Derivative Instruments

9 Months Ended

Sep. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The Company's primary market risk exposure is the volatility of future prices for natural gas and NGLs, which can affect the operating results of the Company. The Company uses derivative commodity instruments to hedge its cash flows from sales of the Company's produced natural gas and NGLs. The Company's overall objective in its hedging program is to protect cash flows from undue exposure to the risk of changing commodity prices.

The derivative commodity instruments currently used by the Company are primarily swap agreements, collar agreements and option agreements that may require payments to or receipt of payments from counterparties based on the differential between two prices for the commodity. The Company uses these agreements to hedge its NYMEX and basis exposure. The Company may also use other contractual agreements in implementing its commodity hedging strategy. The Company's over the counter (OTC) derivative commodity instruments are typically entered into with financial institutions and the creditworthiness of all counterparties is regularly monitored.

The Company does not designate any of its derivative instruments as cash flow hedges; therefore, all changes in fair value of the Company's derivative instruments are recognized within operating revenues in the Statements of Condensed Consolidated Operations. The Company recognizes all derivative instruments as either assets or liabilities at fair value on a gross basis. These derivative instruments are reported as either current assets or current liabilities due to their highly liquid nature. The Company can net settle its derivative instruments at any time.

Contracts that result in physical delivery of a commodity expected to be sold by the Company in the normal course of business are generally designated as normal sales and are exempt from derivative accounting. If contracts that result in the physical receipt or delivery of a commodity are not designated or do not meet all the criteria to qualify for the normal purchase and normal sale scope exception, the contracts are subject to derivative accounting.

The Company's OTC derivative instruments generally require settlement in cash. The Company also enters into exchange traded derivative commodity instruments that are generally settled with offsetting positions. Settlements of derivative commodity instruments are reported as a component of cash flows from operations in the accompanying Statements of Condensed Consolidated Cash Flows.

With respect to the derivative commodity instruments held by the Company, the Company hedged portions of expected sales of production and portions of its basis exposure covering approximately 1,922 Bcf of natural gas and 276 Mbbls of NGLs as of September 30, 2019, and 3,128 Bcf of natural gas and 1,505 Mbbls of NGLs as of December 31, 2018. The open positions at both September 30, 2019 and December 31, 2018 had maturities extending through December 2024.

When the net fair value of any of the Company's swap agreements represents a liability to the Company that is in excess of the agreed-upon threshold between the Company and the counterparty, the counterparty requires the Company to remit funds as a margin deposit in an amount equal to the portion of the derivative liability that is in excess of the threshold amount. The Company records these deposits as a current asset. When the net fair value of any of the Company's swap agreements represents an asset to the Company that is in excess of the agreed-upon threshold between the Company and the counterparty, the Company requires the counterparty to remit funds as a margin deposit in an amount equal to the portion of the derivative asset that is in excess of the threshold amount. The Company records a current liability for such amounts received. The Company had no such deposits in its Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018.

When the Company enters into exchange-traded natural gas contracts, exchanges may require the Company to remit funds to the corresponding broker as good-faith deposits to guard against the risks associated with changing market conditions. The Company must make such deposits based on an established initial margin requirement as well as the net liability position, if any, of the fair value of the associated contracts. The Company records these deposits as a current asset in the Condensed Consolidated Balance Sheets. When the fair value of such contracts is in a net asset position, the broker may remit funds to the Company. The Company records a current liability for any such amounts received. The initial margin requirements are established by the exchanges based on the price, volatility and the time to expiration of the related contract. The margin requirements are subject to change at the exchanges' discretion. The Company recorded current assets of $23.4 million and $40.3 million as of September 30, 2019 and December 31, 2018, respectively, for such deposits in its Condensed Consolidated Balance Sheets.

The Company has netting agreements with financial institutions and its brokers that permit net settlement of gross commodity derivative assets against gross commodity derivative liabilities. The table below reflects the impact of netting agreements and margin deposits on gross derivative assets and liabilities.



	Gross derivative instruments, recorded in the Condensed Consolidated Balance Sheets		Derivative instruments subject to master netting agreements			Margin deposits remitted to counterparties			Derivative instruments, net
	(Thousands)
As of September 30, 2019
Asset derivative instruments, at fair value	$	771,634	$	(288,898	)	$	—		$	482,736
Liability derivative instruments, at fair value	$	339,995	$	(288,898	)	$	(23,372	)	$	27,725

As of December 31, 2018
Asset derivative instruments, at fair value	$	481,654	$	(256,087	)	$	—		$	225,567
Liability derivative instruments, at fair value	$	336,051	$	(256,087	)	$	(40,283	)	$	39,681

Certain of the Company's OTC derivative instrument contracts provide that, if the Company's credit ratings by S&P Global Ratings (S&P) or Moody's Investors Service, Inc. (Moody's) are lowered below investment grade, additional collateral must be deposited with the counterparty if the derivative liability on those contracts exceeds certain thresholds. The additional collateral can be up to 100% of the derivative liability. As of September 30, 2019, the aggregate fair value of all OTC derivative instruments with credit risk-related contingent features that were in a net liability position was $76.7 million, for which the Company had no collateral posted on September 30, 2019. If the Company's credit rating by S&P or Moody's had been downgraded to a rating immediately below investment grade on September 30, 2019, the Company would not have been required to post any additional collateral under its OTC derivative instrument contracts with the respective counterparties. The required margin on the Company's derivative instruments is subject to significant change as a result of factors other than credit rating, such as gas prices and credit thresholds set forth in agreements between the hedging counterparties and the Company. Investment grade refers to the quality of the Company's

credit as assessed by one or more credit rating agencies. The Company's senior unsecured debt was rated BBB- by S&P and Baa3 by Moody's at September 30, 2019. In order to be considered investment grade, the Company must be rated BBB- or higher by S&P and Baa3 or higher by Moody's. Anything below these ratings is considered non-investment grade. See also "Security Ratings and Financing Triggers" under Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations."

The Company may engage in interest rate swaps to hedge exposure to fluctuations in interest rates but has not executed any interest rate swaps since 2011. Amounts related to historical interest rate swaps are recorded in other comprehensive income (OCI). See Note 9.