Fair Value

3 Months Ended

Mar. 31, 2013

Fair Value

Fair Value

5. Fair Value

Fair value measurements and disclosures relate primarily to the Partnership’s derivative positions discussed in Note 4. The following table presents the derivative instruments carried at fair value as of March 31, 2013 and December 31, 2012 (in thousands):

As of March 31, 2013	Assets		Liabilities
Significant other observable inputs (Level 2)
Commodity contracts	$	5,548	$	(13,147	)
Significant unobservable inputs (Level 3)
Commodity contracts	14,969		(2,492		)
Embedded derivatives in commodity contracts	6,478		(31,359		)
Total carrying value in Condensed Consolidated Balance Sheet	$	26,995	$	(46,998	)

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 Condensed 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 March 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)	$	0.93		—	$	0.99		Oct. 2013 - Dec. 2014
		Forward isobutane prices (per gallon)	$	1.49		—	$	1.54		Apr. 2013 - Dec. 2014
		Forward normal butane prices (per gallon)	$	1.30		—	$	1.46		Apr. 2013 - Dec. 2014
		Forward natural gasoline prices (per gallon)	$	1.90		—	$	2.15		Apr. 2013 - Dec. 2014
		Crude option volatilities (%)	12.11		%	—	20.78		%	Apr. 2013 - Dec. 2014
	Liabilities	Forward propane prices (per gallon)	$	0.95		—	$	0.99		Apr. 2013 - Dec. 2013
		Forward natural gasoline prices (per gallon)	$	2.04		—	$	2.15		Apr. 2013 - Dec. 2013
		Propane option volatilities	10.56		%	—	22.69		%	Apr. 2013 - Dec. 2013
		Crude option volatilities (%)	10.24		%	—	22.34		%	Apr. 2013 - Jan. 2014
Embedded derivatives in commodity contracts	Asset	ERCOT Pricing (per MegaWatt Hour) (1)	$	31.33		—	$	72.19		Apr. 2013 - Dec. 2014
	Liability	Forward propane prices (per gallon)	$	0.92		—	$	0.99		Apr. 2013 - Dec. 2022
		Forward isobutane prices (per gallon)	$	1.39		—	$	1.54		Apr. 2013 - Dec. 2022
		Forward normal butane prices (per gallon)	$	1.28		—	$	1.46		Apr. 2013 - Dec. 2022
		Forward natural gasoline prices (per gallon)	$	1.71		—	$	2.15		Apr. 2013 - Dec. 2022
		Forward natural gas prices (per mmbtu)	$	4.04		—	$	5.87		Apr. 2013 - Dec. 2022
		Probability of renewal (2)				0%

(1) 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.

(2) 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 4. 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 4. 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 4, 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 March 31, 2013, the Risk Department utilized internally developed price curves for the period of January 2015 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 the 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 Partnership’s estimated price curves.

Changes in Level 3 Fair Value Measurements

The table below includes a rollforward of the balance sheet amounts for the three months ended March 31, 2013 and 2012 for assets and liabilities classified by the Partnership within Level 3 of the valuation hierarchy (in thousands):

	Three months ended March 31, 2013
	Commodity Derivative Contracts (net)			Embedded Derivatives in Commodity Contracts (net)
Fair value at beginning of period	$	12,449		$	(33,957	)
Total gain (realized and unrealized) included in earnings (1)	3,324			6,532
Settlements	(3,296		)	2,544
Fair value at end of period	$	12,477		$	(24,881	)
The amount of total net gains for the period included in earnings attributable to the change in unrealized gains or losses relating to contracts still held at end of period (1)	$	3,431		$	6,675

	Three months ended March 31, 2012
	Commodity Derivative Contracts (net)			Embedded Derivatives in Commodity Contracts (net)
Fair value at beginning of period	$	(2,965	)	$	(53,904	)
Total loss (realized and unrealized) included in earnings (1)	(12,076		)	(10,438		)
Settlements	(2,409		)	3,538
Fair value at end of period	$	(17,450	)	$	(60,804	)
The amount of total net losses for the period included in earnings attributable to the change in unrealized gains or losses relating to contracts still held at end of period (1)	$	(14,050	)	$	(10,620	)

(1) Gains and losses on Commodity Derivative Contracts classified as Level 3 are recorded in Revenue: Derivative (loss) gain. Gains and losses on Embedded Derivatives in Commodity Contracts are recorded in Purchased product costs, Derivative loss (gain) related to purchased product costs, Facility expenses, and Derivative loss (gain) related to facility expenses.