Fair Value Measurements

9 Months Ended

Sep. 30, 2015

Fair Value Measurements

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 (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs.

The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).

The three levels of the fair value hierarchy are as follows:

Level 1 – Quoted prices are available in active markets for identical assets or liabilities 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 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.

Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, basis swaps, options, and collars.

Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

The following table sets forth, by level, within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for at fair value as of December 31, 2014. The Company’s Bankruptcy Petition in July 2015 represented an event of default under Sabine’s derivative agreements resulting in a termination right by counterparties on all derivative positions at July 15, 2015.  Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

	Recurring Fair Value Measurements
	(in millions)
	Level 1		Level 2		Level 3		Total
As of December 31, 2014
Derivative Assets	$	—	$	191.8	$	—	$	191.8
Derivative Liabilities		—		(38.5)		—		(38.5)
Total	$	—	$	153.3	$	—	$	153.3

The observable data includes the forward curve for commodity prices and interest rates based on quoted markets prices and prospective volatility factors related to changes in commodity prices, as well as the impact of the Company’s non‑performance risk as well as the non-performance risk of its counterparties which is derived using credit default swap values.

The Company measures fair value of its debt based on recent trade activity for fixed rate obligations, Term Loan Facility, 2017 Notes, 2019 Notes and 2020 Notes, on a Level 2 methodology using quoted market prices which include consideration of the Company’s credit risk. The following table outlines the fair value of the New Revolving Credit Facility, Term Loan Facility, 2017 Notes, 2019 Notes and 2020 Notes as of September 30, 2015 and December 31, 2014:

	September 30,		December 31,
	2015		2014
	(in thousands)
New Revolving Credit Facility
Carrying Value	$	875,828	$	545,000
Fair Value (1)	$	875,828	$	512,414
Term Loan Facility
Carrying Value (2)	$	700,000	$	696,916
Fair Value	$	151,375	$	653,798
2017 Senior Notes
Carrying Value (2)	$	350,000	$	348,669
Fair Value	$	23,230	$	190,400
2019 Senior Notes
Carrying Value (2)	$	577,914	$	293,064
Fair Value	$	67,183	$	184,932
2020 Senior Notes
Carrying Value (2)	$	222,087	$	105,234
Fair Value	$	32,758	$	73,311

(1) The value of the New Revolving Credit Facility, which has a variable interest rate, is stated at the carrying value as of September 30, 2015, as a basis for fair value is indeterminable.

(2) At December 31, 2014 carrying value was equal to the face value, net of discount and were presented as a current liability in the Condensed Consolidated Balance Sheets. At September 30, 2015 the carrying value equals the face value and are presented as a long term liability in “Liabilities Subject to Compromise”.

Sabine utilizes fair value on a non-recurring basis to perform impairment tests as required on the Company’s inventory and property, plant and equipment. The Company considered the decrease in gas prices from June 30, 2015 to September 30, 2015 a triggering event to assess impairment. For the three and nine months ended September 30, 2015, the Company recorded $0.8 million impairment charges for gas gathering and processing equipment. No impairment charge for gas gathering and processing equipment was recorded in the three months ended September 30, 2014. In the nine months ended September 30, 2014, the Company recorded impairment charges for gas gathering and processing equipment of $1.7 million. These impairments were based on expected present value and estimated future cash flows using current volume throughput and pricing assumptions. For the three and nine months ended September 30, 2015 the Company recognized $0.9 million of impairment charges related to the write-down of carrying value of certain sizes of casing inventory. For the three and nine months ended September 30, 2014 Sabine had no material impairment charges related to the write-down of carrying value of certain sizes of casing inventory. Assets and liabilities acquired in business combinations are recorded at their fair value as of the date of acquisition (Note 7). The inputs used to determine such fair value are primarily based upon internally developed cash flow models and would generally be classified as Level 3. Additionally, the Company uses fair value to determine the inception value of the Company’s asset retirement obligations. The inputs used to determine such fair value are primarily based upon costs incurred historically for similar work, as well as estimates for costs that would be incurred to restore leased property to the contractually stipulated condition, and would generally be classified as Level 3.