Fair Value Measurement

6 Months Ended

Jun. 30, 2013

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 June 30, 2013 and December 31, 2012, 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, net
June 30, 2013	$	53.2	$	—	$	53.2	$	—
December 31, 2012	$	23.2	$	—	$	23.2	$	—

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:



June 30, 2013	Carrying Amount		Estimated Fair Value
(in millions)			Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	9	$	9	$	—	$	—	$	9
Senior secured revolving credit facility(1)	646		—		646		—		646
10.25% Senior notes due 2014(2)	205		221		—		—		221
6.75% Senior notes due 2020	300		311		—		—		311
6.375% Senior notes due 2022	600		599		—		—		599
	$	1,760	$	1,140	$	646	$	—	$	1,786

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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 $1.6 million.



December 31, 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)	563		—		563		—		563
10.25% Senior notes due 2014(2)	205		229		—		—		229
6.75% Senior notes due 2020	300		323		—		—		323
6.375% Senior notes due 2022	600		627		—		—		627
	$	1,668	$	1,179	$	563	$	—	$	1,742

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(1)


(2)	Carrying amount does not include unamortized discount of $2.3 million.

- 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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