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Fair Value Measurements | 3 Months Ended
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Mar. 31, 2012
Fair Value Measurements |
Fair Value Measurements |
E. 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 an insignificant portion 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 industry discounted cash flow 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 industry discounted cash flow 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 Company considers current market information about option trading and historical averages in deriving these volatilities. At March 31, 2012 the range of Company derived market volatilities used to value Level 3 assets and liabilities was 25-48%. The fair value of the collar agreements is sensitive to changes in the volatility assumption. Significant changes in this assumption might result in a significantly higher or lower fair values for these assets and liabilities. As of March 31, 2012, an increase in volatilities would increase the value of the derivative asset and a decrease in volatilities 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 |  | March 31, 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 |  | $ | 608,647 |  | $ | 2,077 |  | $ | 450,504 |  | $ | 156,066 |
Total assets |  | $ | 608,647 |  | $ | 2,077 |  | $ | 450,504 |  | $ | 156,066 |
Liabilities |  |  |  |  |  |  |  |  |
Derivative instruments, at fair value |  | $ | 120,044 |  | $ | 2,774 |  | $ | 117,270 |  | $ | — |
Total liabilities |  | $ | 120,044 |  | $ | 2,774 |  | $ | 117,270 |  | $ | — |
|  |  |  | 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 March 31, |
|  | 2012 |  | 2011 |
|  | (Thousands) |
Balance at January 1 |  | $ | 143,260 |  | $ | 116,672 |
Total gains or losses: |  |  |  |  |
Included in earnings |  | — |  | 14 |
Included in other comprehensive income |  | 31,596 |  | (5,831 | )
Settlements |  | (18,790 | ) | (13,491 | )
Transfers in and/or out of Level 3 |  | — |  | — |
Balance at March 31 |  | $ | 156,066 |  | $ | 97,364 |
There are no gains or losses included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held as of March 31, 2012 and 2011. The carrying value of cash equivalents approximates fair value due to the short 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 discounted cash flow model which estimates 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 March 31, 2012 and December 31, 2011 was approximately $3 billion.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=6925170&loc=d3e19296-110258 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 159 -Paragraph 17-22, 27, 28 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=6947722&loc=d3e13433-108611 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 15C, 15D -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. 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