Quarterly report pursuant to Section 13 or 15(d)

Fair Value of Financial Instruments

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Fair Value of Financial Instruments
 9 Months Ended
Sep. 30, 2012
Fair Value of Financial Instruments
10. Fair Value of Financial Instruments

Certain of our assets and liabilities are required to be measured at fair value on a recurring basis. For purposes of recording fair value adjustments for certain financial and non-financial assets and liabilities, and determining fair value disclosures, we estimate fair value at a price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market for the asset or liability.

The fair value measurement and disclosure requirements of FASB Accounting Standards Codification Topic No. 820, Fair Value Measurement and Disclosures (ASC 820) requires inputs that we categorize using a three-level hierarchy, from highest to lowest level of observable inputs, as follows:

 

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Level 1 — Unadjusted quoted prices for identical assets or liabilities in active markets;

 

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Level 2 — Direct or indirect observable inputs, including quoted prices or other market data, for similar assets or liabilities in active markets or identical assets or liabilities in less active markets;

 

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Level 3 — Unobservable inputs that require significant judgment for which there is little or no market data.

When multiple input levels are required for a valuation, we categorize the entire fair value measurement according to the lowest level of input that is significant to the entire measurement even though we may have also utilized significant inputs that are more readily observable.

The amounts reported in our consolidated condensed balance sheets for cash and cash equivalents, accounts receivable, and accounts payable approximate fair value. Fair values and related carrying values of our debt instruments are as follows:

 

      September 30, 2012      December 31, 2011  
     Carrying Amount      Fair Value      Carrying Amount      Fair Value  
     (in thousands)  
Long-term Debt            

9.125% Notes

    $ 300,000       $ 323,250       $ 300,000       $ 315,000   

9.125% Notes

      125,000         134,688         —           —     

2.125% Notes

      —           —           125,000         123,204   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total

    $ 425,000       $ 457,938       $ 425,000       $ 438,204   
  

 

 

     

 

 

     

 

 

     

 

 

  

The carrying amount of our interest rate swap agreements represents the estimated fair value, measured using Level 2 inputs. The carrying amount of our interest rate swap agreements was $0.1 million as of both September 30, 2012 and December 31, 2011. As of September 30, 2012, the carrying amount of the agreements is classified as current and is recorded in accounts payable and accrued liabilities. As of December 31, 2011, the agreements were classified as long-term and recorded in other long-term liabilities on our consolidated condensed balance sheets.

 

As discussed in Note 2, in accordance with the impairment or disposal of long-lived assets subsections of ASC 360-10, Property, Plant and Equipment, during the fourth quarter of 2011, we recorded a non-cash pre-tax impairment charge of $170.0 million ($109.1 million, after tax) related to the AADU rigs in order to record them at their fair value of $169.5 million. The fair value of the AADU rigs was based on expected future cash flows using Level 3 inputs discounted at a 10 percent rate of interest.

Market conditions could cause an instrument to be reclassified from Level 1 to Level 2, or Level 2 to Level 3. There were no transfers between levels of the fair value hierarchy or any changes in the valuation techniques used during the three months ended September 30, 2012.