ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In addition to the risks inherent in operations, CNX is exposed to financial, market, political and economic risks. The following discussion provides additional detail regarding CNX's exposure to the risks of changing commodity prices, interest rates and foreign exchange rates.
CNX is exposed to market price risk in the normal course of selling natural gas and liquids. CNX uses fixed-price contracts, options and derivative commodity instruments (over-the-counter swaps) to minimize exposure to market price volatility in the sale of natural gas. Under our risk management policy, it is not our intent to engage in derivative activities for speculative purposes. Typically, CNX “sells” swaps under which it receives a fixed price from counterparties and pays a floating market price. During the second quarter of 2020, CNX purchased, rather than sold, financial swaps for the period May through November of 2020 under which CNX will pay a fixed price to and receive a floating price from its hedge counterparties.
CNX has established risk management policies and procedures to strengthen the internal control environment of the marketing of commodities produced from its asset base. All of the derivative instruments without other risk assessment procedures are held for purposes other than trading. They are used primarily to mitigate uncertainty and volatility and cover underlying exposures. The Company's market risk strategy incorporates fundamental risk management tools to assess market price risk and establish a framework in which management can maintain a portfolio of transactions within pre-defined risk parameters.
CNX believes that the use of derivative instruments, along with our risk assessment procedures and internal controls, mitigates our exposure to material risks. The use of derivative instruments without other risk assessment procedures could materially affect the Company's results of operations depending on market prices; however, we believe that use of these instruments will not have a material adverse effect on our financial position or liquidity due to our risk assessment procedures and internal controls.
For a summary of accounting policies related to derivative instruments, see Note 1 - Significant Accounting Policies in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K.
At December 31, 2020 and 2019, our open derivative instruments were in a net asset position with a fair value of $118 million and $406 million, respectively. A sensitivity analysis has been performed to determine the incremental effect on future earnings related to open derivative instruments at December 31, 2020 and 2019. A hypothetical 10 percent increase in future natural gas prices would have decreased the fair value by $362 million and $383 million at December 31, 2020 and 2019, respectively. A hypothetical 10 percent decrease in future natural gas prices would have increased the fair value by $366 million and $402 million at December 31, 2020 and 2019, respectively.
CNX's interest expense is sensitive to changes in the general level of interest rates in the United States. The Company uses derivative instruments to manage risk related to interest rates. These instruments change the variable-rate cash flow exposure on the debt obligations to fixed cash flows. At December 31, 2020 and 2019, CNX had $1,980 million and $1,797 million, respectively, aggregate principal amount of debt outstanding under fixed-rate instruments, including unamortized debt issuance costs of $27 million and $9 million, respectively. At December 31, 2020 and 2019, CNX had $452 million and $973 million, respectively, of debt outstanding under variable-rate instruments. CNX’s primary exposure to market risk for changes in interest rates relates to our Credit Facility, under which there were $161 million of borrowings at December 31, 2020 and $661 million at December 31, 2019, and CNXM's revolving credit facility, under which there were $291 million of borrowings at December 31, 2020 and $312 million at December 31, 2019. A hypothetical 100 basis-point increase in the average rate for CNX's variable-rate instruments would decrease pre-tax future earnings as of December 31, 2020 and 2019 by $5 million and $10 million, respectively, on an annualized basis.
All of CNX's transactions are denominated in U.S. dollars, and, as a result, it does not have material exposure to currency exchange-rate risks.
Natural Gas Hedging Volumes
As of January 7, 2021, the Company's hedged volumes for the periods indicated are as follows:
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For the Three Months Ended
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March 31,
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June 30,
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September 30,
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December 31,
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Total Year
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2021 Fixed Price Volumes
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Hedged Bcf
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126.3
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112.1
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115.2
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119.2
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472.1*
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Weighted Average Hedge Price per Mcf
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$
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2.57
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$
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2.45
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$
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2.45
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$
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2.52
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$
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2.50
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2022 Fixed Price Volumes
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Hedged Bcf
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101.4
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96.9
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97.9
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95.1
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391.3
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Weighted Average Hedge Price per Mcf
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$
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2.41
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$
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2.32
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$
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2.32
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$
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2.30
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$
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2.34
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2023 Fixed Price Volumes
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Hedged Bcf
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70.2
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71.0
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71.8
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71.8
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284.8
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Weighted Average Hedge Price per Mcf
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$
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2.24
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$
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2.21
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$
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2.21
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$
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2.23
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$
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2.22
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2024 Fixed Price Volumes
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Hedged Bcf
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67.6
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64.7
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65.4
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65.4
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263.1
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Weighted Average Hedge Price per Mcf
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$
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2.32
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$
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2.27
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$
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2.27
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$
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2.27
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$
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2.28
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2025 Fixed Price Volumes
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Hedged Bcf
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25.4
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25.7
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26.0
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25.9
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103.0
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Weighted Average Hedge Price per Mcf
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$
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2.10
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$
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2.10
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$
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2.10
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$
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2.10
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$
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2.10
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*Quarterly volumes do not add to annual volumes inasmuch as a discrete condition in individual quarters, where basis hedge volumes exceed NYMEX hedge volumes, does not exist for the year taken as a whole.
