Derivative Instruments

12 Months Ended

Dec. 31, 2011

Derivative Instruments [Abstract]

Derivative Instruments

Derivative Instruments

Policies. The Partnership established comprehensive risk management policies and procedures to monitor and manage the market risks associated with commodity prices, counterparty credit, and interest rates. The General Partner is responsible for delegation of transaction authority levels, and the Audit and Risk Committee of the General Partner is responsible for the overall management of these risks, including monitoring exposure limits. The Audit and Risk Committee receives regular briefings on exposures and overall risk management in the context of market activities.

Commodity Price Risk. The Partnership is a net seller of NGLs, condensate and natural gas as a result of its gathering and processing operations. The prices of these commodities are impacted by changes in the supply and demand as well as market focus. Both the Partnership's profitability and cash flow are affected by the inherent volatility of these commodities which could adversely affect its ability to make distributions to its unitholders. The Partnership manages this commodity price exposure through an integrated strategy that includes management of its contract portfolio, matching sales prices of commodities with purchases, optimization of its portfolio by monitoring basis and other price differentials in operating areas, and the use of derivative contracts. In some cases, the Partnership may not be able to match pricing terms or to cover its risk to price exposure with financial hedges, and it may be exposed to commodity price risk. Speculative positions with derivative contracts are prohibited under the Partnership's policies.

The Partnership has swap contracts settled against NGLs (ethane, propane, butane, and natural gasoline), condensate and natural gas market prices. The Partnership also has put options settled against ethane. The Partnership will exercise these options only when the market prices for ethane is below the price that the Partnership has locked on these options.

As of December 31, 2011 all of the Partnership's commodity swap contracts were accounted for as cash flow hedges, and the Partnership's put options were accounted for on mark-to-market basis. On January 1, 2012, the Partnership, for accounting purposes, de-designated its swap contracts and will account for these contracts using the mark-to-market method of accounting. Upon the de-designation of these trades, the Partnership has $4.8 million in net hedging losses in accumulated other comprehensive loss which will be amortized to earnings over the next 2.25 years, of which $5.2 million of net hedging losses will be amortized to revenues in the next 12 months.

Interest Rate Risk. The Partnership is exposed to variable interest rate risk as a result of borrowings under its credit facility. As of December 31, 2011 and December 31, 2010, the Partnership had $332 million and $285 million, respectively, of outstanding borrowings exposed to variable interest rate risk. The Partnership’s $300 million interest rate swaps expired in March 2010. In April 2010, the Partnership entered into two-year interest rate swaps related to $250 million of borrowings under its revolving credit facility, effectively locking the base rate for these borrowings at 1.325% through April 2012. As of December 31, 2011 the interest rate swaps were accounted for using the mark-to-market method of accounting.

Credit Risk. The Partnership's resale of NGLs, condensate, and natural gas exposes it to credit risk, as the margin on any sale is generally a very small percentage of the total sales price. Therefore, a credit loss can be very large relative to overall profitability on these transactions. The Partnership attempts to ensure that it issues credit only to creditworthy counterparties and that in appropriate circumstances any such extension of credit is backed by adequate collateral, such as a letter of credit or parental guarantee from a parent company with potentially better credit.

The Partnership is exposed to credit risk from its derivative counterparties. The Partnership does not require collateral from these counterparties. The Partnership deals primarily with financial institutions when entering into financial derivatives, and utilizes master netting 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 was $4.8 million, which would be reduced by $4.6 million due to the netting feature. The Partnership has elected to present assets and liabilities under master netting agreements gross on the condensed consolidated balance sheets.

Embedded Derivatives. The Series A Preferred Units contain embedded derivatives which are required to be bifurcated and accounted for separately, such as the holders' conversion option and the Partnership's call option. These embedded derivatives are accounted for using mark-to-market accounting. The Partnership does not expect the embedded derivatives to affect its cash flows.

The Partnership’s derivative assets and liabilities, including credit risk adjustments, for the years ended December 31, 2011 and 2010 are detailed below:

	Assets				Liabilities
	December 31, 2011		December 31, 2010		December 31, 2011		December 31, 2010
Derivatives designated as cash flow hedges
Current amounts
Commodity contracts	$	4,065	$	2,650	$	10,065	$	11,421
Long-term amounts
Commodity contracts	474		23		63		3,271
Total cash flow hedging instruments	4,539		2,673		10,128		14,692
Derivatives not designated as cash flow hedges
Current amounts
Ethane put options	309		—		—		—
Interest rate contracts	—		—		470		1,751
Long-term amounts
Interest rate contracts	—		—		—		833
Embedded derivatives in Series A Preferred Units	—		—		39,049		57,023
Total derivatives not designated as cash flow hedges	309		—		39,519		59,607
Total derivatives	$	4,848	$	2,673	$	49,647	$	74,299

The Partnership's statement of operation for the year ended December 31, 2011 and 2010 were impacted by derivative instruments activities as detailed below:

		Successor						Predecessor
		Year Ended December 31, 2011			Period from May 26, 2010 to December 31, 2010			Period from January 1, 2010 to May 25, 2010			Year Ended December 31, 2009
		Change in Value Recognized in AOCI on Derivatives (Effective Portion)
Derivatives in cash flow hedging relationships:
Commodity derivatives		$	(12,678	)	$	(11,099	)	$	14,371		$	(19,958	)
Interest rate swap derivatives		—			—			—			(2,082		)
		$	(12,678	)	$	(11,099	)	$	14,371		$	(22,040	)
	Location of Gain/(Loss) Recognized in Income	Amount of Gain/(Loss) Reclassified from AOCI into Income (Effective Portion)
Derivatives in cash flow hedging relationships:
Commodity derivatives	Revenue	$	(19,018	)	$	—		$	(5,200	)	$	54,260
Interest rate swap derivatives	Interest expense	—			—			(1,060		)	(6,255		)
		$	(19,018	)	$	—		$	(6,260	)	$	48,005
	Location of Gain/(Loss) Recognized in Income	Amount of Gain/(Loss) Recognized in Income on Ineffective Portion
Derivatives in cash flow hedging relationships:
Commodity derivatives	Revenue	$	3		$	(88	)	$	(799	)	$	108

	Location of Gain/(Loss) Recognized in  Income	Amount of Gain/(Loss) from De-designation Amortized from AOCI into Income
Derivatives not designated in a hedging relationship:
Commodity derivatives	Revenue	$	—		$	—		$	4,115		$	(611	)
	Location of  Gain/(Loss) Recognized in  Income	Amount of Gain/(Loss) Recognized in Income on Derivatives
Derivatives not designated in a hedging relationship:
Commodity derivatives	Revenue	$	(58	)	$	(7,778	)	$	1,168		$	(13,669	)
Interest rate swap derivatives	Interest expense	(395		)	(3,588		)	(824		)	—
Embedded derivatives	Other  income & deductions	17,974			(8,390		)	(4,039		)	(15,686		)
		$	17,521		$	(19,756	)	$	(3,695	)	$	(29,355	)