Fair Value Measurement

9 Months Ended

Sep. 30, 2012

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair Value Measurements

The authoritative guidance for fair value measurements establishes a three-tier fair value hierarchy, which prioritizes the inputs used to measure fair value. These tiers include: Level 1, defined as unadjusted quoted prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for use when little or no market data exists, therefore requiring an entity to develop its own assumptions.

A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company's assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the classification of assets and liabilities within the fair value hierarchy. The Company recognizes transfers between levels at the end of the reporting period for which the transfer has occurred.

The fair value of all derivative instruments is estimated with industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. The fair value of all derivative instruments is estimated using a combined income and market valuation methodology based upon forward commodity price and volatility curves. The curves are obtained from independent pricing services, and the Company has made no adjustments to the obtained prices. The independent pricing services publish observable market information from multiple brokers and exchanges. All valuations were compared against counterparty valuations to verify the reasonableness of prices. The Company also considers counterparty credit risk and its own credit risk in its determination of all estimated fair values. The Company has consistently applied these valuation techniques in all periods presented and believes it has obtained the most accurate information available for the types of derivative contracts it holds.

Assets (Liabilities) Measured at Fair Value on a Recurring Basis

The following table presents information about the Company's financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2012 and December 31, 2011, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair values:

(in millions)	Total			Level 1		Level 2			Level 3
Commodity derivative asset (liability), net
September 30, 2012	$	19.0		$	—	$	19.0		$	—
December 31, 2011	$	(22.7	)	$	—	$	(22.7	)	$	—

Changes in Level 3 Fair Value Measurements

The table below includes a rollforward of the Condensed Balance Sheet amounts (including the change in fair value) for financial instruments classified by the Company within Level 3 of the fair value hierarchy. When a determination is made to classify a financial instrument within Level 3, the determination is based upon the significance of the unobservable factors to the overall fair value measurement. Level 3 financial instruments typically include, in addition to the unobservable or Level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources).

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in millions)	2012		2011		2012		2011
Fair value liability, beginning of period	$	—	$	—	$	—	$	(101.8	)
Transfers out of Level 3(1)	—		—		—		101.8
Realized and unrealized (gain) loss included in earnings	—		—		—		—
Settlements	—		—		—		—
Fair value liability, end of period	$	—	$	—	$	—	$	—
Total unrealized (gain) loss included in earnings related to financial assets and liabilities still on the Condensed Balance Sheets at September 30, 2012 and 2011	$	—	$	—	$	—	$	—

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(1) During the first quarter of 2011, the inputs used to value oil collars, natural gas collars and natural gas basis swaps were directly or indirectly observable, and these instruments were transferred to Level 2.

For further discussion related to the Company's derivatives, see Note 8 to the Condensed Financial Statements.

Fair Market Value of Financial Instruments

The Company uses various assumptions and methods in estimating the fair values of its financial instruments. The following table presents fair value information about the Company's financial instruments:

September 30, 2012	Carrying Amount		Estimated Fair Value
(in millions)			Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	—	$	—	$	—	$	—	$	—
Senior secured revolving credit facility(1)	510		—		510		—		510
10.25% Senior notes due 2014(2)	205		229		—		—		229
6.75% Senior notes due 2020	300		324		—		—		324
6.375% Senior notes due 2022	600		632		—		—		632
	$	1,615	$	1,185	$	510	$	—	$	1,695

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(1) The Company's credit facility can be repaid at any time without penalty. Interest is generally fixed for 30-day increments at the prime rate or LIBOR plus a stipulated margin for the amount utilized and at a stipulated percentage as a commitment fee for the portion not utilized. The carrying amount of the credit facility approximated fair value due to the short-term maturities of the borrowings and because the borrowings bear interest at variable market rates.

(2) Carrying amount does not include unamortized discount of $2.7 million.

December 31, 2011
(in millions)	Carrying Amount		Estimated Fair Value
Senior secured revolving credit facility(1)	$	532	$	532
8.25% Senior subordinated notes due 2016	200		209
10.25% Senior notes due 2014(2)	355		402
6.75% Senior notes due 2020	300		302
	$	1,387	$	1,445

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(1) The Company's credit facility can be repaid at any time without penalty. Interest is generally fixed for 30-day increments at the prime rate or LIBOR plus a stipulated margin for the amount utilized and at a stipulated percentage as a commitment fee for the portion not utilized. The carrying amount of the credit facility approximated fair value due to the short-term maturities of the borrowings and because the borrowings bear interest at variable market rates.

(2) Carrying amount does not include unamortized discount of $6.6 million.