Annual report pursuant to Section 13 and 15(d)

Fair Value Measurements

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Fair Value Measurements
 12 Months Ended
Dec. 31, 2011
Fair Value Measurements [Abstract]  
Fair Value Measurements

8. Fair Value Measurements

Under the Fair Value Measurements and Disclosures topic of the Codification, fair value is defined as 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. The fair value of an asset should reflect its highest and best use by market participants, whether using an in-use or an in-exchange valuation premise. The fair value of a liability should reflect the risk of nonperformance, which includes, among other things, the Company's credit risk.

Valuation techniques are generally classified into three categories: the market approach; the income approach; and the cost approach. The selection and application of one or more of these techniques requires significant judgment and is primarily dependent upon the characteristics of the asset or liability, the principal (or most advantageous) market in which participants would transact for the asset or liability and the quality and availability of inputs. Inputs to valuation techniques are classified as either observable or unobservable within the following hierarchy:

 

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Level 1 – quoted prices in active markets for identical assets or liabilities.

 

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Level 2 – inputs other than quoted prices that are observable for an asset or liability. These include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated inputs).

 

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Level 3 – unobservable inputs that reflect the Company's own expectations about the assumptions that market participants would use in measuring the fair value of an asset or liability.

 

The following table presents the fair value of our derivatives financial instruments and our Senior Notes (in thousands).

 

            December 31,  
            2011      2010  
     Hierarchy      Assets      Liabilities      Assets      Liabilities  

Derivatives

      Level 2       $ 4,087       $ 7,199       $ —         $ 14,882   

Senior Notes

      Level 2         —           612,000         —           441,000   

Revolving bank credit facility

      Level 2         —           117,000         —           —     

Derivatives are reported in the statement of financial position at fair value. The Senior Notes are reported in the statement of financial position at their carrying value which was $600.0 million and $450.0 million at December 31, 2011 and 2010, respectively. The revolving bank credit facility debt is reported in the statement of financial position at its carrying value which was $117.0 million and nil at December 31, 2011 and 2010, respectively.

We measure the fair value of our derivative financial instruments by applying the income approach and using inputs that are classified within Level 2 of the valuation hierarchy. The inputs used for our derivative financial instruments fair value measurement are the exercise price, the expiration date, the settlement date, notional quantities, the implied volatility, the discount curve with spreads and published commodity futures prices. The fair value of our Senior Notes is based on quoted prices and the market is not an active market; therefore, the fair value is classified within Level 2. The carrying amount of debt under our revolving bank credit facility approximates fair value because the interest rates are variable and reflective of market rates. For additional information about our derivative financial instruments refer to Note 6 and for additional information on our Senior Notes and revolving bank credit facility refer to Note 7.