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Fair Value Measurements
6 Months Ended
Jun. 30, 2015
Fair Value Disclosures [Abstract]  
Fair Value Measurements

(12) 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. 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 June 30, 2015 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
June 30,
2015

 

Trading securities held in the deferred compensation plans

 

$

64,420

 

 

$

 

 

$

 

 

$

64,420

 

Derivatives swaps

 

 

 

 

 

231,687

 

 

 

 

 

 

231,687

 

                    –collars

 

 

 —

 

 

 

31,149

 

 

 

 —

 

 

 

31,149

 

                    –basis swaps

  

 

  —

 

  

 

5,860

 

 

 

 

  

 

5,860

 

 

 

  

Fair Value Measurements at December 31, 2014 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,
2014

 

Trading securities held in the deferred compensation plans

  

$

68,454

  

  

$

  

 

$

  

  

$

68,454

  

Derivatives swaps

  

 

 —

 

  

 

344,216

 

 

 

  

  

 

344,216

 

                    –collars

  

 

 —

 

  

 

57,460

  

 

 

  

  

 

57,460

  

                    –basis swaps

  

 

 —

 

  

 

1,687

  

 

 

  

  

 

1,687

  

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 consolidated statements of operations. For second quarter 2015, interest and dividends were $139,000 and the mark-to-market adjustment was a loss of $576,000 compared to interest and dividends of $103,000 and mark-to-market gain of $2.1 million in second quarter 2014. For the six months ended June 30, 2015, interest and dividends were $248,000 and the mark-to-market adjustment was a gain of $832,000 compared to interest and dividends of $171,000 and the mark-to-market adjustment of a gain of $2.6 million in the same period of 2014.

Fair Values—Reported

The following table presents the carrying amounts and the fair values of our financial instruments as of June 30, 2015 and December 31, 2014 (in thousands):

 

 

 

June 30, 2015

 

 

December 31, 2014

 

 

 

Carrying
Value

 

 

Fair
Value

 

 

Carrying
Value

 

 

Fair
Value

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity swaps, collars and basis swaps

 

$

268,821

 

 

$

268,821

 

 

$

403,363

 

 

$

403,363

 

Marketable securities(a)

 

 

64,420

 

 

 

64,420

 

 

 

68,454

 

 

 

68,454

 

(Liabilities):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity swaps

 

 

(125

)

 

 

(125

)

 

 

 

 

 

 

Bank credit facility(b)

 

 

(364,000

)

 

 

(364,000

)

 

 

(723,000

)

 

 

(723,000

)

Deferred compensation plan(c)

 

 

(182,648

)

 

 

(182,648

)

 

 

(203,433

)

 

 

(203,433

)

4.875% senior notes due 2025(b)

 

 

(750,000

)

 

 

(728,438

)

 

 

 

 

 

 

6.75% senior subordinated notes due 2020(b)

 

 

(500,000

)

 

 

(515,625

)

 

 

(500,000

)

 

 

(523,125

)

5.75% senior subordinated notes due 2021(b)

 

 

(500,000

)

 

 

(513,125

)

 

 

(500,000

)

 

 

(520,000

)

5.00% senior subordinated notes due 2022(b)

 

 

(600,000

)

 

 

(588,750

)

 

 

(600,000

)

 

 

(601,500

)

5.00% senior subordinated notes due 2023(b)

 

 

(750,000

)

 

 

(733,125

)

 

 

(750,000

)

 

 

(754,688

)

(a)

Marketable securities, which are held in our deferred compensation plans, are actively traded on major exchanges. Refer to Note 13 for additional information.

(b)

The book value of our bank debt approximates fair value because of its floating rate structure. The fair value of our senior notes and our senior subordinated notes is based on end of period market quotes which are Level 2 inputs. Refer to Note 8 for additional information.

(c)

The fair value of our deferred compensation plan is updated at the closing price on the balance sheet date which is a Level 1 input.

Our current assets and liabilities contain financial instruments, the most significant of which are trade accounts receivable and payable. 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 and expected incurrence of bad debt expense. Non-financial liabilities initially measured at fair value include asset retirement obligations. For additional information, see Note 9.

Concentrations of Credit Risk

As of June 30, 2015, our primary concentrations of credit risk are the risks of not collecting accounts receivable and the risk of a counterparty’s 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 deemed necessary to limit our risk of loss. Our allowance for uncollectible receivables was $3.0 million at June 30, 2015 and $2.7 million at December 31, 2014. As of June 30, 2015, our derivative contracts consist of swaps and collars. Our exposure to credit risk is diversified among major investment grade financial institutions, where 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 June 30, 2015, our derivative counterparties include seventeen financial institutions, of which all but two are secured lenders in our bank credit facility. At June 30, 2015, our net derivative assets include a net receivable from these two counterparties that are not included in our bank credit facility of $19.9 million.