Our primary objective in entering into derivative financial instruments is to manage our exposure to commodity price fluctuations, protect our returns on investments and achieve a more predictable cash flow in connection with our operations. These transactions limit exposure to declines in commodity prices, but also limit the benefits we would realize if commodity prices increase. When prices for oil and natural gas are volatile, a significant portion of the effect of our derivative financial instrument management activities consists of non-cash income or expense due to changes in the fair value of our derivative financial instrument contracts. Cash charges or gains only arise from payments made or received on monthly settlements of contracts or if we terminate a contract prior to its expiration.

We account for our derivative financial instruments in accordance with FASB ASC Topic 815 for Derivatives and Hedging, or ASC 815, which requires that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. ASC 815 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met, or exemptions for normal purchases and normal sales as permitted by ASC 815 exist. We do not designate our derivative financial instruments as hedging instruments for financial accounting purposes and, as a result, we recognize the change in the respective instruments' fair value currently in earnings. The table below outlines the classification of our derivative financial instruments on our Condensed Consolidated Balance Sheets and their financial impact in our Condensed Consolidated Statements of Operations.


		Three months ended September 30,				Nine months ended September 30,
(in thousands)	Statement of Operations location	2011		2010		2011		2010
Commodity contracts (1)	Gain on derivative financial instruments	$	84,284	$	56,209	$	130,978	$	156,065
Interest rate contracts (2)	Interest income (expense)		0		0		0		(45	)

Net gain		$	84,284	$	56,209	$	130,978	$	156,020

(1)	Included in these amounts are net cash receipts of $32,938 and $83,090 for the three and nine months ended September 30, 2011, respectively, and net cash receipts of $43,075 and $166,660 for the three and nine months ended September 30, 2010, respectively.

(2)	Included in these amounts are net cash payments of $0 and $2,063 for the three and nine months ended September 30, 2010. Our interest rate swaps expired on February 14, 2010 and we have not entered into any new interest rate swap agreements as of September 30, 2011.

Settlements in the normal course of maturities of our derivative financial instrument contracts result in cash receipts from, or cash disbursements to, our derivative contract counterparties. Changes in the fair value of our derivative financial instrument contracts are currently included in income with a corresponding increase or decrease in the balance sheet fair value amounts. Unrealized fair value adjustments included in "Gain (loss) on derivative financial instruments," which do not impact cash flows, were gains of $51.4 million and $13.1 million for the three months ended September 30, 2011 and 2010, respectively, and gains of $47.9 million and losses of $10.6 million for the nine months ended September 30, 2011 and 2010, respectively. The unrealized fair value adjustment included in "Interest expense," which does not impact cash flows, was a gain of $2.0 million for the nine months ended September 30, 2010. There was no impact for the three and nine months ended September 30, 2011 and for the three months ended September 30, 2010, as our interest rate swaps expired on February 14, 2010 and we have not entered into any new interest rate swap agreements as of September 30, 2011.

We place our derivative financial instruments with the financial institutions that are lenders under our credit agreement that we believe have high quality credit ratings. To mitigate our risk of loss due to default, we have entered into master netting agreements with our counterparties on our derivative financial instruments that allow us to offset our asset position with our liability position in the event of a default by the counterparty.

The following table presents the volume and fair value of our oil and natural gas derivative financial instruments as of September 30, 2011:

At December 31, 2010, we had outstanding derivative contracts to mitigate price volatility covering 89,500 Mmcf of natural gas and 822 Mbbls of oil. At September 30, 2011, the average forward NYMEX oil prices per Bbl for the remainder of 2011 and for 2012 were $79.37 and $81.06 respectively, and the average forward NYMEX natural gas prices per Mmbtu for the remainder of 2011 and for 2012 were $3.80 and $4.24, respectively.

Our derivative financial instruments used to mitigate price volatility covered approximately 63.7% and 57.6% for the three and nine months ended September 30, 2011, respectively, and approximately 49.6% and 56.2% for the three and nine months ended September 30, 2010, respectively, of our total equivalent Mcfe production.