Fair Value Measurements

9 Months Ended

Sep. 30, 2011

Fair Value Measurements [Abstract]

Fair Value Measurements

8. Fair Value Measurements

     FASB ASC Topic 820-10, Fair Value Measurements and Disclosures (“ASC Topic 820-10”) defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosures about fair value measurements; however, it does not require any new fair value measurements, rather, its application is made pursuant to other accounting pronouncements that require or permit fair value measurements.

     Fair value measurements are generally based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s view of market assumptions in the absence of observable market information. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. ASC Topic 820-10 includes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy consists of the following three levels:

Level 1	—	Inputs are quoted prices in active markets for identical assets or liabilities.
Level 2	—	Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.
Level 3	—	Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

     As of September 30, 2011 the fair value of the warrants issued by Discovery Offshore was $2.0 million. The fair value of the warrants was determined using a Monte Carlo simulation based on the following assumptions:

	September 30,
	2011
Strike Price (NOK)		11.50
Target Price (NOK)		23.00
Stock Value (NOK)		8.75
Expected Volatility (%)		50.0	%
Risk-Free Interest Rate (%)		0.96	%
Expected Life of Warrants (years)		5.0
Number of Warrants		5,000,000

     The Company used the historical volatility of companies similar to that of Discovery Offshore to estimate volatility. The risk-free interest rate assumption was based on observed interest rates consistent with the approximate life of the warrants. The stock price represents the closing stock price of Discovery Offshore stock at September 30, 2011. The strike price, target price, expected life and number of warrants are all contractual based on the terms of the warrant agreement.

     The following table represents the Company’s derivative asset measured at fair value on a recurring basis as of September 30, 2011 (in thousands):

			Quoted Prices in
	Total		Active Markets for
	Fair Value		Identical Asset or		Significant Other		Significant
	Measurement		Liability		Observable Inputs		Unobservable Inputs
	September 30, 2011		(Level 1)		(Level 2)		(Level 3)
Warrants	$	1,980	$	—	$	1,980	$	—

     There were no derivative assets or liabilities outstanding at December 31, 2010.

     The following table represents the Company’s assets measured at fair value on a non-recurring basis for which an impairment measurement was made as of December 31, 2010 (in thousands):

	Total		Quoted Prices in		Significant
	Fair Value		Active Markets for		Other		Significant
	Measurement		Identical Asset or		Observable		Unobservable
	December 31,		Liability		Inputs		Inputs		Total
	2010		(Level 1)		(Level 2)		(Level 3)		Gain (Loss)
Property and Equipment, Net	$	27,848	$	—	$	—	$	27,848	$	(125,136	)

     The Company incurred $125.1 million ($81.3 million, net of tax) in impairment of property and equipment charges related to certain of its assets of which $2.4 million ($1.5 million, net of tax) related to the discontinued operations of its Delta Towing segment. The property and equipment was valued based on the discounted cash flows associated with the assets which included management’s estimate of sales proceeds less costs to sell.

     The carrying value and fair value of the Company’s equity investment in Discovery Offshore was $34.9 million and $27.4 million at September 30, 2011, respectively. The fair value was calculated using the closing price of Discovery Offshore shares converted to U.S. dollars using the exchange rate at September 30, 2011.

Fair Value of Financial Instruments

     The carrying amounts of the Company’s financial instruments, which include cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities, approximate fair values because of the short-term nature of the instruments.

     The fair value of the Company’s 3.375% Convertible Senior Notes, 10.5% Senior Secured Notes and term loan facility is estimated based on quoted prices in active markets. The fair value of the Company’s 7.375% Senior Notes is estimated based on discounted cash flows using inputs from quoted prices in active markets for similar debt instruments. The following table provides the carrying value and fair value of the Company’s long-term debt instruments:

	September 30, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
			(in millions)
Term Loan Facility, due July 2013	$	456.5	$	436.8	$	475.2	$	443.7
10.5% Senior Secured Notes, due October 2017		293.5		287.8		292.9		245.1
3.375% Convertible Senior Notes, due June 2038		89.2		81.5		86.5		69.1
7.375% Senior Notes, due April 2018		3.5		2.9		3.5		2.2