Derivative Instruments

3 Months Ended

Mar. 31, 2013

Derivative Instruments

4.Derivative Instruments

Commodity Contracts

The Company’s primary market exposure is to adverse fluctuations in the price of natural gas. The Company uses derivative instruments, primarily forward contracts, costless collars and swaps, to manage the price risk associated with its gas production, and the resulting impact on cash flow, net income and earnings per share. The Company does not use derivative instruments for speculative purposes.

The extent of the Company’s risk management activities is controlled through policies and procedures that involve senior management and were approved by the Company’s Board of Directors. Senior management is responsible for proposing hedging recommendations, executing the approved hedging plan, overseeing the risk management process including methodologies used for valuation and risk measurement and presenting policy changes to the Board. The Company’s Board of Directors is responsible for approving risk management policies and for establishing the Company’s overall risk tolerance levels. The duration of the various derivative instruments depends on senior management’s view of market conditions, available contract prices and the Company’s operating strategy. Under the Company’s credit agreement, the Company can hedge up to 90% of the projected proved developed producing reserves for the next 12 month period, and up to 80% of the projected proved producing reserves for the 24 month period thereafter.

The Company accounts for its derivative instruments as mark-to-market derivative instruments. Under mark-to-market accounting, derivative instruments are recognized as either assets or liabilities at fair value on the Company’s consolidated balance sheets and changes in fair value are recognized in the price risk management activities line on the consolidated statements of operations. Realized gains and losses resulting from the contract settlement of derivatives are also recorded in the price risk management activities line on the consolidated statements of operations.

On the consolidated statements of cash flows, the cash flows from these instruments are classified as operating activities.

Derivative instruments expose the Company to counterparty credit risk. The Company enters into these contracts with third parties and financial institutions that it considers to be creditworthy. In addition, the Company’s master netting agreements reduce credit risk by permitting the Company to net settle for transactions with the same counterparty.

As with most derivative instruments, the Company’s derivative contracts contain provisions which may allow for another party to require security from the counterparty to ensure performance under the contract. The security may be in the form of, but not limited to, a letter of credit, security interest or a performance bond. As of March31, 2013, no party to any of the Company’s derivative contracts has required any form of security guarantee.

The Company had the following commodity volumes under derivative contracts as of March31, 2013:

TypeofContract	Remaining Contractual Volume(Mcf)	Term	Price		Price Index(1)
FixedPriceSwap	1,650,000	01/13-12/13	$5.16			NYMEX
Costless Collar	1,650,000	01/13-12/13	$5.00	floor		NYMEX
			$5.35	ceiling
Costless Collar	1,620,000	01/13-12/13	$3.25	floor		NYMEX
			$4.00	ceiling
Fixed Price Swap	1,825,000	01/14-12/14	$4.27			NYMEX
Fixed Price Swap	1,800,000	01/14-12/14	$4.20			NYMEX
Costless Collar	1,800,000	01/14-12/14	$4.00	floor		NYMEX
			$4.50	ceiling
Total	10,345,000

(1)New York Mercantile Exchange (“NYMEX”).

The Company entered into one additional derivative contract subsequent to March31, 2013. Please refer to Note 12 for the derivative contract terms.

Interest Rate Swap

As of March31, 2013, the Company had the following interest rate swap in place with a third party to manage the risk associated with the floating interest rate on its credit facility:

TypeofContract	Contractual Amount	Term	Rate(LIBOR)	Effective InterestRate(1)
InterestRateSwap	$30,000	12/31/12-9/30/16	1.050%	3.55%

(1)In accordance with its credit facility, the Company pays interest amounts based upon the Eurodollar LIBOR rate or Prime rate and plus a spread ranging from 0.75% to 2.75% depending on its outstanding borrowings. The effective rate shown reflects the interest rate based on the outstanding borrowings at March31, 2013.

The table below contains a summary of all the Company’s derivative positions reported on the consolidated balance sheet as of March31, 2013, presented gross of any master netting arrangements:

Derivativesnotdesignated as hedginginstrumentsunderASC815	BalanceSheetLocation	FairValue
Assets
Commodityderivatives	Assetsfrompriceriskmanagement-current	$3,222
	Assetsfrompriceriskmanagement-longterm	177
Liabilities
Commodity derivatives	Liabilities from price risk management - current	$(648)
Interest rate swap	Other current liabilities	(222)
	Other long term liabilities	(311)
Total		$2,218

The before-tax effect of derivative instruments not designated as hedging instruments on the consolidated statements of operations for the three months ended March 31, 2013 and 2012 was as follows:

	AmountofGain(Loss)Recognized in Three Months Ended March31,
	2013	2012
Unrealized gain (loss) on commodity contracts1	$(4,673)	$2,597
Realized gain on commodity contracts1	1,869	3,175
Unrealized gain (loss) on interest rate swap2	37	(23)
Realized losson interest rate swap2	(63)	(23)
Total activity for derivatives not designated as hedging instruments	$(2,830)	$5,726

1Included in price risk management activities, net on the consolidated statements of operations. Price risk management activities totaled $(2,804) and $5,772 for the three months ended March31, 2013 and 2012, respectively.

2 Included in interest expense, net on the consolidated statements of operations.

Refer to Note 5 for additional information regarding the valuation of the Company’s derivative instruments.