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Fair Value Measurements

12 Months Ended

Dec. 31, 2019

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, 2019 and 2018 were as follows:


	December 31, 2019								December 31, 2018
(in millions)	Carrying Amount			Fair Value			Carrying Amount		Fair Value
Cash and cash equivalents	$	5		$	5		$	201	$	201
2018 revolving credit facility due April 2024⁽¹⁾	34			34			—		—
Senior notes ⁽²⁾	2,228			2,085			2,342		2,190
Derivative instruments, net	155		⁽³⁾	155		⁽³⁾	52		52

(1)In October 2019, the Company amended its 2018 revolving credit facility agreement which, among other things, extended the maturity from 2023 to 2024.

(2)Excludes unamortized debt issuance costs and debt discounts.

(3)Includes $9 million in premiums paid related to certain natural gas fixed price swaps recognized as a component of derivative assets within current assets on the consolidated balance sheet.

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 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 certain senior notes were updated to a Level 1 in the second quarter of 2018 as the market activity for a portion of the Company’s debt resulted in timely quoted prices. In 2019, the 4.10% Senior Notes due March 2022 were reclassified as a Level 2 measurement due to relative market inactivity. The 4.05% Senior Notes due January 2020, which were classified as a Level 2 measurement at December 31, 2018, were retired in December 2019.

The carrying value of the borrowings under the Company’s revolving credit facility (to the extent utilized) approximates 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 Company has classified its derivatives into the fair value hierarchy 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 New York Mercantile Exchange (“NYMEX”) futures index for natural gas and oil derivatives and Oil Price Information Service (“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, 2019 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 contracts expire in June 2020.

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, 2019
	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 ⁽¹⁾	$	—	$	84	$	—	$	84
Fixed price swap – oil	—		5		—		5
Fixed price swap – propane	—		24		—		24
Fixed price swap – ethane	—		11		—		11
Two-way costless collar – natural gas	—		14		—		14
Two-way costless collar – oil	—		5		—		5
Two-way costless collar – propane	—		2		—		2
Three-way costless collar – natural gas	—		200		—		200
Three-way costless collar – oil	—		10		—		10
Basis swap – natural gas	—		32		—		32
Purchased call option – natural gas	—		3		—		3
Fixed price swap – natural gas storage	—		1		—		1

Liabilities
Purchased fixed price swap – natural gas	—		(1)		—		(1)
Fixed price swap – natural gas	—		(1)		—		(1)
Fixed price swap – oil	—		(8)		—		(8)
Two-way costless collar – natural gas	—		(8)		—		(8)
Two-way costless collar – oil	—		(5)		—		(5)
Three-way costless collar – natural gas	—		(156)		—		(156)
Three-way costless collar – oil	—		(12)		—		(12)
Basis swap – natural gas	—		(26)		—		(26)
Sold call option – natural gas	—		(18)		—		(18)
Sold call option – oil	—		(1)		—		(1)
Total	$	—	$	155	$	—	$	155

(1)Includes $9 million in premiums paid related to certain natural gas fixed price swaps recognized as a component of derivative assets within current assets on the consolidated balance sheet at December 31, 2019. As certain natural gas fixed price swaps settle, the premium will be amortized and recognized as a component of gain (loss) on derivatives on the consolidated statement of operations.


	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 swaps – 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

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, 2019 and 2018. The fair values of Level 3 derivative instruments were 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, 2019 and 2018. 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.


	For the years ended December 31,
(in millions)	2019		2018
Balance at beginning of year	$	—	$	22
Total gains (losses):
Included in earnings	—		(17)
Settlements ⁽¹⁾	—		1
Transfers into/out of Level 3 ⁽²⁾	—		(6)
Balance at end of period	$	—	$	—
Change in gains (losses) included in earnings relating to derivatives still held as of December 31	$	—	$	—

(1)Includes $1 million for amortization of premiums paid related to certain natural gas purchased call options for the year ended December 31, 2018.

(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 1 3 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

In accordance with accounting guidance for Property, Plant and Equipment, assets held for sale are measured at the lower of carrying value or fair value less costs to sell. Because the assets outside of the full cost pool included in the Fayetteville Shale sale met the criteria for held for sale accounting in the third quarter of 2018, the Company determined the carrying value of certain non-full cost pool assets exceeded the fair value less costs to sell. As a result, the Company recorded a non-cash

impairment charge of $161 million for the year ended December 31, 2018, of which $145 million related to midstream gathering assets and $15 million related to E&P which were both reflected as assets held for sale in the third quarter of 2018. Additionally, the Company recorded a $1 million non-cash impairment related to other non-core assets that were not included in the sale. 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 future commodity prices, projections of estimated quantities of natural gas reserves, operating costs, projections of future rates of production, inflation factors and risk adjusted discount rates. In 2019, the Company determined that the $26 million carrying value of certain non-core assets exceeded their respective fair value less costs to sell and recognized a $16 million non-cash impairment. The Company used Level 3 measurements to determine the fair value of these assets.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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