DERIVATIVES, MARKETABLE SECURITIES AND FAIR VALUE MEASUREMENTS

The following table categorizes our commodity derivative instruments based upon the level of the inputs used in estimating the fair value:



	Asset Derivatives				Liability Derivatives
	March 31, 2014		December 31, 2013		March 31, 2014		December 31, 2013

	(in thousands)				(in thousands)
Level 2 derivative instruments	$	85,630	$	107,395	$	8,293	$	3,448
Level 3 derivative instruments	8,629		23,485		1,428		—
Total	$	94,259	$	130,880	$	9,721	$	3,448

The fair value of “Level 2” derivative instruments included in these disclosures was estimated using inputs quoted in active markets for the periods covered by the derivatives. 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 other 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 input is the market prices for natural gas 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 $4.01 to $5.14 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:



	For the Three Months Ended March 31,
	2014			2013

	(In thousands)
Balance at beginning of period	$	23,485		$	(4,931	)
Total gains (losses) for the period:
Unrealized loss on derivatives	(17,883		)	(18		)
Settlements in net derivative gains (losses)	1,599			(4,088		)
Balance at end of period	$	7,201		$	(9,037	)

Total losses included in net derivative losses attributable to the change in unrealized losses related to assets still held at the reporting date	$	(15,576	)	$	(92	)

Commodity Price Derivatives

As of March 31, 2014, we had natural gas and NGL swaps as follows:



Production Year	Daily Production Volume
Production Year	Natural Gas	NGL	Natural Gas Basis Swaps
	MMcfd	MBbld	MMcfd
Remaining 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 over the original term of the hedging relationship. Gains from the effective portion of derivative assets and liabilities held in AOCI expected to be reclassified into earnings during the following twelve months will result in production revenue of $23.9 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. Upon the early settlements, we recorded the resulting gain as a fair value adjustment to our debt and began to recognize the deferred gain as a reduction of interest expense over the lives of the respective notes. During the three months ended March 31, 2014 and 2013, we recognized $0.5 million and $1.3 million, respectively, of those deferred gains as a reduction of interest expense. Gains from the effective portion of these interest rate swaps expected to reduce interest expense during the following twelve months are $2.1 million.

Fair Value Disclosures

The estimated fair value of our derivative instruments at March 31, 2014 and December 31, 2013 were as follows:



	Asset Derivatives				Liability Derivatives
	March 31, 2014		December 31, 2013		March 31, 2014		December 31, 2013

	(In thousands)				(In thousands)
Derivatives not designated as hedges:
Commodity contracts reported in:
Current derivative assets	$	50,012	$	60,063	$	6,633	$	2,540
Noncurrent derivative assets	90,132		105,315		39,252		31,958
Current derivative liabilities	—		—		9,540		3,125
Noncurrent derivative liabilities	254		—		435		323
Total derivatives not designated as hedges	$	140,398	$	165,378	$	55,860	$	37,946

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 condensed consolidated balance sheets. The change in carrying value of our commodity price derivatives since December 31, 2013 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.

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 sheets as of March 31, 2014 and December 31, 2013 are included in Note 5.

Investments

We hold certain short-term marketable securities related to interest bearing time deposits and commercial paper. 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 2014 and do not anticipate selling or transferring these investments before their maturity date. At March 31, 2014, 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	$	3,508	$	—	$	(9	)	$	3,499
Commercial paper	93,933		15		(5		)	93,943
Marketable securities	$	97,441	$	15	$	(14	)	$	97,442

We had no marketable securities at March 31, 2013.