FAIR VALUE MEASUREMENTS

12 Months Ended

Dec. 31, 2012

FAIR VALUE MEASUREMENTS

(12) FAIR VALUE MEASUREMENTS

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. There are three approaches for measuring the fair value of assets and liabilities: the market approach, the income approach and the cost approach, each of which includes multiple valuation techniques. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to measure fair value by converting future amounts, such as cash flows or earnings, into a single present value amount using current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace the service capacity of an asset. This is often referred to as current replacement cost. The cost approach assumes that the fair value would not exceed what it would cost a market participant to acquire or construct a substitute asset of comparable utility, adjusted for obsolescence.

The fair value accounting standards do not prescribe which valuation technique should be used when measuring fair value and does not prioritize among the techniques. These standards establish a fair value hierarchy that prioritizes the inputs used in applying the various valuation techniques. Inputs broadly refer to the assumptions that market participants use to make pricing decisions, including assumptions about risk. Level 1 inputs are given the highest priority in the fair value hierarchy while Level 3 inputs are given the lowest priority. The three levels of the fair value hierarchy are as follows:

• Level 1 – Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

• Level 2 – Observable market-based inputs or unobservable inputs that are corroborated by market data. These are inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.

• Level 3 – Unobservable inputs that are not corroborated by market data and may be used with internally developed methodologies that result in management’s best estimate of fair value.

Valuation techniques that maximize the use of observable inputs are favored. Assets and liabilities are classified in their entirety based on the lowest priority level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement of assets and liabilities within the levels of the fair value hierarchy.

Fair Values-Recurring

We use a market approach for our recurring fair value measurements and endeavor to use the best information available. Accordingly, valuation techniques that maximize the use of observable impacts are favored. The following tables present the fair value hierarchy table for assets and liabilities measured at fair value, on a recurring basis (in thousands):

	Fair Value Measurements at December 31, 2012 Using:
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Carrying Value as of December 31, 2012
Trading securities held in the deferred compensation plans	$	57,776	$	—	$	—	$	57,776
Derivatives–swaps		—		23,326		—		23,326
–collars		—		121,014		—		121,014
–basis swaps		—		993		—		993

	Fair Value Measurements at December 31, 2011 Using:
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Total Carrying Value as of December 31, 2011
Trading securities held in the deferred compensation plans	$	50,237	$	—		$	—	$	50,237
Derivatives–swaps		—		69,054			—		69,054
–collars		—		211,621			—		211,621
–call options		—		(29,348	)		—		(29,348	)

Our trading securities in Level 1 are exchange-traded and measured at fair value with a market approach using December 31, 2012 market values. Derivatives in Level 2 are measured at fair value with a market approach using third-party pricing services, which have been corroborated with data from active markets or broker quotes.

Our trading securities held in the deferred compensation plan are accounted for using the mark-to-market accounting method and are included in other assets in the accompanying consolidated balance sheets. We elected to adopt the fair value option to simplify our accounting for the investments in our deferred compensation plan. Interest, dividends, and mark-to-market gains/losses are included in deferred compensation plan expense in the accompanying statement of operations. For the year ended December 31, 2012, interest and dividends were $1.4 million and mark-to-market was a gain of $4.7 million. For the year ended December 31, 2011, interest and dividends were $1.4 million and mark-to-market was a loss of $2.3 million. For the year ended December 31, 2010, interest and dividends were $864,000 and the mark-to-market was a gain of $11.5 million.

Fair Values-Non recurring

We review our long-lived assets to be held and used for impairment, including proved natural gas and oil properties, whenever events or circumstances indicate the carrying value of those assets may not be recoverable. During the year ended December 31, 2012, we recognized charges for impairment of oil and gas properties in continuing operations of $34.3 million compared to $38.7 million in 2011 and $6.5 million in 2010. Also in 2012, we evaluated certain surface property we own which included a consideration for the potential sale of the assets and we recognized an impairment charge of $1.3 million. Discontinued operations includes an impairment charge related to our Barnett Shale assets of $463.2 million in 2010.

Continuing Operations

Due to declines in commodity prices and estimated reserves over the last three years, there were indications that the carrying values of certain of our oil and gas properties may be impaired and undiscounted future cash flows attributed to these assets indicated their carrying amounts were not expected to be recovered. Their fair value was measured using an income approach based upon internal estimates of future production levels, prices, drilling and operating costs and discount rates, which are Level 3 inputs. In some cases, we also considered the potential sale of certain of these properties. We recorded non-cash charges during 2012 of $31.1 million related to our Mississippi natural gas and oil properties and $3.2 million related to oil and natural gas properties in North Texas. We recorded non-cash charges during 2011 of $31.2 million related to our East Texas natural gas and oil properties and $7.5 million related to our Gulf Coast onshore properties. 2010 includes impairment charges of $6.5 million related to our Gulf Coast onshore properties.

The following table presents the value of these assets measured at fair value on a nonrecurring basis (in thousands):

	Year Ended December 31,
	2012				2011				2010
	Fair Value		Impairment		Fair Value		Impairment		Fair Value		Impairment
Natural gas and oil properties – continuing operations	$	12,604	$	34,273	$	24,388	$	38,681	$	16,075	$	6,505
Natural gas and oil properties – discontinued operations		—		—		—		—		835,913		463,244
Surface property		6,269		1,281		—		—		—		—

Discontinued Operations

Our Barnett properties did not meet held for sale criteria as of December 31, 2010 but our analysis determined that undiscounted cash flows for these properties were less than their carrying value. We compared the carrying value to the estimated fair value and recognized an impairment charge of $463.2 million in fourth quarter 2010, which is reflected in discontinued operations. The fair value of our Barnett properties considered the potential sale of these properties in addition to using an income approach with internal estimates which included reserve quantities, forward natural gas prices, anticipated drilling and operating costs and discount rates, which are Level 3 inputs.

Fair Values – Reported

The following table presents the carrying amounts and the fair values of our financial instruments as of December 31, 2012 and 2011 (in thousands):

	December 31, 2012						December 31, 2011
	Carrying Value			Fair Value			Carrying Value			Fair Value
Assets:
Commodity swaps, collars, basis swaps, call and put options	$	153,267		$	153,267		$	251,500		$	251,500
Marketable securities(a)		57,776			57,776			50,237			50,237
Liabilities:
Commodity swaps, collars and call options		(7,934	)		(7,934	)		(173	)		(173	)
Bank credit facility(b)		(739,000	)		(739,000	)		(187,000	)		(187,000	)
Deferred compensation plan(c)		(187,604	)		(187,604	)		(169,188	)		(169,188	)
7.5% senior subordinated notes due 2017(b)		—			—			(250,000	)		(265,625	)
7.25% senior subordinated notes due 2018(b)		(250,000	)		(262,500	)		(250,000	)		(267,500	)
8.00% senior subordinated notes due 2019(b)		(289,185	)		(332,250	)		(287,967	)		(334,500	)
6.75% senior subordinated notes due 2020(b)		(500,000	)		(542,500	)		(500,000	)		(555,000	)
5.75% senior subordinated notes due 2021(b)		(500,000	)		(535,000	)		(500,000	)		(541,250	)
5.00% senior subordinated notes due 2022(b)		(600,000	)		(627,000	)		—			—

^(a) Marketable securities are held in our deferred compensation plans that are actively traded on major exchanges.

^(b) The book value of our bank debt approximates fair value because of its floating rate structure. The fair value of our senior subordinated notes is based on end of period market quotes, which are Level 2 inputs.

^(c)  The fair value of our deferred compensation plan is updated based on the closing price on the balance sheet date.

Our current assets and liabilities contain financial instruments, the most significant of which are trade accounts receivables and payables. We believe the carrying values of our current assets and liabilities approximate fair value. Our fair value assessment incorporates a variety of considerations, including (1) the short-term duration of the instruments and (2) our historical incurrence of and expected future insignificance of bad debt expense.

Concentrations of Credit Risk

As of December 31, 2012, our primary concentration of credit risks are the risks of collecting accounts receivable and the risk of counterparties’ failure to perform under derivative obligations. See Note 2 for information regarding our accounts receivable and derivative assets and liabilities by counterparty and Note 16 for information regarding our major customers.