Fair Value Measurements

12 Months Ended

Dec. 31, 2012

Fair Value Measurements [Abstract]

Fair Value Measurements

(6) FAIR VALUE MEASUREMENTS

The carrying amounts and estimated fair values of the Company’s financial instruments as of December 31, 2012 and 2011 were as follows:

The carrying values of cash and cash equivalents, accounts receivable, accounts payable, other current assets and current liabilities on the condensed consolidated balance sheets approximate fair value because of their short-term nature. For debt and derivative instruments, the following methods and assumptions were used to estimate fair value:

Debt: The fair values of the Company’s senior notes were based on the market for the Company’s publicly-traded debt as determined based on yield of the Company’s 7.5% Senior Notes due 2018, which was 2.6% as of December 31, 2012 and 4.6% at December 31, 2011, and its 4.10% Senior Notes due 2022, which was 3.1% as of December 31, 2012. The carrying values of the borrowings under the Company’s unsecured revolving credit facility at December 31, 2011 approximate fair value because the interest rate is variable and reflective of market rates.  The Company considers the fair value of its debt to be a Level 2 measurement on the fair value hierarchy.

Derivative Instruments: The fair value of all derivative instruments is the amount at which the instrument could be exchanged currently between willing parties. The amounts are based on quoted market prices, best estimates obtained from counterparties and an option pricing model, when necessary, for price option contracts.

	December 31, 2012				December 31, 2011
	Carrying		Fair		Carrying				Fair
	Amount		Value		Amount				Value
	(in thousands)
Cash and cash equivalents	$	53,583	$	53,583		$	15,627	$		15,627
Restricted cash	$	8,542	$	8,542		$	–	$		–
Unsecured revolving credit facility	$	–	$	–		$	671,500	$		671,500
Senior notes	$	1,669,473	$	1,917,005		$	671,800	$		773,578
Derivative instruments, net	$	287,878	$	287,878		$	704,830	$		704,830

GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. As presented in the tables below, this hierarchy consists of three broad levels:

Level 1 valuations - Consist of unadjusted quoted prices in active markets for identical assets and liabilities and have the highest priority.

Level 2 valuations - Consist of quoted market information for the calculation of fair market value.

Level 3 valuations - Consist of internal estimates and have the lowest priority.

Pursuant to GAAP, the Company has classified its derivatives into these levels depending upon the data utilized to determine their fair values. The Company’s Level 2 fair value measurements include fixed-price and floating-price swaps and are estimated using internal discounted cash flow calculations using the NYMEX futures index. The Company’s Level 3 fair value measurements include costless-collars, basis swaps and call options. The Company’s costless-collars and call options are valued using the Black-Scholes model, an industry standard option valuation model, and takes into account inputs such as contract terms, including maturity, and market parameters, including assumptions of the NYMEX futures index, interest rates, volatility and credit worthiness. The Company’s basis swaps are estimated using internal discounted cash flow calculations based upon forward commodity price curves. 

The accounting group, reporting to the Vice President and Controller, is responsible for determining the Company’s Level 3 fair value measurements.  Inputs to the Black-Scholes model, including the volatility input, which is the significant unobservable input for Level 3 fair value measurements, are obtained from a third-party pricing source, with independent verification of most significant inputs on a monthly basis. An increase (decrease) in volatility would result in an increase (decrease) in fair value measurement, respectively.

Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):

	December 31, 2012
	Fair Value Measurements Using:
	Quoted Prices		Significant
	in Active		Other		Significant
	Markets		Observable Inputs		Unobservable Inputs		Assets (Liabilities)
	(Level 1)		(Level 2)		(Level 3)		at Fair Value
Derivative assets	$	–	$	287,993	$	4,151	$	292,144
Derivative liabilities		–		–		(4,266)		(4,266)
Total	$	–	$	287,993	$	(115)	$	287,878
	December 31, 2011
	Fair Value Measurements Using:
	Quoted Prices		Significant
	in Active		Other		Significant
	Markets		Observable Inputs		Unobservable Inputs		Assets (Liabilities)
	(Level 1)		(Level 2)		(Level 3)		at Fair Value
Derivative assets	$	–	$	534,560	$	182,783	$	717,343
Derivative liabilities		–		(11,849)		(664)		(12,513)
Total	$	–	$	522,711	$	182,119	$	704,830

The table below presents reconciliations for the change in net fair value of derivative assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2012 and 2011. The fair values of Level 3 derivative instruments are estimated using proprietary valuation models that utilize both market, observable and unobservable parameters. Level 3 instruments presented in the table consist of net derivatives valued using pricing models incorporating assumptions that, in the Company’s judgment, reflect reasonable assumptions a marketplace participant would have used as of December 31, 2012 and at December 31, 2011.

Total net gains and losses for Level 3 derivatives for the years ended December 31, 2012 and 2011 are provided below:

	For the years ended
	December 31,
	2012		2011
	(in thousands)
Balance at beginning of period	$	182,119	$	97,677
Total gains or losses (realized/unrealized):
Included in earnings		216,857		67,998
Included in other comprehensive income		(178,847)		79,215
Purchases, issuances, and settlements:
Purchases		–		–
Issuances		–		–
Settlements		(220,244)		(62,913)
Transfers into/out of Level 3		–		142
Balance at end of period	$	(115)	$	182,119
Change in unrealized gains included in earnings relating to derivatives still held as of December 31	$	(3,362)	$	5,085