Southwestern Energy Company (SWN)

Other Derivative Contracts

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 under SFAS 133. Basis swap derivative instruments that do not qualify as cash flow hedges are recorded on the balance sheet at their fair values under hedging assets, other assets and hedging liabilities, and all realized and unrealized gains and losses related to these contracts are recognized immediately in the unaudited condensed consolidated statements of operations as a component of gas sales. Gas sales included an unrealized loss of $0.6 million for the three months ended March 31, 2009, compared to an unrealized gain of $5.4 million for the three months ended March 31, 2008 for non-qualifying basis swaps.  

As of March 31, 2009 and 2008, the Company had basis swaps on the following volumes of gas production that did not qualify for hedge treatment:

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The following table summarizes the effect of basis swaps that did not qualify for hedge accounting on the unaudited condensed consolidated statements of operations for the three months ended March 31, 2009 and 2008:

Other Derivative Contracts

Although the Company’s basis swaps meet the objectives to manage our commodity price exposure, these trades are typically entered into at different times than our instruments that qualify as cash flow hedges and thus do not qualify for hedge accounting under FAS 133. Basis swap trades are recorded on the balance sheet at their fair values under hedging assets and hedging liabilities, and all realized and unrealized gains and losses related to these contracts are recognized immediately in the statement of operations as a component of gas sales. As of December 31, 2008 and 2007, the fair values of the basis swaps that do not meet the requirements of FAS 133 hedges were a $1.7 million asset and a $0.7 million liability, respectively.  The unrealized gain included in gas and oil sales for non-qualifying basis swaps was $2.5 million in 2008, compared to an unrealized gain of $6.0 million in 2007 and an unrealized loss of $25.8 million in 2006.

Other Derivative Contracts

Although the Company’s
basis swaps meet the objectives to manage our commodity price exposure, these
trades are typically entered into at different times than our instruments that
qualify as cash flow hedges and thus do not qualify for hedge accounting under
FAS 133. Basis swap trades are recorded on the balance sheet at their fair
values under hedging assets and hedging liabilities, and all realized and
unrealized gains and losses related to these contracts are recognized
immediately in the statement of operations as a component of gas sales. As of
December 31, 2008 and 2007, the fair values of the basis swaps that do not meet
the requirements of FAS 133 hedges were a $1.7 million asset and a $0.7 million
liability, respectively.  The unrealized gain included in gas and oil sales
for non-qualifying basis swaps was $2.5 million in 2008, compared to an
unrealized gain of $6.0 million in 2007 and an unrealized loss of $25.8 million
in 2006.

Other Derivative Contracts

Although the Company’s basis swaps meet the objectives to manage our commodity price exposure, some of these trades do not qualify for hedge accounting under FAS 133. The basis swaps that do qualify for hedge accounting treatment are classified as “matched-basis” swaps. These matched-basis swaps have been combined with other derivative trades (i.e., costless collars and swaps) to form a single hedge where both trades are accounted for as a unit. The basis swap trades that have not been designated as hedges are recorded on the balance sheet at their fair values under hedging assets and hedging liabilities. All realized and unrealized gains and losses related to these contracts are recognized immediately in the statement of operations as a component of gas sales. As of December 31, 2007 and 2006, the fair values of the basis swaps that do not meet the requirements of FAS 133 hedges were a $0.7 million liability and a $6.7 million liability, respectively.  The unrealized gain included in gas and oil sales for non-qualifying basis swaps was $6.0 million in 2007, compared to an unrealized loss of $25.8 million in 2006 and an unrealized gain of $19.1 million in 2005.

Other Derivative Contracts

Although the Company’s basis swaps meet the objectives to manage our commodity price exposure, some of these trades do not qualify for hedge accounting under FAS 133. The basis swaps that do qualify for hedge accounting treatment are classified as “matched-basis” swaps. These matched-basis swaps have been combined with other derivative trades (i.e., costless collars and swaps) to form a single hedge where both trades are accounted for as a unit. The basis swap trades that have not been designated as hedges are recorded on the balance sheet at their fair values under hedging assets and hedging liabilities. All realized and unrealized gains and losses related to these contracts are recognized immediately in the statement of operations as a component of gas sales. As of December 31, 2007 and 2006, the fair values of the basis swaps that do not meet the requirements of FAS 133 hedges were a $0.7 million liability and a $6.7 million liability, r
espectively.  The unrealized gain included in gas and oil sales for non-qualifying basis swaps was $6.0 million in 2007, compared to an unrealized loss of $25.8 million in 2006 and an unrealized gain of $19.1 million in 2005.

Other Derivative Contracts

Although the Company’s basis swaps meet the objectives to manage our commodity price exposure, some of these trades do not qualify for hedge accounting under FAS 133. The basis swaps that do qualify for hedge accounting treatment are classified as “matched-basis” swaps. These matched basis swaps have been combined with other derivative trades (i.e., costless collars and swaps) to form a single hedge where both trades are accounted for as a unit. The basis swap trades that have not been designated as hedges are recorded on the balance sheet at their fair values under hedging assets and hedging liabilities. All realized and unrealized gains and losses related to these contracts are recognized immediately in the statement of operations as a component of gas sales. As of December 31, 2006 and 2005, the fair values of the basis swaps that do not meet the requirements of FAS 133 hedges were a $6.7 million liability and a $19.1 million asset, respectively.  The unrealized loss included in gas and oil sales for non-qualifying basis swaps was $25.8 million in 2006, compared to an unrealized gain of $19.1 million in 2005 and an unrealized loss of $1.2 million in 2004.

Other Derivative Contracts

Although the Company’s basis swaps meet the objectives to manage our commodity price exposure, some of these trades do not qualify for hedge accounting under FAS 133. The basis swaps that do qualify for hedge accounting treatment are classified as “matched-basis” swaps. These matched basis swaps have been combined with other derivative trades (i.e., costless collars and swaps) to form a single hedge where both trades are accounted for as a unit. The basis swap trades that have not been designated as hedges are recorded on the balance sheet at their fair values under hedging assets and hedging liabilities. All realized and unrealized gains and losses related to these contracts are recognized immediately in the statement of operations as a component of gas sales. As of September 30, 2006, the Company recorded an unrealized loss of $1.7 million related to basis swaps that do not meet the requirements of FAS 133 as hedges.

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The Natural Gas Distribution segment periodically enters into derivative contracts designed to mitigate risk related to future gas prices.  The Company does not recognize unrealized income/loss for these regulatory hedges as the effects of these hedges are passed through to utility customers. As of September 30, 2006, the Company recognized a liability of $5.0 million related to regulatory hedges.

At September 30, 2006, the Company's net asset related to its hedging activities was $39.9 million. Additionally, at September 30, 2006, the Company had recorded a cumulative gain to other comprehensive income net of tax (equity section of the balance sheet) of $23.3 million. The amount recorded in other comprehensive income will be relieved over time and taken to the income statement as the physical transactions being hedged occur.  Assuming the market prices of gas and oil futures as of September 30, 2006, remain unchanged, the Company would expect to transfer an aggregate pre-tax gain of approximately $17.7 million from accumulated other comprehensive income to earnings during the next 12 months. The change in accumulated other comprehensive income (loss) related to derivatives was a gain of $62.0 million ($39.1 million after tax) compared to a loss of $193.4 million ($121.8 million after tax) for the three months ended September 30, 2006 and 2005, respectively, and a gain of $195.5 million ($123.2 million after tax) compared to a loss of $241.8 million ($152.3 million after tax) for the nine months ended September 30, 2006 and 2005, respectively.  Additional volatility in earnings and other comprehensive income (loss) may occur in the future as a result of the application of FAS 133.

Other Derivative Contracts

Although the Company’s basis swaps meet the objectives to manage our commodity price exposure, some of these trades do not qualify for hedge accounting under FAS 133. The basis swaps that do qualify for hedge accounting treatment are classified as “matched-basis” swaps. These matched basis swaps have been combined with other derivative trades (i.e., costless collars and swaps) to form a single hedge where both trades are accounted for as a unit. The basis swap trades that have not been designated as hedges are recorded on the balance sheet at their fair values under hedging assets and hedging liabilities. All unrealized gains and losses related to these contracts are recognized immediately in the statement of operations as a component of gas sales. As of June 30, 2006, the Company recorded an unrealized gain of $6.8 million related to basis swaps that do not meet the requirements of FAS 133 as hedges.  

The Natural Gas Distribution segment periodically enters into derivative contracts designed to mitigate risk related to future gas prices.  The Company does not recognize unrealized income/loss for these regulatory hedges as the effects of these hedges are passed through to utility customers. As of June 30, 2006 the Company recognized a liability of $0.4 million related to regulatory hedges.

At June 30, 2006, the Company's net liability related to its hedging activities was $23.4 million. Additionally, at June 30, 2006, the Company had recorded a cumulative loss to other comprehensive income net of tax (equity section of the balance sheet) of $15.7 million. The amount recorded in other comprehensive income will be relieved over time and taken to the income statement as the physical transactions being hedged occur.  Assuming the market prices of futures as of June 30, 2006 remain unchanged, the Company would expect to transfer an aggregate loss of approximately $10.2 million from accumulated other comprehensive income to pre-tax earnings as a loss during the next 12 months. The change in accumulated other comprehensive income (loss) related to derivatives was a gain of $34.4 million ($21.7 million after tax) compared to a gain of $13.4 million ($8.5 million after tax) for

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the three months ended June 30, 2006 and 2005, respectively and gains of $133.5 million ($84.1 million after tax) compared to a loss of $48.4 million ($30.5 million after tax) for the six months ended June 30, 2006 and 2005 respectively.  Additional volatility in earnings and other comprehensive income (loss) may occur in the future as a result of the application of FAS 133.

Other Derivative Contracts

Although the Company’s basis swaps meet the objectives to manage our commodity price exposure, some of these trades do not qualify for hedge accounting under FAS 133. The basis swaps that do qualify for hedge accounting treatment are classified as “matched-basis” swaps. These matched basis swaps have been combined with other derivative trades (i.e., costless collars and swaps) to form a single hedge where both trades are accounted for as a unit. The basis swap trades that have not been designated as hedges are recorded on the balance sheet at their fair values under hedging assets and hedging liabilities. All unrealized gains and losses related to these contracts are recognized immediately in the statement of operations as a component of gas sales. As of June 30, 2006, the Company recorded an unrealized gain of $6.8 million related to basis swaps that do not meet the requirements of FAS 133 as hedges.  

The Natural Gas Distribution segment periodically enters into derivative contracts designed to mitigate risk related to future gas prices.  The Company does not recognize unrealized income/loss for these regulatory hedges as the effects of these hedges are passed through to utility customers. As of June 30, 2006 the Company recognized a liability of $0.4 million related to regulatory hedges.

At June 30, 2006, the Company's net liability related to its hedging activities was $23.4 million. Additionally, at June 30, 2006, the Company had recorded a cumulative loss to other comprehensive income net of tax (equity section of the balance sheet) of $15.7 million. The amount recorded in other comprehensive income will be relieved over time and taken to the income statement as the physical transactions being hedged occur.  Assuming the market prices of futures as of June 30, 2006 remain unchanged, the Company would expect to transfer an aggregate loss of approximately $10.2 million from accumulated other comprehensive income to pre-tax earnings as a loss during the next 12 months. The change in accumulated other comprehensive income (loss) related to derivatives was a gain of $34.4 million ($21.7 million after tax) compared to a gain of $13.4 million ($8.5 million after tax) for

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the three months ended June 30, 2006 and 2005, respectively and gains of $133.5 million ($84.1 million after tax) compared to a loss of $48.4 million ($30.5 million after tax) for the six months ended June 30, 2006 and 2005 respectively.  Additional volatility in earnings and other comprehensive income (loss) may occur in the future as a result of the application of FAS 133.