Derivatives

12 Months Ended

Dec. 31, 2011

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives

(10) Derivatives

Interest Rate Swaps

The Partnership did have any interest rate swaps during the year endedDecember 31, 2011.

The impact of the interest rate swaps on net income is included in other income (expense) in the consolidated statements of operations as part of interest expense, net, as follows (in thousands):

		Years Ended December 31,
			2010		2009
Change in fair value of derivatives that do not qualify for hedge
	accounting		$	22,405	$	797
Realized losses on derivatives				(26,542)		(19,044)
Loss on interest rate swaps included in continuing operations			$	(4,137)	$	(18,247)

Commodity Swaps

The Partnership manages its exposure to fluctuations in commodity prices by hedging the impact of market fluctuations. Swaps are used to manage and hedge prices and location risk related to these market exposures. Swaps are also used to manage margins on offsetting fixed-price purchase or sale commitments for physical quantities of natural gas and NGLs.

The Partnership commonly enters into various derivative financial transactions which it does not designate as hedges. These transactions include “swing swaps,” “third party on-system financial swaps,” “storage swaps,” “basis swaps,” “processing margin swaps” and “put options”. Swing swaps are generally short-term in nature (one month), and are usually entered into to protect against changes in the volume of daily versus first-of-month index priced gas supplies or markets. Third party on-system financial swaps are hedges that the Partnership enters into on behalf of its customers who are connected to its systems, wherein the Partnership fixes a supply or market price for a period of time for its customers, and simultaneously enters into the derivative transaction. Storage swap transactions protect against changes in the value of gas that the Partnership has stored to serve various operational requirements. Basis swaps are used to hedge basis location price risk due to buying gas into one of our systems on one index and selling gas off that same system on a different index. Processing margin financial swaps are used to hedge fractionation spread risk at our processing plants relating to the option to process versus bypassingour equity gas. Put options are purchased to hedge against declines in pricing and as such represent options, not obligations, to sell the related underlying volumes at a fixed price.

The components of (gain) loss on derivatives in the consolidated statements of operations relating to commodity swaps are (in thousands):

		Years Ended December 31,
		2011		2010		2009
Change in fair value of derivatives that do not qualify for hedge
	accounting	$	726	$	1,003	$	2,816
Realized (gains) losses on derivatives			7,015		7,955		(6,139)
Ineffective portion of derivatives qualifying for hedge accounting			(158)		142		65
Net (gains) losses related to commodity swaps		$	7,583	$	9,100	$	(3,258)
Put option premium mark to market			193		-		-
Net losses included in income from discontinued operations			-		-		264
(Gains) losses on derivatives included in continuing operations		$	7,776	$	9,100	$	(2,994)

	The fair value of derivative assets and liabilities relating to commodity swaps are as follows (in thousands):
		Years Ended December 31,
		2011		2010
Fair value of derivative assets — current, designated		$	151	$	1
Fair value of derivative assets — current, non-designated			2,716		5,522
Fair value of derivative assets — long term, non-designated			-		1,169
Fair value of derivative liabilities — current, designated			(702)		(1,066)
Fair value of derivative liabilities — current, non-designated			(4,885)		(6,914)
Fair value of derivative liabilities — long term, non-designated			-		(1,156)
Net fair value of derivatives		$	(2,720)	$	(2,444)

Set forth below is the summarized notional volumes and fair value of all instruments held for price risk management purposes and related physical offsets at December 31, 2011 (all gas volumes are expressed in MMBtu's and liquids volumes are expressed in gallons). The remaining term of the contracts extend no later than December 2012. Changes in the fair value of the Partnership's mark to market derivatives are recorded in earnings in the period the transaction is entered into. The effective portion of changes in the fair value of cash flow hedges is recorded in accumulated other comprehensive income until the related anticipated future cash flow is recognized in earnings. The ineffective portion is recorded in earnings immediately.

		December 31, 2011
Transaction Type		Volume	Fair Value
		(In thousands)
Cash Flow Hedges:*
	Liquids swaps (short contracts)	(7,876)	$	(551)
	Total swaps designated as cash flow hedges		$	(551)
Mark to Market Derivatives:*
	Swing swaps (short contracts)	(1,600)	$	(1)
	Physical offsets to swing swap transactions (long contracts)	1,600		(6)
	Basis swaps (long contracts)	5,635		1,341
	Physical offsets to basis swap transactions (short contracts)	(1,116)		3,102
	Basis swaps (short contracts)	(5,635)		(1,348)
	Physical offsets to basis swap transactions (long contracts)	1,085		(3,282)
	Processing margin hedges — liquids (short contracts)	(14,338)		(294)
	Processing margin hedges — gas (long contracts)	1,620		(2,301)
	Processing margin hedges — gas (short contracts)	(187)		163
	Storage swap transactions (long contracts)	70		(5)
	Storage swap transactions (short contracts)	(360)		462
	Total mark to market derivatives		$	(2,169)

*All are gas contracts, volume in MMBtu's, except for processing margin hedges — liquids and liquids swaps (volume in gallons).

On all transactions where the Partnership is exposed to counterparty risk, the Partnership analyzes the counterparty's financial condition prior to entering into an agreement, establishes limits and monitors the appropriateness of these limits on an ongoing basis. The Partnership primarily deals with two types of counterparties, financial institutions and other energy companies, when entering into financial derivatives on commodities. The Partnership has entered into Master International Swaps and Derivatives Association Agreements that allow for netting of swap contract receivables and payables in the event of default by either party. If the Partnership's counterparties failed to perform under existing swap contracts, the Partnership's maximum loss as of December 31, 2011 of $5.9 million would be reduced to $3.9 million due to the netting feature.

Impact of Cash Flow Hedges

The impact of realized gains or losses from derivatives designated as cash flow hedge contracts in the consolidated statements of operations is summarized below (in thousands):

	Years Ended December 31,
Increase (decrease) in Midstream revenue	2011		2010		2009
Natural gas	$	-	$	-	$	2,156
Liquids		(2,772)		(1,733)		9,707
Realized (gain) loss included in income from discontinued operations		-		-		(759)
	$	(2,772)	$	(1,733)	$	11,104

Natural Gas

As of December 31, 2011, the Partnership has no balances in accumulated other comprehensive income related to natural gas.

Liquids

As of December 31, 2011, an unrealized derivative fair value net loss of $0.5 million related to cash flow hedges of liquids price risk was recorded in accumulated other comprehensive income (loss). Of this net amount, a $0.5 million loss is expected to be reclassified into earnings through December 2012. The actual reclassification to earnings will be based on mark to market prices at the contract settlement date, along with the realization of the gain or loss on the related physical volume, which amount is not reflected above.

Derivatives Other Than Cash Flow Hedges

Assets and liabilities related to third party derivative contracts, swing swaps, basis swaps, storage swaps and processing margin swaps are included in the fair value of derivative assets and liabilities and the profit and loss on the mark to market value of these contracts are recorded net as (gain) loss on derivatives in the consolidated statement of operations. The Partnership estimates the fair value of all of its energy trading contracts using actively quoted prices. The estimated fair value of energy trading contracts by maturity date was as follows (in thousands):

	Maturity Periods
	Less than one year		One to two years		More than two years		Total fair value
December 31, 2011.	$	(2,169)	$	-	$	-	$	(2,169)