goodrich petroleum corporation - RR DONNELLEY FINANCIAL

Gain on Derivatives Not Designated as Hedges
We produce and sell oil and natural gas into a market where selling prices are historically volatile. For
example, on June 10, 2011 the Henry Hub natural gas spot price reached a high of $4.92 per MMBtu, but the
price was down to $2.80 per MMBtu at November 28, 2011. We enter into swap contracts, swaptions, costless
collars or other derivative agreements from time to time to manage commodity price risk for a portion of our
production.
Gain on derivatives not designated as hedges was $34.5 million for 2011. The gain includes a realized gain
of $31.3 million on our natural gas derivatives and an unrealized gain of $3.2 million for the change in fair value
of our oil and natural gas commodity contracts. The unrealized gain reflects the lower average futures strip prices
from December 31, 2010 as compared to December 31, 2011.
Gain on derivatives not designated as hedges was $55.3 million for 2010. The gain includes a realized gain
of $24.6 million on our natural gas derivatives and an unrealized gain of $30.7 million for the change in fair
value of our oil and natural gas commodity contracts. The unrealized gain reflects the lower average futures strip
prices from December 31, 2009 as compared to December 31, 2010.
Gain on derivatives not designated as hedges was $47.1 million for 2009, which includes a gain of $47.8
million from our natural gas derivatives offset by a $0.7 million loss on our interest rate derivatives. The gain on
our natural gas derivatives includes a realized gain of $98.0 million offset by a $50.2 million unrealized loss for
the change in fair value of our natural gas commodity contracts. The unrealized loss resulted from the roll off of
existing natural gas derivative contracts during 2009. The loss on interest rate hedges in 2009 includes a realized
loss of $1.4 million offset by an unrealized gain of $0.7 million. Our interest rate derivative contracts expired in
the first half of 2010.
We will continue to be exposed to volatility in earnings resulting from changes in the fair value of our
commodity contracts when we do not designate these contracts as hedges.
Income Tax Benefit
We recorded no income tax benefit for the year 2011. We increased our valuation allowance and reduced
our net deferred tax assets to zero during 2009 after considering all available positive and negative evidence
related to the realization of our deferred tax assets. Our assessment of the realization of our deferred tax assets
has not changed and as a result, we continue to maintain a full valuation allowance for our net deferred asset as
of December 31, 2011.
We recorded a small tax benefit of less than $0.1 million in 2010, which reflects the monetization of our
alternative minimum tax credit. We otherwise recorded no income tax benefit for the year 2010. Income tax
benefit of $67.3 million for 2009 includes an increase to our valuation allowance of $54.3 million.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our primary sources of cash during 2011 were from cash on hand, cash flow from operating activities,
available borrowings under our Senior Credit Facility and our issuance in March 2011 of $275 million of our
2019 Notes. We used cash primarily to fund our capital spending program, retire debt and pay preferred stock
dividends. Our primary sources of cash during 2010 were from cash on hand, cash flow from operating activities
and proceeds from divestitures. In 2010, we used cash primarily to fund our capital spending program, and pay
preferred stock dividends. Our primary sources of cash during 2009 were cash flow from operating activities and
the issuance of debt. In 2009, we used cash primarily to fund our capital spending program, retire debt and pay
preferred stock dividends.
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