(8) FAIR VALUE MEASUREMENTS

The carrying amounts and estimated fair values of the Company’s financial instruments as of March 31, 2018 and December 31, 2017 were as follows:


	March 31, 2018				December 31, 2017
	Carrying		Fair		Carrying			Fair
(in millions)	Amount		Value		Amount			Value
Cash and cash equivalents	$	958	$	958	$	916		$	916
2018 term loan facility due December 2020 (1)(2)		1,191		1,191		1,191			1,191
Senior notes (2)		3,242		3,199		3,242			3,358
Derivative instruments, net		78		78		76	(3)		76	(3)

(1)

Concurrent with the closing of the new 2018 credit facility agreement, the Company repaid the $1,191 million secured term loan balance on April 26, 2018. See Note 16 – Subsequent Events for more information on the 2018 credit facility.

(2)

Excludes unamortized debt issuance costs and debt discounts.

(3)

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

The carrying values of cash and cash equivalents, accounts receivable, other current assets, accounts payable and other 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 market prices of the Company’s senior notes.

The carrying values of the borrowings under the Company’s term loan facilities and unsecured revolving credit facility (to the extent utilized) 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 natural gas 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, 2018 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 call 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. An increase (decrease) in volatility would result in an increase (decrease) in fair value measurement, respectively.

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


	March 31, 2018
	Fair Value Measurements Using:
(in millions)	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Assets (Liabilities) at Fair Value
Fixed price swap - natural gas assets	$	–	$	54	$	–	$	54
Fixed price swap - propane assets		–		3		–		3
Two-way costless collar assets		–		–		16		16
Three-way costless collar assets		–		–		91		91
Basis swap assets		–		–		6		6
Purchased call option assets		–		–		18		18
Interest rate swap assets		–		1		–		1
Fixed price swap - natural gas liabilities		–		(2)		–		(2)
Two-way costless collar liabilities		–		–		(9)		(9)
Three-way costless collar liabilities		–		–		(41)		(41)
Basis swap liabilities		–		–		(7)		(7)
Sold call option liabilities		–		–		(52)		(52)
Total	$	–	$	56	$	22	$	78


	December 31, 2017
	Fair Value Measurements Using:
(in millions)	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Assets (Liabilities) at Fair Value
Fixed price swap assets	$	–	$	56	$	–	$	56
Two-way costless collar assets		–		–		5		5
Three-way costless collar assets		–		–		121		121
Purchased call option assets		–		–		2		2
Basis swap assets		–		–		2		2
Fixed price swap liabilities		–		(1)		–		(1)
Two-way costless collar liabilities		–		–		(1)		(1)
Three-way costless collar liabilities		–		–		(66)		(66)
Basis swap liabilities		–		–		(23)		(23)
Sold call option liabilities		–		–		(18)		(18)
Interest rate swap liabilities		–		(1)		–		(1)
Total	$	–	$	54	$	22	$	76

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, 2018 and 2017. 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, 2018 and 2017.


	For the three months ended
	March 31,
(in millions)	2018		2017
Balance at beginning of period	$	22	$	(195)
Total gains (losses):
Included in earnings		(9)		13
Settlements (1)		9		14
Transfers into/out of Level 3		–		–
Balance at end of period	$	22	$	(168)
Change in gains included in earnings relating to derivatives still held as of March 31	$	–	$	27

(1)

Includes $1 million amortization of premiums paid related to certain call options for the three months ended March 31, 2018.