FAIR VALUE MEASUREMENTS

U.S. Generally Accepted Accounting Principles establish a fair value hierarchy that has three levels based on the reliability of the inputs used to determine the fair value. These levels include: Level 1, defined as inputs such 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.

As of September 30, 2017 (Successor) and December 31, 2016 (Predecessor), we held certain financial assets that are required to be measured at fair value on a recurring basis, including our commodity derivative instruments and our investments in marketable securities. We utilize the services of an independent third party to assist us in valuing our derivative instruments. The income approach is used in this determination utilizing the third party’s proprietary pricing model. The model accounts for our credit risk and the credit risk of our counterparties in the discount rate applied to estimated future cash inflows and outflows. Our swap contracts are included within the Level 2 fair value hierarchy, and our collar and put contracts are included within the Level 3 fair value hierarchy. Significant unobservable inputs used in establishing fair value for the collars and puts were the volatility impacts in the pricing model as it relates to the call portion of the collar and the floor of the put. For a more detailed description of our derivative instruments, see Note 9 – Derivative Instruments and Hedging Activities. We used the market approach in determining the fair value of our investments in marketable securities, which are included within the Level 1 fair value hierarchy.

The following tables present our assets and liabilities that are measured at fair value on a recurring basis at September 30, 2017 (Successor) (in millions).



	Fair Value Measurements
	Successor as of
	September 30, 2017
Assets	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Marketable securities (Other assets)	$	9.3	$	9.3	$	—	$	—
Derivative contracts	3.6		—		0.5		3.1
Total	$	12.9	$	9.3	$	0.5	$	3.1



	Fair Value Measurements at
	Successor as of
	September 30, 2017
Liabilities	Total		Quoted Prices in Active Markets for Identical Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Derivative contracts	$	0.5	$	—	$	0.1	$	0.4
Total	$	0.5	$	—	$	0.1	$	0.4

We had no liabilities measured at fair value on a recurring basis at December 31, 2016 (Predecessor). The following table presents our assets that are measured at fair value on a recurring basis at December 31, 2016 (Predecessor) (in millions).



	Fair Value Measurements
	Predecessor as of
	December 31, 2016
Assets	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Marketable securities (Other assets)	$	8.7	$	8.7	$	—	$	—
Total	$	8.7	$	8.7	$	—	$	—

The table below presents a reconciliation for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the period from March 1, 2017 through September 30, 2017 (Successor) and the period from January 1, 2017 through February 28, 2017 (Predecessor) (in millions).



	Hedging Contracts, net
Balance as of January 1, 2017 (Predecessor)	$	—
Total gains/(losses) (realized or unrealized):
Included in earnings	(0.6		)
Included in other comprehensive income	—
Purchases, sales, issuances and settlements	3.7
Transfers in and out of Level 3	—
Balance as of February 28, 2017 (Successor)	3.1
Total gains/(losses) (realized or unrealized):
Included in earnings	(1.3		)
Included in other comprehensive income	—
Purchases, sales, issuances and settlements	1.0
Transfers in and out of Level 3	—
Balance as of September 30, 2017 (Successor)	$	2.8
The amount of total gains/(losses) for the period included in earnings (derivative income) attributable to the change in unrealized gain/(losses) relating to derivatives still held at September 30, 2017	$	(1.7	)

The fair value of cash and cash equivalents approximated book value at September 30, 2017 and December 31, 2016. Upon emergence from bankruptcy on February 28, 2017, the 2017 Convertible Notes and 2022 Notes were cancelled, and the Company issued the 2022 Second Lien Notes. As of December 31, 2016, the fair value of the liability component of the 2017 Convertible Notes was approximately $293.5 million. As of December 31, 2016, the fair value of the 2022 Notes was approximately $465.0 million. As of September 30, 2017, the fair value of the 2022 Second Lien Notes was approximately $220.5 million.

The fair values of the 2022 Notes and the 2022 Second Lien Notes were determined based on quotes obtained from brokers, which represent Level 1 inputs. We applied fair value concepts in determining the liability component of the 2017 Convertible Notes at inception and December 31, 2016. The fair value of the liability was estimated using an income approach. The significant inputs in these determinations were market interest rates based on quotes obtained from brokers and represent Level 2 inputs.

On February 28, 2017, the Company emerged from bankruptcy and adopted fresh start accounting, which resulted in the Company becoming a new entity for financial reporting purposes. Upon the adoption of fresh start accounting, the Company’s assets and liabilities were recorded at their fair values as of the fresh start reporting date, February 28, 2017. See Note 3 – Fresh Start Accounting for a detailed discussion of the fair value approaches used by the Company. The inputs utilized in the valuation of our most significant asset, our oil and gas properties, included mostly unobservable inputs, which fall within Level 3 of the fair value hierarchy.