Fair Value Measurements

9 Months Ended

Sep. 30, 2014

Fair Value Measurements [Abstract]

Fair Value Measurements

(8) FAIR VALUE MEASUREMENTS

The carrying amounts and estimated fair values of the Company’s financial instruments as of September 30, 2014 and December 31, 2013 were as follows:

	September 30, 2014				December 31, 2013
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
	(in millions)
Cash and cash equivalents	$	20	$	20	$	23	$	23
Credit facility	$	139	$	139	$	283	$	283
Senior notes	$	1,668	$	1,957	$	1,668	$	1,796
Derivative instruments	$	78	$	78	$	39	$	39

The carrying values of cash and cash equivalents, accounts receivable, accounts payable, other current assets and current liabilities on the unaudited condensed consolidated balance sheets approximate fair value because of their short-term nature. For debt and derivative instruments, the following methods and assumptions were used to estimate fair value:

Debt: The fair values of the Company’s senior notes were based on the market for the Company’s publicly traded debt as determined based on yield of the Company’s 7.5% Senior Notes due 2018, which was 2.2% at September 30, 2014 and 2.6% at December 31, 2013, and its 4.10% Senior Notes due 2022, which was 3.6% at September 30, 2014, and 4.2% at December 31, 2013. The carrying value of the borrowings under the Company’s Credit Facility at September 30, 2014, approximates fair value because the interest rate is variable and reflective of market rates.  The Company considers the fair value of its debt to be a Level 2 measurement on the fair value hierarchy. 

Derivative Instruments: The fair value of all derivative instruments is the amount at which the instrument could be exchanged currently between willing parties. The amounts are based on quoted market prices, best estimates obtained from counterparties and an option pricing model, when necessary, for price option contracts.

GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. As presented in the tables below, this hierarchy consists of three broad levels:

Level 1 valuations - Consist of unadjusted quoted prices in active markets for identical assets and liabilities and have the highest priority.

Level 2 valuations - Consist of quoted market information for the calculation of fair market value.

Level 3 valuations - Consist of internal estimates and have the lowest priority.

The Company has classified its derivatives into these levels depending upon the data utilized to determine their fair values. The Company’s Level 2 fair value measurements include fixed-price swaps and are estimated using internal discounted cash flow calculations using the NYMEX futures index.The Company utilizes discounted cash flow models for valuing its interest rate derivatives. The net derivative values attributable to the Company's interest rate derivative contracts as of September 30, 2014 are based on (i) the contracted notional amounts, (ii) active market-quoted London Interbank Offered Rate (“LIBOR”) yield curves and (iii) the applicable credit-adjusted risk-free rate yield curve. The Company's interest rate derivative asset and liability measurements represent Level 2 inputs in the hierarchy. The Company’s Level 3 fair value measurements include fixed price call options and basis swaps. The Company’s fixed price call options are valued using the Black-Scholes model, an industry standard option valuation model that takes into account inputs such as contract terms, including maturity, and market parameters, including assumptions of the NYMEX futures index, interest rates, volatility and credit worthiness.  The Company’s basis swaps are estimated using internal discounted cash flow calculations based upon forward commodity price curves. 

Inputs to the Black-Scholes model, including the volatility input, which is the significant unobservable input for Level 3 fair value measurements, are obtained from a third-party pricing source, with independent verification of most significant inputs on a monthly basis. An increase (decrease) in volatility would resultin an increase (decrease) in fair value measurement, respectively.

Assets and liabilities measured at fair value on a recurring basis are summarized below:

	September 30, 2014
		(in millions)
	Fair Value Measurements Using:
	Quoted Prices		Significant
	in Active		Other		Significant
	Markets		Observable Inputs		Unobservable Inputs		Assets (Liabilities)
	(Level 1)		(Level 2)		(Level 3)		at Fair Value
Derivative assets	$	–	$	128	$	18	$	146
Derivative liabilities		–		(4)		(64)		(68)
Total	$	–	$	124	$	(46)	$	78
	December 31, 2013
		(in millions)
	Fair Value Measurements Using:
	Quoted Prices		Significant
	in Active		Other		Significant
	Markets		Observable Inputs		Unobservable Inputs		Assets (Liabilities)
	(Level 1)		(Level 2)		(Level 3)		at Fair Value
Derivative assets	$	–	$	66	$	13	$	79
Derivative liabilities		–		(8)		(32)		(40)
Total	$	–	$	58	$	(19)	$	39

The table below presents reconciliations for the change in net fair value of derivative assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine month periods ended September 30, 2014 and September 30, 2013. The fair values of Level 3 derivative instruments are estimated using proprietary valuation models that utilize both market observable and unobservable parameters. Level 3 instruments presented in the table consist of net derivatives valued using pricing models incorporating assumptions that, in the Company’s judgment, reflect the assumptions a reasonable marketplace participant would have used at September 30, 2014 and September 30, 2013.

	For the three months ended				For the nine months ended
	September 30,				September 30,
	2014		2013		2014		2013
	(in millions)
Balance at beginning of period	$	(55)	$	(28)	$	(19)	$	–
Total gains (losses):
Included in earnings		18		5		(27)		(22)
Included in other comprehensive income		–		–		–		–
Purchases, issuances, and settlements:
Purchases		–		–		–		–
Issuances		–		–		–		–
Settlements		(9)		(2)		–		(3)
Transfers into/out of Level 3		–		–		–		–
Balance at end of period	$	(46)	$	(25)	$	(46)	$	(25)
Change in gains (losses) included in earnings relating to derivatives still held as of September 30	$	9	$	3	$	(27)	$	(25)