8. Fair Value

Fair Value Measurement

Fair value measurements and disclosures relate primarily to the Partnership's derivative positions as discussed in Note 7.

Money market funds are measured at fair value and are included in Level 1 measurements of the valuation hierarchy. The derivative contracts are measured at fair value on a recurring basis and classified within Level 2 and Level 3 of the valuation hierarchy. The Level 2 and Level 3 measurements are obtained using a market approach. LIBOR rates are an observable input for the measurement of all derivative contracts. The measurements for all commodity contracts contain observable inputs in the form of forward prices based on WTI crude oil prices; Columbia Appalachia, Henry Hub, PEPL and Houston Ship Channel natural gas prices. Level 2 instruments include crude oil and natural gas swap contracts. The valuations are based on the appropriate commodity prices and contain no significant unobservable inputs. Level 3 instruments include crude oil options, all NGL transactions and embedded derivatives in commodity contracts. The significant unobservable inputs for crude oil options, NGL transactions and embedded derivatives in commodity contracts include option volatilities and NGL prices interpolated and extrapolated due to inactive markets, electricity price curves, and probability of renewal. The following table presents the financial instruments carried at fair value as of December 31, 2013 and 2012 and by the valuation hierarchy (in thousands):

As of December 31, 2013	Assets		Liabilities

Significant other observable inputs (Level 2)
Commodity contracts	$	544	$	(4,691	)
Significant unobservable inputs (Level 3)
Commodity contracts		8,142		(13,602	)
Embedded derivatives in commodity contracts		3,276		(38,308	)


Total carrying value in Consolidated Balance Sheet	$	11,962	$	(56,601	)

As of December 31, 2012	Assets		Liabilities

Significant other observable inputs (Level 2)
Commodity contracts	$	8,441	$	(15,970	)
Significant unobservable inputs (Level 3)
Commodity contracts		15,795		(3,346	)
Embedded derivatives in commodity contracts		6,146		(40,103	)


Total carrying value in Consolidated Balance Sheet	$	30,382	$	(59,419	)

The following table provides additional information about the significant unobservable inputs used in the valuation of Level 3 instruments as of December 31, 2013. The market approach is used for valuation of all instruments.

Level 3 Instrument	Balance Sheet Classification	Unobservable Inputs	Value Range	Time Period

Commodity contracts	Assets	Forward propane prices (per gallon)(1)	$1.07 - $1.26	Jan. 2014 - Dec. 2014
		Forward isobutane prices (per gallon)(1)	$1.32 - $1.40	Jan. 2014 - Dec. 2014
		Forward normal butane prices (per gallon)(1)	$1.26 - $1.36	Jan. 2014 - Dec. 2014
		Forward natural gasoline prices (per gallon)(1)	$2.02 - $2.13	Jan. 2014 - Dec. 2014
		Crude option volatilities (%)	10.43% - 19.76%	Jan. 2014 - Dec. 2014
	Liabilities	Forward propane prices (per gallon)(1)	$1.07 - $1.26	Jan. 2014 - Dec. 2014
		Forward isobutane prices (per gallon)(1)	$1.32 - $1.40	Jan. 2014 - Dec. 2014
		Forward normal butane prices (per gallon)(1)	$1.26 - $1.36	Jan. 2014 - Dec. 2014
		Forward natural gasoline prices (per gallon)(1)	$2.02 - $2.13	Jan. 2014 - Dec. 2014
		Crude option volatilities (%)	8.92% - 21.29%	Jan. 2014 - Jul. 2014
Embedded derivatives in commodity contracts	Asset	ERCOT Pricing (per Megawatt Hour)(2)	$33.98 - $62.96	Jan. 2014 - Dec. 2014
	Liability	Forward propane prices (per gallon)(1)	$0.91 - $1.26	Jan. 2014 - Dec. 2022
		Forward isobutane prices (per gallon)(1)	$1.27 - $1.40	Jan. 2014 - Dec. 2022
		Forward normal butane prices (per gallon)(1)	$1.19 - $1.36	Jan. 2014 - Dec. 2022
		Forward natural gasoline prices (per gallon)(1)	$1.82 - $2.13	Jan. 2014 - Dec. 2022
		Forward natural gas prices (per MMBtu)(3)	$3.50 - $4.59	Jan. 2014 - Dec. 2022
		Probability of renewal(4)	0%

(1): NGL prices decrease over the respective periods.
(2): The forward ERCOT prices utilized in the valuations are generally flat at the low end of the range with a seasonal spike in pricing in the summer months.
(3): Natural gas prices used in the valuations are generally at the lower end of the range in the early years and increase over time.
(4): The producer counterparty to the embedded derivative has the option to renew the gas purchase agreement and the related keep-whole processing agreement for two successive five-year terms after 2022. The embedded gas purchase agreement cannot be renewed without the renewal of the related keep-whole processing agreement. Due to the significant number of years until the renewal options are exercisable and the high level of uncertainty regarding the counterparty's future business strategy, the future commodity price environment, and the future competitive environment for midstream services in the Appalachia area, management determined that a 0% probability of renewal is an appropriate assumption.

Fair Value Sensitivity Related to Unobservable Inputs

Commodity contracts (assets and liabilities)—For the Partnership's commodity contracts, increases in forward NGL prices result in a decrease in the fair value of the derivative assets and an increase in the fair value of the derivative liabilities. The forward prices for the individual NGL products generally increase or decrease in a positive correlation with one another. An increase in crude option volatilities will generally result in an increase in the fair value of the Partnership's derivative assets and derivative liabilities in commodity contracts.

Embedded derivative in commodity contracts (liability)—The embedded derivative liability relates to the natural gas purchase agreement embedded in a keep-whole processing agreement as discussed further in Note 7. Increases (decreases) in forward NGL prices result in an increase (decrease) in the fair value of the embedded derivative liability. An increase in the probability of renewal would result in an increase in the fair value of the related embedded derivative liability.

Embedded derivative in commodity contracts (asset)—The embedded derivative asset relates to utilities costs discussed further in Note 7. Increases in the forward ERCOT prices, relative to natural gas prices, result in an increase in the fair value of the embedded derivative asset.

Level 3 Valuation Process

The Partnership's Risk Management Department (the "Risk Department") is responsible for the valuation of the Partnership's commodity derivative contracts and embedded derivatives in commodity contracts. The Risk Department reports to the Chief Financial Officer and is responsible for the oversight of the Partnership's commodity risk management program. The members of the Risk Department have the requisite experience, knowledge and day-to-day involvement in the energy commodity markets to ensure appropriate valuations and understand the changes in the valuations from period to period. The valuations of the Level 3 commodity derivative contracts are performed by a third-party pricing service and reviewed and validated on a quarterly basis by the Risk Department by comparing the pricing and option volatilities to actual market data and/or data provided by at least one other independent third-party pricing service. The valuations for the embedded derivatives in commodity contracts are completed by the Risk Department utilizing the market data and price curves provided by the third-party pricing service. For the embedded derivative in the keep-whole processing arrangement discussed in Note 7, the Risk Department must develop forward price curves for NGLs and natural gas for periods in which price curves are not available from third-party pricing services due to insufficient market data. As of December 31, 2013, the Risk Department utilized internally developed price curves for the period of January 2016 through December 2022 in the valuation of the embedded derivative in the keep-whole processing arrangement. In developing the pricing curves for these periods, the Risk Department maximizes its use of the latest known market data and trends as well as its understanding of the historical relationships between forward NGL and natural gas prices and the forward market data that is available for the required period, such as crude oil pricing and natural gas pricing from other markets. However, there is very limited actual market data available to validate the Risk Department's estimated price curves.

Changes in Level 3 Fair Value Measurements

The tables below include a roll forward of the balance sheet amounts for the years ended December 31, 2013 and 2012 (including the change in fair value) for assets and liabilities classified by the Partnership within Level 3 of the valuation hierarchy (in thousands):

	Year Ended December 31, 2013

	Commodity Derivative Contracts (net)			Embedded Derivatives in Commodity Contracts (net)
Fair value at beginning of period	$	12,449		$	(33,957	)
Total loss (realized and unrealized) included in earnings(1)		(19,157	)		(10,336	)
Settlements		1,248			9,261


Fair value at end of period	$	(5,460	)	$	(35,032	)




The amount of total losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at end of period	$	(13,040	)	$	(8,559	)

	Year Ended December 31, 2012

	Commodity Derivative Contracts (net)			Embedded Derivatives in Commodity Contracts (net)
Fair value at beginning of period	$	(2,965	)	$	(53,904	)
Total gain (realized and unrealized) included in earnings(1)		17,153			9,199
Settlements		(1,739	)		10,748


Fair value at end of period	$	12,449		$	(33,957	)




The amount of total gains for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at end of period	$	8,213		$	8,175

(1): Gains and losses on Commodity Derivative Contracts classified as Level 3 are recorded in Derivative (loss) gain—revenue in the accompanying Consolidated Statements of Operations. Gains and losses on Embedded Derivatives in Commodity Contracts are recorded in Purchased product costs, Derivative (gain) loss related to purchased product costs and Derivative loss (gain) related to facility expenses.