Derivative Instruments

6 Months Ended

Jun. 30, 2011

DERIVATIVE INSTRUMENTS

DERIVATIVE INSTRUMENTS

NOTE 4 — DERIVATIVE INSTRUMENTS

The MGP, on behalf of the Partnership, used a number of different derivative instruments, principally swaps and collars, in connection with its commodity price risk management activities. The MGP entered into financial instruments to hedge the Partnership's forecasted natural gas and crude oil against the variability in expected future cash flows attributable to changes in market prices. Swap instruments are contractual agreements between counterparties to exchange obligations of money as the underlying natural gas and crude oil is sold. Under swap agreements, the Partnership received or pays a fixed price and receives or remits a floating price based on certain indices for the relevant contract period. Commodity-based option instruments are contractual agreements that grant the right, but not obligation, to purchase or sell natural gas and crude oil at a fixed price for the relevant contract period.

Historically, the MGP has entered into natural gas and crude oil future option contracts and collar contracts on behalf of the Partnership to achieve more predictable cash flows by hedging its exposure to changes in natural gas and oil prices. At any point in time, such contracts may include regulated New York Mercantile Exchange ("NYMEX") futures and options contracts and non-regulated over-the-counter futures contracts with qualified counterparties. NYMEX contracts are generally settled with offsetting positions, but may be settled by the delivery of natural gas. Crude oil contracts are based on a West Texas Intermediate ("WTI") index. These contracts have qualified and been designated as cash flow hedges and recorded at their fair values.

The MGP formally documents all relationships between hedging instruments and the items being hedged, including its risk management objective and strategy for undertaking the hedging transactions. This includes matching the commodity derivative contracts to the forecasted transactions. The MGP assesses, both at the inception of the derivative and on an ongoing basis, whether the derivative is effective in offsetting changes in the forecasted cash flow of the hedged item. If it is determined that a derivative is not effective as a hedge or that it has ceased to be an effective hedge due to the loss of adequate correlation between the hedging instrument and the underlying item being hedged, the MGP will discontinue hedge accounting for the derivative and subsequent changes in the derivative fair value, which is determined by the MGP through the utilization of market data, will be recognized immediately within gain (loss) on mark-to-market derivatives in the Partnership's statements of operations. For derivatives qualifying as hedges, the Partnership recognizes the effective portion of changes in fair value in partners' capital as accumulated other comprehensive income and reclassifies the portion relating to commodity derivatives to gas and oil production revenues for the Partnership's derivatives within the Partnership's statements of operations as the underlying transactions are settled. For non-qualifying derivatives and for the ineffective portion of qualifying derivatives, the Partnership recognizes changes in fair value within gain (loss) on mark-to-market derivatives in its statements of operations as they occur.

Prior to the acquisition on February 17, 2011 of "the Transferred Business", Atlas Energy, Inc. monetized its derivative instruments related to the Transferred Business. The monetized proceeds relate to instruments that were originally put into place to hedge future natural gas and oil production of the Transferred Business, including production generated through its Drilling Partnerships. At June 30, 2011, the Partnership recorded a net receivable from the monetized derivative instruments of $1,031,400 in accounts receivable-affiliate and $1,071,500 in long-term receivable-affiliate with the corresponding net unrealized gains in accumulated other comprehensive income on the Partnership's balance sheets, which will be allocated to natural gas and oil production revenue generated over the period of the original instruments' contracts. As a result of the monetization and the early settlement of natural gas and oil derivative instruments, the Partnership recorded a net deferred gain on its balance sheets in other comprehensive income of $2,102,900 as of June 30, 2011. During the period, $390,000 of monetized proceeds were recorded by the Partnership and allocated only to the limited partners. Of the $2,102,900 of net unrealized gain in accumulated other comprehensive income, the Partnership will reclassify $1,031,400 of net gains to the Partnership's statements of operations over the next twelve month period and the remaining $1,071,500 in later periods.

The following table summarizes the fair value of the Partnership's derivative instruments as of December 31, 2010, as well as the gain or loss recognized in the statement of operations for the three and six months ended June 30, 2011.

Fair Value of Derivative Instruments:

		Fair Value
	Balance Sheet	December 31,
Derivatives in Cash Flow Hedging Relationships	Location	2010
Commodity Contracts	Current assets	$	1,325,500
	Long-term assets		1,665,800
			2,991,300
	Current liabilities		(4,300	)
	Long-term liabilities		(162,300	)
			(166,600	)
	Total	$	2,824,700

Effects of derivative instruments on Statement of Operations:

				Period Ended				Period Ended
		Three Months		April 1, 2010		Six Months		April 1, 2010
		Ended		Through		Ended		Through
		June 30,		June 30,		June 30,		June 30,
		2011		2010		2011		2010
Derivative in Cash Flow Hedging Relationships	Gain Recognized in OCI on Derivatives
	Commodity Contracts	$	—	$	—	$	113,900	$	—

				Period Ended				Period Ended
		Three Months		April 1, 2010		Six Months		April 1, 2010
		Ended		Through		Ended		Through
		June 30,		June 30,		June 30,		June 30,
		2011		2010		2011		2010
Location of Gain Reclassified from Accumulated OCI into Income	Gain Reclassified from OCI into Net Income
	Gas and Oil Revenue	$	369,800	$	—	$	659,800	$	—