(13) 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 do 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:

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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.

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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.

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Level 3 – Unobservable inputs for which there is little, if any, market activity for the asset or liability being measured. These inputs reflect management’s best estimates of the assumptions market participants would use in determining fair value. Our Level 3 measurements consist of instruments using standard pricing models and other valuation methods that utilize unobservable pricing inputs that are significant to the overall 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.

Significant uses of fair value measurements include:

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impairment assessments of long-lived assets;

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impairment assessments of goodwill; and

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recorded value of derivative instruments and trading securities.

The need to test long-lived assets and goodwill can be based on several indicators, including a significant reduction in prices of natural gas, oil and condensate, NGLs, sustained declines in our common stock, unfavorable adjustments to reserves, significant changes in the expected timing of production, other changes to contracts or changes in the regulatory environment in which a property is located.

Fair Values – Recurring

We use a market approach for our recurring fair value measurements and endeavor to use the best information available. 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 June 30, 2018 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 June 30, 2018
Trading securities held in the deferred compensation plans	$	68,876	$	—		$	—		$	68,876
Derivatives –swaps		—		(103,092	)		—			(103,092	)
–collars				12			—			12
–calls		—		(701	)		—			(701	)
–basis swaps		—		(4,285	)		264			(4,021	)
–freight swaps		—		166			—			166
–swaptions		—		—			(485	)		(485	)

	Fair Value Measurements at December 31, 2017 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, 2017
Trading securities held in the deferred compensation plans	$	67,117	$	—		$	—	$	67,117
Derivatives –swaps		—		3,910			—		3,910
–collars		—		3,039			85		3,124
–basis swaps		—		(9,025	)		39		(8,986	)
–freight swaps		—		276			—		276
–swaptions		—		—			6,534		6,534

Our trading securities in Level 1 are exchange-traded and measured at fair value with a market approach using end of period 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. As of June 30, 2018, a portion of our natural gas derivative instruments contains swaptions where the counterparty has the right, but not the obligation, to enter into a fixed price swap on a pre-determined date. Derivatives in Level 3 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. Subjectivity in the volatility factors utilized can cause a significant change in the fair value measurement of our swaptions. The following is a reconciliation of the beginning and ending balances for derivative instruments classified as Level 3 in the fair value hierarchy (in thousands):

	As of June 30, 2018
Balance at December 31, 2017	$	6,658
Total losses:
Included in earnings		(2,956	)
Settlements		(1,781	)
Transfer out of Level 3 ⁽¹⁾		(2,142	)
Balance at June 30, 2018	$	(221	)

⁽¹⁾ During first six months 2018, we transferred $2.1 million of swaption contracts out of Level 3 due to the exercise of these swaptions by our counterparties.

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 or losses are included in deferred compensation plan expense in the accompanying consolidated statements of operations. For second quarter 2018, interest and dividends were $213,000 and the mark-to-market adjustment was a gain of $324,000 compared to interest and dividends of $204,000 and a mark-to-market gain of $1.5 million in second quarter 2017. For first six months 2018, interest and dividends were $381,000 and the mark-to-market loss was $798,000 compared to interest and dividends of $323,000 and mark-to-market gain of $3.0 million in the same period of the prior year.

Fair Values—Non-recurring

Our proved natural gas and oil properties are reviewed for impairment periodically as events or changes in circumstances indicate the carrying amount may not be recoverable. In second quarter 2018, we increased our interest in certain properties in our shallow legacy oil and natural gas assets in Northwest Pennsylvania for a minimal dollar amount for which the fair value was previously determined to be zero. As a result, in second quarter 2018, we recorded additional impairment of $15.3 million related to these properties. In first quarter 2018, there were indicators that the carrying value of certain of our oil gas properties in Oklahoma may be impaired and undiscounted future cash flows attributed to these assets indicated their carrying amounts were not expected to be recovered. Their remaining fair value was measured using a market approach based upon the potential sale of these properties, which is a Level 3 input. We recorded non-cash charges in first quarter 2018 of $7.3 million related to these properties. The following presents the value of these assets measured at fair value on a non-recurring basis at the time impairment was recorded (in thousands):

Three Months Ended

June 30, 2018

Six Months Ended

June 30, 2018

Fair Value

Impairment

Fair Value

Impairment

Natural gas and oil properties

—

15,302

32,516

22,614

Fair Values—Reported

The following presents the carrying amounts and the fair values of our financial instruments as of June 30, 2018 and December 31, 2017 (in thousands):

	June 30, 2018						December 31, 2017
	Carrying Value			Fair Value			Carrying Value			Fair Value
Assets:
Commodity swaps, options and basis swaps	$	3,295		$	3,295		$	58,880		$	58,880
Marketable securities ^(a)		68,876			68,876			67,117			67,117
(Liabilities):
Commodity swaps, options and basis swaps		(111,416	)		(111,416	)		(54,022	)		(54,022	)
Bank credit facility ^(b)		(1,314,000	)		(1,314,000	)		(1,211,000	)		(1,211,000	)
5.75% senior notes due 2021 ^(b)		(475,952	)		(487,741	)		(475,952	)		(493,872	)
5.00% senior notes due 2022 ^(b)		(580,032	)		(575,427	)		(580,032	)		(578,727	)
5.875% senior notes due 2022 ^(b)		(329,244	)		(334,551	)		(329,244	)		(339,200	)
Other senior notes due 2022 ^(b)		(590	)		(582	)		(590	)		(591	)
5.00% senior notes due 2023 ^(b)		(741,531	)		(716,808	)		(741,531	)		(735,614	)
4.875% senior notes due 2025 ^(b)		(750,000	)		(704,940	)		(750,000	)		(733,755	)
5.75% senior subordinated notes due 2021 ^(b)		(22,214	)		(22,699	)		(22,214	)		(22,192	)
5.00% senior subordinated notes due 2022 ^(b)		(19,054	)		(18,825	)		(19,054	)		(18,741	)
5.00% senior subordinated notes due 2023 ^(b)		(7,712	)		(7,484	)		(7,712	)		(7,614	)
Deferred compensation plan ^(c)		(116,629	)		(116,629	)		(114,414	)		(114,414	)

^(a)	Marketable securities, which are held in our deferred compensation plans, 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 notes and 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 at the closing price on the balance sheet date which is a Level 1 input.

Our current assets and liabilities include financial instruments, the most significant of which are trade accounts receivable and payable. 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 and expected incurrence of bad debt expense. Non-financial liabilities initially measured at fair value include asset retirement obligations. For additional information, see Note 10.

Concentrations of Credit Risk

As of June 30, 2018, our primary concentrations of credit risk are the risks of not collecting accounts receivable and the risk of a counterparty’s failure to perform under derivative obligations. Most of our receivables are from a diverse group of companies, including major energy companies, pipeline companies, local distribution companies, financial institutions and end-users in various industries. Letters of credit or other appropriate securities are obtained as deemed necessary to limit our risk of loss. Our allowance for uncollectable receivables was $5.6 million at June 30, 2018 and $7.1 million at December 31, 2017. Our derivative exposure to credit risk is diversified primarily among major investment grade financial institutions, where we have master netting agreements which provide for offsetting payables against receivables from separate derivative contracts. To manage counterparty risk associated with our derivatives, we select and monitor our counterparties based on our assessment of their financial strength and/or credit ratings. We may also limit the level of exposure with any single counterparty. At June 30, 2018, our derivative counterparties include twenty financial institutions, of which all but five are secured lenders in our bank credit facility. At June 30, 2018, our net derivative liability includes a net payable of $27.5 million to these five counterparties that are not participants in our bank credit facility.