Financial Instruments

9 Months Ended

Sep. 30, 2011

Financial Instruments [Abstract]

Financial Instruments

Note 11 — Financial Instruments

We are exposed to market risks, including changes in commodity prices and interest rates. We may use financial instruments such as puts, calls, swaps and other financial instruments to mitigate the effects of the identified risks. In general, we attempt to hedge risks to our future cash flow and profitability resulting from changes in commodity prices or interest rates so that we can maintain cash flows sufficient to meet debt service, required capital expenditures, distribution objectives and similar requirements.

Commodity Risk Hedging Program

NGL and natural gas prices are volatile and are impacted by changes in fundamental supply and demand, as well as market uncertainty and a variety of additional factors that are beyond our control. Our profitability is directly affected by prevailing commodity prices as they pertain to: (i) processing at our processing plants or third-party processing plants, (ii) purchasing and selling or gathering and transporting volumes of natural gas at index-related prices and (iii) fractionating and transporting NGLs. We use commodity derivative instruments to manage the risks associated with natural gas and NGL prices. Our risk management activities are governed by our risk management policy, which, subject to certain limitations, allows our management to purchase options and enter into swaps for crude oil, NGLs and natural gas in order to reduce our exposure to substantial adverse changes in the prices of those commodities. Our risk management policy prohibits the use of derivative instruments for speculative purposes.

Our Risk Management Committee, which consists of senior executives in the operations, finance and legal departments, monitors and ensures our compliance with the risk management policy. The Audit Committee of our Board of Directors oversees the implementation of our risk management policy, and we have engaged an independent firm to monitor our compliance with the policy on a monthly basis. The risk management policy provides that any derivative transactions must be executed by our Chief Financial Officer or his designee and must be authorized in advance of execution by our Chief Executive Officer. The policy requires derivative transactions to take place either on the New York Mercantile Exchange (NYMEX) through a clearing member firm or with over-the-counter counterparties, with investment grade ratings from both Moody’s Investors Service and Standard & Poor’s Ratings Services and with complete industry standard contractual documentation. Our payment obligations in connection with our swap transactions are secured by a first priority lien in the collateral securing our revolving credit facility indebtedness that ranks equal in right of payment with liens granted in favor of our lenders. As long as this first priority lien is in effect, we will have no obligation to post cash, letters of credit or other additional collateral to secure these hedges at any time, even if our counterparty’s exposure to our credit increases over the term of the hedge as a result of higher commodity prices or because there has been a change in our creditworthiness.

Financial instruments that we acquire pursuant to our risk management policy are recorded on our consolidated balance sheets at fair value. For derivatives designated as cash flow hedges under ASC 815, “Derivatives and Hedging,” we recognize the effective portion of changes in fair value as other comprehensive income (“OCI”) and reclassify them to revenue within the consolidated statements of operations as settlements of the underlying transactions impact earnings. For derivatives not designated as cash flow hedges, we recognize changes in fair value as a gain or loss in our consolidated statements of operations. These financial instruments serve the same risk management purpose whether designated as a cash flow hedge or not.

We assess, both at the inception of each hedge and on an ongoing basis, whether our derivative instruments are effective in hedging the variability of forecasted cash flows associated with the underlying hedged items. If the correlation between a derivative instrument and the underlying hedged item is lost or it becomes probable that the original forecasted transaction will not occur, we discontinue hedge accounting based on a determination that the instrument is ineffective as a hedge. Subsequent changes in the derivative instrument’s fair value are immediately recognized as a gain or loss (increase or decrease in revenue) in our consolidated statements of operations.

As of September 30, 2011, we estimated that $11,885,000 of OCI will be reclassified as a decrease to earnings in the next 12 months as a result of monthly settlements of instruments hedging crude oil, NGLs and natural gas. In addition, for the three and nine months ended September 30, 2011, we reclassified $478,000 and $1,026,000, respectively, of losses from accumulated OCI to earnings as a result of determining the forecasted transaction was probable of not occurring.

At September 30, 2011, the notional volumes of our commodity positions were:

Commodity	Instrument	Unit	2011		2012		2013
Natural gas	Calls	MMBtu/d		10,000		—		—
Natural gas	Call Spreads	MMBtu/d		7,100		—		—
Natural gas	Swaps	MMBtu/d		10,000		—		—
NGLs	Puts	Bbl/d		7,950		5,000		1,650
NGLs	Swaps	Bbl/d		1,500		—		—
Crude oil	Puts	Bbl/d		2,700		1,500		750

At December 31, 2010, the notional volumes of our commodity positions were:

Commodity	Instrument	Unit	2011		2012		2013
Natural gas	Calls	MMBtu/d		10,000		—		—
Natural gas	Call Spreads	MMBtu/d		7,100		—		—
Natural gas	Swaps	MMBtu/d		10,000		—		—
NGLs	Puts	Bbl/d		7,950		3,500		—
NGLs	Swaps	Bbl/d		1,500		—		—
Crude oil	Puts	Bbl/d		2,700		1,500		400

Interest Rate Risk Hedging Program

Our interest rate exposure results from variable rate borrowings under our revolving credit facility. We manage a portion of our interest rate exposure using interest rate swaps, which allow us to convert a portion of our variable rate debt into fixed rate debt. As of September 30, 2011, we hold a notional amount of $95.0 million in interest rate swaps, which have a weighted average fixed rate of 4.30% and mature in October 2012. As of September 30, 2011, our interest rate swaps were not designated as cash flow hedges.

As of September 30, 2011, we estimate that $185,000 of OCI related to previously designated swaps will be reclassified as a decrease to earnings in the next 12 months as the underlying interest rate swaps expire.

ASC 820 “Fair Value Measurement” and ASC 815 “Derivatives and Hedging”

We recognize the fair value of our assets and liabilities that require periodic re-measurement as necessary based upon the requirements of ASC 820. This standard defines fair value, expands disclosure requirements with respect to fair value and specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. “Inputs” are the assumptions that a market participant would use in valuing the asset or liability. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. The three levels of the fair value hierarchy established by ASC 820 are as follows:

•  Level 1 — Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

•  Level 2 — Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly; and

•  Level 3 — Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

At each balance sheet date, we perform an analysis of all instruments subject to ASC 820 and include in Level 3 all of those for which fair value is based on significant unobservable inputs.

The following tables set forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2011 and December 31, 2010. As required by ASC 820, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Management’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value of assets and liabilities and their placement within the fair value hierarchy levels.

	Fair Value Measurements on Hedging Instruments(a)
	September 30, 2011
	Level 1		Level 2			Level 3		Total
	(In thousands)
Assets:
Natural Gas:
Short-term — Designated(b)	$	—	$	—		$	—	$	—
Short-term — Not designated(b)		—		—			—		—
Long-term — Designated(c)		—		—			—		—
Long-term — Not designated(c)		—		—			—		—
Natural Gas Liquids:
Short-term — Designated(b)		—		—			5,076		5,076
Short-term — Not designated(b)		—		—			1,285		1,285
Long-term — Designated(c)		—		—			8,947		8,947
Long-term — Not designated(c)		—		—			611		611
Crude Oil:
Short-term — Designated(b)		—		—			4,417		4,417
Short-term — Not designated(b)		—		—			1,323		1,323
Long-term — Designated(c)		—		—			7,074		7,074
Long-term — Not designated(c)		—		—			496		496
Total	$	—	$	—		$	29,229	$	29,229
Liabilities:
Natural Gas:
Short-term — Not designated(d)	$	—	$	129		$	—	$	129
Natural Gas Liquids:
Short-term — Designated(d)		—		—			2,730		2,730
Long-term — Designated(e)		—		—			—		—
Interest Rate:
Short-term — Not designated(d)		—		4,426			—		4,426
Long-term — Not designated(e)		—		176			—		176
Total	$	—	$	4,731		$	2,730	$	7,461
Total designated assets	$	—	$	—		$	22,784	$	22,784
Total not designated (liabilities)/assets	$	—	$	(4,731	)	$	3,715	$	(1,016	)

(a)	Instruments re-measured on a recurring basis.
(b)	Included on the consolidated balance sheets as a current asset under the heading of “Risk management assets.”
(c)	Included on the consolidated balance sheets as a noncurrent asset under the heading of “Risk management assets.”
(d)	Included on the consolidated balance sheets as a current liability under the heading of “Risk management liabilities.”

(e) Included on the consolidated balance sheets as a noncurrent liability under the heading of “Risk management and other noncurrent liabilities.”

	Fair Value Measurements on Hedging Instruments(a)
	December 31, 2010
	Level 1		Level 2			Level 3		Total
			(In thousands)
Assets:
Natural Gas:
Short-term — Designated(b)	$	—	$	—		$	87	$	87
Natural Gas Liquids:
Short-term — Designated(b)		—		—			6,812		6,812
Short-term — Not designated(b)		—		—			14		14
Long-term — Designated(c)		—		—			6,391		6,391
Crude Oil:
Short-term — Designated(b)		—		—			904		904
Short-term — Not designated(b)		—		—			19		19
Long-term — Designated(c)		—		—			5,552		5,552
Total	$	—	$	—		$	19,779	$	19,779
Liabilities:
Natural Gas:
Short-term — Not designated(d)	$	—	$	82		$	—	$	82
Natural Gas Liquids:
Short-term — Designated(d)		—		—			4,867		4,867
Interest Rate:
Short-term — Not designated(d)		—		4,408			—		4,408
Long-term — Not designated(e)		—		2,469			—		2,469
Total	$	—	$	6,959		$	4,867	$	11,826
Total designated assets	$	—	$	—		$	14,879	$	14,879
Total not designated (liabilities)/assets	$	—	$	(6,959	)	$	33	$	(6,926	)

(a)	Instruments re-measured on a recurring basis.
(b)	Included on the consolidated balance sheets as a current asset under the heading of “Risk management assets.”
(c)	Included on the consolidated balance sheets as a noncurrent asset under the heading of “Risk management assets.”
(d)	Included on the consolidated balance sheets as a current liability under the heading of “Risk management liabilities.”
(e)	Included on the consolidated balance sheets as a noncurrent liability under the heading of “Risk management and other noncurrent liabilities.”

We use the income approach incorporating market-based inputs in determining fair value for our derivative contracts.

Valuation of our Level 2 derivative contracts are based on observable market prices (1-month or 3-month LIBOR interest rate curves or CenterPoint East and Houston Ship Channel market curves) incorporating discount rates and credit risk.

Valuation of our Level 3 derivative contracts incorporates the use of valuation models using significant unobservable inputs. To the extent certain model inputs are observable (prices of WTI Crude, Mont Belvieu NGLs and Houston Ship Channel natural gas), we include observable market price and volatility data as inputs to our valuation model in addition to incorporating discount rates and credit risk. For those input parameters that are not readily available (implied volatilities for Mont Belvieu NGL prices or prices for illiquid periods of price curves), the modeling methodology incorporates available market information to generate these inputs through techniques such as regression based extrapolation.

As discussed in Notes 3 and 4, we recorded impairments with respect to our equity investments in Bighorn and Fort Union and a contract under which we provide services to Rocky Mountains producers during the three months ended September 30, 2011. The valuation of these investments required use of significant unobservable inputs. Our probability-weighted discounted cash flow analysis included the following input parameters that are not readily available: a discount rate reflective of our cost of capital and estimated contract rates, volumes, operating and maintenance costs and capital expenditures.

The following table presents, by level within the fair value hierarchy, certain assets that have been measured at fair value on a non-recurring basis.

	Fair Value Measurements of
	Impairments(a)
	September 30, 2011
	Level 3		Impairment Expense
	(In thousands)
Long-lived assets(b)	$	383,199	$	165,000
Long-lived intangible assets(c)		29,406		5,000

(a)	Measured on a non-recurring basis.
(b)	Impairments of equity investments in Bighorn and Fort Union are included on the consolidated balance sheets as a noncurrent asset under “Investments in unconsolidated affiliates” and on the consolidated statements of operations under “Equity in loss (earnings) from unconsolidated affiliates.”
(c)	Impairment of contract is included on the consolidated balance sheets as a noncurrent asset under “Intangible assets, net” and on the consolidated statements of operations under “Depreciation, amortization and impairment.”

The following tables provide a reconciliation of changes in the fair value of derivatives classified as Level 3 in the fair value hierarchy (in thousands):

	Three Months Ended September 30, 2011
	Natural Gas			Natural Gas Liquids			Crude Oil			Total
	(In thousands)
Assets balance, beginning of period	$	4		$	7,043		$	5,280		$	12,327
Total gains or losses:
Non-cash amortization of option premium		(1,486	)		(3,953	)		(2,004	)		(7,443	)
Other amounts included in earnings		—			(2,112	)		1,583			(529	)
Included in accumulated other comprehensive loss		1,482			7,768			8,452			17,702
Purchases		—			1,561			—			1,561
Settlements		—			2,881			—			2,881
Asset balance, end of period	$	—		$	13,188		$	13,311		$	26,499
Change in unrealized income included in earnings related to instruments still held as of the end of the period	$	—		$	(181	)	$	(267	)	$	(448	)

	Nine Months Ended September 30, 2011
	Natural Gas			Natural Gas Liquids			Crude Oil			Total
	(In thousands)
Assets balance, beginning of period	$	87		$	8,350		$	6,475		$	14,912
Total gains or losses:
Non-cash amortization of option premium		(4,409	)		(11,714	)		(5,946	)		(22,069	)
Other amounts included in earnings		—			(7,211	)		2,373			(4,838	)
Included in accumulated other comprehensive loss		4,322			7,245			8,609			20,176
Purchases		—			8,925			1,800			10,725
Settlements		—			7,593			—			7,593
Asset balance, end of period	$	—		$	13,188		$	13,311		$	26,499
Change in unrealized (income) loss included in earnings related to instruments still held as of the end of the period	$	—		$	(495	)	$	(208	)	$	(703	)

	Three Months Ended September 30, 2010
	Natural Gas			Natural Gas Liquids			Crude Oil			Total
	(In thousands)
Assets balance, beginning of period	$	653		$	36,237		$	21,529		$	58,419
Total gains or losses:
Non-cash amortization of option premium		(1,489	)		(4,154	)		(2,520	)		(8,163	)
Other amounts included in earnings		—			5,699			5,063			10,762
Included in accumulated other comprehensive loss		954			(15,048	)		(6,733	)		(20,827	)
Purchases		—			2,051			1,315			3,366
Settlements		—			(5,752	)		(5,382	)		(11,134	)
Asset balance, end of year	$	118		$	19,033		$	13,272		$	32,423
Change in unrealized loss (income) included in earnings related to instruments still held as of the end of the period	$	—		$	(135	)	$	316		$	181

	Nine Months Ended September 30, 2010
	Natural Gas			Natural Gas Liquids			Crude Oil			Total
	(In thousands)
Assets balance, beginning of period	$	2,752		$	15,641		$	24,213		$	42,606
Total gains or losses:
Non-cash amortization of option premium		(4,417	)		(12,317	)		(7,476	)		(24,210	)
Other amounts included in earnings		—			12,332			15,283			27,615
Included in accumulated other comprehensive loss		1,783			6,208			(8,069	)		(78	)
Purchases		—			9,433			4,740			14,173
Settlements		—			(12,264	)		(15,419	)		(27,683	)
Asset balance, end of period	$	118		$	19,033		$	13,272		$	32,423
Change in unrealized (income) loss included in earnings related to instruments still held as of the end of the period	$	—		$	(165	)	$	470		$	305

Realized gains and losses for all Level 3 recurring items recorded in earnings are included in revenue on the consolidated statements of operations. Unrealized gains and losses for Level 3 recurring items that are not designated as cash flow hedges, or are ineffective as cash flow hedges, are also included in revenue on the consolidated statements of operations. The effective portion of unrealized gains and losses relating to cash flow hedges are included in accumulated other comprehensive loss on the consolidated balance sheets and consolidated statements of members’ capital and comprehensive loss.

Transfers in and/or out of Level 2 or Level 3 represent existing assets or liabilities where inputs to the valuation became less observable or assets and liabilities that were previously classified as a lower level for which the lowest significant input became observable during the period. There were no transfers in or out of Level 2 or Level 3 during the periods presented.

We have not entered into any derivative transactions containing credit risk related contingent features as of September 30, 2011.

The following table presents derivatives that are designated as cash flow hedges:

The Effect of Derivative Instruments on the Statements of Operations

							Amount of Gain
							(Loss) Recognized
							in Income
							on Derivative
	Amount of Gain			Amount of Gain			(Ineffective Portion
	(Loss) Recognized			(Loss) Reclassified			and Amount
Derivatives in	in OCI on			from Accumulated			Excluded from
ASC 815 Cash Flow	Derivatives			OCI into Income			Effectiveness			Statements of
Hedging Relationships	(Effective Portion)			(Effective Portion)			Testing)			Operations Location
(In thousands)
Three Months Ended September 30, 2011
Natural gas	$	(5	)	$	(1,486	)	$	—		Natural gas sales
Natural gas liquids		1,102			(6,667	)		213		Natural gas liquids sales
Crude oil		6,901			(1,550	)		518		Condensate and other
Interest rate swaps		—			(74	)		—		Interest and other financing costs
Total	$	7,998		$	(9,777	)	$	731
Nine Months Ended September 30, 2011
Natural gas	$	(88	)	$	(4,410	)	$	—		Natural gas sales
Natural gas liquids		(11,496	)		(18,755	)		(104	)	Natural gas liquids sales
Crude oil		3,926			(4,682	)		558		Condensate and other
Interest rate swaps		—			(254	)		—		Interest and other financing costs
Total	$	(7,658	)	$	(28,101	)	$	454
Three Months Ended September 30, 2010
Natural gas	$	(535	)	$	(1,489	)	$	—		Natural gas sales
Natural gas liquids		(12,869	)		2,179			(116	)	Natural gas liquids sales
Crude oil		(3,764	)		2,971			(39	)	Condensate and other
Interest rate swaps		—			(117	)		—		Interest and other financing costs
Total	$	(17,168	)	$	3,544		$	(155	)
Nine Months Ended September 30, 2010
Natural gas	$	(2,634	)	$	(4,417	)	$	—		Natural gas sales
Natural gas liquids		6,784			577			(145	)	Natural gas liquids sales
Crude oil		(220	)		7,847			68		Condensate and other
Interest rate swaps		—			(371	)		—		Interest and other financing costs
Total	$	3,930		$	3,636		$	(77	)

The following table presents derivatives that are not designated as cash flow hedges:

The Effect of Derivative Instruments on the Statements of Operations

	Amount of Gain
Derivatives Not Designated as	(Loss) Recognized in			Statements of
Hedging Instruments Under ASC 820	Income on Derivative			Operations Location
	(In thousands)
Three Months Ended September 30, 2011
Natural gas	$	(34	)	Natural gas sales
Natural gas liquids		556		Natural gas liquids sales
Crude oil		1,065		Condensate and other
Interest rate swaps		(54	)	Interest and other financing costs
Total	$	1,533
Nine Months Ended September 30, 2011
Natural gas	$	(162	)	Natural gas sales
Natural gas liquids		472		Natural gas liquids sales
Crude oil		1,814		Condensate and other
Interest rate swaps		(617	)	Interest and other financing costs
Total	$	1,507
Three Months Ended September 30, 2010
Natural gas	$	(15	)	Natural gas sales
Natural gas liquids		63		Natural gas liquids sales
Crude oil		(281	)	Condensate and other
Interest rate swaps		(1,101	)	Interest and other financing costs
Total	$	(1,334	)
Nine Months Ended September 30, 2010
Natural gas	$	(123	)	Natural gas sales
Natural gas liquids		214		Natural gas liquids sales
Crude oil		(205	)	Condensate and other
Interest rate swaps		(3,089	)	Interest and other financing costs
Total	$	(3,203	)