Interactive 2009 Annual Report (PDF 7.56 MB) - Denbury Resources ...

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100 Denbury Resources Inc. 2009 Annual ReportFor the years ended December 31, 2009, 2008, and 2007, the net effect on income of derivative financial instrumentswas as follows:Amount of Gain/(Loss)Recognized in IncomeLocation of Gain/(Loss) Year Ended December 31,Type of Contract Recognized in Income 2009 2008 2007In thousandsDerivatives not designated as hedging instruments:Commodity ContractsCrude Oil Contracts Commodity derivative income (expense) $ (229,016) $ 228,920 $ (24,310)Natural Gas Contracts Commodity derivative income (expense) (7,210) (28,867) 5,713Total derivatives not designated as hedging instruments $ (236,226) $ 200,053 $ (18,597)Note 11. Fair Value MeasurementsFair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transactionbetween market participants at the measurement date (exit price). We utilize market data or assumptions that marketparticipants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in theinputs to the valuation technique. These inputs can be readily observable, market corroborated, or generallyunobservable. We primarily apply the market approach for recurring fair value measurements and endeavor to utilizethe best available information. Accordingly, we utilize valuation techniques that maximize the use of observable inputsand minimize the use of unobservable inputs. We are able to classify fair value balances based on the observability ofthose inputs. The FASC establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. Thehierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1measurement) and the lowest priority to unobservable inputs (level 3 measurement). The three levels of the fair valuehierarchy are as follows:Level 1 — Quoted prices in active markets for identical assets or liabilities as of the reporting date. For the yearsended December 31, 2009 and 2008, we had no level 1 recurring measurements.Level 2 — Pricing inputs are other than quoted prices in active markets included in level 1, which are either directlyor indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued usingmodels or other valuation methodologies. These models are primarily industry-standard models that consider variousassumptions, including quoted forward prices for commodities, time value, volatility factors, and current market andcontractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all ofthese assumptions are observable in the marketplace throughout the full term of the instrument, can be derived fromobservable data or are supported by observable levels at which transactions are executed in the marketplace.Instruments in this category include non-exchange-traded oil and natural gas derivatives such as over-the-counterswaps. We have included an estimate of nonperformance risk in the fair value measurement of our oil and natural gasderivative contracts. We have measured nonperformance risk based upon credit default swaps or credit spreads. AtDecember 31, 2009 and 2008, the fair value of our oil and natural gas derivative contracts was reduced by $0.8 millionand $3.7 million, respectively, for estimated nonperformance risk.Level 3 — Pricing inputs include significant inputs that are generally less observable from objective sources. Theseinputs may be used with internally developed methodologies that result in management’s best estimate of fair value.Form 10-K Part IINotes to Consolidated Financial Statements
Denbury Resources Inc. 2009 Annual Report 101The following table sets forth by level within the fair value hierarchy our financial assets and liabilities that wereaccounted for at fair value on a recurring basis as of December 31, 2009 and 2008.Fair Value Measurements Using:SignificantQuoted Prices Other Significantin Active Observable UnobservableMarkets Inputs InputsIn thousands (Level 1) (Level 2) (Level 3) TotalDecember 31, 2009Assets:Oil derivative contracts $ — $ 815 $ — $ 815Liabilities:Oil and natural gas derivative contracts — (129,559) — (129,559)Total $ — $ (128,744) $ — $ (128,744)December 31, 2008Assets:Oil derivative contracts $ — $ 249,746 $ — $ 249,746Total $ — $ 249,746 $ — $ 249,746The following table sets forth the fair value of financial instruments that are not recorded at fair value in ourConsolidated Financial Statements.December 31, 2009 December 31, 2008Carrying Estimated Carrying EstimatedIn thousands Amount Fair Value Amount Fair Value9.75% Senior Subordinated Notes due 2016 $ 399,926 $ 455,129 $ — $ —7.5% Senior Subordinated Notes due 2015 300,513 299,250 300,599 213,0007.5% Senior Subordinated Notes due 2013 224,369 226,125 224,174 171,000Senior Bank Loan 125,000 122,500 75,000 64,000The fair values of our senior subordinated notes are based on quoted market prices. The carrying value of ourSenior Bank Loan is approximately fair value based on the fact that it is subject to short-term floating interest rates thatapproximate the rates available to us for those periods. We adjusted the estimated fair value measurement of our SeniorBank Loan for estimated nonperformance risk. This estimated nonperformance risk totaled approximately $2.5 millionand $11.0 million at December 31, 2009 and 2008, respectively, and was determined utilizing industry credit defaultswaps. We have other financial instruments consisting primarily of cash, cash equivalents, short-term receivables andpayables that approximate fair value due to the nature of the instrument and the relatively short maturities.Note 12. Commitments and ContingenciesWe have operating leases for the rental of equipment, office space and vehicles that totaled $162.2 million, $128.6million and $143.8 million as of December 31, 2009, 2008 and 2007, respectively. During the last seven years, weentered into lease financing agreements for equipment at certain of our oil and natural gas properties and CO 2 sourcefields. These lease financings totaled $49.3 million during 2009, $6.1 million during 2008, and $27.1 million during 2007with associated required monthly payments of approximately $670,000 for the 2009 leases, $56,000 for the 2008leases, and $257,000 for the 2007 leases. Leases entered into prior to 2006 have seven-year terms, leases entered intoin 2006 through 2008 have 10-year terms, and leases entered into in 2009 have five to 10-year terms. Rental expensefor operating leases totaled $37.6 million in 2009, $32.3 million in 2008, and $24.6 million in 2007. We have subleasedpart of the office space where we have operating leases. The cash payments we will receive under these contracts totalapproximately $0.9 million for 2010 through 2012.In 2005 and 2006, we entered into three agreements with Genesis to transport crude oil and CO 2 . These agreementsare accounted for as capital leases and are discussed in detail in Note 3, “Related Party Transactions – Genesis”. In2008, we entered into two transactions with Genesis involving our NEJD Pipeline system and Free State Pipeline, whichNotes to Consolidated Financial StatementsForm 10-K Part II
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Interactive 2009 Annual Report (PDF 7.56 MB) - Denbury Resources ...

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