FAIR VALUE MEASUREMENTS

Derivative Financial Instruments

The accounting guidance for fair value measurements requires certain disclosures about assets and liabilities measured at fair value. This guidance establishes a hierarchical framework for disclosing the observability of the inputs utilized in measuring assets and liabilities at fair value. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement within the fair value hierarchy levels. We record transfers, if necessary, between levels at the end of the reporting period for all of our financial instruments. For additional information see Notes 1, 8 and 10 to the Consolidated Financial Statements included in our 2013 Annual Report on Form 10-K filed with the SEC.

Transfers into Level 3, if any, occur when significant inputs used to value the derivative instruments become less observable such as a significant decrease in the frequency and volume in which the instrument is traded, negatively impacting the availability of observable pricing inputs. Transfers out of Level 3, if any, occur when the significant inputs become more observable, such as when the time between the valuation date and the delivery date of a transaction becomes shorter, positively impacting the availability of observable pricing inputs.

Valuation Methodologies for Derivatives

Oil and Gas Segment:


•	The commodity option contracts for our Oil and Gas segment are valued using the market approach and can include calls and puts. Fair value was derived using quoted prices from third-party brokers for similar instruments as to quantity and timing. The prices are then validated through third-party sources and therefore support Level 2 disclosure.


•	The commodity basis swaps for our Oil and Gas segment are valued using the market approach with the instrument’s current forward price strip hedged for the same quantity and date and discounted based on the three-month LIBOR. We utilize observable inputs which support a Level 2 disclosure.

Utilities Segments:

•

The commodity contracts for our Utilities Segments, valued using the market approach, include exchange-traded futures, options and basis swaps (Level 2) and OTC basis swaps (Level 3) for natural gas contracts. For Level 2 assets and liabilities, fair value was derived using broker quotes validated by the Chicago Mercantile Exchange pricing for similar instruments. For Level 3 assets and liabilities, fair value was derived using average price quotes from the OTC contract broker and an independent third-party market participant because these instruments are not traded on an exchange.

Corporate Activities:

•

The interest rate swaps are valued using the market approach. We establish fair value by obtaining price quotes directly from the counterparty which are based on the floating three-month LIBOR curve for the term of the contract. The fair value obtained from the counterparty is then validated by utilizing a nationally recognized service that obtains observable inputs to compute fair value for the same instrument. In addition, the fair value for the interest rate swap derivatives includes a CVA component. The CVA considers the fair value of the interest rate swap and the probability of default based on the life of the contract. For the probability of a default component, we utilize observable inputs supporting a Level 2 disclosure by using our credit default spread, if available, or a generic credit default spread curve that takes into account our credit ratings.

Recurring Fair Value Measurements

There have been no significant transfers between Level 1 and Level 2 derivative balances. Amounts included in cash collateral and counterparty netting in the following tables represent the impact of legally enforceable master netting agreements that allow us to settle positive and negative positions, netting of asset and liability positions permitted in accordance with accounting standards for offsetting as well as cash collateral posted with the same counterparties.

The following tables set forth by level within the fair value hierarchy our gross assets and gross liabilities and related offsetting as permitted by GAAP that were accounted for at fair value on a recurring basis for derivative instruments. A discussion of fair value of financial instruments is included in Note 10:



	As of September 30, 2014
	Level 1		Level 2		Level 3		Cash Collateral and Counterparty Netting			Total
	(in thousands)
Assets:
Commodity derivatives — Oil and Gas
Options -- Oil	$	—	$	—	$	—	$	—		$	—
Basis Swaps -- Oil	—		322		—		(322		)	—
Options -- Gas	—		—		—		—			—
Basis Swaps -- Gas	—		1,545		—		(1,545		)	—
Commodity derivatives — Utilities	—		4,029		—		(4,029		)	—
Total	$	—	$	5,896	$	—	$	(5,896	)	$	—

Liabilities:
Commodity derivatives — Oil and Gas
Options -- Oil	$	—	$	—	$	—	$	—		$	—
Basis Swaps -- Oil	—		487		—		(487		)	—
Options -- Gas	—		—		—		—			—
Basis Swaps -- Gas	—		865		—		(865		)	—
Commodity derivatives — Utilities	—		8,679		—		(8,679		)	—
Interest rate swaps	—		6,670		—		—			6,670
Total	$	—	$	16,701	$	—	$	(10,031	)	$	6,670



	As of December 31, 2013
	Level 1		Level 2		Level 3		Cash Collateral and Counterparty Netting			Total
	(in thousands)
Assets:
Commodity derivatives — Oil and Gas
Options -- Oil	$	—	$	—	$	—	$	—		$	—
Basis Swaps -- Oil	—		130		—		(75		)	55
Options -- Gas	—		—		—		—			—
Basis Swaps -- Gas	—		815		—		(815		)	—
Commodity derivatives —Utilities	—		3,030		—		(2,368		)	662
Total	$	—	$	3,975	$	—	$	(3,258	)	$	717

Liabilities:
Commodity derivatives — Oil and Gas
Options -- Oil	$	—	$	—	$	—	$	—		$	—
Basis Swaps -- Oil	—		1,229		—		(1,229		)	—
Options -- Gas	—		—		—		—			—
Basis Swaps -- Gas	—		531		—		(531		)	—
Commodity derivatives — Utilities	—		9,100		—		(9,100		)	—
Interest rate swaps	—		9,088		—		—			9,088
Total	$	—	$	19,948	$	—	$	(10,860	)	$	9,088



	As of September 30, 2013
	Level 1		Level 2		Level 3		Cash Collateral and Counterparty Netting			Total
	(in thousands)
Assets:
Commodity derivatives — Oil and Gas
Options -- Oil	$	—	$	2	$	—	$	—		$	2
Basis Swaps -- Oil	—		51		—		(40		)	11
Options -- Gas	—		—		—		—			—
Basis Swaps -- Gas	—		1,752		—		(1,639		)	113
Commodity derivatives — Utilities	—		2,351		—		(2,351		)	—
Total	$	—	$	4,156	$	—	$	(4,030	)	$	126

Liabilities:
Commodity derivatives — Oil and Gas
Options -- Oil	$	—	$	142	$	—	$	(77	)	$	65
Basis Swaps -- Oil	—		1,318		—		(1,284		)	34
Options -- Gas	—		—		—		—			—
Basis Swaps -- Gas	—		232		—		(181		)	51
Commodity derivatives — Utilities	—		10,747		—		(10,747		)	—
Interest rate swaps	—		83,142		—		(5,960		)	77,182
Total	$	—	$	95,581	$	—	$	(18,249	)	$	77,332

Fair Value Measures by Balance Sheet Classification

As required by accounting standards for derivatives and hedges, fair values within the following tables are presented on a gross basis reflecting the netting of asset and liability positions permitted in accordance with accounting standards for offsetting and under terms of our master netting agreements and the impact of legally enforceable master netting agreements that allow us to settle positive and negative positions; however, the amounts do not include net cash collateral on deposit in margin accounts at September 30, 2014, December 31, 2013, and September 30, 2013, to collateralize certain financial instruments, which are included in Derivative assets and/or Derivative liabilities. Therefore, the balances are not indicative of either our actual credit exposure or net economic exposure. Additionally, the amounts below will not agree with the amounts presented on our Condensed Consolidated Balance Sheets, nor will they correspond to the fair value measurements presented in Note 8.

The following tables present the fair value and balance sheet classification of our derivative instruments (in thousands):



As of September 30, 2014
	Balance Sheet Location	Fair Value of Asset Derivatives		Fair Value of Liability Derivatives
Derivatives designated as hedges:
Commodity derivatives	Derivative assets — current	$	1,174	$	—
Commodity derivatives	Derivative assets — non-current	692		—
Commodity derivatives	Derivative liabilities — current	—		497
Commodity derivatives	Derivative liabilities — non-current	—		856
Interest rate swaps	Derivative liabilities — current	—		3,397
Interest rate swaps	Derivative liabilities — non-current	—		3,273
Total derivatives designated as hedges		$	1,866	$	8,023

Derivatives not designated as hedges:
Commodity derivatives	Derivative assets — current	$	—	$	—
Commodity derivatives	Derivative assets — non-current	—		—
Commodity derivatives	Derivative liabilities — current	—		48
Commodity derivatives	Derivative liabilities — non-current	—		4,602
Total derivatives not designated as hedges		$	—	$	4,650



As of December 31, 2013
	Balance Sheet Location	Fair Value of Asset Derivatives		Fair Value of Liability Derivatives
Derivatives designated as hedges:
Commodity derivatives	Derivative assets — current	$	248	$	—
Commodity derivatives	Derivative assets — non-current	698		—
Commodity derivatives	Derivative liabilities — current	—		1,541
Commodity derivatives	Derivative liabilities — non-current	—		219
Interest rate swaps	Derivative liabilities — current	—		3,474
Interest rate swaps	Derivative liabilities — non-current	—		5,614
Total derivatives designated as hedges		$	946	$	10,848

Derivatives not designated as hedges:
Commodity derivatives	Derivative assets — current	$	662	$	—
Commodity derivatives	Derivative assets — non-current	—		—
Commodity derivatives	Derivative liabilities — current	—		—
Commodity derivatives	Derivative liabilities — non-current	—		6,732
Total derivatives not designated as hedges		$	662	$	6,732



As of September 30, 2013
	Balance Sheet Location	Fair Value of Asset Derivatives		Fair Value of Liability Derivatives
Derivatives designated as hedges:
Commodity derivatives	Derivative assets — current	$	846	$	—
Commodity derivatives	Derivative assets — non-current	959		—
Commodity derivatives	Derivative liabilities — current	—		1,317
Commodity derivatives	Derivative liabilities — non-current	—		375
Interest rate swaps	Derivative liabilities — current	—		7,039
Interest rate swaps	Derivative liabilities — non-current	—		11,388
Total derivatives designated as hedges		$	1,805	$	20,119

Derivatives not designated as hedges:
Commodity derivatives	Derivative assets — current	$	—	$	—
Commodity derivatives	Derivative assets — non-current	—		—
Commodity derivatives	Derivative liabilities — current	—		1,795
Commodity derivatives	Derivative liabilities — non-current	—		6,601
Interest rate swaps	Derivative liabilities — current	—		64,715
Interest rate swaps	Derivative liabilities — non-current	—		—
Total derivatives not designated as hedges		$	—	$	73,111