10-Q 1 rrc-10q_20140630.htm 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark one)

þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             

Commission File Number: 001-12209

 

RANGE RESOURCES CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

 

34-1312571

(State or Other Jurisdiction of

Incorporation or Organization)

 

(IRS Employer

Identification No.)

 

100 Throckmorton Street, Suite 1200

Fort Worth, Texas

 

76102

(Address of Principal Executive Offices)

 

(Zip Code)

Registrant’s telephone number, including area code

(817) 870-2601

 

Former Name, Former Address and Former Fiscal Year, if changed since last report: Not applicable

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

    Yes  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files).

    Yes  þ    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer

 

þ

  

Accelerated Filer

 

¨

 

 

 

 

Non-Accelerated Filer

 

¨  (Do not check if smaller reporting company)

  

Smaller Reporting Company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

    Yes  ¨    No  þ

168,697,568 Common Shares were outstanding on July 25, 2014

 

 

 

 

 


RANGE RESOURCES CORPORATION

FORM 10-Q

Quarter Ended June 30, 2014

Unless the context otherwise indicates, all references in this report to “Range,” “we,” “us,” or “our” are to Range Resources Corporation and its wholly-owned subsidiaries and its ownership interests in equity method investees.

TABLE OF CONTENTS

 

 

 

 

 

Page

PART I – FINANCIAL INFORMATION 

  

 

ITEM 1.

 

Financial Statements

  

3

 

 

   Consolidated Balance Sheets (Unaudited)

  

3

 

 

   Consolidated Statements of Operations (Unaudited)

  

4

 

 

   Consolidated Statements of Comprehensive Income (Unaudited)

  

5

 

 

   Consolidated Statements of Cash Flows (Unaudited)

  

6

 

 

   Selected Notes to Consolidated Financial Statements (Unaudited)

  

7

ITEM 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

24

ITEM 3.

 

Quantitative and Qualitative Disclosures about Market Risk

  

36

ITEM 4.

 

Controls and Procedures

  

38

PART II – OTHER INFORMATION

  

 

ITEM 1.

 

Legal Proceedings

  

39

ITEM 1A.

 

Risk Factors

  

39

ITEM 6.

 

Exhibits

  

39

 

 

 

 

 

SIGNATURES

  

40

 

 

 

2


PART I – FINANCIAL INFORMATION

ITEM 1.

Financial Statements

RANGE RESOURCES CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

June 30,

 

 

December 31,

 

 

2014

 

 

2013

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

292

 

 

$

348

 

      Accounts receivable, less allowance for doubtful accounts of $2,743 and $2,494

 

183,749

 

 

 

179,667

 

Derivative assets

 

5,463

 

 

 

4,421

 

Deferred tax asset

 

39,411

 

 

 

51,414

 

Inventory and other

 

18,664

 

 

 

12,451

 

Total current assets

 

247,579

 

 

 

248,301

 

Derivative assets

 

4,760

 

 

 

9,233

 

Equity method investments

 

 

 

129,034

 

Natural gas and oil properties, successful efforts method

 

9,732,010

 

 

 

9,032,881

 

Accumulated depletion and depreciation

 

(2,336,666

)

 

 

(2,274,444

)

 

 

7,395,344

 

 

 

6,758,437

 

Transportation and field assets

 

123,471

 

 

 

118,625

 

Accumulated depreciation and amortization

 

(84,807

)

 

 

(85,841

)

 

 

38,664

 

 

 

32,784

 

Other assets

 

114,211

 

 

 

121,297

 

Total assets

$

7,800,558

 

 

$

7,299,086

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

291,107

 

 

$

258,431

 

Asset retirement obligations

 

5,037

 

 

 

5,037

 

Accrued liabilities

 

158,518

 

 

 

161,520

 

Accrued interest

 

41,243

 

 

 

44,375

 

Derivative liabilities

 

62,965

 

 

 

26,198

 

Total current liabilities

 

558,870

 

 

 

495,561

 

Bank debt

 

480,000

 

 

 

500,000

 

Subordinated notes

 

2,350,000

 

 

 

2,640,516

 

Deferred tax liability

 

894,115

 

 

 

771,980

 

Derivative liabilities

 

7,101

 

 

25

 

Deferred compensation liability

 

240,787

 

 

 

247,537

 

Asset retirement obligations and other liabilities

 

249,511

 

 

 

229,015

 

Total liabilities

 

4,780,384

 

 

 

4,884,634

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

Preferred stock, $1 par, 10,000,000 shares authorized, none issued and outstanding

 

 

 

Common stock, $0.01 par, 475,000,000 shares authorized, 168,693,792 issued at

     June 30, 2014 and 163,441,414 issued at December 31, 2013

 

1,687

 

 

 

1,634

 

Common stock held in treasury, 83,184 shares at June 30, 2014 and 98,520 shares

     at December 31, 2013

 

(3,096

)

 

 

(3,637

)

Additional paid-in capital

 

2,378,254

 

 

 

1,959,636

 

Retained earnings

 

641,379

 

 

 

450,583

 

Accumulated other comprehensive income

 

1,950

 

 

 

6,236

 

Total stockholders’ equity

 

3,020,174

 

 

 

2,414,452

 

Total liabilities and stockholders’ equity

$

7,800,558

 

 

$

7,299,086

 

See accompanying notes.

 

 

3


RANGE RESOURCES CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share data)

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues and other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Natural gas, NGLs and oil sales

$

477,517

 

 

$

437,678

 

 

$

1,049,534

 

 

$

835,917

 

Derivative fair value (loss) income

 

(24,109

)

 

 

137,760

 

 

 

(170,959

)

 

 

37,885

 

Gain on the sale of assets

 

282,064

 

 

 

83,287

 

 

 

281,711

 

 

 

83,121

 

Brokered natural gas, marketing and other

 

30,052

 

 

 

14,631

 

 

 

62,580

 

 

 

35,672

 

Total revenues and other income

 

765,524

 

 

 

673,356

 

 

 

1,222,866

 

 

 

992,595

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct operating

 

34,935

 

 

 

32,636

 

 

 

74,730

 

 

 

62,824

 

Transportation, gathering and compression

 

76,809

 

 

 

66,048

 

 

 

150,970

 

 

 

128,464

 

Production and ad valorem taxes

 

10,844

 

 

 

11,113

 

 

 

22,522

 

 

 

22,496

 

Brokered natural gas and marketing

 

34,775

 

 

 

16,662

 

 

 

68,904

 

 

 

38,977

 

Exploration

 

13,621

 

 

 

13,068

 

 

 

28,467

 

 

 

29,848

 

Abandonment and impairment of unproved properties

 

9,332

 

 

 

19,156

 

 

 

19,327

 

 

 

34,374

 

General and administrative

 

56,888

 

 

 

101,987

 

 

 

106,100

 

 

 

186,045

 

Deferred compensation plan

 

10,519

 

 

 

(6,878

)

 

 

8,484

 

 

 

35,482

 

Interest expense

 

45,488

 

 

 

45,071

 

 

 

90,889

 

 

 

87,281

 

Loss on early extinguishment of debt

 

24,596

 

 

 

12,280

 

 

 

24,596

 

 

 

12,280

 

Depletion, depreciation and amortization

 

133,361

 

 

 

119,995

 

 

 

262,043

 

 

 

235,096

 

Impairment of proved properties and other assets

 

24,991

 

 

 

741

 

 

 

24,991

 

 

 

741

 

Total costs and expenses

 

476,159

 

 

 

431,879

 

 

 

882,023

 

 

 

873,908

 

Income from operations before income taxes

 

289,365

 

 

 

241,477

 

 

 

340,843

 

 

 

118,687

 

Income tax expense (benefit)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

(1

)

 

 

(25

)

 

 

5

 

 

 

-

 

Deferred

 

117,977

 

 

 

97,519

 

 

 

136,928

 

 

 

50,314

 

 

 

117,976

 

 

 

97,494

 

 

 

136,933

 

 

 

50,314

 

Net income

$

171,389

 

 

$

143,983

 

 

$

203,910

 

 

$

68,373

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

1.04

 

 

$

0.88

 

 

$

1.24

 

 

$

0.42

 

Diluted

$

1.04

 

 

$

0.88

 

 

$

1.24

 

 

$

0.42

 

Dividends paid per common share

$

0.04

 

 

$

0.04

 

 

$

0.08

 

 

$

0.08

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

161,909

 

 

 

160,565

 

 

 

161,354

 

 

 

160,346

 

Diluted

 

162,813

 

 

 

161,414

 

 

 

162,323

 

 

 

161,223

 

See accompanying notes.

 

 

4


RANGE RESOURCES CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited, in thousands)

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

171,389

 

 

$

143,983

 

 

$

203,910

 

 

$

68,373

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized loss (gain) on hedge derivative contract settlements reclassified into

   natural gas, NGLs and oil sales from other comprehensive income, net of taxes (1)

 

 

 

 

 

 

 

(14,840

)

De-designated hedges reclassified into natural gas, NGLs and oil sales, net of taxes (2)

 

(3,046

)

 

 

(18,616

)

 

 

(4,286

)

 

 

(26,041

)

De-designated hedges reclassified to derivative fair value income, net of taxes (3)

 

 

 

(547

)

 

 

 

 

(1,937

)

Change in unrealized deferred hedging (losses) gains, net of taxes (4)

 

 

 

 

 

 

 

(4,203

)

Total comprehensive income

$

168,343

 

 

$

124,820

 

 

$

199,624

 

 

$

21,352

 

(1) 

Amounts are net of income tax benefit of $9,488 for the six months ended June 30, 2013.

(2) 

Amounts are net of income tax benefit of $1,866 for the three months ended June 30, 2014 and $2,790 for the six months ended June 30, 2014. Amounts are net of income tax benefit of $11,902 for the three months ended June 30, 2013 and $16,649 for the six months ended June 30, 2013.

(3) 

Amounts relate to transactions not probable of occurring and are presented net of income tax benefit of $350 for the three months ended June 30, 2013 and $1,239 for the six months ended June 30, 2013.

(4) 

Amounts are net of income tax benefit of $2,687 for the six months ended June 30, 2013.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

 

5


RANGE RESOURCES CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

 

 

 

 

 

Six Months Ended June 30,

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

 

 

Net income

$

203,910

 

 

$

68,373

 

Adjustments to reconcile net income to net cash provided from operating activities:

 

 

 

 

 

 

 

Loss (gain) from equity method investments, net of distributions

 

3,096

 

 

 

(1,552

)

Deferred income tax expense

 

136,928

 

 

 

50,314

 

Depletion, depreciation and amortization and impairment

 

287,034

 

 

 

235,837

 

Exploration dry hole costs

 

1

 

 

 

(159

)

Abandonment and impairment of unproved properties

 

19,327

 

 

 

34,374

 

Derivative fair value loss (income)

 

170,959

 

 

 

(37,885

)

Cash settlements on derivative financial instruments that do not qualify for hedge

   accounting

 

(130,762

)

 

 

(21,384

)

Allowance for bad debt

 

250

 

 

 

250

 

Amortization of deferred financing costs, loss on extinguishment of debt and other

 

29,812

 

 

 

16,662

 

Deferred and stock-based compensation

 

47,912

 

 

 

63,325

 

Gain on the sale of assets

 

(281,711

)

 

 

(83,121

)

Changes in working capital:

 

 

 

 

 

 

 

Accounts receivable

 

1,275

 

 

 

(2,143

)

Inventory and other

 

(6,872

)

 

 

1,545

 

Accounts payable

 

20,115

 

 

 

(10,381

)

Accrued liabilities and other

 

(59,751

)

 

 

(34,166

)

Net cash provided from operating activities

 

441,523

 

 

 

279,889

 

Investing activities:

 

 

 

 

 

 

 

Additions to natural gas and oil properties

 

(546,354

)

 

 

(592,692

)

Additions to field service assets

 

(5,119

)

 

 

(2,033

)

Acreage purchases

 

(110,471

)

 

 

(27,449

)

Equity method investments

 

1,103

 

 

 

1,885

 

Proceeds from disposal of assets

 

146,140

 

 

 

296,068

 

Purchases of marketable securities held by the deferred compensation plan

 

(11,251

)

 

 

(20,213

)

Proceeds from the sales of marketable securities held by the deferred compensation plan

 

13,343

 

 

 

16,342

 

Net cash used in investing activities

 

(512,609

)

 

 

(328,092

)

Financing activities:

 

 

 

 

 

 

 

Borrowing on credit facilities

 

1,175,000

 

 

 

893,000

 

Repayment on credit facilities

 

(1,195,000

)

 

 

(1,323,000

)

Issuance of subordinated notes

 

 

 

 

750,000

 

Repayment of subordinated notes

 

(312,000

)

 

 

(259,063

)

Dividends paid

 

(13,114

)

 

 

(13,057

)

Debt issuance costs

 

 

 

 

(12,324

)

Issuance of common stock, net of offering expenses

 

396,662

 

 

 

343

 

Change in cash overdrafts

 

4,679

 

 

 

(1,155

)

Proceeds from the sales of common stock held by the deferred compensation plan

 

14,803

 

 

 

13,491

 

Net cash provided from financing activities

 

71,030

 

 

 

48,235

 

(Decrease) increase in cash and cash equivalents

 

(56

)

 

 

32

 

Cash and cash equivalents at beginning of period

 

348

 

 

 

252

 

Cash and cash equivalents at end of period

$

292

 

 

$

284

 

See accompanying notes.

 

6


RANGE RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

(1) SUMMARY OF ORGANIZATION AND NATURE OF BUSINESS

Range Resources Corporation (“Range,” “we,” “us,” or “our”) is a Fort Worth, Texas-based independent natural gas, natural gas liquids (“NGLs”) and oil company primarily engaged in the exploration, development and acquisition of natural gas and oil properties in the Appalachian and Southwestern regions of the United States. Our objective is to build stockholder value through consistent growth in reserves and production on a cost-efficient basis. Range is a Delaware corporation with our common stock listed and traded on the New York Stock Exchange under the symbol “RRC.”

 

(2) BASIS OF PRESENTATION

Presentation

These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Range Resources Corporation 2013 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on February 26, 2014. The results of operations for the second quarter and the six months ended June 30, 2014 are not necessarily indicative of the results to be expected for the full year. These consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary for fair presentation of the results for the periods presented. All adjustments are of a normal recurring nature unless otherwise disclosed. These consolidated financial statements, including selected notes, have been prepared in accordance with the applicable rules of the SEC and do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements. Certain reclassifications have been made to prior years reported amounts in order to conform with the current year presentation including reclassifications between accounts payable and accrued liabilities within cash flow from operating activities and a change in the presentation for our derivative activities. These reclassifications have no impact on previously reported net income, stockholders’ equity or cash flows.

De-designation of Commodity Derivative Contracts

Effective March 1, 2013, we elected to discontinue hedge accounting prospectively. After March 1, 2013, both realized and unrealized gains and losses are recognized in derivative fair value income or loss immediately each quarter as derivative contracts are settled and marked to market. For additional information, see Note 11.

 

(3) NEW ACCOUNTING STANDARDS

Not Yet Adopted

In May 2014, an accounting standards update was issued for “Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements in “Topic 605, Revenue Recognition” and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance is effective retrospectively for us for the reporting period beginning January 1, 2017, with early application not permitted. We are evaluating our existing revenue recognition policies to determine whether any contracts will be affected by the new requirements.

Recently Adopted

In February 2013, an accounting standards update was issued to provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date, except for obligations such as asset retirement and environmental obligations, contingencies, guarantees, income taxes and retirement benefits, which are separately addressed within U.S. GAAP. An entity is required to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date as the sum of (1) the amount the entity agreed to pay on the basis of its arrangement among its co-obligors and (2) any amount the entity expects to pay on behalf of its co-obligors. Disclosure of the nature of the obligation, including how the liability arose, the relationship with other co-obligors and the terms and conditions of the arrangement is required. In addition, the total outstanding amount under the arrangement, not reduced by the effect of any amounts that may be recoverable from other entities, plus the carrying amount of any liability or receivable recognized must be disclosed. This accounting standards update is effective for us beginning in first quarter 2014 and should be applied retrospectively for those in-scope obligations resulting from joint and several liability arrangements that exist at the beginning of 2014. Early adoption was permitted and we adopted this new standard in first quarter 2014 which did not have an impact on our consolidated results of operations, financial position or cash flows.

7


In April 2014, an accounting standards update was issued that raised the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other material disposal transactions that do not meet the revised definition of a discontinued operation. Under the updated standard, a disposal of a component or group of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the component or group of components of the entity (1) has been disposed of by a sale, (2) has been disposed of other than by sale or (3) is classified as held for sale. This accounting standards update is effective for annual periods beginning on or after December 15, 2014 and is applied prospectively. Early adoption is permitted but only for disposals (or classifications that are held for sale) that have not been reported in financial statements previously issued or available for use. We adopted this new standard in first quarter 2014 and, as a result, the Conger Exchange defined and described in more detail below, is not reported as a discontinued operation.

 

(4) ACQUISITIONS AND DISPOSITIONS

Conger Exchange Transaction. In April 2014, we entered into an exchange agreement with EQT Corporation and certain of its affiliates (“collectively, EQT”) in which we sold our Conger assets in Glasscock and Sterling Counties, Texas in exchange for producing properties and other EQT assets in Virginia and $145.0 million in cash (“Conger Exchange”). We closed the exchange transaction on June 16, 2014. The assets exchanged meet the definition of a business under accounting standards and was recorded at fair value. We recognized a pre-tax gain of $275.2 million related to this exchange, before selling expenses of $5.0 million, which is recognized as a gain on sale of assets in our consolidated statement of operations for the three months and the six months ended June 30, 2014. The combined carrying amount of our Conger assets prior to the exchange was $271.8 million. We are in the process of identifying and determining the fair value of the assets acquired and liabilities assumed as part of the Conger Exchange. The following table presents a preliminary estimate of the fair value of assets acquired and liabilities assumed in the transaction, pending final closing adjustments (in thousands):

 

Conger Exchange

 

Consideration

 

 

 

     Fair value of net assets transferred

$

550,273

 

 

 

 

 

Fair value of assets acquired and liabilities assumed

 

 

 

Cash

$

145,000

 

Working capital – Nora Gathering, LLC

 

14,244

 

Natural gas and oil properties

 

407,255

 

Transportation and field assets

 

7,793

 

Other liabilities-firm transportation contract

 

(12,092

)

Asset retirement obligations

 

(11,927

)

         Fair value of net assets acquired and liabilities assumed

$

550,273

 

 

In connection with the Conger Exchange, we acquired the remaining 50% interest held by EQT in Nora Gathering, LLC (“NGLLC”), a natural gas gathering operation, which we had previously accounted for using the equity method of accounting. As of June 16, 2014, we have consolidated NGLLC into our consolidated financial statements. Our previous 50% membership interest in NGLLC was remeasured to fair value on the acquisition date, resulting in a gain of $10.0 million which is recognized in gain on sale of assets in our consolidated statement of operations for the three months and the six months ended June 30, 2014. We assumed trade receivables as part of the acquisition of NGLLC of $5.5 million, all of which we expect to collect.

For the period from June 16, 2014 through June 30, 2014, we recognized $2.8 million of natural gas, oil and NGLs sales from the property interests acquired in the Conger Exchange and we recognized $2.1 million of field net operating income (defined as natural gas, oil and NGLs sales less direct operating expenses, production and ad valorem taxes and transportation expenses).

Conger Exchange Fair Value

Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (often referred to as the “exit price”). The fair value measurement is based on the assumptions of market participants and not those of the reporting entity. Therefore, entity-specific intentions do not impact the measurement of fair value unless those assumptions are consistent with market participant views.

The fair value of the Conger Exchange described above was based on an income approach which was supplemented by a market approach. For the natural gas and oil properties, the income approach uses significant inputs not observable in the market, which are Level 3 inputs. The significant inputs assumed include future production and capital, commodity prices, risk-adjusted discount rates, natural gas and oil pricing differentials, and projected reserve recovery factors. The market approach uses inputs such as recent market transactions in a similar geographic region and with similar production. The income approach for the natural gas gathering operations was based on a discounted future net cash flow model, which uses Level 3 inputs and was supplemented by a market approach.

8


Other 2014 Dispositions

In addition to the Conger Exchange above, in the six months ended June 30, 2014, we sold miscellaneous proved property and inventory for proceeds of $1.1 million resulting in a pre-tax gain of $1.6 million.

2013 Dispositions

In April 2013, we completed the sale of certain of our Delaware and Permian Basin properties in southeast New Mexico and West Texas for a price of $275.0 million and we recognized pre-tax gain of $83.3 million, before selling expenses of $4.2 million. In addition, in the six months ended June 30, 2013, we sold miscellaneous proved and unproved properties and inventory for proceeds of $25.2 million resulting in a pre-tax gain of $3.7 million.  

 

(5) INCOME TAXES

Income tax expense from operations was as follows (in thousands):

 

 

Three Months Ended
June 30,

 

 

Six Months Ended
June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Income tax expense

$

117,976

 

 

$

97,494

 

 

$

136,933

 

 

$

50,314

 

Effective tax rate

 

40.8

%

 

 

40.4

%

 

 

40.2

%

 

 

42.4

%

 

We compute our quarterly taxes under the effective tax rate method based on applying an anticipated annual effective rate to our year-to-date income, except for discrete items. Income taxes for discrete items are computed and recorded in the period that the specific transaction occurs. For second quarter and the six months ended June 30, 2014 and 2013, our overall effective tax rate on operations was different than the federal statutory rate of 35% due primarily to state income taxes, valuation allowances and other permanent differences.

 

(6) INCOME PER COMMON SHARE

Basic income or loss per share attributable to common shareholders is computed as (1) income or loss attributable to common shareholders (2) less income allocable to participating securities (3) divided by weighted average basic shares outstanding. Diluted income or loss per share attributable to common stockholders is computed as (1) basic income or loss attributable to common shareholders (2) plus diluted adjustments to income allocable to participating securities (3) divided by weighted average diluted shares outstanding. The following tables set forth a reconciliation of income or loss attributable to common shareholders to basic income or loss attributable to common shareholders to diluted income or loss attributable to common shareholders (in thousands except per share amounts):

 

 

Three Months Ended
June 30,

 

 

Six Months Ended
June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Net income, as reported

$

171,389

 

 

$

143,983

 

 

$

203,910

 

 

$

68,373

 

Participating basic earnings (a)

 

(2,868

)

 

 

(2,335

 

 

(3,460

)

 

 

(1,124

)

Basic net income attributed to common shareholders

 

168,521

 

 

 

141,648

 

 

 

200,450

 

 

 

67,249

 

Reallocation of participating earnings (a)

 

15

 

 

 

12

  

 

 

19

 

 

 

5

 

Diluted net income attributed to common shareholders

$

168,536

 

 

$

141,660

 

 

$

200,469

 

 

$

67,254

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

1.04

 

 

$

0.88

 

 

$

1.24

 

 

$

0.42

 

Diluted

$

1.04

 

 

$

0.88

 

 

$

1.24

 

 

$

0.42

 

(a) Restricted Stock Awards represent participating securities because they participate in nonforfeitable dividends or distributions with common equity owners. Income allocable to participating securities represents the distributed and undistributed earnings attributable to the participating securities. Participating securities, however, do not participate in undistributed net losses.

9


The following table provides a reconciliation of basic weighted average common shares outstanding to diluted weighted average common shares outstanding (in thousands):

 

Three Months Ended
June 30,

 

 

Six Months Ended
June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding – basic

 

161,909

 

 

 

160,565

 

 

 

161,354

 

 

 

160,346

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Director and employee stock options and SARs

 

904

 

 

 

849

 

 

 

969

 

 

 

877

 

Weighted average common shares outstanding – diluted

 

162,813

 

 

 

161,414

 

 

 

162,323

 

 

 

161,223

 

 

Weighted average common shares-basic for the three months ended June 30, 2014 excludes 2.8 million shares and the three months ended June 30, 2013 excludes 2.6 million shares of restricted stock held in our deferred compensation plans (although all awards are issued and outstanding upon grant). Weighted average common shares-basic for the six months ended June 30, 2014 excludes 2.8 million shares of restricted stock compared to 2.7 million in the same period of 2013. All stock appreciation rights (“SARs”) for the three months ended June 30, 2014 or for the six months ended June 30, 2014 were included in the computations of diluted income from operations per share because the grant prices of the SARs were all less than the average market price of the common stock. SARs of 161,000 for the three months ended June 30, 2013 and 252,000 for the six months ended June 30, 2013 were outstanding but not included in the computations of diluted income from operations per share because the grant prices of the SARs were greater than the average market price of the common shares.

 

(7) SUSPENDED EXPLORATORY WELL COSTS

We capitalize exploratory well costs until a determination is made that the well has either found proved reserves or that it is impaired. Capitalized exploratory well costs are presented in natural gas and oil properties in the accompanying consolidated balance sheets. If an exploratory well is determined to be impaired, the well costs are charged to exploration expense in the accompanying consolidated statements of operations. The following table reflects the changes in capitalized exploratory well costs for the six months ended June 30, 2014 and the year ended December 31, 2013 (in thousands except for number of projects):

 

 

 

June 30,
2014

 

 

December 31,
2013

 

Balance at beginning of period

 

$

6,964

 

 

$

57,360

 

Additions to capitalized exploratory well costs pending the determination of proved reserves

 

 

44,472

 

 

 

39,832

 

Reclassifications to wells, facilities and equipment based on determination of proved reserves

 

 

 

 

 

(84,840

)

Capitalized exploratory well costs charged to expense

 

 

 

 

 

 

Divested wells

 

 

 

 

 

(5,388

)

Balance at end of period

 

 

51,436

 

 

 

6,964

 

Less exploratory well costs that have been capitalized for a period of one year or less

 

 

(44,472

)

 

 

 

Capitalized exploratory well costs that have been capitalized for a period greater than one year

 

$

6,964

 

 

$

6,964

 

Number of projects that have exploratory well costs that have been capitalized for a period greater than one year

 

 

1

 

 

 

1

 

As of June 30, 2014, $7.0 million of capitalized exploratory well costs have been capitalized for more than one year which relates to one well in our Marcellus Shale area where we are evaluating pipeline options. The following table provides an aging of capitalized exploratory well costs that have been suspended for more than one year as of June 30, 2014 (in thousands):

 

 

  

Total

 

  

2013

 

  

2012

 

  

2011

 

Capitalized exploratory well costs that have been capitalized for more than one year

  

$

6,964

  

  

$

110

  

  

$

6,801

  

  

$

53

  

 

10


(8) INDEBTEDNESS

We had the following debt outstanding as of the dates shown below (bank debt interest rate at June 30, 2014 is shown parenthetically) (in thousands). No interest was capitalized during the three months or the six months ended June 30, 2014 or 2013:

 

 

June 30,
2014

 

 

December 31,
2013

 

Bank debt (1.9%)

 

$

480,000

 

 

$

500,000

 

Senior subordinated notes:

 

 

 

 

 

 

 

 

8.00% senior subordinated notes due 2019, net of $9,484 discount

 

 

¾

 

 

 

290,516

 

6.75% senior subordinated notes due 2020

 

 

500,000

 

 

 

500,000

 

5.75% senior subordinated notes due 2021

 

 

500,000

 

 

 

500,000

 

5.00% senior subordinated notes due 2022

 

 

600,000

 

 

 

600,000

 

5.00% senior subordinated notes due 2023

 

 

750,000

 

 

 

750,000

 

Total debt

 

$

2,830,000

 

 

$

3,140,516

 

Bank Debt

In February 2011, we entered into an amended and restated revolving bank facility, which we refer to as our bank debt or our bank credit facility, which is secured by substantially all of our assets. The bank credit facility provides for an initial commitment equal to the lesser of the facility amount or the borrowing base. On June 30, 2014, the facility amount was $1.75 billion and the borrowing base was $2.0 billion. The bank credit facility provides for a borrowing base subject to redeterminations semi-annually and for event-driven unscheduled redeterminations. As part of our semi-annual bank review completed on April 3, 2014, our borrowing base was reaffirmed at $2.0 billion and our facility amount was also reaffirmed at $1.75 billion. Our current bank group is composed of twenty-eight financial institutions with no one bank holding more than 9% of the total facility. The bank credit facility amount may be increased to the borrowing base amount with twenty days notice, subject to the banks agreeing to participate in the facility increase and our payment of a mutually acceptable commitment fee to those banks. As of June 30, 2014, the outstanding balance under our bank credit facility was $480.0 million. Additionally, we had $131.0 million of undrawn letters of credit leaving $1.1 billion of borrowing capacity available under the facility. The bank credit facility matures on February 18, 2016. Borrowings under the bank credit facility can either be at the Alternate Base Rate (as defined in the bank credit facility) plus a spread ranging from 0.50% to 1.5% or LIBOR borrowings at the Adjusted LIBO Rate (as defined in the bank credit facility) plus a spread ranging from 1.5% to 2.5%. The applicable spread is dependent upon borrowings relative to the borrowing base. We may elect, from time to time, to convert all or any part of our LIBOR loans to base rate loans or to convert all or any of the base rate loans to LIBOR loans. The weighted average interest rate was 2.1% for the three months ended June 30, 2014 compared to 2.2% for the three months ended June 30, 2013. The weighted average interest rate was 2.1% for both the six months ended June 30, 2014 and 2013. A commitment fee is paid on the undrawn balance based on an annual rate of 0.375% to 0.50%. At June 30, 2014, the commitment fee was 0.375% and the interest rate margin was 1.75% on our LIBOR loans and 0.75% on our base rate loans.

Senior Subordinated Notes

If we experience a change of control, bondholders may require us to repurchase all or a portion of all of our senior subordinated notes at 101% of the aggregate principal amount plus accrued and unpaid interest, if any. All of the senior subordinated notes and the guarantees by our subsidiary guarantors are general, unsecured obligations and are subordinated to our bank debt and will be subordinated to future senior debt that we or our subsidiary guarantors are permitted to incur under the bank credit facility and the indentures governing the subordinated notes.

Early Extinguishment of Debt

On May 27, 2014, we announced a call for the redemption of $300.0 million of our outstanding 8.0% senior subordinated notes due 2019 at 104.0% of par plus accrued and unpaid interest, which were redeemed on June 26, 2014. In second quarter 2014, we recognized a $24.6 million loss on extinguishment of debt, including transaction call premium cost as well as expensing of the remaining deferred financing costs on the repurchased debt.

11


Guarantees

Range Resources Corporation is a holding company which owns no operating assets and has no significant operations independent of its subsidiaries. The guarantees by our subsidiaries, who are 100% owned by Range, of our senior subordinated notes are full and unconditional and joint and several, subject to certain customary release provisions. A subsidiary guarantor may be released from its obligations under the guarantee:

in the event of a sale or other disposition of all or substantially all of the assets of the subsidiary guarantor or a sale or other disposition of all the capital stock of the subsidiary guarantor, to any corporation or other person (including an unrestricted subsidiary of Range) by way of merger, consolidation, or otherwise; or

if Range designates any restricted subsidiary that is a guarantor to be an unrestricted subsidiary in accordance with the terms of the indenture.

Debt Covenants and Maturity

Our bank credit facility contains negative covenants that limit our ability, among other things, to pay cash dividends, incur additional indebtedness, sell assets, enter into certain hedging contracts, change the nature of our business or operations, merge, consolidate, or make certain investments. In addition, we are required to maintain a ratio of debt to EBITDAX (as defined in the credit agreement) of no greater than 4.25 to 1.0 and a current ratio (as defined in the credit agreement) of no less than 1.0 to 1.0. We were in compliance with our covenants under the bank credit facility at June 30, 2014.

The indentures governing our senior subordinated notes contain various restrictive covenants that are substantially identical to each other and may limit our ability to, among other things, pay cash dividends, incur additional indebtedness, sell assets, enter into transactions with affiliates, or change the nature of our business. At June 30, 2014, we are in compliance with these covenants.

 

(9) ASSET RETIREMENT OBLIGATIONS

Our asset retirement obligations primarily represent the estimated present value of the amounts we will incur to plug, abandon and remediate our producing properties at the end of their productive lives. Significant inputs used in determining such obligations include estimates of plugging and abandonment costs, estimated future inflation rates and well life. The inputs are calculated based on historical data as well as current estimated costs. A reconciliation of our liability for plugging and abandonment costs for the six months ended June 30, 2014 is as follows (in thousands):

 

 

  

Six Months
Ended
June 30, 2014

 

Beginning of period

  

$

230,077

  

Liabilities incurred

  

 

3,854

 

Acquisitions

  

 

11,927

 

Disposition of wells

  

 

(12,057

)

Liabilities settled

 

 

(2,142

)

Change in estimate

  

 

1,777

 

Accretion expense

  

 

7,370

 

End of period

  

 

 240,806

 

Less current portion

  

 

(5,037

)

Long-term asset retirement obligations

  

$

 235,769

 

Accretion expense is recognized as a component of depreciation, depletion and amortization expense in the accompanying statements of operations.

 

12


(10) CAPITAL STOCK

We have authorized capital stock of 485.0 million shares which includes 475.0 million shares of common stock and 10.0 million shares of preferred stock. We currently have no preferred stock issued or outstanding. The following is a schedule of changes in the number of common shares outstanding since the beginning of 2013:

 

 

 

Six Months
Ended
June 30,
2014

 

 

Year
Ended
December 31,
2013

 

Beginning balance

 

 

163,342,894

 

 

 

162,514,098

 

Public offering

 

 

4,560,000

 

 

 

¾

 

SARs exercised

 

 

188,305

 

 

 

278,916

 

Restricted stock granted

 

 

266,453

 

 

 

401,122

 

Restricted stock units vested

 

 

237,620

 

 

 

119,480

 

Treasury shares issued

 

 

15,336

 

 

 

29,278

 

Ending balance

 

 

168,610,608

 

 

 

163,342,894

 

 

 

(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 swaps or collars 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. The fair value of our derivative 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”) or Mont Belview for NGLs, approximated a net unrealized pre-tax loss of $68.5 million at June 30, 2014. These contracts expire monthly through December 2016. The following table sets forth our commodity-based derivative volumes by year as of June 30, 2014, excluding our basis swaps which are discussed separately below:

 

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

  

260,000 Mmbtu/day

  

$ 4.18

2015

  

Swaps

  

287,432 Mmbtu/day

  

$ 4.22

2016

  

Swaps

  

90,000 Mmbtu/day

  

$ 4.21

 

 

 

 

 

 

 

Crude Oil

  

 

  

 

  

 

2014

  

Collars

  

2,000 bbls/day

  

$ 85.55–$ 100.00

2014

  

Swaps

  

9,500 bbls/day

  

$ 94.35

2015

  

Swaps

  

9,626 bbls day

  

$ 90.57

2016

 

Swaps

 

501 bbls/day

 

$ 91.10

 

 

 

 

 

 

 

NGLs (C3-Propane)

  

 

  

 

  

 

2014

  

Swaps

  

12,000 bbls/day

  

$ 1.02/gallon

2015

 

Swaps

 

1,000 bbls/day

 

$ 1.10/gallon

 

 

 

 

 

 

 

NGLs (NC4-Normal butane)

  

 

  

 

  

 

2014

  

Swaps

  

4,000 bbls/day

  

$ 1.34/gallon

 

 

 

 

 

 

 

NGLs (C5-Natural Gasoline)

  

 

  

 

  

 

2014

 

Swaps

 

3,500 bbls/day

 

$ 2.17/gallon

2015

  

Swaps

  

500 bbls/day

  

$ 2.14/gallon

13


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 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 June 30, 2014, an unrealized pre-tax derivative gain of $3.1 million ($1.9 million after tax) 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 or were designated 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 derivative instruments that qualified for hedge accounting as cash flow hedges. Natural gas, NGLs and oil sales include $4.9 million of gains in second quarter 2014 compared to gains of $30.5 million in the same period of 2013 related to settled hedging transactions. Natural gas, NGLs and oil sales include $7.1 million of gains in the first six months 2014 compared to gains of $67.0 million in the same period of 2013. Any ineffectiveness associated with these hedge derivatives is reflected in derivative fair value income or 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 or loss for the three months and the six months ended June 30, 2014 includes no ineffective gains or losses compared to a loss of $2.9 million in the six months ended June 30, 2013. During the six months ended June 30, 2013, we recognized a pre-tax gain of $3.2 million in derivative fair value income as a result of the discontinuance of hedge accounting where we determined the transaction was probable not to occur primarily due to the sale of certain of our Delaware and Permian Basin properties in New Mexico and West Texas.

Basis Swap Contracts

In addition to the collars and swaps above, at June 30, 2014, 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 indicies in Appalachia. These contracts are for 215,693 Mmbtu/day and settle monthly through March 2015. The fair value of these contracts was a gain of $8.7 million on June 30, 2014.

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) of unrealized net gains, representing the mark-to-market value of the effective portion of our cash flow hedges as of February 28, 2013. As a result of discontinuing hedge accounting, the mark-to-market values included in AOCI as of the de-designation date were frozen and will be reclassified into earnings in natural gas, NGLs and oil sales in future periods as the underlying hedged transactions occur. As of June 30, 2014, we expect to reclassify into earnings $3.1 million of unrealized gains in the remaining months of 2014.

With the election to de-designate hedging instruments, all of our derivative instruments continue to be recorded at fair value with unrealized gains and losses recognized immediately in earnings rather than in AOCI. These mark-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.

 

14


Derivative Assets and Liabilities

The combined fair value of derivatives included in the accompanying consolidated balance sheets as of June 30, 2014 and December 31, 2013 is summarized below. 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. The tables below provide additional information relating to our master netting arrangements with our derivative counterparties (in thousands):

 

 

  

June 30, 2014

 

 

 

  

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

  

$

4,967

 

  

$

(1,606

)

  

$

3,361

  

 

–collars

  

 

3,594

 

  

 

(3,826

)

  

 

(232

)

 

–basis swaps

 

 

19,606

 

 

 

(9,559

)

 

 

10,047

 

Crude oil

–swaps

  

 

84

 

  

 

 (2,305

)

  

 

(2,221

)

NGLs

–C3 swaps

  

 

1,538

 

  

 

 (2,160

)

  

 

(622

)

 

–NC4 swap

  

 

1,227

 

  

 

 (1,227

)

  

 

 

 

–C5 swaps

 

 

86

 

 

 

(196

)

 

 

(110

)

 

 

  

$

31,102

 

  

$

(20,879

)

  

$

10,223

 

 

 

 

  

June 30, 2014

 

 

 

  

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

  

$

(19,095

  

$

1,606

  

  

$

(17,489

)

 

–collars

  

 

(15,750

  

 

3,826

 

  

 

(11,924

)

 

–basis swaps

 

 

(10,934

)

 

 

9,559

 

 

 

(1,375

)

Crude oil

–swaps

  

 

 (36,628

  

 

2,305

 

  

 

(34,323

)

 

–collars

  

 

 (1,693

  

 

 —

 

  

 

(1,693

)

NGLs

–C3 swaps

  

 

(6,246

)

  

 

2,160

 

  

 

(4,086

)

 

–NC4 swaps

  

 

(120

  

 

1,227

 

  

 

1,107

 

 

–C5 swaps

  

 

(479

)

  

 

196

 

  

 

(283

)

 

 

  

$

(90,945

  

$

20,879

 

  

$

(70,066

)

 

 

 

  

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

 

 

 

Crude oil

–swaps

  

 

3,567

  

 

 

(1,321

 

 

2,246

 

NGLs

–C3 swaps

  

 

826

  

 

 

(826

 

 

 

 

–NC4 swaps

  

 

863

  

 

 

(863

 

 

 

 

–C5 swaps

  

 

121

  

 

 

(121

 

 

 

 

 

  

$

33,360

  

 

$

(19,706

 

$

13,654

 

15


 

 

 

  

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

 

 

  

 

 

(398

)

NGLs

–C3 swaps

  

 

(18,172

 

 

826

  

 

 

(17,346

)

 

–NC4 swaps

  

 

(757

 

 

863

  

 

 

106

  

 

–C5 swaps

  

 

  

 

 

121

  

 

 

121

  

 

 

  

$

(45,929

 

$

19,706

  

 

$

(26,223

)

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

 

Three Months Ended June 30,

 

 

Six Months Ended June 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)

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Swaps

$

 

  

$

¾

 

 

$

1,052

 

 

$

3,875

 

  

$

¾

 

 

$

125

 

 

$

1,889

 

 

$

11,922

 

Collars

 

 

  

 

¾

 

 

 

3,860

 

 

 

27,540

 

  

 

¾

 

 

 

(7,015

)

 

 

5,188

 

 

 

58,272

 

Income taxes

 

 

  

 

¾

 

 

 

(1,866

)

 

 

(12,252

  

 

¾

 

 

 

2,687

 

 

 

(2,791

)

 

 

(27,376

)

 

$

 

  

$

¾

 

 

$

3,046

 

 

$

19,163

 

  

$

¾

 

 

$

(4,203

)

 

$

4,286

 

 

$

42,818

 

(a) 

For realized gains upon derivative contract settlement, the reduction in AOCI is offset by an increase in revenues, NGLs and oil sales. For realized losses upon derivative contract settlement, the increase in AOCI is offset by a decrease in revenues. See additional discussion above regarding the discontinuance of hedge accounting.

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 June 30,

 

 

 

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

 

 

Gain (Loss) Recognized in
Income (Ineffective Portion)

 

 

Derivative Fair Value
Income (Loss)

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Swaps

 

$

(38,521

)

 

$

65,003

 

 

$

 

 

$

 

 

$

(38,521

)

 

$

65,003

 

Re-purchased swaps

 

 

 

 

 

(1,663

)

 

 

 

 

 

 

 

 

 

 

 

(1,663

)

Collars

 

 

1,032

 

 

 

74,420

 

 

 

 

 

 

 

 

 

1,032

 

 

 

74,420

 

Basis swaps

 

 

13,380

 

 

 

 

 

 

 

 

 

 

 

 

13,380

 

 

 

 

Total

 

$

(24,109

)

 

$

137,760

 

 

$

 

 

$

¾

 

 

$

(24,109

)

 

$

137,760

 

 

 

 

Six Months Ended June 30,

 

 

 

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

 

 

Gain (Loss) Recognized in
Income (Ineffective Portion)

 

 

Derivative Fair Value
Income (Loss)

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Swaps

 

$

(82,593

)

 

$

21,927

 

 

$

 

 

$

(1,995

)

 

$

(82,593

)

 

$

19,932

 

Re-purchased swaps

 

 

 

 

 

(478

)

 

 

 

 

 

 

 

 

 

 

 

(478

)

Collars

 

 

(38,116

)

 

 

19,417

 

 

 

 

 

 

(896

)

 

 

(38,116

)

 

 

18,521

 

Basis swaps

 

 

(50,250

)

 

 

(90

)

 

 

 

 

 

 

 

 

(50,250

)

 

 

(90

)

Total

 

$

(170,959

)

 

$

40,776

 

 

$

 

 

$

(2,891

)

 

$

(170,959

)

 

$

37,885

 

 

 

16


(12) FAIR VALUE MEASUREMENTS

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There are three approaches for measuring the fair value of assets and liabilities: the market approach, the income approach and the cost approach, each of which includes multiple valuation techniques. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to measure fair value by converting future amounts, such as cash flows or earnings, into a single present value amount using current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace the service capacity of an asset. This is often referred to as current replacement cost. The cost approach assumes that the fair value would not exceed what it would cost a market participant to acquire or construct a substitute asset of comparable utility, adjusted for obsolescence.

The fair value accounting standards do not prescribe which valuation technique should be used when measuring fair value and does not prioritize among the techniques. These standards establish a fair value hierarchy that prioritizes the inputs used in applying the various valuation techniques. Inputs broadly refer to the assumptions that market participants use to make pricing decisions, including assumptions about risk. Level 1 inputs are given the highest priority in the fair value hierarchy while Level 3 inputs are given the lowest priority. The three levels of the fair value hierarchy are as follows:

Level 1 – Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 – Observable market-based inputs or unobservable inputs that are corroborated by market data. These are inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.

Level 3 – Unobservable inputs that are not corroborated by market data and may be used with internally developed methodologies that result in management’s best estimate of fair value.

Valuation techniques that maximize the use of observable inputs are favored. Assets and liabilities are classified in their entirety based on the lowest priority level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement of assets and liabilities within the levels of the fair value hierarchy.

Fair Values – Recurring

We use a market approach for our recurring fair value measurements and endeavor to use the best information available. The following tables present the fair value hierarchy table for assets and liabilities measured at fair value, on a recurring basis (in thousands):

 

 

 

Fair Value Measurements at June 30, 2014 using:

 

 

 

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

 

 

Significant
Other
Observable
Inputs
(Level 2)

 

 

Significant
Unobservable
Inputs
(Level 3)

 

 

Total
Carrying
Value as of
June 30,
2014

 

Trading securities held in the deferred compensation plans

 

$

68,129

 

 

$

 

 

$

 

 

$

68,129

 

Derivatives swaps

 

 

 

 

 

(54,665

)

 

 

 

 

 

(54,665

)

                    –collars

 

 

 —

 

 

 

(13,849

)

 

 

 —

 

 

 

(13,849

)

                    –basis swaps

  

 

  —

 

  

 

 6,319

 

 

 

2,353

 

  

 

 8,672

 

 

 

  

Fair Value Measurements at December 31, 2013 using:

 

 

  

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

 

  

Significant
Other
Observable
Inputs
(Level 2)

 

 

Significant
Unobservable
Inputs
(Level 3)

 

  

Total
Carrying
Value as of
December 31,
2013

 

Trading securities held in the deferred compensation plans

  

$

67,766

  

  

$

  

 

$

  

  

$

67,766

  

Derivatives swaps

  

 

 —

 

  

 

(18,812

)

 

 

  

  

 

(18,812

)

                    –collars

  

 

 —

 

  

 

2,314

  

 

 

  

  

 

2,314

  

                    –basis swaps

  

 

 —

 

  

 

3,381

  

 

 

548

  

  

 

3,929

  

17


Our trading securities in Level 1 are exchange-traded and measured at fair value with a market approach using end of period market values. Derivatives in Level 2 are measured at fair value with a market approach using third-party pricing services, which have been corroborated with data from active markets or broker quotes. As of June 30, 2014, we have four natural gas basis swaps categorized as Level 3 due to the forward price curve being unavailable for the regional sales point. We based the fair value on the most similar regional forward natural gas basis curve received from a third party pricing service along with assumed basis differentials based on historical trends.

Our trading securities held in the deferred compensation plan are accounted for using the mark-to-market accounting method and are included in other assets in the accompanying consolidated balance sheets. We elected to adopt the fair value option to simplify our accounting for the investments in our deferred compensation plan. Interest, dividends, and mark-to-market gains or losses are included in deferred compensation plan expense in the accompanying statement of operations. For second quarter 2014, interest and dividends were $103,000 and the mark-to-market adjustment was a gain of $2.1 million compared to interest and dividends of $629,000 and mark-to-market loss of $1.0 million in the same period of the prior year. For the six months ended June 30, 2014, interest and dividends were $171,000 and the mark-to-market adjustment was a gain of $2.6 million compared to interest and dividends of $668,000 and mark-to-market adjustment of a gain of $586,000 in the same period of 2013.

Fair ValuesNon-recurring

Due to declines in estimated reserves, there were indications that the carrying values of certain of our oil and gas properties may be impaired and undiscounted future cash flows attributed to these assets indicated their carrying amounts were not expected to be recovered. Their fair value was measured using an income approach based upon internal estimates of future production levels, prices, drilling and operating costs and discount rates, which are Level 3 inputs. We recorded non-cash charges during the three months and the six months ended June 30, 2014 of $25.0 million related to natural gas and oil properties in Mississippi, West Texas and North Texas. Also, in 2013 we evaluated certain surface property we owned which included a consideration for the potential sale of these assets and we recognized an impairment charge of $741,000. The following table presents the value of these assets measured at fair value on a non-recurring basis at the time impairment was recorded (in thousands):