8. FAIR VALUE MEASUREMENTS

The Company follows the authoritative guidance for measuring fair value of assets and liabilities in its financial statements. The authoritative guidance also established a formal fair value hierarchy based on the inputs used to measure fair value. The hierarchy gives the highest priority to Level 1 measurements and the lowest priority to Level 3 measurements. The Company has classified its assets and liabilities into these levels depending upon the data relied on to determine the fair values. For further information regarding the fair value hierarchy, refer to Note 14 of the Notes to the Consolidated Financial Statements in the Form 10-K.

Non-Financial Assets and Liabilities

The Company discloses or recognizes its non-financial assets and liabilities, such as impairments of long-lived assets, at fair value on a nonrecurring basis. As none of the Company’s non-financial assets and liabilities were impaired as of June 30, 2013 and 2012 and no other assets or liabilities were required to be measured at fair value on a non-recurring basis, additional disclosures are not provided.

The estimated fair value of the Company’s asset retirement obligation at inception is determined by utilizing the income approach by applying a credit-adjusted risk-free rate, which takes into account the Company’s credit risk, the time value of money, and the current economic state, to the undiscounted expected abandonment cash flows. Given the unobservable nature of the inputs, the measurement of the asset retirement obligation is deemed to use Level 3 inputs.

Financial Assets and Liabilities

The following fair value hierarchy table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis:

(In thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		June 30, 2013
Assets
Deferred compensation plan	$	11,416	$	—	$	—	$	11,416
Derivative instruments	—		3,729		83,878		87,607
Total assets	$	11,416	$	3,729	$	83,878	$	99,023

Liabilities
Deferred compensation plan	$	30,385	$	—	$	—	$	30,385
Derivative instruments	—		—		—		—

Total liabilities	$	30,385	$	—	$	—	$	30,385

(In thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		December 31, 2012
Assets
Deferred compensation plan	$	10,608	$	—	$	—	$	10,608
Derivative instruments	—		9,473		41,351		50,824

Total assets	$	10,608	$	9,473	$	41,351	$	61,432

Liabilities
Deferred compensation plan	$	23,893	$	—	$	—	$	23,893
Derivative instruments	—		—		192		192

Total liabilities	$	23,893	$	—	$	192	$	24,085

The Company’s investments associated with its deferred compensation plan consist of mutual funds and deferred shares of the Company’s common stock that are publicly traded and for which market prices are readily available.

The derivative instruments were measured based on quotes from the Company’s counterparties. Such quotes have been derived using an income approach that considers various inputs including current market and contractual prices for the underlying instruments, quoted forward prices for natural gas and crude oil, basis differentials, volatility factors and interest rates, such as a LIBOR curve for a similar length of time as the derivative contract term as applicable. Estimates are verified using relevant NYMEX futures contracts and compares them to multiple quotes obtained from counterparties for reasonableness. The determination of the fair values presented above also incorporates a credit adjustment for nonperformance risk. The Company measured the nonperformance risk of its counterparties by reviewing credit default swap spreads for the various financial institutions in which it has derivative transactions, while nonperformance risk of the Company is evaluated using a market credit spread provided by the Company’s bank.

The significant unobservable inputs for Level 3 derivative contracts include basis differentials and volatility factors. An increase (decrease) in these unobservable inputs would result in an increase (decrease) in fair value, respectively. The Company does not have access to the specific assumptions used in its counterparties’ valuation models. Consequently, additional disclosures regarding significant Level 3 unobservable inputs were not provided.

The following table sets forth a reconciliation of changes in the fair value of financial assets and liabilities classified as Level 3 in the fair value hierarchy:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(In thousands)	2013			2012			2013			2012
Balance at beginning of period	$	(29,899	)	$	218,942		$	41,159		$	195,127
Total gains / (losses) (realized or unrealized):
Included in earnings (1)	(272		)	69,390			13,056			126,428
Included in other comprehensive income	113,777			(90,234		)	42,719			(67,541		)
Settlements	272			(68,885		)	(13,056		)	(125,186		)
Transfers in and/or out of level 3	—			—			—			385
Balance at end of period	$	83,878		$	129,213		$	83,878		$	129,213

(1) There were no unrealized gains or losses for the three and six months ended June 30, 2013. Unrealized losses of $0.3 million for the three and six months ended June 30, 2012, respectively, were included in natural gas revenues in the Condensed Consolidated Statement of Operations.

There were no transfers between Level 1 and Level 2 measurements for the three and six months ended June 30, 2013 and 2012.

Fair Value of Other Financial Instruments

The estimated fair value of financial instruments is the amount at which the instrument could be exchanged currently between willing parties. The carrying amounts reported in the Condensed Consolidated Balance Sheet for cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturities of these instruments.

The fair value of long-term debt is the estimated amount the Company would have to pay a third party to assume the debt, including a credit spread for the difference between the issue rate and the period end market rate. The credit spread is the Company’s default or repayment risk. The credit spread (premium or discount) is determined by comparing the Company’s fixed-rate notes and credit facility to new issuances (secured and unsecured) and secondary trades of similar size and credit statistics for both public and private debt. The fair value of all fixed-rate notes and the credit facility is based on interest rates currently available to the Company. The Company’s long-term debt is valued using an income approach and classified as Level 3 in the fair value hierarchy due to the unobservable nature of the inputs.

The Company uses available market data and valuation methodologies to estimate the fair value of debt. The carrying amounts and fair values of long-term debt are as follows:

	June 30, 2013						December 31, 2012
(In thousands)	Carrying Amount			Estimated Fair Value			Carrying Amount			Estimated Fair Value
Total debt	$	1,142,000		$	1,235,176		$	1,087,000		$	1,213,474
Current maturities	(75,000		)	(75,301		)	(75,000		)	(77,175		)
Long-term debt, excluding current maturities	$	1,067,000		$	1,159,875		$	1,012,000		$	1,136,299