NOTE 4. RISK MANAGEMENT

Our business activities expose us to risks associated with changes in the market price of oil, natural gas and natural gas liquids. In addition, our floating rate credit facility exposes us to risks associated with changes in interest rates. As such, future earnings are subject to fluctuation due to changes in the market prices of oil, natural gas and natural gas liquids and interest rates. We use derivatives to reduce our risk of changes in the prices of oil, natural gas and natural gas liquids and interest rates. Our policies do not permit the use of derivatives for speculative purposes.

We have elected not to designate any of our derivatives as hedging instruments. Accordingly, changes in the fair value of our derivatives are recorded immediately to net income as “Unrealized gains (losses) on derivatives, net” in our unaudited condensed consolidated statements of operations.

As of June 30, 2011, we had entered into oil commodity contracts with the following terms:

Period Covered	Hedged Volume (MBbls)		Weighted Average Fixed Price		Weighted Average Floor Price		Weighted Average Ceiling Price
Swaps – July 2011 through December 2011		209.4	$	95.01	$		$
Collars – July 2011 through December 2011		236.6				105.66		156.16
Swaps –2012		625.7		96.45
Collars – 2012		456.8				104.54		156.77
Swaps –2013		994.5		86.46
Swaps – 2014		897.2		91.90

As of June 30, 2011, we had entered into natural gas commodity contracts with the following terms:

Period Covered	Hedged Volume (MmmBtus)		Weighted Average Fixed Price		Weighted Average Floor Price		Weighted Average Ceiling Price
Swaps – July 2011 through December 2011		8,322.9	$	6.67	$		$
Collars – July 2011 through December 2011		3,330.6				7.54		9.90
Swaps –2012		14,307.6		6.84
Collars – 2012		6,618.7				7.94		9.90
Swaps – 2013		18,797.5		5.77
Swaps – 2014		14,600.0		5.75
Swaps – 2015		14,600.0		6.00

As of June 30, 2011, we had entered into natural gas liquids commodity contracts with the following terms:

Period Covered	Hedged Volume (MBbls)		Weighted Average Fixed Price
Ethane (MBbls):
Swaps – July 2011 through December 2011		188.6	$	20.06
Propane (MBbls):
Swaps – July 2011 through December 2011		112.7		49.77

As of June 30, 2011, we had entered into natural gas basis swaps with the following terms:

Period Covered

Floating Index 1

Floating Index 2

Hedged

Volume

(MmmBtus)

Spread

July 2011 through December 2011

NYMEX

Dominion Appalachia

174.4

0.1975

July 2011 through December 2011

NYMEX

Appalachia Columbia

47.7

0.1500

As of June 30, 2011, we had entered into interest rate swaps with the following terms:

Period Covered	Notional Amount		Floating Rate	Fixed Rate
July 2011 – July 2012	$	90,000	1 Month LIBOR		4.157	%
July 2011 – September 2012		40,000	1 Month LIBOR		2.145	%
July 2012 – July 2015		110,000	1 Month LIBOR		3.315	%

The fair value of these derivatives was as follows:

	Asset Derivatives						Liability Derivatives
	June 30, 2011			December 31, 2010			June 30, 2011			December 31, 2010
Commodity contracts	$	89,564		$	123,655		$	10,620		$	7,633
Interest rate swaps		–			–			8,925			12,152
Total fair value		89,564			123,655			19,545			19,785
Netting arrangements		(11,773	)		(17,058	)		(11,773	)		(17,058	)
Net recorded fair value	$	77,791		$	106,597		$	7,772		$	2,727

Location of derivatives in our unaudited condensed consolidated balance sheets:
Derivative asset	$	51,215		$	55,100		$	–		$	–
Long–term derivative asset		26,576			51,497			–			–
Derivative liability		–			–			1,178			1,943
Long–term derivative liability		–			–			6,594			784
	$	77,791		$	106,597		$	7,772		$	2,727

The following table presents the impact of derivatives and their location within the unaudited condensed consolidated statements of operations:

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Realized gains on derivatives, net:
Commodity contracts (1)	$	11,388		$	16,044		$	27,070		$	26,167
Interest rate swaps (2)		2,854			(2,143	)		714			(4,301	)
Total	$	14,242		$	13,901		$	27,784		$	21,866

Unrealized gains (losses) on derivatives, net:
Commodity contracts	$	20,380		$	(1,189	)	$	(34,181	)	$	32,701
Interest rate swaps (2)		(2,958	)		(969	)		(1,452	)		(2,199	)
Total	$	17,422		$	(2,158	)	$	(35,633	)	$	30,502

(1)

Realized gains for the three months and six months ended June 30, 2011 exclude $1.4 million and $2.9 million, respectively, related to the initial value of derivatives acquired in our December 2010 acquisition of oil and natural gas properties that have been relieved through the settlement of such derivatives.

(2)

In June 2011, we terminated three of our interest rate swaps and reclassified the $4.7 million non–cash gain from “Unrealized gains (losses) on derivatives, net” to “Realized gains on derivatives, net.”