(6) FAIR VALUE MEASUREMENTS

The carrying amounts and estimated fair values of the Company’s financial instruments as of December 31, 2017 and 2016 were as follows:


	December 31, 2017				December 31, 2016
	Carrying		Fair		Carrying		Fair
(in millions)	Amount		Value		Amount		Value
Cash and cash equivalents	$	916	$	916	$	1,423	$	1,423
2015 term loan due December 2020		–		–		327		327
2016 term loan due December 2020 (1)		1,191		1,191		1,191		1,191
Senior notes		3,242		3,358		3,166		3,182
Derivative instruments, net (2)		76		76		(375)		(375)

(1)

The maturity date will accelerate to October 2019 if, by that date, the Company has not amended, redeemed or refinanced at least $765 million of its senior notes due in January 2020. As of December 31, 2017, the Company has redeemed and refinanced $758 million principal amount of the 2020 senior notes.

(2)

Excludes $1 million in premiums paid related to certain purchased call options currently recognized as a component of derivative assets within current assets on the consolidated balance sheet.

The carrying values of cash and cash equivalents, accounts receivable, other current assets, accounts payable and other current liabilities on the 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 term loan facilities and unsecured revolving credit facility 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 December 31, 2017 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, purchased put options, two-way costless collars and three-way costless collars (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.

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

December 31, 2017

Fair Value Measurements Using:

Quoted Prices

Significant

in Active

Significant Other

Unobservable

Markets

Observable Inputs

Inputs

Assets (Liabilities)

(in millions)

(Level 1)

(Level 2)

(Level 3)

at Fair Value

Fixed price swap assets

–

Two-way costless collar assets

–

Three-way costless collar assets

–

121

Basis swap assets

–

Purchased call option assets

–

Fixed price swap liabilities

–

(1)

–

(1)

Two-way costless collar liabilities

–

(1)

Three-way costless collar liabilities

–

(66)

Basis swap liabilities

–

(23)

Sold call option liabilities

–

(18)

Interest rate swap liabilities

–

(1)

–

(1)

Total

–


	December 31, 2016
	Fair Value Measurements Using:
	Quoted Prices		Significant Other		Significant
	in Active Markets		Observable Inputs		Unobservable Inputs		Assets (Liabilities)
(in millions)	(Level 1)		(Level 2)		(Level 3)		at Fair Value
Fixed price swap assets	$	–	$	1	$	–	$	1
Two-way costless collar assets		–		–		10		10
Three-way costless collar assets		–		–		111		111
Basis swap assets		–		–		33		33
Fixed price swap liabilities		–		(178)		–		(178)
Two-way costless collar liabilities		–		–		(58)		(58)
Three-way costless collar liabilities		–		–		(192)		(192)
Basis swap liabilities		–		–		(18)		(18)
Sold call option liabilities		–		–		(81)		(81)
Interest rate swap liabilities		–		(3)		–		(3)
Total	$	–	$	(180)	$	(195)	$	(375)

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 years ended December 31, 2017 and 2016. 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 December 31, 2017 and 2016.


	For the years ended
	December 31,
(in millions)	2017		2016
Balance at beginning of period	$	(195)	$	3
Total gains (losses):
Included in earnings		199		(162)
Settlements (1)		18		(36)
Transfers into/out of Level 3		–		–
Balance at end of period	$	22	$	(195)
Change in gains (losses) included in earnings relating to derivatives still held as of December 31,	$	217	$	(198)

(1)

Includes $5 million amortization of premiums paid related to certain call options for the year ended December 31, 2017.

See Note 11 – Retirement and Employee Benefit Plans for a discussion of the fair value measurement of the Company’s pension plan assets.