FAIR VALUE MEASUREMENTS

Determining Fair Value - We define fair value as the price that would be received from the sale of an asset or the transfer of a liability in an orderly transaction between market participants at the measurement date. We use market and income approaches to determine the fair value of our assets and liabilities and consider the markets in which the transactions are executed. We measure the fair value of a group of financial assets and liabilities consistent with how a market participant would price the net risk exposure at the measurement date.

While many of the contracts in our derivative portfolio are executed in liquid markets where price transparency exists, some contracts are executed in markets for which market prices may exist, but the market may be relatively inactive. This results in limited price transparency that requires management’s judgment and assumptions to estimate fair values. For certain transactions, we utilize modeling techniques using NYMEX-settled pricing data and implied forward LIBOR curves. Inputs into our fair value estimates include commodity-exchange prices, over-the-counter quotes, historical correlations of pricing data, data obtained from third-party pricing services and LIBOR and other liquid money-market instrument rates. We validate our valuation inputs with third-party information and settlement prices from other sources, where available.

In addition, as prescribed by the income approach, we compute the fair value of our derivative portfolio by discounting the projected future cash flows from our derivative assets and liabilities to present value using interest-rate yields to calculate present-value discount factors derived from LIBOR, Eurodollar futures and the LIBOR interest-rate swaps market. We also take into consideration the potential impact on market prices of liquidating positions in an orderly manner over a reasonable period of time under current market conditions. We consider current market data in evaluating counterparties’, as well as our own, nonperformance risk, net of collateral, by using specific and sector bond yields and monitoring the credit default swap markets. Although we use our best estimates to determine the fair value of the derivative contracts we have executed, the ultimate market prices realized could differ materially from our estimates.

The fair value of our forward-starting interest-rate swaps are determined using financial models that incorporate the implied forward LIBOR yield curve for the same period as the future interest-rate swap settlements.

Fair Value Hierarchy - At each balance sheet date, we utilize a fair value hierarchy to classify fair value amounts recognized or disclosed in our financial statements based on the observability of inputs used to estimate such fair value. The levels of the hierarchy are described below:


•	Level 1 - fair value measurements are based on unadjusted quoted prices for identical securities in active markets, including NYMEX-settled prices. These balances are composed predominantly of exchange-traded derivative contracts for natural gas and crude oil.


•	Level 2 - fair value measurements are based on significant observable pricing inputs, such as NYMEX-settled prices for natural gas and crude oil, and financial models that utilize implied forward LIBOR yield curves for interest-rate swaps.

•

Level 3 - fair value measurements are based on inputs that may include one or more unobservable inputs, including internally developed natural gas basis and NGL price curves that incorporate observable and unobservable market data from broker quotes, third-party pricing services, market volatilities derived from the most recent NYMEX close spot prices and forward LIBOR curves, and adjustments for the credit risk of our counterparties. We corroborate the data on which our fair value estimates are based using our market knowledge of recent transactions, analysis of historical correlations and validation with independent broker quotes. These balances categorized as Level 3 are composed of derivatives for natural gas and NGLs. We do not believe that our Level 3 fair value estimates have a material impact on our results of operations, as the majority of our derivatives are accounted for as hedges.

Determining the appropriate classification of our fair value measurements within the fair value hierarchy requires management’s judgment regarding the degree to which market data is observable or corroborated by observable market data. We categorize derivatives for which fair value is determined using multiple inputs within a single level, based on the lowest level input that is significant to the fair value measurement in its entirety.

Recurring Fair Value Measurements - The following tables set forth our recurring fair value measurements for the periods indicated:



	June 30, 2018
	Level 1			Level 2			Level 3			Total - Gross			Netting (a)			Total - Net
	(Thousands of dollars)
Derivative assets
Commodity contracts
Financial contracts	$	623		$	—		$	23,498		$	24,121		$	(24,121	)	$	—
Interest-rate contracts	—			29,596			—			29,596			—			29,596
Total derivative assets	$	623		$	29,596		$	23,498		$	53,717		$	(24,121	)	$	29,596
Derivative liabilities
Commodity contracts
Financial contracts	$	(15,178	)	$	—		$	(45,145	)	$	(60,323	)	$	60,323		$	—
Physical contracts	—			—			(1,854		)	(1,854		)	—			(1,854		)
Interest-rate contracts	—			(5,290		)	—			(5,290		)	—			(5,290		)
Total derivative liabilities	$	(15,178	)	$	(5,290	)	$	(46,999	)	$	(67,467	)	$	60,323		$	(7,144	)

(a) - Derivative assets and liabilities are presented in our Consolidated Balance Sheets on a net basis. We net derivative assets and liabilities when a legally enforceable master-netting arrangement exists between the counterparty to a derivative contract and us. At June 30, 2018, we held no cash and posted $52.6 million of cash with various counterparties, including $36.2 million of cash collateral that is offsetting derivative net liability positions under master-netting arrangements in the table above. The remaining $16.4 million of cash collateral in excess of derivative net liability positions is included in other current assets in our Consolidated Balance Sheets.



	December 31, 2017
	Level 1			Level 2		Level 3			Total - Gross			Netting (a)			Total - Net
	(Thousands of dollars)
Derivative assets
Commodity contracts
Financial contracts	$	4,252		$	—	$	20,203		$	24,455		$	(24,455	)	$	—
Interest rate contracts	—			49,960		—			49,960			—			49,960
Total derivative assets	$	4,252		$	49,960	$	20,203		$	74,415		$	(24,455	)	$	49,960
Derivative liabilities
Commodity contracts
Financial contracts	$	(5,708	)	$	—	$	(48,260	)	$	(53,968	)	$	53,936		$	(32	)
Physical contracts	—			—		(4,781		)	(4,781		)	—			(4,781		)
Total derivative liabilities	$	(5,708	)	$	—	$	(53,041	)	$	(58,749	)	$	53,936		$	(4,813	)

(a) - Derivative assets and liabilities are presented in our Consolidated Balance Sheets on a net basis. We net derivative assets and liabilities when a legally enforceable master-netting arrangement exists between the counterparty to a derivative contract and us. At December 31, 2017, we held no cash and posted $49.7 million of cash with various counterparties, including $29.5 million of cash collateral that is offsetting derivative net liability positions under master-netting arrangements in the table above. The remaining $20.2 million of cash collateral in excess of derivative net liability positions is included in other current assets in our Consolidated Balance Sheets.

The following table sets forth a reconciliation of our Level 3 fair value measurements for the periods indicated:



	Three Months Ended						Six Months Ended
	June 30,						June 30,
Derivative Assets (Liabilities)	2018			2017			2018			2017
	(Thousands of dollars)
Net assets (liabilities) at beginning of period	$	3,098		$	(772	)	$	(32,838	)	$	(23,319	)
Total realized/unrealized gains (losses):
Included in earnings (a)	(15		)	(656		)	(100		)	258
Included in other comprehensive income (loss)	(26,584		)	2,178			9,437			23,811
Net assets (liabilities) at end of period	$	(23,501	)	$	750		$	(23,501	)	$	750

(a) - Included in commodity sales revenues in our Consolidated Statements of Income.

Realized/unrealized gains (losses) include the realization of our derivative contracts through maturity. During the three and six months ended June 30, 2018 and 2017, gains or losses included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the end of each reporting period were not material.

We recognize transfers into and out of the levels in the fair value hierarchy as of the end of each reporting period. During the three and six months ended June 30, 2018 and 2017, there were no transfers between levels.

Other Financial Instruments - The approximate fair value of cash and cash equivalents, accounts receivable, accounts payable and short-term borrowings is equal to book value due to the short-term nature of these items. Our cash and cash equivalents are composed of bank and money market accounts and are classified as Level 1. Our short-term borrowings are classified as Level 2 since the estimated fair value of the short-term borrowings can be determined using information available in the commercial paper market.

The estimated fair value of our consolidated long-term debt, including current maturities, was $8.5 billion and $9.3 billion at June 30, 2018, and December 31, 2017, respectively. The book value of our consolidated long-term debt, including current maturities, was $8.0 billion and $8.5 billion at June 30, 2018, and December 31, 2017, respectively. The estimated fair value of the aggregate senior notes outstanding was determined using quoted market prices for similar issues with similar terms and maturities. The estimated fair value of our consolidated long-term debt is classified as Level 2.