(6) 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, 2018 and December 31, 2017, the Company’s derivative financial instruments consisted of fixed price swaps, two-way costless collars, three-way costless collars, basis swaps, call options and interest rate swaps. A description of the Company’s derivative financial instruments is provided below:


Fixed price swaps	If the Company sells a fixed price swap, the Company receives a fixed price for the contract and pays a floating market price to the counterparty. If the Company purchases a fixed price swap, the Company receives a floating market price for the contract and pays a fixed price to the counterparty.

Two-way costless collars	Arrangements that contain a fixed floor price (purchased put option) and a fixed ceiling price (sold call option) based on an index price which, in aggregate, have no net cost. At the contract settlement date, (1) if the index price is higher than the ceiling price, the Company pays the counterparty the difference between the index price and ceiling price, (2) if the index price is between the floor and ceiling prices, no payments are due from either party, and (3) if the index price is below the floor price, the Company will receive the difference between the floor price and the index price.

Three-way costless collars	Arrangements that contain a purchased put option, a sold call option and a sold put option based on an index price which, in aggregate, have no net cost. At the contract settlement date, (1) if the index price is higher than the sold call strike price, the Company pays the counterparty the difference between the index price and sold call strike price, (2) if the index price is between the purchased put strike price and the sold call strike price, no payments are due from either party, (3) if the index price is between the sold put strike price and the purchased put strike price, the Company will receive the difference between the purchased put strike price and the index price, and (4) if the index price is below the sold put strike price, the Company will receive the difference between the purchased put strike price and the sold put strike price.

Basis swaps	Arrangements that guarantee a price differential for natural gas from a specified delivery point. If the Company sells a basis swap, 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. If the Company purchases a basis swap, the Company pays the counterparty if the price differential is greater than the stated terms of the contract and receives a payment from the counterparty if the price differential is less than the stated terms of the contract.

Call options	The Company purchases and sells call options in exchange for a premium. If the Company purchases a call option, the Company receives from the counterparty the excess (if any) of the market price over the strike price of the call option at the time of settlement, but if the market price is below the call’s strike price, no payment is due from either party. If the Company sells a call option, the Company pays the counterparty the excess (if any) of the market price over the strike price of the call option at the time of settlement, but if the market price is below the call’s strike price, no payment is due from either party.

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 chooses counterparties for its derivative instruments that it believes are creditworthy 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, there can be no assurance that a counterparty will be able to meet its obligations to the Company.

The following tables provide 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 tables present the notional amount, the weighted average contract prices and the fair value by expected maturity dates as of March 31, 2018:


Financial Protection on Production		Weighted Average Price per MMBtu										Fair Value at
	Volume (Bcf)	Swaps		Sold Puts		Purchased Puts		Sold Calls		Basis Differential		March 31, 2018 ($ in millions)
Natural gas
2018
Fixed price swaps	215	$	2.97	$	–	$	–	$	–	$	–	$	33
Two-way costless collars	6		–		–		2.90		3.27		–		1
Three-way costless collars	213		–		2.40		2.97		3.37		–		39
Total	434											$	73
2019
Fixed price swaps	93	$	3.00	$	–	$	–	$	–	$	–	$	19
Two-way costless collars	53		–		–		2.80		2.98		–		6
Three-way costless collars	133		–		2.49		2.93		3.34		–		11
Total	279											$	36

Basis swaps
2018	73	$	–	$	–	$	–	$	–	$	(0.59)	$	–
2019	6		–		–		–		–		1.01		(1)
Total	79											$	(1)


	Volume (MBbls)	Weighted Average Strike Price per Bbl		Fair Value at March 31, 2018 ($ in millions)
Propane
2018
Fixed price swaps	1,100	$	34.64	$	3

Ethane
2018
Fixed price swaps	413	$	11.19	$	–
2019
Fixed price swaps	91	$	11.61	$	–


Other Derivative Contracts
	Volume (Bcf)	Weighted Average Strike Price per MMBtu		Fair Value at March 31, 2018 ($ in millions)
Purchased call options
2020	68	$	3.63	$	7
2021	57		3.52		11
Total	125			$	18

Sold call options
2018	47	$	3.50	$	(1)
2019	52		3.50		(4)
2020	137		3.39		(21)
2021	114		3.33		(27)
Total	350			$	(53)


	Volume (Bcf)	Weighted Average Strike Price per MMBtu		Basis Differential		Fair Value at March 31, 2018 ($ in millions)
Storage (1)
2018
Fixed price swaps	1	$	2.76	$	–	$	–
Basis swaps	1		–		(0.88)		–
Total	2					$	–
2019
Fixed price swaps	1	$	3.03	$	–	$	–
Basis swaps	1		–		(0.44)		–
Total	2					$	–

(1)

The Company has entered into certain derivatives to protect the value of volumes of natural gas injected into a storage facility that will be withdrawn at a later date.

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 treatment. Changes in the fair value of the interest rate swaps are included in gain (loss) on derivatives on the unaudited condensed consolidated statements of operations.

The balance sheet classification of the assets and liabilities related to derivative financial instruments (none of which are designated for hedge accounting treatment) are summarized below as of March 31, 2018 and December 31, 2017:


	Derivative Assets
	Balance Sheet Classification		Fair Value
			March 31, 2018		December 31, 2017
Derivatives not designated as hedging instruments:		(in millions)
Fixed price swaps - natural gas	Derivative assets		$	34	$	38
Fixed price swaps - propane	Derivative assets			3		–
Two-way costless collars	Derivative assets			4		5
Three-way costless collars	Derivative assets			63		82
Basis swaps	Derivative assets			6		2
Purchased call options	Derivative assets			–		2
Fixed price swaps - natural gas	Other long-term assets			20		18
Two-way costless collars	Other long-term assets			12		–
Three-way costless collars	Other long-term assets			28		39
Purchased call options	Other long-term assets			18		–
Interest rate swaps	Other long-term assets			1		–
Total derivative assets			$	189	$	186	(1)

	Derivative Liabilities
	Balance Sheet Classification		Fair Value
			March 31, 2018		December 31, 2017
Derivatives not designated as hedging instruments:			(in millions)
Fixed price swaps - natural gas	Derivative liabilities		$	2	$	–
Two-way costless collars	Derivative liabilities			3		1
Three-way costless collars	Derivative liabilities			25		36
Basis swaps	Derivative liabilities			7		23
Sold call options	Derivative liabilities			3		3
Interest rate swaps	Derivative liabilities			–		1
Fixed price swaps - natural gas	Other long-term liabilities			–		1
Two-way costless collars	Other long-term liabilities			6		–
Three-way costless collars	Other long-term liabilities			16		30
Sold call options	Other long-term liabilities			49		15
Total derivative liabilities			$	111	$	110

(1)

Excludes $1 million in premiums paid related to certain call options recognized as a component of derivative assets within current assets on the condensed consolidated balance sheet at December 31, 2017. As certain call options settled, the premium was amortized and recognized as a component of gain (loss) on derivatives on the unaudited condensed statement of operations.

At March 31, 2018, the net fair value of the Company’s financial instruments related to commodities was a $77 million asset. The net fair value of the Company’s interest rate swaps was a $1 million asset as of March 31, 2018.

Derivative Contracts Not Designated for Hedge Accounting

As of March 31, 2018, the Company had no 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 unaudited condensed consolidated statements of operations. Accordingly, the gain (loss) on derivatives component of the statement 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 following tables summarize the before-tax effect of the Company’s derivative instruments not designated for hedge accounting on the unaudited condensed consolidated statements of operations for the three months ended March 31, 2018 and 2017:


		Gain (Loss) on Derivatives, Unsettled Recognized in Earnings
	Consolidated Statement of Operations	For the three months ended
	Classification of Gain (Loss)	March 31,
Derivative Instrument	on Derivatives, Unsettled	2018			2017
		(in millions)
Fixed price swaps - natural gas	Gain (Loss) on Derivatives	$	(3)		$	118
Fixed price swaps - propane	Gain (Loss) on Derivatives		3			–
Two-way costless collars	Gain (Loss) on Derivatives		3			31
Three-way costless collars	Gain (Loss) on Derivatives		(5)			57
Basis swaps	Gain (Loss) on Derivatives		20			(103)
Purchased call options	Gain (Loss) on Derivatives		16			–
Sold call options	Gain (Loss) on Derivatives		(34)			42
Interest rate swaps	Gain (Loss) on Derivatives		2			1
Total gain on unsettled derivatives		$	2		$	146

		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	2018			2017
		(in millions)
Fixed price swaps - natural gas	Gain (Loss) on Derivatives	$	–		$	(16)
Two-way costless collars	Gain (Loss) on Derivatives		4			(3)
Three-way costless collars	Gain (Loss) on Derivatives		7			(4)
Basis swaps	Gain (Loss) on Derivatives		(21)			(1)
Purchased call options	Gain (Loss) on Derivatives		2	(2)		–
Sold call options	Gain (Loss) on Derivatives		(1)			(6)
Total loss on settled derivatives		$	(9)		$	(30)

Total gain (loss) on derivatives		$	(7)		$	116

(1)

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

(2)

Includes $1 million amortization of premiums paid related to certain call options for the three months ended March 31, 2018, which is included in gain (loss) on derivatives on the unaudited condensed consolidated statements of operations.