FAIR VALUE MEASUREMENTS

9 Months Ended

Sep. 30, 2012

FAIR VALUE MEASUREMENTS

(13) FAIR VALUE MEASUREMENTS

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There are three approaches for measuring the fair value of assets and liabilities: the market approach, the income approach and the cost approach, each of which includes multiple valuation techniques. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to measure fair value by converting future amounts, such as cash flows or earnings, into a single present value amount using current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace the service capacity of an asset. This is often referred to as current replacement cost. The cost approach assumes that the fair value would not exceed what it would cost a market participant to acquire or construct a substitute asset of comparable utility, adjusted for obsolescence.

The fair value accounting standards do not prescribe which valuation technique should be used when measuring fair value and does not prioritize among the techniques. These standards establish a fair value hierarchy that prioritizes the inputs used in applying the various valuation techniques. Inputs broadly refer to the assumptions that market participants use to make pricing decisions, including assumptions about risk. Level 1 inputs are given the highest priority in the fair value hierarchy while Level 3 inputs are given the lowest priority. The three levels of the fair value hierarchy are as follows:

• Level 1 – Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

• Level 2 – Observable market-based inputs or unobservable inputs that are corroborated by market data. These are inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.

• Level 3 – Unobservable inputs that are not corroborated by market data and may be used with internally developed methodologies that result in management’s best estimate of fair value.

Valuation techniques that maximize the use of observable inputs are favored. Assets and liabilities are classified in their entirety based on the lowest priority level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement of assets and liabilities within the levels of the fair value hierarchy.

Fair Values-Recurring

We use a market approach for our recurring fair value measurements and endeavor to use the best information available. Accordingly, valuation techniques that maximize the use of observable impacts are favored. The following tables present the fair value hierarchy table for assets and liabilities measured at fair value, on a recurring basis (in thousands):

	Fair Value Measurements at September 30, 2012 using:
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Total Carrying Value as of September 30, 2012
Trading securities held in the deferred compensation plans	$	67,429	$	—		$	—	$	67,429
Derivatives – swaps		—		33,282			—		33,282
– collars		—		109,629			—		109,629
– call options		—		(3,732	)		—		(3,732	)
– put options		—		77			—		77

	Fair Value Measurements at December 31, 2011 using:
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Total Carrying Value as of December 31, 2011
Trading securities held in the deferred compensation plans	$	50,237	$	—		$	—	$	50,237
Derivatives – swaps		—		69,054			—		69,054
– collars		—		211,621			—		211,621
– call options		—		(29,348	)		—		(29,348	)

Our trading securities in Level 1 are exchange-traded and measured at fair value with a market approach using end of period market values. Derivatives in Level 2 are measured at fair value with a market approach using third-party pricing services, which have been corroborated with data from active markets or broker quotes.

Our trading securities held in the deferred compensation plan are accounted for using the mark-to-market accounting method and are included in other assets in the accompanying consolidated balance sheets. We elected to adopt the fair value option to simplify our accounting for the investments in our deferred compensation plan. Interest, dividends, and mark-to-market gains or losses are included in deferred compensation plan expense in the accompanying statement of operations. For third quarter 2012, interest and dividends were $122,000 and the mark-to-market adjustment was a gain of $3.8 million. For third quarter 2011, interest and dividends were $84,000 and the mark-to-market adjustment was a loss of $7.9 million. For the nine months ended September 30, 2012, interest and dividends were $279,000 and the mark-to-market adjustment was a gain of $5.7 million. For the nine months ended September 30, 2011, interest and dividends were $179,000 and the mark-to-market adjustment was a loss of $6.6 million.

Fair Values-Nonrecurring

We review our long-lived assets to be held and used, including proved natural gas and oil properties, whenever events or circumstances indicate the carrying value of those assets may not be recoverable. In third quarter 2012, we evaluated certain surface property we own which included a consideration for the potential sale of these assets. As a result, we recognized an impairment charge of $1.3 million.

Several long-lived assets held for use were evaluated for impairment during 2011 due to reductions in estimated reserves and lower natural gas prices. The fair value of our onshore Gulf Coast assets in 2011 was measured using an income approach based upon internal estimates of future production levels, prices, drilling and operating costs and discount rates, which are Level 3 inputs. Our projected undiscounted cash flows associated with these assets was less than their carrying value and therefore, we recorded an impairment of $7.5 million in third quarter 2011 related to our onshore Gulf Coast proved properties.

Also during third quarter 2011, we evaluated our East Texas properties for impairment which included a consideration for the potential sale of some of these assets, along with a reduction in estimated reserves and lower natural gas prices. This analysis reflected undiscounted cash flows for these properties was less than their carrying value and we recognized an impairment charge of $31.2 million. Some of these properties were sold in third quarter 2011 for proceeds of $10.5 million.

The following table presents the value of these assets measured at fair value on a nonrecurring basis (in thousands). All such fair value measurements represent Level 3 measurements.

	Three Months Ended September 30,								Nine Months Ended September 30,
	2012				2011				2012				2011
	Fair Value		Impairment		Fair Value		Impairment		Fair Value		Impairment		Fair Value		Impairment
Surface property	$	6,269	$	1,281	$	—	$	—	$	6,269	$	1,281	$	—	$	—
Natural gas and oil properties	$	—	$	—	$	24,388	$	38,681	$	—	$	—	$	24,388	$	38,681

Fair Values – Reported

The following table presents the carrying amounts and the fair values of our financial instruments as of September 30, 2012 and December 31, 2011 (in thousands):

	September 30, 2012						December 31, 2011
	Carrying Value			Fair Value			Carrying Value			Fair Value
Assets:
Commodity swaps, collars, call and put options	$	152,489		$	152,489		$	251,500		$	251,500
Marketable securities(a)		67,429			67,429			50,237			50,237
Liabilities:
Commodity swaps, collars, call and put options		(13,233	)		(13,233	)		(173	)		(173	)
Bank credit facility(b)		(461,000	)		(461,000	)		(187,000	)		(187,000	)
7.50% senior subordinated notes due 2017(b)		(250,000	)		(260,000	)		(250,000	)		(265,625	)
7.25% senior subordinated notes due 2018(b)		(250,000	)		(264,375	)		(250,000	)		(267,500	)
8.00% senior subordinated notes due 2019(b)		(288,869	)		(333,000	)		(287,967	)		(334,500	)
6.75% senior subordinated notes due 2020(b)		(500,000	)		(550,000	)		(500,000	)		(555,000	)
5.75% senior subordinated notes due 2021(b)		(500,000	)		(537,500	)		(500,000	)		(541,250	)
5.00% senior subordinated notes due 2022(b)		(600,000	)		(633,000	)		—			—

^(a) Marketable securities, which are held in our deferred compensation plans, and are actively traded on major exchanges.

^(b) The book value of our bank debt approximates fair value because of its floating rate structure. The fair value of our senior subordinated notes is based on end of period market quotes which are Level 2 market values.

Our current assets and liabilities contain financial instruments, the most significant of which are trade accounts receivables and payables. We believe the carrying values of our current assets and liabilities approximate fair value. Our fair value assessment incorporates a variety of considerations, including (1) the short-term duration of the instruments and (2) our historical incurrence of and expected future insignificance of bad debt expense.

Concentrations of Credit Risk

As of September 30, 2012, our primary concentrations of credit risk are the risks of collecting accounts receivable and the risk of counterparties’ failure to perform under derivative obligations. Most of our receivables are from a diverse group of companies, including major energy companies, pipeline companies, local distribution companies, financial institutions and end-users in various industries. Letters of credit or other appropriate security are obtained as necessary to limit our risk of loss. Our allowance for uncollectible receivables was $1.6 million at September 30, 2012 compared to $4.0 million at December 31, 2011. As of September 30, 2012, our derivative contracts consist of swaps, collars, call options and put options. Our exposure is diversified primarily among major investment grade financial institutions, the majority of which we have master netting agreements which provide for offsetting payables against receivables from separate derivative contracts. To manage counterparty risk associated with our derivatives, we select and monitor our counterparties based on our assessment of their financial strength and/or credit ratings. We may also limit the level of exposure with any single counterparty. At September 30, 2012 our derivative counterparties include sixteen financial institutions, of which all but two are secured lenders in our bank credit facility. At September 30, 2012, our net derivative assets include a receivable from the two counterparties not included in our bank credit facility of $12.7 million. For those counterparties that are not secured lenders in our bank credit facility or for which we do not have master netting arrangements, net derivative asset values are determined, in part, by reviewing credit default swap spreads for the counterparties. Net derivative liabilities are determined, in part, by using our market-based credit spread. None of our derivative contracts have margin requirements or collateral provisions that would require funding prior to the scheduled cash settlement date. We have also entered into the International Swaps and Derivatives Association Master Agreements (“ISDA Agreements”) with our counterparties. The terms of the ISDA Agreements provide us and our counterparties with rights of set off upon the occurrence of defined acts of default by either us or a counterparty to a derivative, whereby the party not in default may set off all derivative liabilities owed to the defaulting party against all derivative asset receivables from the defaulting party.