Fair Value Measurements

9 Months Ended

Sep. 30, 2012

Fair Value Measurements

Fair Value Measurements

F.            Fair Value Measurements

The Company records its financial instruments, principally derivative instruments, at fair value in its Condensed Consolidated Balance Sheets.  The Company has an established process for determining fair value which is based on quoted market prices, where available.  If quoted market prices are not available, fair value is based upon models that use as inputs market-based parameters, including but not limited to forward curves, discount rates, volatilities and nonperformance risk.  Nonperformance risk considers the effect of the Company’s credit standing on the fair value of liabilities and the effect of the counterparty’s credit standing on the fair value of assets.  The Company estimates nonperformance risk by analyzing publicly available market information, including a comparison of the yield on debt instruments with credit ratings similar to the Company’s or counterparty’s credit rating and the yield of a risk free instrument.  The Company also considers credit default swaps rates where applicable.

The Company has categorized its assets and liabilities recorded at fair value into a three-level fair value hierarchy, based on the priority of the inputs to the valuation technique.  The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).  Assets and liabilities included in Level 1 include the Company’s futures contracts.  Assets and liabilities in Level 2 include the majority of the Company’s swap agreements, including the forward-starting interest rate swap, and assets and liabilities in Level 3 include the Company’s collars and a limited number of the Company’s swap agreements.  Since the adoption of fair value accounting, the Company has not made any changes to its classification of assets and liabilities in each category.

The fair value of assets and liabilities included in Level 2 is based on standard industry income approach models that use significant observable inputs, including NYMEX and LIBOR forward curves and LIBOR-based discount rates.  Collars included in Level 3 are valued using standard industry income approach models.  The primary significant unobservable input to the valuation of assets and liabilities in Level 3 is the volatility assumption to the option pricing model used to value commodity collars.  The Corporate Risk Control Group (CRCG), which reports to the Chief Financial Officer, is responsible for calculating the volatilities.  The CRCG considers current market information about option trading and historical averages.  The Company prepares an analytical review of all derivative instruments for reasonableness on at least a quarterly basis.  At September 30, 2012, the range of Company derived market volatilities used to value Level 3 assets and liabilities was 25-54%.  The fair value of the collar agreements is sensitive to changes in the volatility assumption. Significant changes in this assumption might result in significantly higher or lower fair values for these assets and liabilities. As of September 30, 2012, an increase in the volatility assumption would increase the value of the derivative asset and a decrease in the volatility assumption would decrease the value of the derivative asset.  The Company uses NYMEX forward curves to value futures, commodity swaps and collars. The Company uses LIBOR forward curves to value interest rate swaps. The NYMEX and LIBOR forward curves are validated to external sources at least monthly.

The following assets and liabilities were measured at fair value on a recurring basis during the period:

			Fair value measurements at reporting date using
Description	September 30, 2012		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
	(Thousands)
Assets
Derivative instruments, at fair value	$	319,203	$	2,153	$	209,506	$	107,544
Total assets	$	319,203	$	2,153	$	209,506	$	107,544
Liabilities
Derivative instruments, at fair value	$	125,452	$	2,529	$	112,350	$	10,573
Total liabilities	$	125,452	$	2,529	$	112,350	$	10,573

			Fair value measurements at reporting date using
Description	December 31, 2011		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
	(Thousands)
Assets
Derivative instruments, at fair value	$	512,161	$	3,612	$	365,238	$	143,311
Total assets	$	512,161	$	3,612	$	365,238	$	143,311
Liabilities
Derivative instruments, at fair value	$	123,306	$	2,727	$	120,528	$	51
Total liabilities	$	123,306	$	2,727	$	120,528	$	51

	Fair value measurements using significant unobservable inputs (Level 3)
	Derivative instruments, at fair value, net three months ended September 30,						Derivative instruments, at fair value, net nine months ended September 30,
	2012			2011			2012			2011
	(Thousands)
Beginning of period	$	129,436		$	101,972		$	143,260		$	116,672
Total gains or losses:
Included in earnings	(90		)	—			(90		)	14
Included in other comprehensive income	(13,839		)	24,101			13,554			35,121
Purchases	22			—			(994		)	—
Settlements	(18,558		)	(12,989		)	(58,759		)	(38,723		)
Transfers in and/or out of Level 3	—			—			—			—
End of period	$	96,971		$	113,084		$	96,971		$	113,084

There are no material gains or losses included in earnings for the periods in the table above attributable to the change in unrealized gains or losses relating to assets and liabilities still held as of September 30, 2012 and 2011.

The carrying value of cash equivalents approximates fair value due to the short-term maturity of the instruments; these are considered Level 1 fair values.

The Company estimates the fair value of its debt using its established fair value methodology.  Because not all of the Company’s debt is actively traded, the fair value of the debt is a Level 2 fair value.  Fair value for non-traded debt obligations is estimated using a standard industry income approach model which utilizes a discount rate based on market rates for debt with similar remaining time to maturity and credit risk.  The estimated fair value of long-term debt on the Condensed Consolidated Balance Sheets at September 30, 2012 and December 31, 2011 was approximately $3.1 billion and $3 billion, respectively.