DERIVATIVES AND HEDGING ACTIVITIES

9 Months Ended

Sep. 30, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVES AND HEDGING ACTIVITIES

DERIVATIVES AND HEDGING ACTIVITIES

The Company is exposed to certain risks arising from both its business operations and economic conditions, and it enters into certain derivative contracts to manage exposure to these risks. To minimize counterparty credit risk in derivative instruments, the Company enters into transactions with high credit-rating counterparties. The Company did not elect to apply hedge accounting to these derivative contracts and recorded the fair value of the derivatives on the Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022.

Interest Rate Risk

The Company manages market risks, including interest rate, liquidity and credit risk primarily by managing the amount, sources and duration of its debt funding and by using derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from activities that result in the payment of future known and uncertain cash amounts, the value of which are determined by interest rates.

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract.

In November 2022 and March 2023, the Company entered into three interest rate swaps with total notional amounts of $2.25 billion that are effective on May 1, 2023 and mature on May 31, 2025. Under these swaps, the Company pays a fixed rate ranging from 4.38% to 4.49% for the respective notional amounts.

The fair value or settlement value of the consolidated interest rate swaps outstanding are presented on a gross basis on the Condensed Consolidated Balance Sheets. Interest rate swap derivative assets were $21.8 million and $2.7 million as of September 30, 2023 and December 31, 2022, respectively. Interest rate swap derivative liabilities were nil and $8.3 million as of September 30, 2023 and December 31, 2022, respectively. The Company recorded cash settlements on interest rate swap derivatives of $4.7 million and nil for the three months ended September 30, 2023 and 2022, respectively, and $7.1 million and $11.3 million for the nine months ended September 30, 2023 and 2022, respectively, in “Interest expense” of the Condensed Consolidated Statements of Operations. In addition, the Company recorded fair value adjustments of $12.5 million and nil for the change in fair value of the interest rate swap derivatives for the three months ended September 30, 2023 and 2022, respectively, and $34.6 million and $14.0 million for the nine months ended September 30, 2023 and 2022, respectively, in “Interest expense” of the Condensed Consolidated Statements of Operations.

Commodity Price Risk

The results of the Company’s operations may be affected by the market prices of oil, natural gas and NGLs. A portion of the Company’s revenue is directly tied to local natural gas, natural gas liquids and condensate prices in the Permian Basin and the U.S. Gulf Coast. Fluctuations in commodity prices also impact operating cost elements both directly and indirectly. Management regularly reviews the Company’s potential exposure to commodity price risk and manages exposure of such risk through commodity hedge contracts.

During the past twelve months, the Company entered into multiple commodity swap contracts based on the OPIS NGL Mont Belvieu prices for ethane, propane and butane, the Waha Basis index and the NYMEX WTI index. These contracts are on various notional quantities of NGLs, natural gas and crude. Similarly, the Company has entered into various natural gas and crude basis spread swaps. These index swaps are effective over the next 1 to 17 months and are used to hedge against location price risk of the respective commodity resulting from supply and demand volatility and protect cash flows against price fluctuations. The table below presents detailed information of commodity swaps outstanding as of September 30, 2023 (in thousands, except volumes):

		September 30, 2023
Commodity	Instruments	Unit	Volume	Net Fair Value
Natural Gas	Commodity Swap	MMBtus	3,010,000	$	89
NGL	Commodity Swap	Gallons	124,179,300	(1,358)
Crude	Commodity Swap	Bbl	171,900	(1,341)
Crude Collar	Commodity Swap	Bbl	109,600	(537)
Natural Gas Basis Spread Swaps	Commodity Swap	MMBtus	203,200	138
Crude Gas Basis Spread Swaps	Commodity Swap	Bbl	24,395,000	16
				$	(2,993)

The fair value or settlement value of the swaps outstanding are presented on a gross basis on the Condensed Consolidated Balance Sheets. Commodity swap derivative assets were $2.3 million and $4.3 million as of September 30, 2023 and December 31, 2022, respectively. Commodity swap derivative liabilities were $5.2 million and $5.7 million as of September 30, 2023 and December 31, 2022, respectively. The Company recorded cash settlements on commodity swap derivatives of $0.2 million and nil for the three months ended September 30, 2023 and 2022, respectively, and $8.0 million and $0.2 million for the nine months ended September 30, 2023 and 2022, respectively, in “Product revenue” of the Condensed Consolidated Statements of Operations. In addition, the Company recorded fair value adjustments of $8.1 million and nil for the three months ended September 30, 2023 and 2022, respectively, and $6.5 million and nil for the change in fair value of commodity swap derivatives for the nine months ended September 30, 2023 and 2022, respectively, in “Product revenue” of the Condensed Consolidated Statements of Operations.