| |
Directors of Basic Services, Inc. It is management's
opinion that the transactions with both of these entitities were
performed at prevailing market rates.
At December 31, 2004, the Company had outstanding
related-party accounts receivable and payable balances of $0.3 million
and $0.7 million, respectively. At December 31, 2003, the Company
had outstanding related party accounts payable balances of $0.9
million.
During the year ended 2004, Goodrich Petroleum
("Goodrich") participated in the drilling of one well operated by
the Company. During the year ended December 31, 2004, the Company
incurred land and drilling expenses of $0.6 million with the Company.
Mr. Webster is a member of the Board of Directors of Goodrich. The
terms of the operating agreements between the Company and Goodrich
are consistent with standard industry practices.
See Notes 4, 7 and 9 for a discussion of the
investment in Pinnacle, Subordinated Notes and Series B Preferred
Stock with parties that include members of the Company's Board of
Directors or their affiliates.
Steven A. Webster, Chairman of the Board of
the Company, is also a managing director of Credit Suisse First
Boston Private Equity and is therefore a related party to the Pinnacle
transaction.
The Company entered into a transition services
agreement with Pinnacle pursuant to which the Company provided certain
accounting, treasury, tax, insurance and financial reporting functions
to Pinnacle for a monthly fee equal to the Company's actual cost
to provide such services. No such services were provided during
2004.
13. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITY
The Company's operations involve managing market
risks related to changes in commodity prices. Derivative financial
instruments, specifically swaps, futures, options and other contracts,
are used to reduce and manage those risks. The Company addresses
market risk by selecting instruments whose value fluctuations correlate
strongly with the underlying commodity being hedged. The Company
enters into swaps, options, collars and other derivative contracts
to hedge the price risks associated with a portion of anticipated
future oil and natural gas production. While the use of hedging
arrangements limits the downside risk of adverse price movements,
it may also limit future gains from favorable movements. Under these
agreements, payments are received or made based on the differential
between a fixed and a variable product price. These agreements are
settled in cash at termination, expiration or exchanged for physical
delivery contracts. The Company enters into the majority of its
hedging transactions with two counterparties and a netting agreement
is in place with those counterparties. The Company does not obtain
collateral to support the agreements but monitors the financial
viability of counterparties and believes its credit risk is minimal
on these transactions. In the event of nonperformance, the Company
would be exposed to price risk. The Company has some risk of accounting
loss since the price received for the product at the actual physical
delivery point may differ from the prevailing price at the delivery
point required for settlement of the hedging transaction.
As of December 31, 2003 and 2004, the unrealized
gain/(loss), net of tax, of $0.2 million and $59,000, respectively,
(net of tax of $0.1 million and $34,000, respectively) remained
in accumulated other comprehensive income related to the valuation
of the Company's hedging positions.
Total oil purchased and sold under swaps and
collars during 2002, 2003 and 2004 were 131,300 Bbls, 193,600 Bbls
and 121,700 Bbls, respectively. Total natural gas purchased and
sold under swaps and collars in 2002, 2003 and 2004 were 2,314,000
MMBtu, 2,739,000 MMBtu and 3,936,000 MMBtu, respectively. The net
losses realized by the Company under such hedging arrangements were
$(0.9) million, $(1.8) million and $(1.0) million for 2002, 2003
and 2004, respectively, and are included in oil and natural gas
revenues.
|
|
