Derivatives And Risk Management

3 Months Ended

Mar. 31, 2016

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, oil and NGLs which impacts the predictability of its cash flows related to the sale of those commodities.  These risks are managed by the Company’s use of certain derivative financial instruments.  As of March 31, 2016, the Company’s derivative financial instruments consisted of fixed price swaps, sold call options, purchased put options and interest rate swaps.  The Company also had basis swaps and sold call options as of December 31, 2015.  The basis swaps settled in the first quarter of 2016. A description of the Company’s derivative financial instruments is provided below:

Fixed price swaps	The Company receives a fixed price for the contract and pays a floating market price to the counterparty.
Sold call options	The Company sells call options in exchange for a premium.  If the market price exceeds the strike price of the call option  at the time of settlement, the Company pays the counterparty such excess on sold call options. If the market price settles below the call’s strike price, no payment is due from either party.
Purchased put options	The Company purchases put options from the counterparty by payment of a cash premium.  If the market price is lower than the put’s strike price at the time of settlement, the Company receives from the counterparty such difference on purchased put options.  If the market price settles above the put’s strike price, no payment is due from either party.
Basis swaps	Arrangements 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.
Interest rate swaps	Interest rate swaps are used to fix or float interest rates on existing or anticipated indebtedness. The purpose of these instruments is to manage the Company’s existing or anticipated exposure to unfavorable interest rate changes.

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 following table provides information about the Company’s financial instruments that are sensitive to changes in commodity prices and that are used to protect the Company’s exposure.  None of the financial instruments below are designated for hedge accounting treatment.  The table presents the notional amount in Bcf, the weighted average contract prices and the fair value by expected maturity dates as of March 31, 2016.

		Weighted Average Price per MMBtu
	Volume (Bcf)	Swaps		Purchased Puts		Sold Calls		Fair value at March 31, 2016 ($ in millions)
Natural Gas:
Fixed Price Swaps:
2016	64	$	2.48	$	–	$	–	$	20
Purchased Put Options:
2016	43	$	–	$	2.35	$	–	$	15
Sold Call Options:
2016	90	$	–	$	–	$	5.00	$	–
2017	86	$	–	$	–	$	3.25	$	(16)
2018	63	$	–	$	–	$	3.50	$	(12)
2019	52	$	–	$	–	$	3.50	$	(13)
2020	32	$	–	$	–	$	3.75	$	(9)

The balance sheet classification of the assets related to derivative financial instruments (none of which are designated for hedge accounting) are summarized below as of March  31, 2016  and December 31, 2015:

	Derivative Assets
	Balance Sheet Classification		Fair Value
			March 31, 2016		December 31, 2015
		(in millions)
Basis swaps	Derivative assets		$	–	$	3
Fixed price swaps	Derivative assets			20		–
Purchased put options	Derivative assets			15		–
Total derivative assets			$	35	$	3
	Derivative Liabilities
	Balance Sheet Classification		Fair Value
			March 31, 2016		December 31, 2015
			(in millions)
Sold call options	Derivative liabilities		$	5	$	–
Interest rate swaps	Derivative liabilities			3		3
Sold call options	Other long-term liabilities			45		–
Interest rate swaps	Other long-term liabilities			5		2
Total derivative liabilities			$	58	$	5

At March 31, 2016, the net fair value of the Company’s financial instruments related to natural gas was a  $15 millionliability.  The net fair value of the Company’s interest rate swaps was an $8 million liability at March 31, 2016.

Derivative Contracts not Designated for Hedge Accounting

As of March 31, 2016, the Company did not have any positions designated for hedge accounting treatment.  Gains and losses on derivatives that are not designated for hedge accounting treatment, or that do not meet hedge accounting requirements, are recorded as a component of gain (loss) on derivatives on the condensed consolidated statements of operations.   Accordingly, the gain (loss) on derivatives component of the statements of operations reflects the gains and losses on both settled and unsettled derivatives. The Company calculates gains and losses on settled derivatives as the summation of gains and losses on positions which have settled within the reporting period.  Only the settled gains and losses are included in the Company’s realized commodity price calculations.

The Company is a party to interest rate swaps that were entered into to mitigate the Company’s exposure to volatility in interest rates. The interest rate swaps have a notional amount of $170 million and expire in June 2020.The Company did not designate the interest rate swaps for hedge accounting.  Changes in the fair value of the interest rate swaps are included in gain (loss) on derivatives in the unaudited condensed consolidated statements of operations.

The following tables summarize the before tax effect of fixed price swaps, basis swaps, sold call options, purchased put options and interest rate swaps not designated for hedge accounting on the unaudited condensed consolidated statements of operations for the three months ended March 31, 2016 and 2015:

		Gain (Loss) on Derivatives,
		Unsettled
		Recognized in Earnings
	Consolidated Statement of Operations	For the three months ended
	Classification of Gain (Loss) on	March 31,
Derivative Instrument	Derivatives, Unsettled	2016		2015
		(in millions)
Basis swaps	Gain (Loss) on Derivatives	$	(3)	$	(8)
Sold call options	Gain (Loss) on Derivatives		(50)		8
Purchased put options	Gain (Loss) on Derivatives		15		–
Fixed price swaps	Gain (Loss) on Derivatives		20		(18)
Interest rate swaps	Gain (Loss) on Derivatives		(3)		(3)
Total loss on unsettled derivatives		$	(21)	$	(21)
		Gain (Loss)
		on Derivatives, Settled (1)
		Recognized in Earnings
	Consolidated Statement of Operations	For the three months ended
	Classification of Gain (Loss)	March 31,
Derivative Instrument	on Derivatives, Settled (1)	2016		2015
		(in millions)
Basis swaps	Gain (Loss) on Derivatives	$	4	$	(6)
Fixed price swaps	Gain (Loss) on Derivatives		4		42
Interest rate swaps	Gain (Loss) on Derivatives		(1)		(1)
Total gain on settled derivatives (2)		$	7	$	35
Total gain (loss) on derivatives		$	(14)	$	14

(1) The Company calculates gain (loss) on derivatives, settled, as the summation of gains and losses on positions that have settled within the period.

(2) These amounts are included, along with gas sales revenues, in the calculation of the Company’s realized natural gas price.

Derivative Contracts Designated for Hedge Accounting

All derivatives are recognized in the balance sheet as either an asset or liability and are measured at fair value other than transactions for which normal purchase/normal sale is applied. Certain criteria must be satisfied in order for derivative financial instruments to be designated for hedge accounting.  Accounting guidance for qualifying hedges allows an unsettled derivative’s unrealized gains and losses to be recorded either in earnings or as a component of other comprehensive income until settled.  In the period of settlement, the Company recognizes the gains and losses from these qualifying hedges in operating revenues.  In 2015, the Company had certain fixed price swaps that were designated for hedge accounting.  For the three months ended March 31, 2015, the Company reported a gain in other comprehensive income of $24 million (pre-tax) related to the effective portion of our unsettled fixed price swaps.  The ineffective portion of those fixed price swaps was recognized in earnings and had an inconsequential impact to the unaudited condensed consolidated statement of operations for the three ended March 31, 2015.  During the first quarter of 2015, a gain of $42 million (pre-tax) on settled fixed price swaps was transferred from other comprehensive income into gas sales revenues in the consolidated statements of operations.  As of March 31, 2016, the Company did not have any positions designated for hedge accounting treatment.