Part IV
Item 15.
Exhibits and Financial Statement Schedules
XTO ENERGY INC. Notes to Consolidated Financial Statements
8. Commodity Sales Commitments
Our policy is to consider hedging a portion of our production at commodity prices management deems attractive. While there is a risk we may not be able to realize the benefit of rising prices, management may enter into hedging agreements because of the benefits of predictable, stable cash flows.
In addition to selling gas under fixed price physical delivery contracts, we enter futures contracts, energy swaps, collars and basis swaps to hedge our exposure to price fluctuations on natural gas, crude oil and natural gas liquids sales. When actual commodity prices exceed the fixed price provided by these contracts we pay this excess to the counterparty, and when the commodity prices are below the contractually provided fixed price, we receive this difference from the counterparty. We have hedged a portion of our exposure to variability in future cash flows from natural gas, crude oil and natural gas liquids sales through December 2008.
Natural Gas
We have entered into natural gas futures contracts and swap agreements that effectively fix prices for the production and periods shown below. Prices to be realized for hedged production may be less than these fixed prices because of location, quality and other adjustments. See Note 7 regarding accounting for commodity hedges.
Production Period |
Mcf per Day |
Average |
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| 2008 | January to March | 1,100,000 | $ | 8.33 |
| April to December | 1,200,000 | $ | 8.32 | |
The price we receive for our gas production is generally less than the NYMEX price because of adjustments for delivery location (“basis”), relative quality and other factors. We have entered sell basis swap agreements that effectively fix the basis adjustment as shown below. Not all of our sell basis swap agreements are designated as hedges for hedge accounting purposes.
Production Period |
Mcf per Day |
Weighted Average |
||
| 2008 | January (b) | 610,000 | $ | 0.43 |
| February (b) | 680,000 | $ | 0.42 | |
| March (b) | 560,000 | $ | 0.41 | |
| April to June (b) | 360,000 | $ | 0.57 | |
| July to October (b) | 330,000 | $ | 0.60 | |
| November to December (b) | 220,000 | $ | 0.78 | |
| 2009 | January to March (b) | 160,000 | $ | 0.97 |
| April to December (b) | 150,000 | $ | 1.02 | |
| 2010 | January to December | 50,000 | $ | 0.27 |
(a) Reductions to NYMEX gas prices for delivery location. (b) 2008 and 2009 amounts include 100,000 Mcf per day at $1.39 to be delivered in the Rocky Mountain Region. |
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Net settlements on futures and sell basis swap hedge contracts increased gas revenues by $658 million in 2007 and $618 million in 2006 and decreased gas revenue by $127 million in 2005. As of December 31, 2007, an unrealized pre-tax derivative fair value gain of $177 million, related to cash flow hedges of gas price risk, was recorded in accumulated other comprehensive income (loss). This fair value gain is expected to be reclassified into earnings in 2008. The actual reclassification to earnings will be based on mark-to-market prices at the contract settlement date. The settlement of futures contracts and sell basis swap agreements related to January 2008 gas production increased gas revenue by approximately $33 million, or $0.63 per Mcf.
Crude Oil
We have entered into crude oil futures contracts and swap agreements that effectively fix prices for the production and periods shown below. Prices to be realized for hedged production may be less than these fixed prices because of location, quality and other adjustments. See Note 7 regarding accounting for commodity hedges.
Production Period |
Bbls per Day |
Average |
||
| 2008 | January to December | 30,000 | $ | 74.20 |
We have entered crude sweet and sour differential swaps of $4.00 per Bbl for 10,000 Bbls per day of sour crude oil production for January to December 2008.
Net gains on futures and differential swap hedge contracts increased oil revenue by $24 million in 2007 and $3 million in 2006, and net losses reduced oil revenue by $75 million in 2005. As of December 31, 2007, an unrealized pre-tax derivative fair value loss of $207 million related to cash flow hedges of oil price risk was recorded in accumulated other comprehensive income (loss). This fair value loss is expected to be reclassified into earnings in 2008. The actual reclassification to earnings will be based on mark-to-market prices at the contract settlement date. The settlement of futures contracts, swap agreements and differential swap contracts related to January 2008 production decreased oil revenue by approximately $17 million, or $10.97 per Bbl.
Natural Gas Liquids
We have entered into natural gas liquids futures contracts that effectively fix prices for the production and periods shown below. Prices to be realized for hedged production may be less than these fixed prices because of location, quality and other adjustments.
Production Period |
Bbls per Day |
Average |
||
| 2008 | January to December | 5,000 | $ | 44.22 |
As of December 31, 2007, an unrealized pre-tax derivative fair value loss of $22 million, related to cash flow hedges of natural gas liquids price risk, was recorded in accumulated other comprehensive income (loss). This fair value loss is expected to be reclassified into earnings in 2008. The actual reclassification to earnings will be based on mark-to-market prices at the contract settlement date. The settlement of futures contracts related to January 2008 production decreased natural gas liquids revenue by approximately $3 million, or $5.52 per Bbl.
Transportation Contracts
In connection with our commitments under our transportation contracts (Note 6), we have entered purchase basis swap agreements related to potential purchase of gas volumes to be transported. Purchase basis swap agreements are not designated as hedges for hedge accounting purposes.
Period |
Mcf per Day |
Weighted Average |
||
| 2008 | January to March | 125,000 | $ | 0.69 |
| April to October | 50,000 | $ | 0.83 | |
| November to December | 40,000 | $ | 0.88 | |
| 2009 | January to March | 40,000 | $ | 0.88 |
(a) Reductions to NYMEX gas prices for purchase location. |
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Physical Delivery Contracts
In 1998, we sold a production payment, payable from future production from certain properties acquired in an acquisition, to EEX Corporation for $30 million. The acquisition was recorded net of the sale of the production payment. Under the terms of the production payment conveyance and related delivery agreement, we committed to deliver to EEX a total of approximately 34 Bcf of gas during the 10-year period beginning January 1, 2002, with scheduled deliveries by year, subject to certain variables. EEX will reimburse us for all royalty and production and property tax payments related to such deliveries. EEX will also pay us an operating fee of $0.257 per Mcf for deliveries, which fee will be escalated annually at a rate of 5.5%. In 2001 and 2002, we repurchased 18 Bcf (15 Bcf net) of gas under the production payment for $21 million. We began delivery of the remaining 16 Bcf of gas in September 2006. As of December 31, 2007, remaining volumes to be delivered under this commitment are 12 Bcf.
As part of the July 2007 Dominion acquisition, Dominion retained interests in certain of the acquired properties. Under the terms of the acquisition and the retained interest agreements, Dominion retained the rights to approximately 13 Bcf of gas beginning from the date of the acquisition through February 2009. As of December 31, 2007 remaining volumes to be delivered to Dominion are 7 Bcf.