Fair Value Measurements

9 Months Ended

Sep. 30, 2012

Fair Value Measurements

Note 7 – 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, 2012 and December 31, 2011, we held certain financial assets and liabilities that are required to be measured at fair value on a recurring basis, including our commodity derivative instruments and our investments in money market funds and fixed income securities. We utilize the services of an independent third party to assist us in valuing our derivative instruments. We used the income approach in determining the fair value of our derivative instruments utilizing a 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. For a more detailed description of our derivative instruments see Note 3 – Derivative Instruments and Hedging Activities. We used the market approach in determining the fair value of our investments in money market funds and fixed income 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, 2012:

	Fair Value Measurements at September 30, 2012
Assets	Total			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	(in millions)
Fixed income securities	$	6.0		$	6.0	$	—		$	—
Hedging contracts		52.2			—		52.2			—
Total	$	58.2		$	6.0	$	52.2		$	—
	Fair Value Measurements at September 30, 2012
Liabilities	Total			Quoted Prices in Active Markets for Identical Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	(in millions)
Hedging contracts	($	3.3	)	$	—	($	3.3	)	$	—
Total	($	3.3	)	$	—	($	3.3	)	$	—

The following tables present our assets and liabilities that are measured at fair value on a recurring basis at December 31, 2011:

	Fair Value Measurements at December 31, 2011
Assets	Total			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	(in millions)
Money market funds	$	5.6		$	5.6	$	—		$	—
Hedging contracts		47.7			—		47.7			—
Total	$	53.3		$	5.6	$	47.7		$	—
	Fair Value Measurements at December 31, 2011
Liabilities	Total			Quoted Prices in Active Markets for Identical Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	(in millions)
Hedging contracts	($	11.9	)	$	—	($	11.9	)	$	—
Total	($	11.9	)	$	—	($	11.9	)	$	—

The fair value of cash and cash equivalents and our variable rate bank debt approximated book value at September 30, 2012 and December 31, 2011. As of September 30, 2012 and December 31, 2011, the fair value of our $375 million 8 ⁵/₈% Senior Notes due 2017 was approximately $403.1 million and $386.3 million, respectively. As of September 30, 2012 and December 31, 2011, the fair value of our $200 million 6 ³/₄% Senior Subordinated Notes due 2014 was approximately $200.8 million and $199.0 million, respectively. As of September 30, 2012, the fair value of the liability component of our 2017 Convertible Notes was approximately $247.9 million. The fair value of our outstanding notes was determined based upon quotes obtained from brokers, which represent Level 2 inputs.

We applied fair value concepts in determining the liability component of our 2017 Convertible Notes (see Note 4 – Long-Term Debt) at inception and at September 30, 2012. The significant inputs in these determinations were market interest rates based on quotes obtained from brokers and represent Level 2 inputs.

We applied fair value concepts in the recording of deep water assets acquired from APC (see Note 6 – Acquisitions). The fair value of proved and unevaluated oil and gas properties was estimated using a market approach. Significant inputs were market value comparisons for similar transactions within an appropriate time period. These inputs were considered Level 3 inputs. Asset retirement obligations were determined in accordance with applicable accounting standards.