7. Fair Value

Fair value measurements and disclosures relate primarily to the Partnership’s derivative positions discussed in Note 6. Money market funds, which are included in Cash and cash equivalents on the Condensed Consolidated Balance Sheets, are measured at fair value and are included in Level 1 measurements of the valuation hierarchy. The following table presents the derivative instruments carried at fair value as of September 30, 2015 and December 31, 2014 (in thousands):

As of September 30, 2015	Assets		Liabilities
Significant other observable inputs (Level 2)
Commodity contracts	$	5,405	$	(95	)
Significant unobservable inputs (Level 3)
Commodity contracts	8,480		(173		)
Embedded derivatives in commodity contracts	21,055		(606		)

Total carrying value in Condensed Consolidated Balance Sheets	$	34,940	$	(874	)

As of December 31, 2014	Assets		Liabilities
Significant other observable inputs (Level 2)
Commodity contracts	$	14,812	$	—
Significant unobservable inputs (Level 3)
Commodity contracts	3,840		—
Embedded derivatives in commodity contracts	18,776		—

Total carrying value in Condensed Consolidated Balance Sheets	$	37,428	$	—

The following table provides additional information about the significant unobservable inputs used in the valuation of Level 3 instruments as of September 30, 2015. The market approach is used for valuation of all instruments.

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

Commodity contracts	Asset	Forward ethane prices (per gallon)	$0.20 - $0.21	Jan. 2016 - Dec. 2016

		Forward propane prices (per gallon)	$0.46 - $0.48	Oct. 2015 - Sep. 2016

		Forward isobutane prices (per gallon)	$0.61 - $0.64	Oct. 2015 - Mar. 2016

		Forward normal butane prices (per gallon)	$0.56 - $0.62	Oct. 2015 - Mar. 2016

		Forward natural gasoline prices (per gallon)	$0.94 - $0.99	Oct. 2015 - Dec. 2016

	Liability	Forward ethane prices (per gallon)	$0.20 - $0.20	Oct. 2015 - Dec. 2015

		Forward propane prices (per gallon)	$0.46 - $0.50	Oct. 2015 - Dec. 2016

		Forward normal butane prices (per gallon)	$0.62 - $0.62	Oct. 2015 - Dec. 2015

Embedded derivatives in commodity contract	Asset	Forward propane prices (per gallon) (1)	$0.46 - $0.53	Oct. 2015 - Dec. 2022

		Forward isobutane prices (per gallon) (1)	$0.59 - $0.66	Oct. 2015 - Dec. 2022

		Forward normal butane prices (per gallon) (1)	$0.53 - $0.64	Oct. 2015 - Dec. 2022

		Forward natural gasoline prices (per gallon) (1)	$0.94 - $1.11	Oct. 2015 - Dec. 2022

		Forward natural gas prices (per MMBtu) (2)	$2.37 - $3.42	Oct. 2015 - Dec. 2022

		Probability of renewal (3)	0%

	Liability	ERCOT Pricing (per MegaWatt Hour)	$23.07 - $25.68	Oct. 2015 - Dec. 2015

(1)

NGL prices used in the valuations are generally at the lower end of the range in the early years and increase over time.

(2)

Natural gas prices used in the valuations are generally at the lower end of the range in the early years and increase over time.

(3)

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 (asset) - The embedded derivative asset relates to the natural gas purchase agreement embedded in a keep-whole processing agreement as discussed further in Note 6. Increases (decreases) in forward NGL prices result in an increase (decrease) in the fair value of the embedded derivative. An increase in the probability of renewal would result in a decrease in the fair value of the related embedded derivative asset.

Embedded derivative in commodity contracts (liability) - The embedded derivative liability relates to utilities costs discussed further in Note 6. Increases in the forward ERCOT prices result in a decrease in the fair value of the embedded derivative liability.

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 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 derivative in the commodity contract 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 6, 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 September 30, 2015, the Risk Department utilized internally developed price curves for the period of October 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 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 three and nine months ended September 30, 2015 and 2014 (including the change in fair value) for assets and liabilities classified by the Partnership within Level 3 of the valuation hierarchy (in thousands):

	Three months ended September 30, 2015
	Commodity Derivative Contracts (net)			Embedded Derivatives in Commodity Contracts (net)
Fair value at beginning of period	$	4,778		$	11,736
Total gain (realized and unrealized) included in earnings (1)	11,388			7,671
Settlements	(7,859		)	1,042

Fair value at end of period	$	8,307		$	20,449


The amount of total 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)	$	6,276		$	10,103

	Three months ended September 30, 2014
	Commodity Derivative Contracts (net)			Embedded Derivatives in Commodity Contracts (net)
Fair value at beginning of period	$	(2,092	)	$	(42,831	)
Total gain (realized and unrealized) included in earnings (1)	5,626			10,715
Settlements	(380		)	2,203

Fair value at end of period	$	3,154		$	(29,913	)


The amount of total 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)	$	4,109		$	11,609

	Nine months ended September 30, 2015
	Commodity Derivative Contracts (net)			Embedded Derivatives in Commodity Contracts (net)
Fair value at beginning of period	$	3,840		$	18,776
Total gain (loss) (realized and unrealized) included in earnings (1)	18,311			(2,527		)
Settlements	(13,844		)	4,200

Fair value at end of period	$	8,307		$	20,449


The amount of total 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)	$	8,307		$	2,943

	Nine months ended September 30, 2014
	Commodity Derivative Contracts (net)			Embedded Derivatives in Commodity Contracts (net)
Fair value at beginning of period	$	(5,460	)	$	(35,032	)
Total gain (loss) (realized and unrealized) included in earnings (1)	1,387			(1,352		)
Settlements	7,227			6,471

Fair value at end of period	$	3,154		$	(29,913	)


The amount of total 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)	$	3,926		$	716

(1)

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