Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2012

Fair Value of Financial Instruments [Abstract]

FAIR VALUE OF FINANCIAL INSTRUMENTS

NOTE 7 — FAIR VALUE OF FINANCIAL INSTRUMENTS

The Partnership has established a hierarchy to measure its financial instruments at fair value which requires it to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs represent market data obtained from independent sources; whereas, unobservable inputs reflect the Partnership's own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort. The hierarchy defines three levels of inputs that may be used to measure fair value:

Level 1– Unadjusted quoted prices in active markets for identical, unrestricted assets and liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.

Level 3 – Unobservable inputs that reflect the entity's own assumptions about the assumptions market participants would use in the pricing of the asset or liability and are consequently not based on market activity but rather through particular valuation techniques.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Partnership uses a market approach fair value methodology to value the assets and liabilities for its outstanding derivative contracts (see Note 6). The Partnership manages and reports the derivative assets and liabilities on the basis of its net exposure to market risks and credit risks by counterparty. The Partnership's commodity derivative contracts are valued based on observable market data related to the change in price of the underlying commodity and are therefore defined as Level 2 assets and liabilities within the same class of nature and risk. These derivative instruments are calculated by utilizing commodity indices quoted prices for futures and options contracts traded on open markets that coincide with the underlying commodity, expiration period, strike price (if applicable) and pricing formula utilized in the derivative instrument.

Information for assets and liabilities measured at fair value at December 31, 2012 and 2011 was as follows:

	Level 1	Level 2	Level 3	Total
As of December 31, 2012
Derivative assets, gross
Commodity swaps	$             —	$       283,700	$             —	$      283,700
Commodity puts	—	192,100	—	192,100
Total derivative assets, gross	—	475,800	—	475,800
Derivative liabilities, gross
Commodity swaps	—	(57,500)	—	(57,500)
Commodity puts	—	—	—	—
Total derivative liabilities, gross	—	(57,500)	—	(57,500)
Total derivatives, fair value, net	$             —	$       418,300	$             —	$      418,300
As of December 31, 2011
Derivative assets, gross
Commodity swaps	$             —	$                   —	$             —	$             —
Commodity puts	—	—	—	—
Total derivative assets, gross	—	—	—	—
Derivative liabilities, gross
Commodity swaps	—	—	—	—
Commodity puts	—	—	—	—
Total derivative liabilities, gross	—	—	—	—
Total derivatives, fair value, net	$             —	$                   —	$             —	$             —

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

The Partnership's other current assets and liabilities on its consolidated combined balance sheets are considered to be financial instruments. The estimated fair values of these instruments approximate their carrying amounts due to their short-term nature and thus are categorized as Level 1. 

The Partnership estimates the fair value of its asset retirement obligations based on discounted cash flow projections using numerous estimates, assumptions and judgments regarding such factors at the date of establishment of an asset retirement obligation such as: amounts and timing of settlements, the credit-adjusted risk-free rate of the Partnership and estimated inflation rates. Information for assets and liabilities that were measured at fair value on a nonrecurring basis for the years ended December 31, 2012 and 2011 were as follows:

	Years Ended December 31,
	2012		2011
	Level 3	Total	Level 3	Total
Asset retirement obligations	$   600	$   600	$118,100	$118,100

The Partnership estimates the fair value of its long-lived assets in conjunction with the review of asset for impairment or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, using estimates, assumptions, and judgments regarding such events or circumstances. For the years ended December 31, 2012 and 2011, the Partnership recognized $50,034,100 and $3,339,200 impairment of long-lived assets which were defined as Level 3 fair value measurements, respectively, (see Note 2 – Impairment of Long-Lived Assets).