Interest expense relates to the commitment fees paid on the revolving line of credit.
Interest expense for the three and six months ended June 30, 2022 and 2021 decreased due to the reduction in the borrowing base on our line of credit during this time.
(Loss) Gain on Derivative Contracts
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| | Three months ended June 30, | | Six months ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Gain (loss) on derivative contracts | | $ | 776,994 | | $ | (1,827,334) | | $ | (194,910) | | $ | (1,361,993) |
For the three and six months ended June 30, 2022 and 2021, Epsilon entered into NYMEX Henry Hub two-way costless collar and Tennessee basis swap derivative contracts for the purpose of hedging its physical natural gas sales revenue. During the three and six months ended June 30, 2022, we paid net cash settlements of $163,559 and $1,375,287, respectively. During the three and six months ended June 30, 2021, we paid net cash settlements of $91,660 and $27,460, respectively.
For the three and six months ended June 30, 2022, realized losses on derivative contracts increased primarily due to the rally in NYMEX Henry Hub Natural Gas Futures resulting in an increased liability for the short call portion of the two-way costless collar position. As of June 30, 2022, the Company had no derivative contracts beyond December 31, 2022.
Other (Expense) Income
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| | Three months ended June 30, | | Six months ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Interest income and other income | | $ | (39,768) | | $ | 8,625 | | $ | (29,953) | | $ | 18,380 |
For the three and six months ended June 30, 2022 and 2021, other income decreased as a result of derecognizing and asset retirement obligation after the P&A of an asset. This was offset by an increase in interest received as a result of increasing interest rates.
Capital Resources and Liquidity
Cash Flow
The primary source of cash for Epsilon during the three and six months ended June 30, 2022 and 2021 was funds generated from operations. The primary uses of cash for the three and six months ended June 30, 2022 were development of natural gas properties, the repurchase of shares of common stock, and the distribution of dividends. The primary uses of cash for the three and six months ended June 30, 2021 were development of natural gas properties and the repurchase of shares of common stock.
At June 30, 2022, we had a working capital surplus of $33.3 million, an increase of $9.2 million over the $24.1 million surplus at December 31, 2021. The Company anticipates its current cash balance, cash flows from operations, and available sources of liquidity to be sufficient to meet its cash requirements for at least the next twelve months.
Three and six months ended June 30, 2022 compared to 2021
During the six months ended June 30, 2022, $15.8 million was provided by the Company’s operating activities, compared to $8.0 million provided during the same period in 2021, a $7.7 million, and 96% increase. The increase was mainly due to increased cash from operations as a result of increased commodity prices, partially offset by the losses created on the hedges as they matured. During the three months ended June 30, 2022, $8.1 million was provided by the Company’s operating activities, compared to $2.4 million provided during the same period in 2021, a $5.7 million, and 235% increase. The increase was mainly due to increased cash from operations as a result of increased commodity prices.