(8) Derivatives

Commodity Swaps

The Partnership manages its exposure to fluctuation in commodity prices by hedging the impact of market fluctuations. Swaps are used to manage and hedge price 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," "liquids 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 bypassing our equity gas. Liquids financial swaps are used to hedge price risk on liquid swaps not otherwise designated as cash flow hedges. 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 loss on derivatives in the consolidated statements of operations relating to commodity swaps are (in thousands):



	Years Ended December 31,
	2013			2012			2011
Change in fair value of derivatives that are not designated for hedge accounting	$	1,674		$	(3,473	)	$	726
Realized losses on derivatives	633			4,514			7,015
Ineffective portion of derivatives designated for hedge accounting	(3		)	(35		)	(158		)
Net losses related to commodity swaps	$	2,304		$	1,006		$	7,583
Put option premium mark to market	—			—			193
Losses on derivatives	$	2,304		$	1,006		$	7,776

The fair value of derivative assets and liabilities relating to commodity swaps are as follows (in thousands):



	December 31,
	2013			2012
Fair value of derivative assets—current, designated	$	9		$	724
Fair value of derivative assets—current, non-designated	293			2,510
Fair value of derivative assets-long term, non-designated	556			—
Fair value of derivative liabilities—current, designated	(705		)	(105		)
Fair value of derivative liabilities—current, non-designated	(463		)	(1,205		)
Fair value of derivative liabilities—long term, non-designated	(755		)	—
Net fair value of derivatives	$	(1,065	)	$	1,924

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, 2013 (all gas volumes are expressed in MMBtus, liquids volumes are expressed in gallons and condensate volumes are expressed in barrels). The remaining term of the contracts extend no later than December 2016. Changes in the fair value of the Partnership's mark to market derivatives are recorded in earnings in the period incurred. 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, 2013
Transaction Type	Volume		Fair Value
	(In thousands)
Cash Flow Hedges:*
Liquids swaps (short contracts)	(8,567	)	$	(696	)
Total swaps designated as cash flow hedges			$	(696	)
Mark to Market Derivatives:*
Swing swaps (long contracts)	1,457		$	(14	)
Physical offsets to swing swap transactions (short contracts)	(1,147	)	—
Swing swaps (short contracts)	(78	)	2
Physical offsets to swing swap transactions (long contracts)	78		—
Processing margin hedges—liquids (short contracts)	(2,662	)	(270		)
Processing margin hedges—gas (long contracts)	291		40
Liquids swaps—non-designated (long contracts)	50,400		(537		)
Liquids swaps—non-designated (short contracts)	(50,400	)	428
Storage swap transactions (short contracts)	(100	)	(18		)
Total mark to market derivatives			$	(369	)

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*	All are gas contracts except for liquids swaps (designated or non-designated), processing margin hedges-liquids and storage swap transactions-condensate inventory.

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 ("ISDAs") 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, 2013 of $0.7 million would be reduced to $0.2 million due to the offsetting of gross fair value payables against gross fair value receivables as allowed by the ISDAs.

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	2013		2012		2011
Liquids	$	768	$	1,381	$	(2,772	)

Natural Gas

As of December 31, 2013, the Partnership has no balances in accumulated other comprehensive income (loss) related to natural gas.

Liquids

As of December 31, 2013, an unrealized derivative fair value net loss of $0.7 million related to cash flow hedges of liquids price risk was recorded in accumulated other comprehensive income (loss) all of which is expected to reclassified into earnings by December 2014. 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, processing margin swaps and liquids 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 a loss on derivatives in the consolidated statement of operations. The Partnership estimates the fair value of all of its derivatve contracts using actively quoted prices. The estimated fair value of derivative 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, 2013	$	(170	)	$	61	$	(260	)	$	(369	)