Derivative Instruments and Risk Management Activities

9 Months Ended

Sep. 30, 2013

Derivative Instruments and Risk Management Activities

Derivative Instruments and Risk Management Activities

(8) Derivative Instruments and Risk Management Activities

(a) Commodity Derivatives

The Company periodically enters into natural gas and oil derivative contracts with counterparties to hedge the price risk associated with a portion of its production. These derivatives are not held for trading purposes. To the extent that changes occur in the market prices of natural gas and oil, the Company is exposed to market risk on these open contracts. This market risk exposure is generally offset by the change in market prices of natural gas and oil recognized upon the ultimate sale of the natural gas and oil produced.

For the nine months ended September 30, 2012 and 2013, the Company was party to oil and natural gas fixed price swaps. When actual commodity prices exceed the fixed price provided by the swap contracts, the Company pays the excess to the counterparty, and when actual commodity prices are below the contractually provided fixed price, the Company receives the difference from the counterparty. The Company’s natural gas and oil swaps have not been designated as hedges for accounting purposes; therefore, all gains and losses were recognized in income currently.

The Company has no collateral from any counterparties. All but one of the Company’s commodity derivative positions are with institutions that are lenders under our Credit Facility and are secured by the collateral pledged on the Credit Facility and cross default provisions between the Credit Facility and the derivative instruments. At September 30, 2013, there were no past due receivables from or payables to any of our counterparties.

As of September 30, 2013, the Company’s positions in fixed price natural gas and oil swaps from October 1, 2013 through December 31, 2019 are summarized in the following table:

	MMbtu/day	Bbls/day	Price
Three Months ending December 31, 2013:
CGTAP-TCO	260,000		$	4.56
Dominion South	190,844		4.89
NYMEX-WTI	—	4,300	103.97
2013 Total	450,844	4,300
Year ending December 31, 2014:
CGLA	10,000		$	3.87
CGTAP-TCO	210,000		5.11
Dominion South	160,000		5.15
NYMEX	120,000		4.00
NYMEX-WTI	—	3,000	96.53
2014 Total	500,000	3,000
Year ending December 31, 2015:
CGLA	40,000		$	4.00
CGTAP-TCO	130,000		4.93
Dominion South	230,000		5.60
NYMEX	80,000		4.10
2015 Total	480,000
Year ending December 31, 2016:
CGLA	170,000		$	4.09
CGTAP-TCO	80,000		4.67
Dominion South	272,500		5.35
NYMEX	60,000		4.25
2016 Total	582,500
Year ending December 31, 2017:
CGLA	420,000		$	4.27
NYMEX	220,000		4.44
CCG	70,000		4.57
CGTAP-TCO	20,000		4.02
2017 Total	730,000
Year ending December 31, 2018:
NYMEX	530,000		$	4.73
Year ending December 31, 2019:
NYMEX	87,500		$	4.75

(b) Summary

The following is a summary of the fair values of our derivative instruments, which are not designated as hedges for accounting purposes and where such values are recorded in the consolidated balance sheets as of December 31, 2012 and September 30, 2013 (in thousands):

	December 31, 2012			September 30, 2013
	Balance			Balance
	sheet			sheet
	location	Fair value		location	Fair value
Asset derivatives not designated as hedges for accounting purposes:
Commodity contracts	Current assets	$	160,579	Current assets	$	204,857
Commodity contracts	Long-term assets	371,436		Long-term assets	503,666
Total asset derivatives		532,015			708,523
Liability derivatives not designated as hedges for accounting purposes:
Commodity contracts	Current liabilities	—		Current liabilities	309
Net asset fair value of derivatives		$	532,015		$	708,214

The following is a summary of realized and unrealized gains (losses) on derivative instruments and where such values are recorded in the consolidated statements of operations for the three months ended and nine months ended September 30, 2012 and 2013 (in thousands):

	Statement of	Three months ended				Nine months ended
	operations	September 30,				September 30,
	location	2012			2013	2012	2013
Commodity derivative fair value gains (losses)	Revenue	$	(159,004	)	161,968	52,210	285,510
Commodity derivative fair value gains (losses)	Discontinued operations	(18,880		)	—	46,358	—
Total gains (losses) on commodity contracts		$	(177,884	)	161,968	98,568	285,510

The following table summarizes the valuation of investments and financial instruments by the fair value hierarchy described in note 1 at September 30, 2013 (in thousands):

	Fair value measurements using
	Quoted
	prices
	in active		Significant
	markets for		other	Significant
	identical		observable	unobservable
	assets		inputs	inputs
Description	(Level 1)		(Level 2)	(Level 3)	Total
Net derivatives asset:
Fixed price commodity swaps	$	—	708,214	—	708,214

The following tables present the gross amounts of recognized derivative assets and liabilities, the amounts offset under netting arrangements with counterparties, and the resulting net amounts presented in the condensed consolidated balance sheets for the periods presented, all at fair value (in thousands):

	December 31, 2012					September 30, 2013
									Net amounts
					Net amounts				of assets
	Gross amounts		Gross amounts		of assets	Gross amounts	Gross amounts		(liabilities)
	of recognized		offset on		on balance	of recognized	offset on		on balance
	assets		balance sheet		sheet	assets	balance sheet		sheet
Commodity derivative assets	$	597,359	(65,344	)	532,015	715,960	(7,437	)	708,523
Commodity derivative liabilities	—		—		—	—	(309	)	(309	)