Fair Value Measurements

3 Months Ended

Mar. 31, 2016

Fair Value Measurements [Abstract]

Fair Value Measurements

(9) FAIR VALUE MEASUREMENTS

The carrying amounts and estimated fair values of the Company’s financial instruments as of March  31, 2016 and December 31, 2015 were as follows:

	March 31, 2016				December 31, 2015
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
	(in millions)
Cash and cash equivalents	$	1,597	$	1,597	$	15	$	15
Credit facility		1,852		1,852		116		116
Term loan facility		748		748		747		747
Senior notes		3,843		2,729		3,842		2,651
Derivative instruments, net		(23)		(23)		(2)		(2)

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 value of the Company’s publicly traded debt as determined based on the yield of the Company’s senior notes.

The carrying values of the borrowings under the Company’s unsecured revolving credit and term loan facilities approximate 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.

The fair value hierarchy 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 fixed price swaps (Level 2) are estimated using third-party discounted cash flow calculations using the NYMEX futures index. The Company utilized discounted cash flow models for valuing its interest rate derivatives (Level 2). The net derivative values attributable to the Company's interest rate derivative contracts as of March 31, 2016 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 sold call options and purchased put options (Level 3) 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 (Level 3) are estimated using third-party 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 the most significant inputs on a monthly basis. An increase (decrease) in volatility would result in an increase (decrease) in fair value measurement, respectively. However, such changes would not have a significant impact.

Assets and liabilities measured at fair value on a recurring basis are summarized below (in millions):

	March 31, 2016
	Fair Value Measurements Using:
	Quoted Prices		Significant		Significant
	in Active		Other		Unobservable
	Markets		Observable Inputs		Inputs		Assets (Liabilities)
	(Level 1)		(Level 2)		(Level 3)		at Fair Value
Fixed price swap assets	$	–	$	20	$	–	$	20
Purchased put option assets		–		–		15		15
Interest rate swap liabilities		–		(8)		–		(8)
Sold call option liabilities		–		–		(50)		(50)
Total	$	–	$	12	$	(35)	$	(23)
	December 31, 2015
	Fair Value Measurements Using:
	Quoted Prices		Significant		Significant
	in Active		Other		Unobservable
	Markets		Observable Inputs		Inputs		Assets (Liabilities)
	(Level 1)		(Level 2)		(Level 3)		at Fair Value
Basis swap assets	$	–	$	–	$	3	$	3
Interest rate swap liabilities		–		(5)		–		(5)
Total	$	–	$	(5)	$	3	$	(2)

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 months ended March  31, 2016 and 2015.  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 reasonable assumptions a marketplace participant would have used as of March  31, 2016 and 2015.

	For the three months ended
	March 31,
	2016		2015
	(in millions)
Balance at beginning of period	$	3	$	(8)
Total gains (losses):
Included in earnings		(34)		(6)
Purchases, issuances, and settlements:
Settlements		(4)		6
Transfers into/out of Level 3		–		–
Balance at end of period	$	(35)	$	(8)
Change in losses included in earnings relating to derivatives still held as of March 31	$	(38)	$	–