Coterra Energy Inc. - Quarter Report: 2013 June (Form 10-Q)

Table of Contents

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the quarterly period ended June 30, 2013

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

Commission file number 1-10447

 

 

CABOT OIL & GAS CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Three Memorial City Plaza

840 Gessner Road, Suite 1400, Houston, Texas 77024

(Address of principal executive offices including ZIP code)

 

(281) 589-4600

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

As of July 22, 2013, there were 210,764,304 shares of Common Stock, Par Value $.10 Per Share, outstanding.

 

 

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CABOT OIL & GAS CORPORATION

 

INDEX TO FINANCIAL STATEMENTS

 

	Page
Part I. Financial Information
Item 1.      Financial Statements
Condensed Consolidated Balance Sheet at June 30, 2013 and December 31, 2012	3
Condensed Consolidated Statement of Operations for the Three and Six Months Ended June 30, 2013 and 2012	4
Condensed Consolidated Statement of Comprehensive Income for the Three and Six Months Ended June 30, 2013 and 2012	5
Condensed Consolidated Statement of Cash Flows for the Six Months Ended June 30, 2013 and 2012	6
Notes to the Condensed Consolidated Financial Statements	7
Report of Independent Registered Public Accounting Firm on Review of Interim Financial Information	18
Item 2.      Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.      Quantitative and Qualitative Disclosures about Market Risk	28
Item 4.      Controls and Procedures	29
Part II. Other Information
Item 1.      Legal Proceedings	30
Item 1A.   Risk Factors	30
Item 2.      Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 5.      Other Information	30
Item 6.      Exhibits	31
Signatures	32

 

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PART I. FINANCIAL INFORMATION

 

ITEM 1.                         Financial Statements

 

CABOT OIL & GAS CORPORATION

 

CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)

 

		June 30,			December 31,
(In thousands, except share amounts)		2013			2012
ASSETS
Current assets
Cash and cash equivalents		$	47,277		$	30,736
Accounts receivable, net		204,970			172,419
Income taxes receivable		7,273			—
Inventories		18,276			14,173
Deferred income taxes		50,864			—
Derivative instruments		69,644			50,824
Other current assets		4,889			2,158
Total current assets		403,193			270,310
Properties and equipment, net (Successful efforts method)		4,558,207			4,310,977
Derivative instruments		17,963			—
Other assets		38,573			35,026
		$	5,017,936		$	4,616,313
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	356,851		$	312,480
Current portion of long-term debt		75,000			75,000
Accrued liabilities		58,571			49,789
Income taxes payable		3,969			1,667
Deferred income taxes		—			5,203
Total current liabilities		494,391			444,139
Postretirement benefits		40,313			38,864
Long-term debt		1,067,000			1,012,000
Deferred income taxes		1,015,493			882,672
Asset retirement obligation		68,390			67,016
Other liabilities		46,108			40,175
Total liabilities		2,731,695			2,484,866
Commitments and contingencies
Stockholders’ equity
Common stock:
Authorized — 480,000,000 shares of $0.10 par value in 2013 and 2012, respectively
Issued—210,758,335 shares and 210,429,731 shares in 2013 and 2012, respectively		21,076			21,043
Additional paid-in capital		725,156			716,609
Retained earnings		1,496,795			1,373,264
Accumulated other comprehensive income / (loss)		46,563			23,880
Less treasury stock, at cost:
404,400 shares in 2013 and 2012, respectively		(3,349		)	(3,349		)
Total stockholders’ equity		2,286,241			2,131,447
		$	5,017,936		$	4,616,313

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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CABOT OIL & GAS CORPORATION

 

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)

 

		Three Months Ended June 30,						Six Months Ended June 30,
(In thousands, except per share amounts)		2013			2012			2013			2012
OPERATING REVENUES
Natural gas		$	368,391		$	201,051		$	662,184		$	407,833
Crude oil and condensate		70,226			57,466			135,881			107,447
Brokered natural gas		8,244			5,149			19,137			18,593
Other		2,819			1,991			5,763			3,920
		449,680			265,657			822,965			537,793
OPERATING EXPENSES
Direct operations		36,978			29,306			68,475			56,626
Transportation and gathering		52,648			33,139			98,869			63,397
Brokered natural gas cost		6,704			4,250			15,093			16,122
Taxes other than income		11,364			10,854			23,051			29,437
Exploration		4,529			16,244			8,553			20,245
Depreciation, depletion and amortization		151,389			114,616			300,042			224,973
General and administrative		21,608			46,872			57,312			69,421
		285,220			255,281			571,395			480,221
Gain / (loss) on sale of assets		276			67,703			180			67,168
INCOME FROM OPERATIONS		164,736			78,079			251,750			124,740
Interest expense and other		16,701			18,495			32,956			35,412
Income before income taxes		148,035			59,584			218,794			89,328
Income tax expense		58,921			23,647			86,856			35,073
NET INCOME		$	89,114		$	35,937		$	131,938		$	54,255
Earnings per share
Basic		$	0.42		$	0.17		$	0.63		$	0.26
Diluted		$	0.42		$	0.17		$	0.62		$	0.26
Weighted-average shares outstanding
Basic		210,349			209,512			210,250			209,320
Diluted		211,745			211,158			211,492			210,974
Dividends per common share		$	0.02		$	0.02		$	0.04		$	0.04

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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CABOT OIL & GAS CORPORATION

 

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
(In thousands)		2013			2012			2013			2012
Net income		$	89,114		$	35,937		$	131,938		$	54,255
Other comprehensive income / (loss), net of taxes:
Reclassification adjustment for settled hedge contracts (1)		(1,105		)	(44,579		)	(10,430		)	(78,649		)
Changes in fair value of hedge contracts (2)		69,839			11,246			32,864			54,451
Pension and postretirement benefits:
Amortization of prior service cost (3)		—			67			—			135
Amortization of net loss (4)		124			4,174			249			8,349
Total other comprehensive income / (loss)		68,858			(29,092		)	22,683			(15,714		)
Comprehensive income / (loss)		$	157,972		$	6,845		$	154,621		$	38,541

 

(1)        Net of income taxes of $717 and $28,263 for the three months ended June 30, 2013 and 2012, respectively, and $6,762 and $49,863 for the six months ended June 30, 2013 and 2012, respectively.

(2)        Net of income taxes of $(45,274) and $(7,130) for the three months ended June 30, 2013 and 2012, respectively, and $(21,303) and $(34,653) for the six months ended June 30, 2013 and 2012, respectively.

(3)        Net of income taxes of $0 and $(43) for the three months ended June 30, 2013 and 2012, respectively, and $0 and $(86) for the six months ended June 30, 2013 and 2012, respectively.

(4)        Net of income taxes of $(81) and $(2,647) for the three months ended June 30, 2013 and 2012, respectively, and $(161) and $(5,294) for the six months ended June 30, 2013 and 2012, respectively.

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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CABOT OIL & GAS CORPORATION

 

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

 

		Six Months Ended
		June 30,
(In thousands)		2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	131,938		$	54,255
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation, depletion and amortization		300,042			224,973
Deferred income tax expense		69,662			27,073
(Gain) / loss on sale of assets		(180		)	(67,168		)
Exploration expense		806			10,925
Unrealized (gain) / loss on derivative instruments		—			300
Amortization of debt issuance costs		1,842			3,334
Stock-based compensation, pension and other		27,355			26,987
Changes in assets and liabilities:
Accounts receivable, net		(32,551		)	25,214
Inventories		(4,103		)	9,293
Other current assets		(2,733		)	(3,691		)
Accounts payable and accrued liabilities		9,661			(28,675		)
Income taxes		(4,971		)	4,775
Other assets and liabilities		547			3,547
Stock-based compensation tax benefit		(7,348		)	—
Net cash provided by operating activities		489,967			291,142
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures		(524,056		)	(411,327		)
Proceeds from sale of assets		906			132,715
Investment in equity method investment		(4,250		)	(2,088		)
Net cash used in investing activities		(527,400		)	(280,700		)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings from debt		325,000			170,000
Repayments of debt		(270,000		)	(148,000		)
Stock-based compensation tax benefit		7,348			—
Dividends paid		(8,407		)	(8,368		)
Capitalized debt issuance costs		—			(5,005		)
Other		33			(339		)
Net cash provided by financing activities		53,974			8,288
Net (decrease) / increase in cash and cash equivalents		16,541			18,730
Cash and cash equivalents, beginning of period		30,736			29,911
Cash and cash equivalents, end of period		$	47,277		$	48,641

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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CABOT OIL & GAS CORPORATION

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

1. FINANCIAL STATEMENT PRESENTATION

 

During interim periods, Cabot Oil & Gas Corporation (the Company) follows the same accounting policies disclosed in its Annual Report on Form 10-K for the year ended December 31, 2012 (Form 10-K) filed with the Securities and Exchange Commission (SEC). The interim financial statements should be read in conjunction with the notes to the consolidated financial statements and information presented in the Form 10-K. In management’s opinion, the accompanying interim condensed consolidated financial statements contain all material adjustments, consisting only of normal recurring adjustments, necessary for a fair statement. The results for any interim period are not necessarily indicative of the expected results for the entire year.

 

Certain reclassifications have been made to prior year statements to conform with current year presentation. These reclassifications have no impact on previously reported net income.

 

With respect to the unaudited financial information of the Company as of June 30, 2013 and for the three and six months ended June 30, 2013 and 2012, PricewaterhouseCoopers LLP reported that they have applied limited procedures in accordance with professional standards for a review of such information. However, their separate report dated July 26, 2013 appearing herein states that they did not audit and they do not express an opinion on that unaudited financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for their report on the unaudited financial information because that report is not a “report” or a “part” of the registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.

 

Recent Accounting Pronouncements

 

Effective January 1, 2013, the Company adopted the amended disclosure requirements prescribed in Accounting Standards Update (ASU) No. 2011-11,  “Disclosures about Offsetting Assets and Liabilities” and ASU No. 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” This guidance impacted the disclosures associated with the Company’s commodity derivatives (Note 7) and did not impact its consolidated financial position, results of operations or cash flows.

 

Effective January 1, 2013, the Company adopted the amended disclosure requirements prescribed in ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” This guidance impacted the Company’s disclosures associated with items reclassified from accumulated other comprehensive income / (loss) (Note 9) and did not impact its consolidated financial position, results of operations or cash flows.

 

2. PROPERTIES AND EQUIPMENT, NET

 

Properties and equipment, net are comprised of the following:

 

		June 30,			December 31,
(In thousands)		2013			2012
Proved oil and gas properties		$	6,245,196		$	5,724,940
Unproved oil and gas properties		458,047			467,483
Gathering and pipeline systems		240,062			239,656
Land, building and other equipment		90,690			86,137
		7,033,995			6,518,216
Accumulated depreciation, depletion and amortization		(2,475,788		)	(2,207,239		)
		$	4,558,207		$	4,310,977

 

At June 30, 2013, the Company did not have any projects that had exploratory well costs that were capitalized for a period of greater than one year after drilling.

 

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Divestitures

 

In June 2012, the Company sold a 35% non-operated working interest associated with certain of its Pearsall Shale undeveloped leaseholds in south Texas to a wholly-owned subsidiary of Osaka Gas Co., Ltd. (Osaka) for total consideration of approximately $251.0 million. The Company received $125.0 million in cash proceeds and Osaka agreed to fund 85% of the Company’s share of future drilling and completion costs associated with these leaseholds until it has paid approximately $126.0 million in accordance with a joint development agreement entered into at the closing. The Company recognized a $67.0 million gain on sale of assets associated with this sale. The drilling and completion carry under the joint development agreement will terminate two years after the closing of the transaction; however, based on the Company’s current drilling and completion activities in the Pearsall Shale, the Company expects that the carry will be fully satisfied in the second half of 2013.

 

3. ADDITIONAL BALANCE SHEET INFORMATION

 

Certain balance sheet amounts are comprised of the following:

 

		June 30,			December 31,
(In thousands)		2013			2012
Accounts receivable, net
Trade accounts		$	193,695		$	165,070
Joint interest accounts		6,694			5,659
Other accounts		6,260			2,817
		206,649			173,546
Allowance for doubtful accounts		(1,679		)	(1,127		)
		$	204,970		$	172,419
Inventories
Natural gas in storage		$	8,629		$	7,494
Tubular goods and well equipment		9,274			6,392
Other accounts		373			287
		$	18,276		$	14,173
Other current assets
Prepaid balances and other		4,889			2,158
		$	4,889		$	2,158
Other assets
Deferred compensation plan		$	11,416		$	10,608
Debt issuance cost		15,578			17,420
Equity method investment		11,501			6,915
Other accounts		78			83
		$	38,573		$	35,026
Accounts payable
Trade accounts		$	19,134		$	14,037
Natural gas purchases		6,335			4,892
Royalty and other owners		81,743			66,321
Accrued capital costs		184,891			164,862
Taxes other than income		6,947			10,224
Drilling advances		51,026			44,203
Producer gas imbalances		1,368			1,602
Other accounts		5,407			6,339
		$	356,851		$	312,480
Accrued liabilities
Employee benefits		$	20,779		$	16,011
Postretirement benefits		1,304			1,304
Taxes other than income		11,374			8,735
Interest payable		22,128			22,329
Derivative instruments		—			192
Other accounts		2,986			1,218
		$	58,571		$	49,789
Other liabilities
Deferred compensation plan		$	30,385		$	23,893
Other accounts		15,723			16,282
		$	46,108		$	40,175

 

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4. DEBT AND CREDIT AGREEMENTS

 

The Company’s debt and credit agreements consisted of the following:

 

(In thousands)		June 30, 2013			December 31, 2012
Total debt
7.33% weighted-average fixed rate notes		$	95,000		$	95,000
6.51% weighted-average fixed rate notes		425,000			425,000
9.78% notes		67,000			67,000
5.58% weighted-average fixed rate notes		175,000			175,000
Credit facility		380,000			325,000
Current maturities
7.33% weighted-average fixed rate notes		(75,000		)	(75,000		)
Long-term debt, excluding current maturities		$	1,067,000		$	1,012,000

 

Effective April 17, 2013, the lenders under the Company’s revolving credit facility approved an increase in the Company’s borrowing base from $1.7 billion to $2.3 billion as part of the annual redetermination under the terms of the credit facility. The Company’s commitments under the credit facility of $900.0 million remained unchanged. At June 30, 2013, the Company had $380.0 million of borrowings outstanding under its revolving credit facility at a weighted-average interest rate of 2.0% and $519.0 million available for future borrowings. 

 

5. EARNINGS PER COMMON SHARE

 

Basic EPS is computed by dividing net income (the numerator) by the weighted-average number of common shares outstanding for the period (the denominator). Diluted EPS is similarly calculated except that the denominator is increased using the treasury stock method to reflect the potential dilution that could occur if outstanding stock appreciation rights were exercised and stock awards were vested at the end of the applicable period.

 

		Three Months Ended				Six Months Ended
		June 30,				June 30,
(In thousands)		2013		2012		2013		2012
Weighted-average shares - basic		210,349		209,512		210,250		209,320
Dilution effect of stock appreciation rights and stock awards at end of period		1,396		1,646		1,242		1,654
Weighted-average shares - diluted		211,745		211,158		211,492		210,974
Weighted-average stock awards and shares excluded from diluted earnings per share due to the anti-dilutive effect		1		122		287		179

 

6. COMMITMENTS AND CONTINGENCIES

 

Contractual Obligations

 

The Company has various contractual obligations in the normal course of its operations. Except for certain amended transportation agreements and two new drilling rig commitments described below, there  have been no material changes to our contractual obligations described under “Transportation Agreements”, “Drilling Rig Commitments” and “Lease Commitments” as disclosed in Note 8 in the Notes to Consolidated Financial Statements included in the Form 10-K.

 

Transportation Agreements

 

During the second quarter of 2013, the Company amended certain natural gas transportation agreements associated with the Company’s production in Pennsylvania. This amendment increased the Company’s future aggregate obligations under its transportation agreements by approximately $25.3 million compared to those amounts in disclosed in Note 8 in the Notes to Consolidated Financial Statements included in the Form 10-K.

 

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Drilling Rig Commitments

 

During the second quarter of 2013, the Company entered into two drilling rig commitments for its capital program in the Marcellus Shale that are expected to commence in the third and fourth quarters of 2013 and have initial terms of two and three years, respectively. There have been no material changes to the Company’s existing drilling rig commitments previously disclosed in Note 8 in the Notes to the Consolidated Financial Statements included in the Form 10-K. The future minimum commitments under all of the Company’s drilling rig commitments as of June 30, 2013 are approximately $7.0 million in 2013, $14.9 million in 2014, $6.8 million in 2015 and $4.4 million in 2016.

 

Legal Matters

 

The Company is a defendant in various legal proceedings arising in the normal course of business. All known liabilities are accrued when management determines they are probable based on its best estimate of the potential loss. While the outcome and impact of these legal proceedings on the Company cannot be predicted with certainty, management believes that the resolution of these proceedings will not have a material effect on the Company’s financial position, results of operations or cash flows.

 

Contingency Reserves

 

When deemed necessary, the Company establishes reserves for certain legal proceedings. The establishment of a reserve is based on an estimation process that includes the advice of legal counsel and subjective judgment of management. While management believes these reserves to be adequate, it is reasonably possible that the Company could incur additional losses with respect to those matters in which reserves have been established. The Company believes that any such amount above the amounts accrued is not material to the Condensed Consolidated Financial Statements. Future changes in facts and circumstances not currently foreseeable could result in the actual liability exceeding the estimated ranges of loss and amounts accrued.

 

Environmental Matters

 

Pennsylvania Department of Environmental Protection

 

On December 15, 2010, the Company entered into a consent order and settlement agreement (CO&SA) with the Pennsylvania Department of Environmental Protection (PaDEP), addressing a number of environmental issues originally identified in 2008 and 2009, including alleged releases of drilling mud and other substances, alleged record keeping violations at various wells and alleged natural gas contamination of water supplies to 14 households in Susquehanna County, Pennsylvania. During 2010 and 2011, the Company paid a total of $1.3 million in settlement of fines and penalties sought or claimed by the PaDEP related to this matter. On January 11, 2011, certain of the affected households appealed the CO&SA to the Pennsylvania Environmental Hearing Board (PEHB). On October 17, 2011, the Company requested PaDEP approval to resume hydraulic fracturing and new natural gas well drilling operations in the affected area, along with a request to cease temporary water deliveries to the affected households pursuant to prior consent orders with the PaDEP. The PaDEP concurred that temporary water deliveries to the property owners are no longer necessary. On November 18, 2011, certain of the affected households appealed this order to the PEHB, which appeal was later consolidated with the CO&SA appeal. All appellants have accepted their portion of the $2.2 million that was placed into escrow in 2011 for their benefit and on October 18, 2012 had dismissed their appeal to the PEHB. Subsequent to the withdrawal of the appeals, the PEHB allowed three groups of appellants to reinstate their appeal. It is expected that the PEHB will hold a hearing with respect to the appellants’ appeal in the second half of 2013.

 

The Company is in continuing discussions with the PaDEP to address the results of the Company’s natural gas well test data, water quality sampling and water well headspace screenings, which were required pursuant to the CO&SA. On August 21, 2012, the PaDEP notified the Company that it could commence completion operations on existing wells within the concerned area.

 

7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

The Company periodically enters into commodity derivative instruments to hedge its exposure to price fluctuations related to its natural gas and crude oil production. The Company’s credit agreement restricts the ability of the Company to enter into commodity hedges other than to hedge or mitigate risks to which the Company has actual or projected exposure or as permitted under the Company’s risk management policies and where such derivatives do not subject the Company to material speculative risks. All of the Company’s derivatives are used for risk management purposes and are not held for trading purposes.

 

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As of June 30, 2013, the Company had the following outstanding commodity derivatives:

 

								Collars
								Floor						Ceiling						Swaps
Type of Contract		Volume				Contract Period		Range (1)			Weighted Average (1)			Range (1)			Weighted Average (1)			(Weighted Average) (1)
Natural gas collars		8.9		Bcf		Jul. 2013 - Dec. 2013		$	—		$	5.15		$	6.18-$6.23		$	6.20
Natural gas collars		109.0		Bcf		Jul. 2013 - Dec. 2013		$	3.09-$4.37		$	3.63		$	3.98-$5.02		$	4.27
Natural gas collars		53.3		Bcf		Jul. 2013 - Dec. 2014		$	3.60-$3.96		$	3.78		$	4.55-$4.59		$	4.57
Natural gas collars		124.1		Bcf		Jan. 2014 - Dec. 2014		$	3.86-$4.37		$	4.19		$	4.63-$4.80		$	4.70
Crude oil swaps		552		Mbbl		Jul. 2013 - Dec. 2013														$	101.90

 

(1)    Natural gas prices are stated per Mcf and crude oil prices are stated per barrel.

 

The changes in the fair value of derivatives designated as hedges that are effective are recorded to accumulated other comprehensive income / (loss) in stockholders’ equity in the Condensed Consolidated Balance Sheet. The ineffective portion of the change in fair value of derivatives designated as hedges, if any, and the change in fair value of derivatives not designated as hedges are recorded currently in earnings as a component of natural gas revenue and crude oil and condensate revenue in the Condensed Consolidated Statement of Operations.

 

The following disclosures reflect the impact of derivative instruments on the Company’s condensed consolidated financial statements:

 

Effect of Derivative Instruments on the Condensed Consolidated Balance Sheet

 

				Fair Values of Derivative Instruments
				Derivative Assets						Derivative Liabilities
(In thousands)		Balance Sheet Location		June 30, 2013			December 31, 2012			June 30, 2013			December 31, 2012
Derivatives Designated as Hedging Instruments
Commodity contracts		Derivative instruments (current assets)		$	69,644		$	50,824		$	—		$	—
Commodity contracts		Derivative instruments (non-current assets)		17,963			—			—			—
Commodity contracts		Accrued liabilities		—			—			—			192
Commodity contracts		Derivative instruments (non-current liabilities)		—			—			—			—
				$	87,607		$	50,824		$	—		$	192

 

At June 30, 2013 and December 31, 2012, unrealized gains of $87.6 million ($53.1 million, net of tax) and unrealized gains of $50.6 million ($30.7 million, net of tax), respectively, were recorded in accumulated other comprehensive income / (loss) in stockholder’s equity in the Condensed Consolidated Balance Sheet. Based upon estimates at June 30, 2013, the Company expects to reclassify $42.3 million in after-tax income associated with its commodity hedges from accumulated other comprehensive income / (loss) to the Condensed Consolidated Statement of Operations over the next 12 months.

 

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Table of Contents

 

Offsetting of Derivative Assets and Liabilities in the Condensed Consolidated Balance Sheet

 

(In thousands)		June 30, 2013			December 31, 2012
Derivative Assets
Gross amounts of recognized assets		$	89,840		$	54,454
Gross amounts offset in the statement of financial position		(2,233		)	(3,630		)
Net amounts of assets presented in the statement of financial position		87,607			50,824
Gross amounts of financial instruments not offset in the statement of financial position		549			1,892
Net amount		$	88,156		$	52,716
Derivative Liabilities
Gross amounts of recognized liabilities		$	2,233		$	3,822
Gross amounts offset in the statement of financial position		(2,233		)	(3,630		)
Net amounts of liabilities presented in the statement of financial position		—			192
Gross amounts of financial instruments not offset in the statement of financial position		—			—
Net amount		$	—		$	192

 

Effect of Derivative Instruments on the Condensed Consolidated Statement of Operations

 

Derivatives Designated as Hedging Instruments

 

		Amount of Gain (Loss) Recognized in OCI on Derivatives (Effective Portion)
		Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)		2013			2012			2013			2012
Commodity Contracts		$	115,113		$	18,376		$	54,167		$	89,104

 

Location of Gain (Loss)		Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
Reclassified from Accumulated OCI into		Three Months Ended June 30,						Six Months Ended June 30,
Income (In thousands)		2013			2012			2013			2012
Natural gas revenues		$	(272	)	$	69,732		$	13,056		$	126,728
Crude oil and condensate revenues		2,094			3,110			4,136			1,784
		$	1,822		$	72,842		$	17,192		$	128,512

 

For the three and six months ended June 30, 2013 and 2012, respectively, there was no ineffectiveness recorded in our Condensed Consolidated Statement of Operations related to our derivative instruments.

 

Derivatives Not Designated as Hedging Instruments

 

		Location of Gain (Loss) Recognized in Income on		Three Months Ended  June 30,						Six Months Ended  June 30,
(In thousands)		Derivatives		2013			2012			2013			2012
Commodity Contracts		Natural gas revenues		$	—		$	(342	)	$	—		$	(300	)

 

Additional Disclosures about Derivative Instruments and Hedging Activities

 

The use of derivative instruments involves the risk that the counterparties will be unable to meet their obligation under the agreement. The Company enters into derivative contracts with multiple counterparties in order to limit its exposure to individual counterparties. The Company also has netting arrangements with each of its counterparties that allow it to offset assets and liabilities from separate derivative contracts with that counterparty.

 

Certain counterparties to the Company’s derivative instruments are also lenders under its credit facility. The Company’s credit facility and derivative instruments contain certain cross default and acceleration provisions that may require immediate payment of its derivative liabilities in certain situations.

 

8. FAIR VALUE MEASUREMENTS

 

The Company follows the authoritative guidance for measuring fair value of assets and liabilities in its financial statements. The authoritative guidance also established a formal fair value hierarchy based on the inputs used to measure fair value. The hierarchy gives the highest priority to Level 1 measurements and the lowest priority to Level 3 measurements. The Company has classified its assets and liabilities into these levels depending upon the data relied on to determine the fair values. For further information regarding the fair value hierarchy, refer to Note 14 of the Notes to the Consolidated Financial Statements in the Form 10-K.

 

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