FINANCIAL INSTRUMENTS |
12 Months Ended |
|---|---|
Dec. 31, 2019 | |
| Derivative Instruments and Hedging Activities Disclosure [Abstract] | |
| FINANCIAL INSTRUMENTS |
NOTE 8 — FINANCIAL INSTRUMENTS
As discussed in Note 10, Borrowings, as part of entering into the senior secured term loan credit agreement in 2018, we are required to enter into and maintain certain hedging transactions. As a result, we use derivative financial instruments, namely over the counter (“OTC”) commodity swap instruments (“commodity swaps”), to maintain compliance with this covenant. We do not hold or issue derivative financial instruments for trading purposes.
Commodity swap agreements involve payments to or receipts from counterparties based on the differential between two prices for the commodity, and include basis swaps to protect earnings from undue exposure to the risk of geographic disparities in commodity prices. The fair value of our commodity swaps is classified as Level 2 in the fair value hierarchy and is based on standard industry income approach models that use significant observable inputs, including, but not limited to, New York Mercantile Exchange (NYMEX) natural gas forward curves and basis forward curves, all of which are validated to external sources, at least monthly.
The Company recognizes all derivative instruments as either assets or liabilities at fair value on a net basis as they are with a single counterparty and subject to a master netting arrangement. These derivative instruments are reported as either current or non-current assets or liabilities, based on their maturity dates. The Company can net settle its derivative instruments at any time. As of December 31, 2019, we had a current asset, net of $3.1 million, and a non-current asset, net of $0.4 million, related to the fair value of the current and non-current portions of our commodity swaps.
We do not apply hedge accounting for our commodity swaps; therefore, all changes in fair value of the Company’s derivative instruments are recognized within Other income, net, in the Consolidated Statements of Operations. For the years ended December 31, 2019 and 2018, we recognized a realized gain of $3.7 million and a realized loss of $0.1 million, respectively and an unrealized gain of $3.4 million and $0.1 million, respectively, related to the changes in fair value of the commodity swaps in our Consolidated Statements of Operations. Derivative contracts that result in physical delivery of a commodity expected to be used or sold by the Company in the normal course of business are designated as normal purchases and sales and are exempt from derivative accounting. OTC arrangements require settlement in cash. Settlements of derivative commodity instruments are reported as a component of cash flows from operations in the accompanying Consolidated Statements of Cash Flows.
With respect to the commodity swaps, the Company hedged portions of expected sales of equity production and portions of its basis exposure cover approximately 11.4 Bcf and 11.4 Bcf of natural gas, respectively, as of December 31, 2019. The open positions at December 31, 2019 had maturities extending through September 2021.
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