|3 Months Ended|
Mar. 31, 2019
|Derivative Instruments and Hedging Activities Disclosure [Abstract]|
NOTE 8 — FINANCIAL INSTRUMENTS
As discussed in Note 9, Long-Term Borrowings, as part of entering into the senior secured term loan credit agreement, 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 (collectively “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 also include basis swaps to protect earnings from undue exposure to the risk of geographic disparities in commodity prices, as also required by the negative covenant of the senior secured term loan credit agreement. 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 current or non-current liabilities, based on their maturity dates. The Company can net settle its derivative instruments at any time. As of March 31, 2019, we had a current liability of $0.6 million, net, with respect to the fair value of the current portion of our commodity swaps. In addition, as of March 31, 2019, we also had a non-current liability of $0.6 million, net, with respect to the fair value of the non-current portion of our commodity swaps. The current and the non-current liability are classified within Accrued and other liabilities and Other non-current liabilities, respectively, on the Condensed Consolidated Balance Sheets. Gross current asset and current liability amounts are $0.1 million and $0.7 million, respectively. Gross non-current asset and non-current liability amounts are $0.0 million and $0.6 million, respectively.
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 expense, net, in the Condensed Consolidated Statements of Operations. For the three months ended March 31, 2019, we recognized a realized gain of $0.2 million and an unrealized loss of $1.2 million related to the changes in fair value of the commodity swaps in our Condensed Consolidated Statements of Operations. Derivative contracts which 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 Condensed 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 to cover approximately 18.3 Bcf and 18.3 Bcf of natural gas, respectively, as of March 31, 2019. The open positions at March 31, 2019 had maturities extending through September 2021. For additional details, refer to Note 9, Long-Term Borrowings.
The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef