Table of Contents Index to Financial Statements commodity prices and a weighted average cost of capital rate. The market-based weighted average cost of capital rate is subjected to additional project-specific risking factors. In addition, when appropriate, we review comparable purchases and sales of natural gas and oil properties within the same regions, and use that data as a proxy for fair market value; for example, the amount a willing buyer and seller would enter into in exchange for such properties. Any excess of the acquisition price over the estimated fair value of net assets acquired is recorded as goodwill. Any excess of the estimated fair value of net assets acquired over the acquisition price is recorded in current earnings as a gain on bargain purchase. Deferred taxes are recorded for any differences between the assigned values and the tax basis of assets and liabilities. The Merger with Montage qualified as a business combination, and as such, we estimated the fair value of the assets acquired and liabilities assumed as of the November 13, 2020 acquisition date. The fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). Fair value measurements also utilize assumptions of market participants. We used a discounted cash flow model and made market assumptions as to future commodity prices, projections of estimated quantities of natural gas and oil reserves, expectations for timing and amount of future development and operating costs, projections of future rates of production, expected recovery rates and risk adjusted discount rates. These assumptions represent Level 3 inputs, as defined in  Note 8  – Fair Value Measurements. We recorded the net assets acquired and liabilities assumed in the Montage Merger at their estimated fair value of approximately $213 million, which we consider to be representative of the price paid by a typical market participant. This measurement resulted in no goodwill or bargain purchase being recognized. We use fixed price swap agreements and options to reduce the volatility of earnings and cash flow due to fluctuations in the prices of certain commodities and interest rates. Our policies prohibit speculation with derivatives and limit agreements to counterparties with appropriate credit standings to minimize the risk of uncollectability. We actively monitor the credit status of our counterparties based on their credit ratings and credit default swap rates where applicable, and to date have not had any credit defaults associated with our transactions. In 2020 and 2019, we financially protected 83% and 69%, respectively, of our total production with derivatives. The primary risks related to our derivative contracts are the volatility in market prices and basis differentials for our production. However, the market price risk is generally offset by the gain or loss recognized upon the related transaction that is financially protected. All derivatives are recognized in the balance sheet as either an asset or a liability as measured at fair value other than transactions for which the normal purchase/normal sale exception is applied. Certain criteria must be satisfied for derivative financial instruments to be designated for hedge accounting. Accounting guidance for qualifying hedges allows an unsettled derivative’s unrealized gains and losses to be recorded in either earnings or as a component of other comprehensive income until settled. In the period of settlement, we recognize the gains and losses from these qualifying hedges in gas sales revenues. The ineffective portion of those fixed price swaps are recognized in earnings. Gains and losses on derivatives that are not designated for hedge accounting treatment, or that do not meet hedge accounting requirements, are recorded as a component of gain (loss) on derivatives on the consolidated statements of operations. Accordingly, the gain (loss) on derivatives component of the statement of operations reflects the gains and losses on both settled and unsettled derivatives. We calculate gains and losses on settled derivatives as the summation of gains and losses on positions which have settled within the reporting period. As of December 31, 2020, none of our derivative contracts were designated for hedge accounting treatment. Changes in the fair value of unsettled derivatives that were not designated for hedge accounting treatment are recorded in gain (loss) on derivatives. See  Note 6 to the consolidated financial statements included in this Annual Report for more information on our derivative position at December 31, 2020. Future market price volatility could create significant changes to the derivative positions recorded in our consolidated financial statements. We refer you to “ Quantitative and Qualitative Disclosures about Market Risk ” in Item 7A of Part II of this Annual Report for additional information regarding our hedging activities. We record our prepaid or accrued benefit cost, as well as our periodic benefit cost, for our pension and other postretirement benefit plans using measurement assumptions that we consider reasonable at the time of calculation (see  Note 13  to the consolidated financial statements included in this Annual Report for further discussion and disclosures regarding these benefit plans). Two of the assumptions that affect the amounts recorded are the discount rate, which estimates the rate at which benefits could be effectively settled, and the expected return on plan assets, which reflects the average rate of earnings expected on the funds invested. For the December 31, 2020 benefit obligation the initial discount rate assumed is 3.10%. This compares to an initial discount rate of 3.70% for the benefit obligation and periodic benefit cost recorded in 2020. As part of ongoing effort to reduce costs, we have elected to freeze our pension plan effective January 1, 2021. Employees that were participants in the Derivatives and Risk Management Pension and Other Postretirement Benefits 67