Derivative Instruments

3 Months Ended

Mar. 31, 2020

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 Company's operating results. The Company uses derivative commodity instruments to hedge its cash flows from sales of produced natural gas and NGLs. The overall objective of the Company's hedging program is to protect cash flows from undue exposure to the risk of changing commodity prices.

The derivative commodity instruments used by the Company are primarily swap, collar and option agreements. These agreements 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 when executing its commodity hedging strategy. The Company typically enters into over the counter (OTC) derivative commodity instruments 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 in 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. Contracts that result in the physical receipt or delivery of a commodity but are not designated or do not meet all of the criteria to qualify for the normal purchase and normal sale scope exception 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 operating activities in the 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 1,846 Bcf and 1,644 Bcf of natural gas as of March 31, 2020 and December 31, 2019, respectively. The open positions at both March 31, 2020 and December 31, 2019 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 has the right to require 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 in the Condensed Consolidated Balance Sheets. 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 has the right to require 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 these amounts as a current liability in the Condensed Consolidated Balance Sheets. There were no such deposits recorded in the Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019.

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 is required to make such deposits based on an established initial margin requirement and 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 these amounts as a current liability in the Condensed Consolidated Balance Sheets. The initial margin requirements are established by the exchanges based on the price, volatility and the time to expiration of the contract. The margin requirements are subject to change at the exchanges' discretion. There were $1.1 million and $12.6 million of such deposits recorded as a current asset as of March 31, 2020 and December 31, 2019, respectively, and $20.0 million recorded as a current liability as of March 31, 2020 in the Condensed Consolidated Balance Sheets.

Refer to Note 9 for a discussion of the derivative liability recorded in connection with the Equitrans Share Exchange (defined in Note 9).

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 requirements with counterparties		Net derivative instruments
	(Thousands)
March 31, 2020
Asset derivative instruments, at fair value	$	1,053,502	$	(315,171)	$	(20,044)	$	718,287
Liability derivative instruments, at fair value	526,601		(315,171)		(1,077)		210,353

December 31, 2019
Asset derivative instruments, at fair value	$	812,664	$	(226,116)	$	—	$	586,548
Liability derivative instruments, at fair value	312,696		(226,116)		(12,606)		73,974

Certain of the Company's OTC derivative instrument contracts provide that, if the Company's credit rating assigned by Moody's Investors Service, Inc. (Moody's) or S&P Global Ratings (S&P) is below investment grade, additional collateral must be deposited with the counterparty if the associated derivative liability exceeds certain thresholds. The additional collateral can be up to 100% of the derivative liability. Investment grade refers to the quality of a company's credit as assessed by one or more credit rating agencies. To be considered investment grade, a company must be rated "Baa3" or higher by Moody's, "BBB–" or higher by S&P and "BBB–" or higher by Fitch Rating Service (Fitch). Anything below these ratings is considered non-investment grade. As of March 31, 2020, the Company's senior notes were rated "Ba1" by Moody's and "BB+" by S&P. Margin deposits on the Company's derivative instruments are also subject to factors other than credit rating, such as natural gas prices and credit thresholds set forth in the agreements between hedging counterparties and the Company. As of March 31, 2020, the aggregate fair value of all OTC derivative instruments with credit risk-related contingent features that were in a net liability position was $44.7 million, for which the Company had no collateral posted.

In April 2020, Moody's and S&P downgraded the Company's senior notes credit rating to "Ba3" and "BB–," respectively. As a result, as of May 1, 2020, the Company posted approximately $19 million of margin deposits with counterparties pursuant to the Company's derivative instruments. Refer to Note 6 for a discussion of margin deposit and other collateral exposure.

The Company has not executed any interest rate swaps since 2011. As of December 31, 2019, amounts related to historical interest rate swaps that had been previously recorded in accumulated other comprehensive income (OCI) were fully reclassified into interest expense. See Note 8.