(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 do 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 March 31, 2016 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 March 31, 2016
Trading securities held in the deferred compensation plans	$	63,018	$	—		$	—	$	63,018
Derivatives –swaps		—		261,961			—		261,961
–basis swaps		—		3,097			—		3,097
–freight swaps		—		(11	)		—		(11	)

	Fair Value Measurements at December 31, 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 December 31, 2015
Trading securities held in the deferred compensation plans	$	62,376	$	—	$	—	$	62,376
Derivatives –swaps		—		283,276		—		283,276
–basis swaps		—		4,329		—		4,329

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 first quarter 2016, interest and dividends were $136,000 and the mark-to-market adjustment was a gain of $259,000 compared to interest and dividends of $109,000 and a mark-to-market gain of $1.4 million in first quarter 2015.

Fair Values—Non-recurring

Our proved natural gas and oil properties are reviewed for impairment periodically as events or changes in circumstances indicate the carrying amount may not be recoverable. In the three months ended March 31, 2016, due to declines in commodity prices, there were indicators that the carrying value of certain of our oil and gas properties may be impaired and undiscounted future cash flows attributed to these assets indicated their carrying amounts were not expected to be recovered. Their remaining fair value 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 measurements. We also considered the potential sale of certain of these properties. We recorded non-cash charges during the three months ended March 31, 2016 of $43.0 million related to our natural gas and oil properties in Western Oklahoma. Our estimates of future cash flows attributable to our natural gas and oil properties could decline further with commodity prices which may result in additional impairment charges. The following table presents the value of these assets measured at fair value on a non-recurring basis at the time impairment was recorded (in thousands):

	Three Months Ended March 31,
	2016				2015
		Fair Value		Impairment		Fair Value Value		Impairment
Natural gas and oil properties	$	90,150	$	43,040	$	¾	$	¾

Fair Values—Reported

The following table presents the carrying amounts and the fair values of our financial instruments as of March 31, 2016 and December 31, 2015 (in thousands):

	March 31, 2016						December 31, 2015
	Carrying Value			Fair Value			Carrying Value			Fair Value
Assets:
Commodity swaps and basis swaps	$	266,509		$	266,509		$	288,762		$	288,762
Marketable securities ^(a)		63,018			63,018			62,376			62,376
(Liabilities):
Commodity swaps and basis swaps		(1,462	)		(1,462	)		(1,157	)		(1,157	)
Bank credit facility ^(b)		(31,000	)		(31,000	)		(95,000	)		(95,000	)
Deferred compensation plan ^(c)		(139,279	)		(139,279	)		(122,918	)		(122,918	)
4.875% senior notes due 2025 ^(b)		(750,000	)		(651,563	)		(750,000	)		(572,813	)
5.75% senior subordinated notes due 2021 ^(b)		(500,000	)		(441,250	)		(500,000	)		(396,250	)
5.00% senior subordinated notes due 2022 ^(b)		(600,000	)		(515,250	)		(600,000	)		(447,000	)
5.00% senior subordinated notes due 2023 ^(b)		(750,000	)		(635,625	)		(750,000	)		(551,250	)

^(a)	Marketable securities, which are held in our deferred compensation plans, 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 notes and our senior subordinated notes is based on end of period market quotes which are Level 2 inputs.

^(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 March 31, 2016, 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 uncollectable receivables was $4.5 million at March 31, 2016 and $5.0 million at December 31, 2015. As of March 31, 2016, our derivative contracts consist of swaps. Our derivative exposure to credit risk is diversified primarily 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 March 31, 2016, our derivative counterparties include nineteen financial institutions, of which all but four are secured lenders in our bank credit facility. At March 31, 2016, our net derivative assets include a net receivable from these four counterparties that are not included in our bank credit facility of $9.5 million.