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 (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs.

The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).

The three levels of the fair value hierarchy are as follows:

Level 1 – Quoted prices are available in active markets for identical assets or liabilities 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 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.

Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, basis swaps, options, and collars.

Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

The following table sets forth, by level, within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for at fair value as of December 31, 2014 and 2013. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.


	Recurring Fair Value Measurements
	(in millions)
	Level 1		Level 2		Level 3		Total
As of December 31, 2014
Derivative Assets	$	—	$	191.8	$	—	$	191.8
Derivative Liabilities		—		(38.5)		—		(38.5)
Total	$	—	$	153.3	$	—	$	153.3


	Recurring Fair Value Measurements
	(in millions)
	Level 1		Level 2		Level 3		Total
As of December 31, 2013
Derivative Assets	$	—	$	25.4	$	—	$	25.4
Derivative Liabilities		—		(36.2)		—		(36.2)
Total	$	—	$	(10.8)	$	—	$	(10.8)

The Company’s financial assets and liabilities consist solely of the derivative assets and liabilities also disclosed in Note 11. Derivatives listed above include commodity swaps and put and call options that are carried at fair value. The fair value amounts on the Consolidated Balance Sheets associated with the Company’s derivatives resulted from Level 2 fair value methodologies, that is, the Company is able to value the assets and liabilities based on observable market data for similar instruments. The amounts above include the impact of netting assets and liabilities with counterparties with which the right of offset exists.

The observable data includes the forward curve for commodity prices and interest rates based on quoted markets prices and prospective volatility factors related to changes in commodity prices, as well as the impact of the Company’s non‑performance risk as well as the non-performance risk of its counterparties which is derived using credit default swap values.

The Company measures fair value of its long-term debt based on a Level 2 methodology using quoted market prices which include consideration of the Company’s credit risk. The carrying value of the Company’s New Revolving Credit Facility and Term Loan Facility approximate fair value based on current rates applicable to similar instruments. The following table outlines the fair value of the 2017 Notes, 2019 Notes and 2020 Notes as of December 31, 2014 and 2013:


	December 31,		December 31,
	2014		2013
	(in thousands)
2017 Senior Notes
Carrying Value, net of discount	$	348,669	$	348,040
Fair Value	$	190,400	$	327,698

2019 Senior Notes
Carrying Value, net of discount	$	293,064	$	—
Fair Value	$	184,932	$	—

2020 Senior Notes
Carrying Value, net of discount	$	105,234	$	—
Fair Value	$	73,311	$	—

Sabine utilizes fair value on a non-recurring basis to perform impairment tests as required on the Company’s inventory, property, plant and equipment and goodwill. The testing of goodwill for impairment was done via a two-step process. The first step of the process compared the fair value of the country-wide cost center with its carrying amount including goodwill. The fair value of the country-wide cost center was determined by using a discounted cash flows model which relied primarily on the Company’s reserve data which include significant assumptions, judgment and estimates, as well as a calculated weighted average cost of capital, derived through analysis of the capital structures of selected peer companies and relevant statistical market data. The fair value was below the carrying amount; therefore, the Company performed the second step to compare the implied fair value of goodwill with the carrying amount of goodwill. The implied fair value of goodwill was determined by assigning the fair value of a reporting unit to all of the assets and liabilities of the reporting unit as if the unit had been acquired in a business combination. The Company recognized a $173.5 million impairment of goodwill for the year ended December 31, 2014. The Company recorded impairment charges for gas gathering and processing equipment of $1.7 million in the year ended December 31, 2014 based on expected present value and estimated future cash flows using current volume throughput and pricing assumptions. For the year ended December 31, 2013, the Company recognized no impairment charges for gas gathering and processing equipment. For the year ended December 31, 2012, the Company recognized $21.4 million of impairment charges for gas gathering and processing equipment based on expected present value and estimated future cash flows using current volume throughput and pricing assumptions. For the years ended December 31, 2014, 2013 and 2012, Sabine recognized $0.2 million, $1.1 million and $1.2 million, respectively, of impairment charges related to the write-down of carrying value of certain sizes of casing inventory. Assets and liabilities acquired in business combinations are recorded at their fair value as of the date of acquisition (Note 6). The inputs used to determine such fair value are primarily based upon internally developed cash flow models and would generally be classified as Level 3. Additionally, the Company uses fair value to determine the inception value of the Company’s asset retirement obligations. The inputs used to determine such fair value are primarily based upon costs incurred historically for similar work, as well as estimates for costs that would be incurred to restore leased property to the contractually stipulated condition, and would generally be classified as Level 3.