(8) 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 September 30, 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 Company presents its derivative positions on a gross basis and does not net the asset and liability positions where counterparty master netting arrangements contain provisions for net settlement.

On August 30, 2018, the Company entered into a MIPA to effect the Fayetteville Shale sale. Included in the Fayetteville Shale sale are certain derivative positions associated with the Company’s production. The current fair value of these derivatives are presented as held for sale assets and liabilities as of September 30, 2018, and the periodic changes in fair value are included in Gain (Loss) on Derivatives on the consolidated statements of operations.

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. The derivatives included in the Fayetteville Shale sale are excluded (see Note 2). 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 September 30, 2018:



Financial Protection on Production (1)
		Weighted Average Price per MMBtu
	Volume (Bcf)	Swaps		Sold Puts		Purchased Puts		Sold Calls		Basis Differential		Fair Value at September 30, 2018 ($ in millions)
Natural Gas
2018
Sold fixed price swaps	42	$	2.91	$	–	$	–	$	–	$	–	$	(5)
Two-way costless collars	6		–		–		2.90		3.27		–		–
Three-way costless collars	72		–		2.40		2.97		3.37		–		3
Total	120											$	(2)
2019
Sold fixed price swaps	156	$	2.92	$	–	$	–	$	–	$	–	$	29
Two-way costless collars	53		–		–		2.80		2.98		–		8
Three-way costless collars	163		–		2.47		2.89		3.26		–		13
Total	372											$	50
2020
Sold fixed price swaps	2	$	2.77	$	–	$	–	$	–	$	–	$	–
Three-way costless collars	47		–		2.43		2.80		3.09		–		3
Total	49											$	3

Sold Basis Swaps
2018	16	$	–	$	–	$	–	$	–	$	(0.55)	$	(2)
2019	32		–		–		–		–		0.23		(8)
Total	48											$	(10)

(1)

Excludes derivatives associated with the Fayetteville Shale sale (see Note 2).


	Volume (MBbls)	Weighted Average Strike Price per Bbl		Fair Value at September 30, 2018 ($ in millions)
Propane
2018
Sold fixed price swaps	778	$	34.86	$	(8)
2019
Sold fixed price swaps	1,506	$	32.63	$	(11)

Ethane
2018
Sold fixed price swaps	1,389	$	13.30	$	(13)
2019
Sold fixed price swaps	3,322	$	13.38	$	(16)


Other Derivative Contracts
	Volume (Bcf)	Weighted Average Strike Price per MMBtu		Fair Value at September 30, 2018 ($ in millions)
Purchased Call Options - Natural Gas
2020	68	$	3.63	$	2
2021	57		3.52		2
Total	125			$	4

Sold Call Options - Natural Gas
2018	16	$	3.50	$	–
2019	52		3.50		(2)
2020	136		3.39		(8)
2021	114		3.33		(6)
Total	318			$	(16)

	Volume (MBbl)	Weighted Average Strike Price per Bbl		Fair Value at September 30, 2018 ($ in millions)
Sold Call Options - Oil
2018	276	$	65.00	$	(2)
2019	270		65.00		(3)
Total	546			$	(5)


	Volume (Bcf)	Weighted Average Strike Price per MMBtu		Basis Differential		Fair Value at September 30, 2018 ($ in millions)
Storage (1)
2018
Purchased fixed price swaps	0.2	$	2.77	$	–	$	–
Sold fixed price swaps	0.2		2.89		–		–
Purchased basis swaps	0.1		–		(0.89)		–
Sold basis swaps	0.1		–		(0.62)		–
Total	0.6					$	–
2019
Sold fixed price swaps	0.8	$	3.03	$	–	$	–
Sold basis swaps	0.7		–		(0.44)		–
Total	1.5					$	–

(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 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) is summarized below as of September 30, 2018 and December 31, 2017:


Derivative Assets
	Balance Sheet Classification		Fair Value
			September 30, 2018			December 31, 2017
Derivatives not designated as hedging instruments:		(in millions)
Sold fixed price swaps - natural gas	Derivative assets		$	46	(1)	$	38
Two-way costless collars - natural gas	Derivative assets			12			5
Three-way costless collars - natural gas	Derivative assets			40			82
Sold basis swaps - natural gas	Derivative assets			5			2
Purchased call options - natural gas	Derivative assets			–			3	(2)
Interest rate swaps	Derivative assets			1			–
Sold fixed price swaps - natural gas	Other long-term assets			6			18
Two-way costless collars - natural gas	Other long-term assets			2			–
Three-way costless collars - natural gas	Other long-term assets			24			39
Purchased call options - natural gas	Other long-term assets			4			–
Interest rate swaps	Other long-term assets			1			–
Total derivative assets			$	141		$	187

Derivative Liabilities
	Balance Sheet Classification		Fair Value
			September 30, 2018			December 31, 2017
Derivatives not designated as hedging instruments:			(in millions)
Sold fixed price swaps - natural gas	Derivative liabilities		$	6		$	–
Sold fixed price swaps - propane	Derivative liabilities			19			–
Sold fixed price swaps - ethane	Derivative liabilities			31			–
Two-way costless collars - natural gas	Derivative liabilities			5			1
Three-way costless collars - natural gas	Derivative liabilities			28			36
Sold basis swaps - natural gas	Derivative liabilities			15			23
Sold call options - natural gas	Derivative liabilities			2			3
Sold call options - oil	Derivative liabilities			5			–
Interest rate swaps	Derivative liabilities			–			1
Sold fixed price swaps - natural gas	Other long-term liabilities			–			1
Sold fixed price swaps - propane	Other long-term liabilities			2			–
Sold fixed price swaps - ethane	Other long-term liabilities			2			–
Two-way costless collars - natural gas	Other long-term liabilities			1			–
Three-way costless collars - natural gas	Other long-term liabilities			17			30
Sold call options - natural gas	Other long-term liabilities			14			15
Total derivative liabilities			$	147		$	110

(1)

Includes $22 million in premiums paid related to certain natural gas fixed price swaps recognized as a component of derivative assets within current assets on the consolidated balance sheet at September 30, 2018. As certain natural gas fixed price swaps settle, the premium will be amortized and recognized as a component of gain (loss) on derivatives on the consolidated statement of operations.

(2)

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

At September 30, 2018, the net fair value of the Company’s financial instruments related to commodities that are not classified as held for sale (included in the table above) was an $8 million liability. The net fair value of the Company’s interest rate swaps was a $2 million asset as of September 30, 2018.

Upon the close of the Fayetteville Shale sale, certain derivatives are expected to be novated to the buyer. The Company has classified these derivatives as held for sale assets or liabilities based on current market value. The balance sheet classification of the held for sale assets and liabilities related to these derivative financial instruments is summarized below as of September 30, 2018:



Derivative Assets Held for Sale
	Balance Sheet Classification	Fair Value
		September 30, 2018
Derivatives not designated as hedging instruments:		(in millions)
Sold fixed price swaps - natural gas	Derivative assets	$	23
Sold fixed price swaps - natural gas	Other long-term assets		11
Total derivative assets held for sale		$	34

Derivative Liabilities Held for Sale
	Balance Sheet Classification	Fair Value
		September 30, 2018
Derivatives not designated as hedging instruments:		(in millions)
Sold fixed price swaps - natural gas	Derivative liabilities	$	10
Sold fixed price swaps - natural gas	Other long-term liabilities		39
Total derivative liabilities held for sale		$	49

See Note 2 for additional information regarding the derivatives classified as held for sale.

The following tables summarize the before-tax effect of the Company’s derivative instruments on the consolidated statements of operations for the three and nine months ended September 30, 2018 and 2017:


Unsettled Gain (Loss) on Derivatives Recognized in Earnings

	Consolidated Statement of Operations	For the three months ended				For the nine months ended
	Classification of Gain (Loss)	September 30,				September 30,
Derivative Instrument	on Derivatives, Unsettled	2018		2017		2018		2017
		(in millions)
Sold fixed price swaps - natural gas	Gain (Loss) on Derivatives	$	(17)	$	(2)	$	(46)	$	174
Sold fixed price swaps - propane	Gain (Loss) on Derivatives		(10)		–		(19)		–
Sold fixed price swaps - ethane	Gain (Loss) on Derivatives		(27)		–		(29)		–
Two-way costless collars - natural gas	Gain (Loss) on Derivatives		2		3		4		48
Three-way costless collars - natural gas	Gain (Loss) on Derivatives		(7)		(1)		(36)		87
Sold basis swaps - natural gas	Gain (Loss) on Derivatives		(5)		24		11		(19)
Purchased call options - natural gas	Gain (Loss) on Derivatives		(2)		–		2		–
Sold call options - natural gas	Gain (Loss) on Derivatives		5		6		2		59
Sold call options - oil	Gain (Loss) on Derivatives		1		–		(5)		–
Interest rate swaps	Gain (Loss) on Derivatives		1		1		3		1
Total gain (loss) on unsettled derivatives		$	(59)	$	31	$	(113)	$	350


Settled Gain (Loss) on Derivatives Recognized in Earnings (1)

	Consolidated Statement of Operations	For the three months ended				For the nine months ended
	Classification of Gain (Loss)	September 30,				September 30,
Derivative Instrument	on Derivatives, Settled	2018		2017		2018			2017
		(in millions)
Sold fixed price swaps - natural gas	Gain (Loss) on Derivatives	$	5	$	7	$	18		$	(18)
Sold fixed price swaps - propane	Gain (Loss) on Derivatives		(5)		–		(6)			–
Sold fixed price swaps - ethane	Gain (Loss) on Derivatives		(6)		–		(6)			–
Two-way costless collars - natural gas	Gain (Loss) on Derivatives		–		–		4			(3)
Three-way costless collars - natural gas	Gain (Loss) on Derivatives		5		1		24			(4)
Sold basis swaps - natural gas	Gain (Loss) on Derivatives		(4)		9		(28)			(21)
Purchased call options - natural gas	Gain (Loss) on Derivatives		–		–		2	(2)		–
Sold call options - natural gas (3)	Gain (Loss) on Derivatives		–		(3)		(1)			(9)
Sold call options - oil	Gain (Loss) on Derivatives		(1)		–		(2)			–
Total gain (loss) on settled derivatives		$	(6)	$	14	$	5		$	(55)

Total gain (loss) on derivatives		$	(65)	$	45	$	(108)		$	295

(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 natural gas call options for the nine months ended September 30, 2018, which is included in gain (loss) on derivatives on the consolidated statements of operations.

(3)

Includes $3 million amortization of premiums paid related to certain call options for the three and nine months ended September 30, 2017.