Fair Value Measurements and Derivatives

Fair value refers to an exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy has been established that prioritizes the information used to develop fair value measurements giving priority, from highest to lowest, to quoted prices in active markets for identical assets and liabilities (Level 1); observable inputs not included in Level 1, for example, quoted prices for similar assets and liabilities (Level 2); and unobservable data (Level 3), for example, a reporting entity's own internal data based on the best information available in the circumstances. The Partnership considers any transfers between levels within the fair value hierarchy to have occurred at the beginning of a quarterly reporting period. The Partnership did not recognize any transfers between Level 1 and Level 2 of the fair value hierarchy and did not change its valuation techniques or inputs during the nine months ended September 30, 2012.

The table below identifies the Partnership's assets and liabilities that were recorded at fair value at September 30, 2012 (in millions):



			Fair Value Measurements at September 30, 2012
	September 30, 2012		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total Gains (losses) for the three months ended September 30, 2012			Total Gains (losses) for the nine months ended September 30, 2012
Recurring fair value measurements - Assets
Derivatives
Commodity contracts	$	—	$	—	$	—	$	—

Recurring fair value measurements - Liabilities
Derivatives
Commodity contracts	$	0.8	$	—	$	0.8	$	—

Nonrecurring fair value measurements - Assets
Assets to be abandoned ⁽¹⁾	$	—	$	—	$	—	$	—	$	(1.1	)	$	(3.2	)
Assets held for sale ⁽²⁾	—		—		—		—		—			(2.8		)
	$	—	$	—	$	—	$	—	$	(1.1	)	$	(6.0	)

Nonrecurring fair value measurements - Liabilities
Asset retirement obligation ⁽¹⁾	$	2.2	$	—	$	—	$	2.2	$	—		$	(2.2	)

(1)

In the first half of 2012, the Partnership determined that it would retire a number of small-diameter pipeline assets with a carrying value of $2.1 million. As a result, an asset impairment charge of $4.3 million was recorded for the nine months ended September 30, 2012, of which $2.2 million represent amounts related to the asset retirement obligations for these assets. Additionally, in the third quarter 2012, the Partnership determined that it would retire a turbine associated with one of its compressor stations, which had a carrying value of $1.1 million. As a result, an asset impairment charge of $1.1 million was recorded for the three and nine months ended September 30, 2012.


(2)	In the first quarter 2012, the Partnership recognized a $2.8 million impairment charge related to its Owensboro, Kentucky, office building. The office building was subsequently sold for an amount that equaled its carrying value in the third quarter 2012.

Derivatives

The Partnership uses futures, swaps and option contracts (collectively, derivatives) to hedge exposure to natural gas commodity price risk related to the future operational sales of natural gas and cash for fuel reimbursement where customers pay cash for the cost of fuel used in providing transportation services as opposed to having fuel retained in kind. This price risk exposure includes approximately $6.1 million and $1.7 million of gas stored underground at September 30, 2012, and December 31, 2011, which the Partnership owns and carries on its balance sheet as current Gas stored underground. At September 30, 2012, approximately 2.3 billion cubic feet (Bcf) of anticipated future sales of natural gas and cash for fuel reimbursement were hedged with derivatives having settlement dates in 2012 and 2013. The derivatives qualify for cash flow hedge accounting and are designated as such. The Partnership’s natural gas derivatives are reported at fair value based on New York Mercantile Exchange (NYMEX) quotes for natural gas futures and options. The NYMEX quotes are deemed to be observable inputs in an active market for similar assets and liabilities and are considered Level 2 inputs for purposes of fair value disclosures.

In September 2012, the Partnership settled $100.0 million notional amount of interest rate swaps outstanding associated with the HP Storage Term Loan (described in Note 8 below) for approximately $2.4 million. The swaps were settled prior to their maturity due to the repayment of the HP Storage Term Loan. The fixed rate component of the swaps was at an interest rate of 1.07%. The swaps were not designated as cash flow hedges and changes in the fair value of the swaps were recognized as interest expense in the period that those changes occurred. For the three and nine months ended September 30, 2012, the Partnership recognized interest expense of $0.9 million and $2.7 million related to the interest rate swaps.

In the second quarter 2012, the Partnership entered into a Treasury rate lock for a notional amount of $300.0 million of principal to hedge the risk attributable to changes in the risk-free component of forward 10-year interest rates through June 30, 2012. The Treasury rate lock was designated as a cash flow hedge. On June 8, 2012, the Partnership settled the rate lock concurrent with the issuance of 10-year notes described in Note 8 and paid the counterparty approximately $6.8 million. The loss was deferred as a component of Accumulated other comprehensive loss and will be amortized to interest expense over the 10-year term of the notes.

For the three and nine months ended September 30, 2011, the Partnership sold 3.1 Bcf and 4.5 Bcf of gas with a carrying value of $6.9 million and $10.3 million that was available for sale as a result of a change in the storage working gas needed to support operations and no-notice services at its Texas Gas subsidiary. The Partnership entered into derivatives, which were designated as cash flow hedges, to hedge the price exposure related to the expected sale of the gas. The gas was subsequently sold and the derivatives settled, resulting in gains of $6.0 million and $9.2 million for the three and nine months ended September 30, 2011.

The fair values of derivatives existing as of September 30, 2012, and December 31, 2011, were included in the following captions in the Condensed Consolidated Balance Sheets (in millions):



	Derivative Assets						Derivative Liabilities
	September 30, 2012			December 31, 2011			September 30, 2012			December 31, 2011
	Balance sheet location	Fair Value		Balance sheet location	Fair Value		Balance sheet location	Fair Value		Balance sheet location	Fair Value
Derivatives designated as hedging instruments
Commodity contracts	Other current assets	$	—	Other current assets	$	—	Other current liabilities	$	0.6	Other current liabilities	$	—
	Other non-current assets	$	—	Other non-current assets	$	—	Other non-current liabilities	$	0.2	Other non-current liabilities	$	—
Derivatives not designated as hedging instruments
Interest rate contracts	Other current assets	$	—	Other current assets	$	—	Other current liabilities	$	—	Other current liabilities	$	0.6
	Other non-current assets	$	—	Other non-current assets	$	0.9	Other non-current liabilities	$	—	Other non-current liabilities	$	0.6

The Partnership estimates that approximately $3.0 million of net losses reported in Accumulated other comprehensive income/(loss) (AOCI) as of September 30, 2012, are expected to be reclassified into earnings within the next twelve months. The amount of gains and losses from cash flow hedges recognized in the Condensed Consolidated Statements of Income for the three months ended September 30, 2012, were (in millions):



	Amount of gain/(loss) recognized in AOCI on derivatives (effective portion)			Location of gain/(loss) reclassified from AOCI into income (effective portion)	Amount of gain/(loss) reclassified from AOCI into income (effective portion)			Location of gain/(loss) recognized in income on derivative (in- effective portion and amount excluded from effectiveness testing)	Amount of gain/(loss) recognized in income on derivative (in- effective portion and amount excluded from effectiveness testing)
Derivatives in Cash Flow Hedging Relationship
Commodity contracts	$	(0.6	)	Operating revenues	$	—		N/A	$	—
Interest rate contracts (1)	—			Interest expense	(0.6		)	N/A	—
	$	(0.6	)		$	(0.6	)		$	—


(1)	Related to amounts deferred in AOCI from Treasury rate locks used to hedge interest payments associated with debt offerings that were settled in previous periods and are being amortized to earnings over the terms of the related interest payments, generally the terms of the related debt.

The amount of gains and losses from cash flow hedges recognized in the Condensed Consolidated Statements of Income for the three months ended September 30, 2011, were (in millions):



	Amount of gain/(loss) recognized in AOCI on derivatives (effective portion)		Location of gain/(loss) reclassified from AOCI into income (effective portion)	Amount of gain/(loss) reclassified from AOCI into income (effective portion)			Location of gain/(loss) recognized in income on derivative (in- effective portion and amount excluded from effectiveness testing)	Amount of gain/(loss) recognized in income on derivative (in- effective portion and amount excluded from effectiveness testing)
Derivatives in Cash Flow Hedging Relationship
Commodity contracts	$	1.5	Operating revenues (2)	$	0.4		N/A	$	—
			Net gain on disposal of operating assets	0.2			N/A	—
Interest rate contracts (1)	—		Interest expense	(0.4		)	N/A	—
	$	1.5		$	0.2			$	—


(1)	Related to amounts deferred in AOCI from Treasury rate locks used to hedge interest payments associated with debt offerings that were settled in previous periods and are being amortized to earnings over the terms of the related interest payments, generally the terms of the related debt.


(2)	$0.1 million was recorded in Gas transportation revenues and $0.3 million was recorded in Other revenues.

The amount of gains and losses from cash flow hedges recognized in the Condensed Consolidated Statements of Income for the nine months ended September 30, 2012, were (in millions):



	Amount of gain/(loss) recognized in AOCI on derivatives (effective portion)			Location of gain/(loss) reclassified from AOCI into income (effective portion)	Amount of gain/(loss) reclassified from AOCI into income (effective portion)			Location of gain/(loss) recognized in income on derivative (in- effective portion and amount excluded from effectiveness testing)	Amount of gain/(loss) recognized in income on derivative (in- effective portion and amount excluded from effectiveness testing)
Derivatives in Cash Flow Hedging Relationship
Commodity contracts	$	(0.4	)	Operating revenues (2)	$	0.3		N/A	$	—
Interest rate contracts (1)	(6.8		)	Interest expense	(1.4		)	N/A	—
	$	(7.2	)		$	(1.1	)		$	—


(1)	Related to amounts deferred in AOCI from Treasury rate locks used to hedge interest payments associated with debt offerings that were settled in previous periods and are being amortized to earnings over the terms of the related interest payments, generally the terms of the related debt.


(2)	$0.2 million was recorded in Gas transportation revenues and $0.1 million was recorded in Other revenues.

The amount of gains and losses from cash flow hedges recognized in the Condensed Consolidated Statements of Income for the nine months ended September 30, 2011, were (in millions):



	Amount of gain/(loss) recognized in AOCI on derivatives (effective portion)		Location of gain/(loss) reclassified from AOCI into income (effective portion)	Amount of gain/(loss) reclassified from AOCI into income (effective portion)			Location of gain/(loss) recognized in income on derivative (in- effective portion and amount excluded from effectiveness testing)	Amount of gain/(loss) recognized in income on derivative (in- effective portion and amount excluded from effectiveness testing)
Derivatives in Cash Flow Hedging Relationship
Commodity contracts	$	2.9	Operating revenues (2)	$	0.5		N/A	$	—
			Net gain on disposal of operating assets	0.1			N/A	—
Interest rate contracts (1)	—		Interest expense	(1.3		)	N/A	—
	$	2.9		$	(0.7	)		$	—


(1)	Related to amounts deferred in AOCI from Treasury rate locks used to hedge interest payments associated with debt offerings that were settled in previous periods and are being amortized to earnings over the terms of the related interest payments, generally the terms of the related debt.


(2)	$0.2 million was recorded in Gas transportation revenues and $0.3 million was recorded in Other revenues.

The Partnership has entered into master netting agreements to manage counterparty credit risk associated with its derivatives, however it does not offset on its balance sheets fair value amounts recorded for derivative instruments under these agreements. At September 30, 2012, the Partnership’s derivatives were with two counterparties.

Nonfinancial Assets and Liabilities

The Partnership evaluates long-lived assets for impairment when, in management's judgment, events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Refer to the fair value measurements table above for more information.

Financial Assets and Liabilities

The following methods and assumptions were used in estimating the fair value disclosure amounts for financial instruments, which are consistent with those disclosed in the Partnership's Annual Report on Form 10-K for the year ended December 31, 2011:

Cash and Cash Equivalents: For cash and short-term financial assets, the carrying amount is a reasonable estimate of fair value due to the short maturity of those instruments.

Long-Term Debt: The estimated fair value of the Partnership's publicly traded debt is based on quoted market prices at September 30, 2012, and December 31, 2011. The fair market value of the debt that is not publicly traded is based on market prices of similar debt at September 30, 2012, and December 31, 2011. The carrying value of the Partnership's variable rate debt approximates fair value because the instruments bear a floating market-based interest rate.

Long-Term Debt - Affiliate: The Partnership has borrowings outstanding under a Subordinated Loan Agreement with BPHC. The estimated fair value of the borrowings is based on market prices of similar debt, adjusted for the affiliated nature of the transaction.

The carrying amount and estimated fair values of the Partnership's financial instruments assets and liabilities which are not recorded at fair value on the Condensed Consolidated Balance Sheets as of September 30, 2012, and December 31, 2011, were as follows (in millions):



As of September 30, 2012			Estimated Fair Value
Financial Assets	Carrying Amount		Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	10.9	$	10.9	$	—	$	—	$	10.9

Financial Liabilities
Long-term debt	$	3,063.7	$	—	$	3,319.4	$	—	$	3,319.4
Long-term debt – affiliate	100.0		—		128.0		—		128.0



As of December 31, 2011			Estimated Fair Value
Financial Assets	Carrying Amount		Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	21.9	$	21.9	$	—	$	—	$	21.9

Financial Liabilities
Long-term debt	$	3,298.7	$	—	$	3,537.8	$	—	$	3,537.8
Long-term debt – affiliate	100.0		—		105.8		—		105.8