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Fair Value Measurements
 12 Months Ended
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