Derivatives

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 price and location risks 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 accounting hedges. These transactions include “swing 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. Storage swap transactions protect against changes in the value of products that the Partnership has stored to serve various operational requirements (gas) or has in inventory due to short term constraints in moving the product to market (liquids or condensate). Basis swaps are used to hedge basis location price risk due to buying gas into one of the Partnership’s 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 the Partnership’s processing plants relating to the option to process versus bypassing the Partnership’s equity gas. Liquids financial swaps are used to hedge price risk on percent of liquids contracts. 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.

Changes in the fair value of the Partnership’s mark to market derivatives are recognized in earnings in the period of change. The effective portion of changes in the fair value of cash flow hedges is recorded in AOCI until the related anticipated future cash flow is recognized in earnings. The ineffective portion is recorded in earnings immediately.

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



	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Change in fair value of derivatives that are not designated as hedging instruments	$	388		$	(7,095	)	$	(244	)	$	(5,913	)
Realized (gains) losses on derivatives	(802		)	2,213			314			3,238
Ineffective portion of derivatives designated as hedging instruments	(31		)	(23		)	(43		)	(61		)
(Gain) loss on derivatives	$	(445	)	$	(4,905	)	$	27		$	(2,736	)

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



	June 30, 2013			December 31, 2012
Fair value of derivative assets — current, designated	$	1,070		$	724
Fair value of derivative assets — current, non-designated	2,218			2,510
Fair value of derivative assets — long term, designated	112			—
Fair value of derivative liabilities — current, designated	(3		)	(105		)
Fair value of derivative liabilities — current, non-designated	(670		)	(1,205		)
Net fair value of derivatives	$	2,727		$	1,924

Set forth below are the summarized notional volumes and fair value of all instruments held for price risk management purposes and related physical offsets as of June 30, 2013 (all gas volumes are expressed in million British thermal units, liquids volumes are expressed in gallons and condensate volumes are expressed in barrels). The remaining terms of the contracts extend no later than December 2014.



	June 30, 2013
Transaction Type	Volume		Fair Value
	(In thousands)
Cash Flow Hedges:
Liquids swaps (short contracts)	(9,285	)	$	1,179
Total swaps designated as cash flow hedges			$	1,179

Mark to Market Derivatives:*
Swing swaps (long contracts)	930		$	135
Physical offsets to swing swap transactions (short contracts)	(930	)	(112		)
Swing swaps (short contracts)	(1,008	)	—
Physical offsets to swing swap transactions (long contracts)	1,008		—

Basis swaps (long contracts)	636		(35		)
Physical offsets to basis swap transactions (short contracts)	(636	)	2,042
Basis swaps (short contracts)	(636	)	4
Physical offsets to basis swap transactions (long contracts)	636		(2,255		)

Processing margin hedges — liquids (short contracts)	(4,634	)	1,182
Processing margin hedges — gas (long contracts)	494		(89		)

Liquids swaps - non-designated (short contracts)	(2,559	)	837

Storage swap transactions — gas (short contracts)	(100	)	14
Storage swap transactions — liquids inventory (short contracts)	(1,890	)	16
Storage swap transactions — condensate inventory (short contracts)	(31	)	(191		)
Total mark to market derivatives			$	1,548

__________________________________________________

* All are gas contracts except for liquids swaps (designated or non-designated), processing margin hedges - liquids, storage swap transactions - liquids inventory 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") with its counterparties. If the Partnership’s counterparties failed to perform under existing swap contracts entered into under these ISDAs, the Partnership’s maximum loss as of June 30, 2013 of $3.4 million would be reduced to $3.1 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 condensed consolidated statements of operations is summarized below (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
Increase in Midstream Revenue	2013		2012		2013		2012
Liquids realized gain included in Midstream revenue	$	380	$	407	$	660	$	395

Natural Gas

As of June 30, 2013, the Partnership had no balances in AOCI related to natural gas.

Liquids

As of June 30, 2013, an unrealized derivative fair value net gain of $1.1 million related to cash flow hedges of liquids price risk was recorded in AOCI. Of that amount, a net gain of $1.0 million is expected to be reclassified into earnings through June 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 is not reflected in the above table.

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 (gain) loss on derivatives in the condensed consolidated statement of operations. The Partnership estimates the fair value of all of its energy trading contracts using Level 1 and Level 2 inputs for future commodity prices that are readily available in public markets or can be derived from information available in publicly quoted markets. 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
June 30, 2013	$	1,548	$	—	$	—	$	1,548