Derivative and Hedging Financial Instruments

12 Months Ended

Dec. 31, 2012

Derivative and Hedging Financial Instruments [Abstract]

DERIVATIVE AND HEDGING FINANCIAL INSTRUMENTS

NOTE 11 – DERIVATIVE AND HEDGING FINANCIAL INSTRUMENTS

Pursuant to ASC 480-10-25-8 through 25-12, Derivatives and Hedging Activities, as amended, establishes accounting and reporting standards for derivative instruments. As a part of the ASD Credit agreement, the Company entered into a warrant agreement with Chambers (Lender) which required American Shale to sell the Lenders for a total of $2 million a warrant for 19,500 shares representing 19.5% of ASD’s stock at $263.44 per share. The warrant expires on February 28, 2015. The warrant includes a put option whereby the Lender could require ASD to repurchase the warrant as of February 28, 2015, or earlier if certain events occur which is in accordance with the credit agreement. Under the put option, ASD would pay the excess of the fair market value per share of the stock over $263.44 times the number of shares exercisable less any distributions are similar payments defined by the agreement ASD has the option to transfer working interest in all of its wells equal to the value of the excess value instead of paying in cash.

The embedded derivative is recoded at fair value and reported as a Long-Term Liability on the Consolidated Balance Sheet with the change in fair value recoded in the Consolidated Statements of Operations in Other Income (Expenses). The loss on the change in fair value of the embedded warrant amounted to $808,278 at December 31, 2012. As of December 31, 2012, the Embedded Warrant Liability had a fair value of $2,808,278.

Effective July 13, 2007, as required by the CIT Creditor Agreement, Trans Energy purchased a commodity put option for $310,000 in cash. The terms of the option establish a floor price of $7.35/MMBTU, Settlement Date Henry Hub price of Natural Gas as quoted by the NYMEX, for volumes ranging from 8,241 MMBTU per month to 5,244 MMBTU per month, beginning settlement on August 2, 2007 and ending settlement on December 1, 2011. This put option places no limit on the upside price for Trans Energy’s gas production. If the monthly closing price of Henry Hub gas index is below the floor price then Trans Energy receives proceeds equal to the difference between the floor price and the closing price. The cost of the put option and proceeds, if any, as well as changes in the fair market value of the put options, are charged to other income (expense) as gain (loss) on derivative instruments. In addition on May 22, 2008, Trans Energy entered into a participating commodity put and call option on oil as a costless collar.

Trans Energy entered into these derivative commodity contracts to provide a measure of stability in the cash flows associated with Trans Energy’s oil and gas production and to manage exposure to commodity price fluctuations. Trans Energy does not designate its derivative financial instruments as hedging instruments for financial accounting purposes, and as a result, recognizes the change in the respective instruments’ fair value in earnings. Trans Energy recorded an unrealized loss of $187,590 for the year ended December 31, 2011. Trans Energy received proceeds of $236,532 relating to settlements of its derivative instruments for the year ended December 31, 2011.

These natural gas and oil derivative contracts were completed as of December 31, 2011.

Gas Purchase Agreements

Trans Energy has various agreements with Dominion Field Services, Inc. for fixed prices for gas transported through its pipeline. The monthly volume ranges from 10,000 to 20,000 decatherm (“Dth”) per month, and fixed prices vary from $6.11 to $10.81/Dth through April 2012. A decatherm is equal to one MMBTU.