Derivatives and Risk Management

3 Months Ended

Mar. 31, 2013

Derivatives And Risk Management [Abstract]

Derivatives and Risk Management

(7) DERIVATIVES AND RISK MANAGEMENT

The Company is exposed to volatility in market prices and basis differentials for natural gas and crude oil which impacts the predictability of its cash flows related to the sale of natural gas and oil. These risks are managed by the Company’s use of certain derivative financial instruments.  At March 31, 2013 and December 31, 2012, the Company’s derivative financial instruments consisted of price swaps, basis swaps, and fixed price call options. A description of the Company’s derivative financial instruments is provided below:

Fixed price swapsThe Company receives a fixed price for the contract and pays a floating market price to the counterparty.

Floating price swapsThe Company receives a floating market price from the counterparty and pays a fixed price.

Costless-collarsArrangements that contain a fixed floor price (put) and a fixed ceiling price (call). If the market price exceeds the call strike price or falls below the put strike price, the Company receives the fixed price and pays the market price. If the market price is between the call and the put strike price, no payments are due from either party.

Basis swapsArrangements that guarantee a price differential for natural gas from a specified delivery point. The Company receives a payment from the counterparty if the price differential is greater than the stated terms of the contract and pays the counterparty if the price differential is less than the stated terms of the contract.  

Fixed price call options   The Company sells fixed price call options in exchange for a premium. At the time of settlement, if the market price exceeds the fixed price of the call option, the Company pays the counterparty such excess on sold fixed price call options. If the market price settles below the fixed price of the call option, no payment is due from either party.

GAAP requires that all derivatives be recognized in the balance sheet as either an asset or liability and be measured at fair value. Under GAAP, certain criteria must be satisfied in order for derivative financial instruments to be classified and accounted for as either a cash flow or a fair value hedge. Accounting for qualifying hedges requires a derivative’s gains and losses to be recorded either in earnings or as a component of other comprehensive income. Gains and losses on derivatives that are not elected for hedge accounting treatment or that do not meet hedge accounting requirements are recorded in earnings.

The Company utilizes counterparties for its derivative instruments that it believes are credit-worthy at the time the transactions are entered into and the Company closely monitors the credit ratings of these counterparties. Additionally, the Company performs both quantitative and qualitative assessments of these counterparties based on their credit ratings and credit default swap rates where applicable. However, the events in the financial markets in recent years demonstrate there can be no assurance that a counterparty will be able to meet its obligations to the Company.

The balance sheet classification of the assets related to derivative financial instruments are summarized below at March 31, 2013 and December 31, 2012:

	Derivative Assets
	March 31, 2013			December 31, 2012
	Balance Sheet Classification	Fair Value		Balance Sheet Classification	Fair Value
	(in thousands)
Derivatives designated as hedging instruments:
Fixed price swaps	Hedging asset	$	131,091	Hedging asset	$	279,443
Fixed price swaps	Other assets		4,378	Other assets		8,550
Total derivatives designated as hedging instruments		$	135,469		$	287,993
Derivatives not designated as hedging instruments:
Basis swaps	Hedging asset	$	936	Hedging asset	$	3,250
Fixed price swaps	Hedging asset		985	Hedging asset		–
Basis swaps	Other assets		464	Other assets		901
Fixed price swaps	Other assets		29,507	Other assets		–
Total derivatives not designated as hedging instruments		$	31,892		$	4,151
Total derivative assets		$	167,361		$	292,144
	Derivative Liabilities
	March 31, 2013			December 31, 2012
	Balance Sheet Classification	Fair Value		Balance Sheet Classification	Fair Value
	(in thousands)
Derivatives not designated as hedging instruments:
Basis swaps	Other current liabilities	$	337	Other current liabilities	$	138
Fixed price swaps	Other current liabilities		436	Other current liabilities		–
Basis swaps	Other long-term liabilities		–	Other long-term liabilities		–
Fixed price call options	Other long-term liabilities		61,210	Other long-term liabilities		4,128
Fixed price swaps	Other long-term liabilities		824	Other long-term liabilities		–
Total derivatives not designated as hedging instruments		$	62,807		$	4,266
Total derivative liabilities		$	62,807		$	4,266

Cash Flow Hedges

The reporting of gains and losses on cash flow derivative hedging instruments depends on whether the gains or losses are effective at offsetting changes in the cash flows of the hedged item. The effective portion of the gains and losses on the derivative hedging instruments are recorded in other comprehensive income until recognized in earnings during the period that the hedged transaction takes place. The ineffective portion of the gains and losses from the derivative hedging instrument is recognized in earnings immediately.

As of March 31, 2013, the Company had cash flow hedges on the following volumes of natural gas production (in Bcf):

Year	Fixed price swaps
2013	139.6
2014	18.3

As of March 31, 2013, the Company recorded a net gain in accumulated other comprehensive income related to its hedging activities of $78.7 million. This amount is net of a deferred income tax liability recorded as of March 31, 2013 of $52.5 million. The amount recorded in accumulated other comprehensive income will be relieved over time and recognized in the statement of operations as the physical transactions being hedged occur. Assuming the market prices of natural gas futures as of March 31, 2013 remain unchanged, the Company would expect to transfer an aggregate after-tax net gain of $76.3 million from accumulated other comprehensive income to earnings during the next 12 months. Gains or losses from derivative instruments designated as cash flow hedges are reflected as adjustments to gas sales in the unaudited condensed consolidated statements of operations. Volatility in earnings and other comprehensive income may occur in the future as a result of the Company’s derivative activities.

The following tables summarize the before tax effect of all cash flow hedges on the unaudited condensed consolidated financial statements for the three month periods ended March 31, 2013 and 2012:

		Gain (Loss) Recognized in Other Comprehensive Income
		(Effective Portion)
		For the three months ended
		March 31,
Derivative Instrument		2013		2012
		(in thousands)
Fixed price swaps		$	(73,902)	$	218,957
Costless-collars		$	–	$	56,511
	Classification of Gain	Gain Reclassified from Accumulated Other
	Reclassified from	Comprehensive Income into Earnings
	Accumulated Other	(Effective Portion)
	Comprehensive Income	For the three months ended
	into Earnings	March 31,
Derivative Instrument	(Effective Portion)	2013		2012
		(in thousands)
Fixed price swaps	Gas Sales	$	78,621	$	106,311
Costless-collars	Gas Sales	$	–	$	55,310
		Gain Recognized in Earnings
		(Ineffective Portion)
	Classification of Gain	For the three months ended
	Recognized in Earnings	March 31,
Derivative Instrument	(Ineffective Portion)	2013		2012
		(in thousands)
Fixed price swaps	Gas Sales	$	1,301	$	4,299
Costless-collars	Gas Sales	$	–	$	911

Fair Value Hedges

For fair value hedges, the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item are recognized in earnings immediately.  As of March 31, 2013 and December 31, 2012, the Company had no material fair value hedges.

Other Derivative Contracts

Although the Company’s basis swaps meet the objective of managing commodity price exposure, these trades are typically not entered into concurrent with the Company’s derivative instruments that qualify as cash flow hedges and therefore do not generally qualify for hedge accounting. Basis swap derivative instruments that do not qualify as cash flow hedges are recorded on the balance sheet at their fair values under hedging assets, other assets and other current liabilities, as applicable, and all realized and unrealized gains and losses related to these contracts are recognized immediately in the unaudited condensed consolidated statements of operations as a component of gas sales.

As of March 31, 2013, the Company had basis swaps on natural gas production that did not qualify for hedge accounting treatment of 22.3 Bcf and 10.9 Bcf in 2013 and 2014, respectively.

As of March 31, 2013, the Company had fixed price call options on natural gas production that did not qualify for hedge accounting treatment of 199.8 Bcf for 2015.  As of March 31, 2013, the Company had fixed price swaps not designated for hedge accounting on natural gas production of 181.5 Bcf for 2014.

The following table summarizes the before tax effect of basis swaps, fixed price call options that did not qualify for hedge accounting, and fixed price swaps not designated for hedge accounting,  within the commodity derivative income (loss) line on the unaudited condensed consolidated statements of operations for the three month period ended March 31, 2013 and 2012:

		Unrealized Gain (Loss)
		Recognized in Earnings
	Income Statement	For the three months ended
	Classification	March 31,
Derivative Instrument	of Unrealized Gain (Loss)	2013		2012
		(in thousands)
Basis swaps	Commodity Derivative Income (Loss)	$	(2,950)	$	1,223
Fixed price call options	Commodity Derivative Income (Loss)	$	(57,082)	$	–
Fixed price swaps	Commodity Derivative Income (Loss)	$	29,232	$	–
		Realized Gain
		Recognized in Earnings
	Income Statement	For the three months ended
	Classification	March 31,
Derivative Instrument	of Realized Gain	2013		2012
		(in thousands)
Basis swaps	Commodity Derivative Income (Loss)	$	1,007	$	1,018

As of March 31, 2013, the Company had fixed price swaps not designatedfor hedge accounting on the following volumes of natural gas production (in Bcf):

Year	Fixed price swaps not designated
2014	181.5