FAIR VALUE MEASUREMENTS

6 Months Ended

Jun. 30, 2021

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 June 30, 2021 and December 31, 2020 were as follows:


	June 30, 2021				December 31, 2020
(in millions)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Cash and cash equivalents	$	2	$	2	$	13	$	13
2018 revolving credit facility due April 2024	568		568		700		700
Senior notes (1)	2,471		2,684		2,471		2,609
Derivative instruments, net	(982)		(982)		(41)		(41)

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

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 are 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 fair value of the Company’s 4.10% Senior Notes due March 2022 is considered to be a Level 2 measurement on the fair value hierarchy. The fair values of the Company’s remaining senior notes are considered the be a Level 1 measurement. The carrying values 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 Company measures the fair value of its derivative instruments based upon a pricing model that utilizes market-based inputs, including, but not limited to, the contractual price of the underlying position, current market prices, natural gas and liquids forward curves, discount rates such as the LIBOR curve for a similar duration of each outstanding position, volatility factors and non-performance risk. Non-performance risk considers the effect of the Company’s credit standing on the fair value of derivative liabilities and the effect of counterparty credit standing on the fair value of derivative assets. Both inputs to the model are based on published credit default swap rates and the duration of each outstanding derivative position. As of June 30, 2021 and December 31, 2020, the impact of non-performance risk on the fair value of the Company’s net derivative asset position was a decrease of the net liability of $2 million and $1 million, respectively.

The Company has classified its derivative instruments into 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, 2020 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 and put 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. 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. Swaptions are valued using a variant of the Black-Scholes model referred to as the Black Swaption model, which uses its own separate volatility inputs.

The Company’s basis swaps (Level 2) are estimated using third-party calculations based upon forward commodity price curves.

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


	June 30, 2021
	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
Purchased fixed price swaps	$	—	$	3	$	—	$	3
Fixed price swaps	—		1		—		1
Two-way costless collars	—		28		—		28
Three-way costless collars	—		92		—		92
Basis swaps	—		139		—		139
Call options	—		9		—		9
Purchased fixed price swaps – storage	—		1		—		1
Interest rate swaps	—		1		—		1
Liabilities

Fixed price swaps	—		(528)		—		(528)
Two-way costless collars	—		(181)		—		(181)
Three-way costless collars	—		(430)		—		(430)
Basis swaps	—		(27)		—		(27)
Call options	—		(83)		—		(83)

Swaptions	—		(5)		—		(5)
Fixed price swaps – storage	—		(2)		—		(2)

Total (1)	$	—	$	(982)	$	—	$	(982)

(1)Includes a net reduction to the liability fair value of $2 million related to estimated nonperformance risk.


	December 31, 2020
	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
Purchased fixed price swaps	$	—	$	1	$	—	$	1
Fixed price swaps	—		59		—		59
Two-way costless collars	—		74		—		74
Three-way costless collars	—		174		—		174
Basis swaps	—		75		—		75
Call options	—		4		—		4

Liabilities

Fixed price swaps	—		(96)		—		(96)
Two-way costless collars	—		(65)		—		(65)
Three-way costless collars	—		(214)		—		(214)
Basis swaps	—		(10)		—		(10)
Call options	—		(40)		—		(40)
Put options	—		(1)		—		(1)
Swaptions	—		(2)		—		(2)


Total (1)	$	—	$	(41)	$	—	$	(41)

(1)Includes a net reduction to the liability fair value of $1 million related to estimated nonperformance risk.

- 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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