DERIVATIVES AND FAIR VALUE MEASUREMENTS

The following table categorizes our commodity derivative instruments based upon the use of input levels:



	Asset Derivatives As of December 31,				Liability Derivatives As of December 31,
	2013		2012		2013		2012

	(in thousands)				(in thousands)
Level 2 inputs	$	107,395	$	207,042	$	3,448	$	959
Level 3 inputs	23,485		11,595		—		16,526
Total	$	130,880	$	218,637	$	3,448	$	17,485

The fair value of “Level 2” derivative instruments included in these disclosures was estimated using prices quoted in active markets for the periods covered by the derivatives and the value reported by counterparties. The fair value of derivative instruments designated as “Level 3” was estimated using prices quoted in markets where there is insufficient market activity for consideration as “Level 2” instruments. Currently, only our natural gas derivatives with an original tenure of 10 years utilize “Level 3” inputs, primarily due to comparatively less market data available for the later portion of their term compared with our shorter term derivatives. The fair value of both the “Level 2” and the “Level 3” assets and liabilities are determined using a discounted cash flow model using the terms of the derivative instrument, market prices for the periods covered by the derivatives, and the credit adjusted risk-free interest rates. The “Level 3” unobservable inputs are the market prices for the estimated market values for the period from 2018 to 2021, as there is not an active market for that period of time. These unobservable inputs included within the fair value calculation range from $4.00 to $4.80 and are based upon prices quoted in active markets for the period of time available and applying the differential from this period of time to the market prices for the later years in the term.

The following table identifies the changes in “Level 3” net asset derivative fair values for the periods indicated:



	As of December 31,
	2013			2012

	(In thousands)
Balance at beginning of period	$	(4,931	)	$	150,989
Total gains (losses) for the period:
Unrealized gain on derivatives	40,398			19,451
Transfers out of Level 3	—			(180,732		)
Settlements in production revenue	—			(3,738		)
Settlements in net derivative losses	(11,982		)	(25,203		)
Unrealized gains reported in OCI	—			34,302
Balance at end of period	$	23,485		$	(4,931	)

Total gains included in net derivative gains attributable to the change in unrealized gains related to assets still held at the reporting date	$	41,909		$	19,451

In 2012, transfers from Level 3 to Level 2 represent our ten-year derivative instruments that were exchanged in January and February 2012 for derivative instruments with shorter durations and which were valued on the date of the transfer.

Commodity Price Derivatives

As of December 31, 2013, we had natural gas and NGL swaps as follows:



Production Year	Daily Production Volume
	Natural Gas	NGL	Natural Gas Basis Swaps
	MMcfd	MBbld	MMcfd
2014 ⁽¹⁾	170	4	40
2015	150	—	—
2016-2021	40	—	—


⁽¹⁾	Our 2014 NGL derivatives end in September. Our natural gas derivatives and AECO to NYMEX natural gas basis swaps are in place for the whole of 2014.

Effective December 31, 2012, we discontinued the use of hedge accounting. Changes in value subsequent to this date are recognized in net derivative gains (losses) in the period in which they occur. The net deferred hedge gain that was included in AOCI as of December 31, 2012 is being released into revenue from natural gas, NGL and oil production during the following periods in which we expect the underlying production to occur:



	(In thousands)
2014	$	37,084
2015	33,191
2016	13,476
2017	12,531
2018 and thereafter	$	41,443
	$	137,725

Gains and losses from the effective portion of derivative assets and liabilities held in AOCI expected to be reclassified into earnings during the following twelve months would result in a gain of $25.0 million net of income taxes.

Interest Rate Derivatives

In 2010, we executed early settlements of our interest rate swaps that were designated as fair value hedges of our senior notes due 2015 and our senior subordinated notes. We received cash of $41.5 million in the settlements, including $10.7 million for interest previously accrued and earned. Upon the early settlements, we recorded the resulting gain as a fair value adjustment to our debt and began to recognize the deferred gain of $30.8 million as a reduction of interest expense over the lives of our senior notes due 2015 and our senior subordinated notes.

In June 2013, we repurchased substantially all our senior notes due 2015 resulting in early recognition of the previously deferred gain of $8.3 million. During 2013 and 2012, we recognized $12.0 million and $5.1 million, respectively, of those deferred gains as a reduction of interest expense. The remaining $4.8 million deferral of the 2010 early settlements from the senior subordinated notes interest rate swaps will continue to be recognized as a reduction of interest expense over the life of those instruments currently scheduled as follows:



	(In thousands)
2014	2,039
2015	2,194
2016	569
	$	4,802

Fair Value Disclosures

The estimated fair value of all of our derivative instruments at December 31, 2013 and 2012 were as follows:



	Asset Derivatives				Liability Derivatives
	As of December 31,				As of December 31,
	2013		2012		2013		2012

	(In thousands)				(In thousands)
Derivatives not designated as hedges:
Commodity contracts reported in:
Current derivative assets	$	60,063	$	113,367	$	2,540	$	—
Noncurrent derivative assets	105,315		107,542		31,958		2,272
Current derivative liabilities	—		—		3,125		—
Noncurrent derivative liabilities	—		92		323		17,577
Total derivatives not designated as hedges	$	165,378	$	221,001	$	37,946	$	19,849

Derivative assets and liabilities shown in the table above are presented as gross assets and liabilities, without regard to master netting arrangements, which are considered in the presentation of derivative assets and liabilities in the accompanying consolidated balance sheets. The change in carrying value of our commodity price derivatives since December 31, 2012 principally resulted from the overall increase in market prices for natural gas relative to the prices in our open derivative instruments, offset by settlements during the period.

The changes in the carrying value of our derivatives accounted for as hedges for 2012 are presented below:



	For the Year Ended December 31, 2012
	Commodity Hedges

	(In thousands)
Derivative fair value at beginning of period	$	342,799
Settlements in production revenue	(176,084		)
Settlements in net derivative gains	(3,820		)
Ineffectiveness reported in net derivative gains	1,281
Unrealized gains reported in OCI	107,112
Derecognition of hedge	(271,288		)
Derivative fair value at end of period	$	—

Investments

We hold certain short-term marketable securities related to interest bearing time deposits and commercial paper. We classify our marketable securities within “Level 2.” These held-to-maturity marketable securities are included in Cash and Cash Equivalents if the maturities at the time we made the investment were three months or less. For maturities greater than three months but less than a year, the marketable securities are included in current Marketable Securities. We did not sell or transfer any of our marketable securities during 2013 and do not anticipate selling or transferring these investments before their maturity date. At December 31, 2013, we had the following marketable securities:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Market Value

	(In thousands)
Marketable securities (held-to-maturity)
Time deposits	$	29,419	$	—	$	(22	)	$	29,397
Commercial paper	136,924		27		(25		)	136,926
Marketable securities	$	166,343	$	27	$	(47	)	$	166,323

We had no marketable securities at December 31, 2012.

Financial instruments not carried at fair value

Carrying values and fair values of financial instruments that are not carried at fair value in the consolidated balance sheet as of December 31, 2013 and December 31, 2012 are included in Note 11.