(7) FAIR VALUE MEASUREMENTS

Assets and liabilities measured at fair value on a recurring basis

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


	December 31, 2018				December 31, 2017
	Carrying		Fair		Carrying			Fair
(in millions)	Amount		Value		Amount			Value
Cash and cash equivalents	$	201	$	201	$	916		$	916
2018 revolving credit facility due April 2023		–		–		–			–
2016 term loan facility due December 2020 (1) (2)		–		–		1,191			1,191
Senior notes (1)(3)		2,342		2,190		3,242			3,358
Derivative instruments, net		52		52		77	(4)		77	(4)

(1)

Excludes unamortized debt issuance costs and debt discounts.

(2)

In April 2018, the Company replaced its 2016 credit facility with a new 2018 credit facility and repaid the $1,191 million secured term loan balance in full.

(3)

In December 2018, the Company repurchased $900 million of certain of its outstanding senior notes with a portion of the net proceeds from the Fayetteville Shale sale.

(4)

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

The carrying values of cash and cash equivalents, including marketable securities, 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 market prices of the Company’s senior notes. These instruments were previously classified as a Level 2 measurement but substantially all senior notes were updated to a Level 1 in the second quarter of 2018 as the market activity of the Company’s debt has resulted in timely quoted prices. The 4.05% Senior Notes due January 2020 remain a Level 2 measurement due to relative market inactivity.

The carrying values of the borrowings under the Company’s revolving credit facility (to the extent utilized) and previous term loan facility approximate fair value because the interest rate is variable and reflective of market rates. The Company considers the fair value of its revolving credit facility to be a Level 1 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 for natural gas and oil derivatives and Oil Price Information Services (“OPIS”) for ethane and propane derivatives. The Company utilizes 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, 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 2) 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 and OPIS futures index, interest rates, volatility and credit worthiness. The Company’s basis swaps (Level 2) are estimated using third-party calculations based upon forward commodity price curves. These instruments were previously classified as a Level 3 measurement in the fair value hierarchy but were updated to a Level 2 measurement in the second quarter of 2018 as a result of the Company’s ability to derive volatility inputs and forward commodity price curves from directly observable sources.

Inputs to the Black-Scholes model, including the volatility input 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:


	December 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
Assets
Fixed price swap – natural gas	$	–	$	38	$	–	$	38
Fixed price swap – oil		–		19		–		19
Fixed price swap – propane		–		11		–		11
Fixed price swap – ethane		–		8		–		8
Two-way costless collar – natural gas		–		11		–		11
Two-way costless collar – oil		–		11		–		11
Three-way costless collar – natural gas		–		75		–		75
Basis swap – natural gas		–		11		–		11
Purchased call option – natural gas		–		6		–		6
Interest rate swap		–		1		–		1
Liabilities
Purchased fixed price swap – oil		–		(6)		–		(6)
Fixed price swap – natural gas		–		(10)		–		(10)
Fixed price swap – ethane		–		(3)		–		(3)
Two-way costless collar – natural gas		–		(7)		–		(7)
Two-way costless collar – oil		–		(1)		–		(1)
Three-way costless collar – natural gas		–		(68)		–		(68)
Basis swap – natural gas		–		(22)		–		(22)
Sold call option – natural gas		–		(22)		–		(22)
Total	$	–	$	52	$	–	$	52


	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
Assets
Fixed price swap – natural gas	$	–	$	56	$	–	$	56
Two-way costless collar – natural gas		–		–		5		5
Three-way costless collar – natural gas		–		–		121		121
Purchased call option – natural gas (1)		–		–		3		3
Basis swap – natural gas		–		–		2		2
Liabilities
Fixed price swap – natural gas		–		(1)		–		(1)
Two-way costless collar – natural gas		–		–		(1)		(1)
Three-way costless collar – natural gas		–		–		(66)		(66)
Basis swap – natural gas		–		–		(23)		(23)
Sold call option – natural gas		–		–		(18)		(18)
Interest rate swap		–		(1)		–		(1)
Total	$	–	$	54	$	23	$	77

(1)

Includes $1 million in premiums paid related to certain natural gas call options recognized as a component of derivative assets within current assets on the consolidated balance sheets at December 31, 2017.

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, 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 consisted of net derivatives valued using pricing models incorporating assumptions that, in the Company’s judgment, reflected reasonable assumptions a marketplace participant would have used as of December 31, 2018 and 2017.


	For the years ended
	December 31,
(in millions)	2018		2017
Balance at beginning of year	$	22	$	(195)
Total gains (losses):
Included in earnings		(17)		199
Settlements (1)		1		18
Transfers into/out of Level 3 (2)		(6)		–
Balance at end of period	$	–	$	22
Change in gains (losses) included in earnings relating to derivatives still held as of December 31	$	–	$	217

(1)

Includes $1 million and $5 million amortization of premiums paid related to certain natural gas call options for the years ended December 31, 2018 and 2017, respectively.

(2)

Commodity derivatives previously presented as Level 3 were transferred to Level 2 in the second quarter of 2018 as the Company moved from using proprietary volatility inputs and forward curves to more widely available published information, increasing market observability.

See Note 12 for a discussion of the fair value measurement of the Company’s pension plan assets.

Assets and liabilities measured at fair value on a nonrecurring basis

As further discussed in Note 3, the Company’s announcement of the Fayetteville Shale sale resulted in the reclassification of certain related assets and liabilities to held for sale on its balance sheet in the third quarter of 2018. Because the non-full cost pool assets met the criteria for held for sale accounting in the third quarter of 2018 due to their inclusion in the Fayetteville Shale sale, the Company determined the carrying value of certain non-full cost pool assets exceeded the carrying value less costs to sell. As a result, an impairment charge of $160 million was recorded for the year ended December 31, 2018, of which $145 million related to midstream gathering assets held for sale and $15 million related to E&P assets held for sale. Separately, the Company recorded an $11 million impairment of other non-core assets that were not included in the Fayetteville Shale sale, for the year ended December 31, 2018. The estimated fair value of the gathering assets was based on an estimated discounted cash flow model and market assumptions. The significant Level 3 assumptions used in the calculation of estimated discounted cash flows included in future rates of production, inflation factors and risk adjusted discount rates. These impairments are included in Net Income (Loss) from Operations in the accompanying consolidated statements of operations. On December 3, 2018, the Company closed on the Fayetteville Shale sale. Consequently, the Company recognized a net gain on the sale of non-full cost pool assets of $17 million, which consisted of a gain on the Midstream segment of $35 million and a loss on the E&P segment of $18 million.