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Fair Value Measurements | 12 Months Ended
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Dec. 31, 2012
Fair Value Measurements |
Fair Value Measurements | 14. Fair Value Measurements The Company follows fair value measurement authoritative accounting guidance for measuring fair values of assets and liabilities in financial statements. 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 who are independent, knowledgeable and willing and able to transact would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. The Company is able to classify fair value balances based on the observability of these inputs. The authoritative guidance for fair value measurements establishes three levels of the fair value hierarchy, defined as follows: • Level 1: Unadjusted, quoted prices for identical assets or liabilities in active markets • Level 2: Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly for substantially the full term of the asset or liability. • Level 3: Significant, unobservable inputs for use when little or no market data exists, requiring a significant degree of judgment. The hierarchy gives the highest priority to Level 1 measurements and the lowest priority to Level 3 measurements. Depending on the particular asset or liability, input availability can vary depending on factors such as product type, longevity of a product in the market and other particular transaction conditions. In some cases, certain inputs used to measure fair value may be categorized into different levels of the fair value hierarchy. For disclosure purposes under the accounting guidance, the lowest level that contains significant inputs used in valuation should be chosen. Non-Financial Assets and Liabilities The Company discloses or recognizes its non-financial assets and liabilities, such as impairments of oil and gas properties and other assets and asset retirement obligations, at fair value on a nonrecurring basis. During the year ended December 31, 2010, the Company recorded impairment charges related to certain oil and gas properties and other assets. Refer to Note 2 for additional disclosures related to fair value associated with the impaired assets. As none of the Company's other non-financial assets and liabilities were impaired as of December 31, 2012, 2011 and 2010 and no other fair value measurements were required to be recognized on a non-recurring basis, additional disclosures were not provided. The estimated fair value of the Company's asset retirement obligation at inception is determined by utilizing the income approach by applying a credit-adjusted risk-free rate, which takes into account the Company's credit risk, the time value of money, and the current economic state, to the undiscounted expected abandonment cash flows. Given the unobservable nature of the inputs, the measurement of the asset retirement obligation is deemed to use Level 3 inputs. Financial Assets and Liabilities Our financial assets and liabilities are measured at fair value on a recurring basis. The following fair value hierarchy table presents information about the Company's financial assets and liabilities measured at fair value on a recurring basis:
(In thousands) |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3) |  | Balance as of December 31, 2012 |
--- | --- | --- | --- | --- | --- | --- | --- | --- | ---
Assets |  |  |  |  |  |  |  |  |  |  |  |  |
Deferred compensation plan |  | $ | 10,608 |  | $ | — |  | $ | — |  | $ | 10,608 |
Derivative contracts |  |  | — |  |  | 9,473 |  |  | 41,351 |  |  | 50,824 |
Total assets |  | $ | 10,608 |  | $ | 9,473 |  | $ | 41,351 |  | $ | 61,432 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |
Deferred compensation plan |  | $ | 23,893 |  | $ | — |  | $ | — |  | $ | 23,893 |
Derivative contracts |  |  | — |  |  | — |  |  | 192 |  |  | 192 |
Total liabilities |  | $ | 23,893 |  | $ | — |  | $ | 192 |  | $ | 24,085 |
(In thousands) |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3) |  | Balance as of December 31, 2011 |
--- | --- | --- | --- | --- | --- | --- | --- | --- | ---
Assets |  |  |  |  |  |  |  |  |  |  |  |  |
Deferred compensation plan |  | $ | 10,838 |  | $ | — |  | $ | — |  | $ | 10,838 |
Derivative contracts |  |  | — |  |  | — |  |  | 195,512 |  |  | 195,512 |
Total assets |  | $ | 10,838 |  | $ | — |  | $ | 195,512 |  | $ | 206,350 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |
Deferred compensation plan |  | $ | 20,187 |  | $ | — |  | $ | — |  | $ | 20,187 |
Derivative contracts |  |  | — |  |  | — |  |  | 385 |  |  | 385 |
Total liabilities |  | $ | 20,187 |  | $ | — |  | $ | 385 |  | $ | 20,572 |
The Company's investments associated with its deferred compensation plan consist of mutual funds and deferred shares of the Company's common stock that are publicly traded and for which market prices are readily available. The derivative contracts were measured based on quotes from the Company's counterparties. Such quotes have been derived using valuation models that consider various inputs including current market and contractual prices for the underlying instruments, quoted forward prices for natural gas and crude oil, volatility factors and interest rates, such as a LIBOR curve for a similar length of time as the derivative contract term as applicable. These estimates are verified using comparable NYMEX futures contracts or are compared to multiple quotes obtained from counterparties for reasonableness. The determination of the fair values presented above also incorporate a credit adjustment for non-performance risk. The Company measured the nonperformance risk of its counterparties by reviewing credit default swap spreads for the various financial institutions in which it has derivative transactions while nonperformance risk of the Company is evaluated using a market credit spread provided by the Company's bank. The significant unobservable inputs for Level 3 derivative contracts include basis differentials and volatility factors. An increase (decrease) in these unobservable inputs would result in an increase (decrease) in fair value, respectively. The Company does not have access to the specific assumptions used in its counterparties' valuation models. Consequently, additional disclosures regarding significant Level 3 unobservable inputs were not provided. The following table sets forth a reconciliation of changes in the fair value of financial assets and liabilities classified as Level 3 in the fair value hierarchy:
|  | Year Ended December 31, |
--- | --- | --- | ---
(In thousands) |  | 2012 |  | 2011 |  | 2010 |
Balance at beginning of period |  | $ | 195,127 |  | $ | 14,746 |  | $ | 112,307 |
Total gains or (losses) (realized or unrealized): |  |  |  |  |  |  |  |  |  |
Included in earnings(1) |  |  | 224,614 |  |  | 85,375 |  |  | 172,764 |
Included in other comprehensive income |  |  | (157,478 | ) |  | 181,346 |  |  | (97,335 | )
Settlements |  |  | (221,489 | ) |  | (86,340 | ) |  | (172,990 | )
Transfers in and/or out of level 3 |  |  | 385 |  |  | — |  |  | — |
Balance at end of period |  | $ | 41,159 |  | $ | 195,127 |  | $ | 14,746 |
(1) A loss of $0.5 million, $1.0 million and $0.2 million for the years ended December 31, 2012, 2011 and 2010, respectively, was unrealized and included in Natural gas revenues in the Consolidated Statement of Operations. There were no transfers between Level 1 and Level 2 measurements for the years ended December 31, 2012, 2011 and 2010. Fair Value of Other Financial Instruments The estimated fair value of other financial instruments is the amount at which the instrument could be exchanged currently between willing parties. The carrying amounts reported in the Consolidated Balance Sheet for cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturities of these instruments. Based on the inputs used to fair value these financial instruments, cash and cash equivalents are deemed to use Level 1 inputs and the remaining financial instruments are deemed to use Level 2. The fair value of long-term debt is the estimated amount the Company would have to pay a third party to assume the debt, including a credit spread for the difference between the issue rate and the period end market rate. The credit spread is the Company's default or repayment risk. The credit spread (premium or discount) is determined by comparing the Company's fixed-rate notes and credit facility to new issuances (secured and unsecured) and secondary trades of similar size and credit statistics for both public and private debt. The fair value of all of the fixed-rate notes and credit facility is based on interest rates currently available to the Company. Given the unobservable nature of the inputs, the fair value of long-term debt is deemed to use Level 3 inputs. The Company uses available market data and valuation methodologies to estimate the fair value of debt. The carrying amounts and fair values of long-term debt are as follows:
|  | December 31, 2012 |  | December 31, 2011 |
--- | --- | --- | --- | --- | ---
(In thousands) |  | Carrying Amount |  | Estimated Fair Value |  | Carrying Amount |  | Estimated Fair Value |
Long-term debt |  | $ | 1,087,000 |  | $ | 1,213,474 |  | $ | 950,000 |  | $ | 1,082,531 |
Current maturities |  |  | (75,000 | ) |  | (77,175 | ) |  | — |  |  | — |
Long-term debt, excluding current maturities |  | $ | 1,012,000 |  | $ | 1,136,299 |  | $ | 950,000 |  | $ | 1,082,531 |

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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 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=7491637&loc=d3e13504-108611 Reference 2: 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. Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 133 -Paragraph 44A, 44B -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 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 15A -Subparagraph a-d -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 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 3, 10, 14, 15 -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 6: 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=7491637&loc=d3e13433-108611 Reference 7: 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. 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