Derivative Instruments and Hedging Activities

3 Months Ended

Mar. 31, 2013

Derivative Instruments and Hedging Activities [Abstract]

Derivative Instruments and Hedging Activities

Note 12 — Derivative Instruments and Hedging Activities

Partnership Commodity Hedges

The primary purpose of the Partnership's commodity risk management activities is to manage its exposure to commodity price risk and reduce volatility in its operating cash flow due to fluctuations in commodity prices. The Partnership has hedged the commodity prices associated with a portion of its expected (i) natural gas equity volumes in Field Gathering and Processing Operations and (ii) NGL and condensate equity volumes predominately in Field Gathering and Processing segment and the LOU business unit in Coastal Gathering and Processing segment that result from its percent of proceeds processing arrangements. These hedge positions will move favorably in periods of falling prices and unfavorably in periods of rising prices. The Partnership has designated these derivative contracts as cash flow hedges for accounting purposes.

The hedges generally match the NGL product composition and the NGL and natural gas delivery points to those of the Partnership's physical equity volumes. The NGL hedges may be transacted as specific NGL hedges or as baskets of ethane, propane, normal butane, isobutane and natural gasoline based upon the Partnership's expected equity NGL composition. We believe this approach avoids uncorrelated risks resulting from employing hedges on crude oil or other petroleum products as "proxy" hedges of NGL prices. The Partnership's natural gas and NGL hedges are settled using published index prices for delivery at various locations, which closely approximate the Partnership's actual natural gas and NGL delivery points.

The Partnership hedges a portion of its condensate sales using crude oil hedges that are based on the NYMEX futures contracts for West Texas Intermediate light, sweet crude, which approximates the prices received for condensate. This necessarily exposes the Partnership to a market differential risk if the NYMEX futures do not move in exact parity with the sales price of its underlying condensate equity volumes.

At March 31, 2013, the notional volumes of the Partnership's commodity hedges for equity volumes were:

Commodity	Instrument	Unit	2013		2014		2015		2016
Natural Gas	Swaps	MMBtu/d		31,108		25,500		12,001		5,000
NGL	Swaps	Bbl/d		5,650		1,000		-		-
Condensate	Swaps	Bbl/d		1,962		1,450		-		-

The Partnership also enters into derivative instruments to help manage other short-term commodity-related business risks. The Partnership has not designated these derivatives as hedges, and records changes in fair value and cash settlements to revenues.

The Partnership's derivative contracts are subject to netting arrangements that allow net cash settlement of offsetting asset and liability positions with the same counterparty. We record derivative assets and liabilities on our Consolidated Balance Sheets on a gross basis, without considering the effect of master netting arrangements. The following schedules reflect the fair values of our derivative instruments and their location in our Consolidated Balance Sheets as well as pro forma reporting assuming that we reported derivatives subject to master netting agreements on a net basis: 

		Fair Value as of March 31, 2013						Fair Value as of December 31, 2012
Balance Sheet		Derivative			Derivative			Derivative			Derivative
Location		Assets			Liabilities			Assets			Liabilities
Derivatives designated as hedging instruments
Commodity contracts	Current		$	18.1		$	8.1		$	29.2		$	7.2
Long-term				3.2			5.0			5.1			4.8
Total derivatives designated as hedging instruments			$	21.3		$	13.1		$	34.3		$	12.0
Derivatives not designated as hedging instruments
Commodity contracts	Current		$	0.1		$	0.1		$	0.1		$	0.2
Long-term				-			-			-			-
Total derivatives not designated as hedging instruments			$	0.1		$	0.1		$	0.1		$	0.2
Total current position			$	18.2		$	8.2		$	29.3		$	7.4
Total long-term position				3.2			5.0			5.1			4.8
Total derivatives			$	21.4		$	13.2		$	34.4		$	12.2

The pro forma impact of reporting derivatives in the Consolidated Balance Sheet is determined as follows:
	Gross Presentation						Pro forma Net Presentation
	Asset			Liability			Asset			Liability
March 31, 2013	Position			Position			Position			Position
Current position
Counterparties with offsetting position		$	16.3		$	7.1		$	9.2		$	-
Counterparties without offsetting position - assets			1.9			-			1.9			-
Counterparties without offsetting position - liabilities			-			1.1			-			1.1
			18.2			8.2			11.1			1.1
Long-term position
Counterparties with offsetting position			3.2			0.9			2.3			-
Counterparties without offsetting position - assets			-			-			-			-
Counterparties without offsetting position - liabilities			-			4.1			-			4.1
			3.2			5.0			2.3			4.1
Total derivatives
Counterparties with offsetting position			19.5			8.0			11.5			-
Counterparties without offsetting position - assets			1.9			-			1.9			-
Counterparties without offsetting position - liabilities			-			5.2			-			5.2
		$	21.4		$	13.2		$	13.4		$	5.2
December 31, 2012
Current position
Counterparties with offsetting position		$	23.8		$	7.4		$	16.4		$	-
Counterparties without offsetting position - assets			5.5			-			5.5			-
Counterparties without offsetting position - liabilities			-			-			-			-
			29.3			7.4			21.9			-
Long-term position
Counterparties with offsetting position			4.4			2.8			1.6			-
Counterparties without offsetting position - assets			0.7			-			0.7			-
Counterparties without offsetting position - liabilities			-			2.0			-			2.0
			5.1			4.8			2.3			2.0
Total derivatives
Counterparties with offsetting position			28.2			10.2			18.0			-
Counterparties without offsetting position - assets			6.2			-			6.2			-
Counterparties without offsetting position - liabilities			-			2.0			-			2.0
		$	34.4		$	12.2		$	24.2		$	2.0

The fair value of the Partnership's derivative instruments, depending on the type of instrument, was determined by the use of present value methods or standard option valuation models with assumptions about commodity prices based on those observed in underlying markets.

The estimated fair value of the Partnership's derivative instruments was a net asset of $8.2 million as of March 31, 2013, net of an adjustment for credit risk. The credit risk adjustment is based on the default probabilities by year as indicated by market quotes for the counterparties' credit default swap rates. These default probabilities have been applied to the unadjusted fair values of the derivative instruments to arrive at the credit risk adjustment, which was immaterial for all periods presented.

The Partnership's payment obligations in connection with substantially all of these hedging transactions and any additional credit exposure due to a rise in natural gas, NGL and crude oil prices relative to the fixed prices set forth in the hedges are secured by a first priority lien in the collateral securing its senior secured indebtedness that ranks equal in right of payment with liens granted in favor of its senior secured lenders.
 

The following tables reflect amounts recorded in other comprehensive income ("OCI") and amounts reclassified from OCI to revenue and expense for the periods indicated:

	Gain (Loss) Recognized in OCI on Derivatives
Derivatives in	(Effective Portion)
Cash Flow Hedging	Three Months Ended March 31,
Relationships	2013			2012
Commodity contracts		(7.6	)		15.5
	$	(7.6	)	$	15.5
	Gain (Loss) Reclassified from OCI into Income
	(Effective Portion)
	Three Months Ended March 31,
Location of Gain (Loss)		2013			2012
Interest expense, net	$	(1.7	)	$	(2.3	)
Revenues		6.6			2.5
	$	4.9		$	0.2

Hedge ineffectiveness was immaterial for all periods presented.

Our consolidated earnings are also affected by the Partnership's use of the mark-to-market method of accounting for derivative instruments that do not qualify for hedge accounting or that have not been designated as hedges. The changes in fair value of these instruments are recorded on the balance sheet and through earnings (i.e., using the "mark-to-market" method) rather than being deferred until the anticipated transaction settles. The use of mark-to-market accounting for financial instruments can cause non-cash earnings volatility due to changes in the underlying commodity price indices. Gain (loss) recognized on derivatives not designated as hedging instruments was immaterial for all periods presented.

The following table shows the deferred gains (losses) included in accumulated OCI that will be reclassified into earnings through the end of 2016:

	March 31, 2013			December 31, 2012
Commodity hedges, before tax	$	1.1		$	3.2
Commodity hedges, after tax		0.6			1.9
Interest rate swaps, before tax		(1.0	)		(1.2	)
Interest rate swaps, after tax		(0.6	)		(0.7	)

As of March 31, 2013, deferred net gains of $10.8 millionon commodity hedges and deferred net losses of $5.7 million on terminated interest rate swaps recorded in OCI are expected to be reclassified to revenue and interest expense during the next twelve months.

See Note 13 for additional disclosures related to derivative instruments and hedging activities.