NOTE 5 – FAIR VALUE MEASUREMENTS

Our financial instruments, including cash and cash equivalents, accounts receivable and accounts payable, are carried at cost, which approximates fair value due to the short-term maturity of these instruments. Our other financial and non-financial assets and liabilities that are being measured on a recurring basis are measured and reported at fair value.

Fair value is defined as the 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 (exit price). U.S. GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of fair value hierarchy are as follows:

Level 1 – Defined as inputs such as unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 – Defined as inputs other than quoted prices in active markets that are either directly or indirectly observable for the asset or liability.

Level 3 – Defined as unobservable inputs for use when little or no market data exists, therefore requires an entity to develop its own assumptions for the asset or liability.

Commodity Derivative Instruments — The fair value of the commodity derivative instruments is estimated using a combined income and market valuation methodology based upon observable forward commodity price and volatility curves. The curves are obtained from independent pricing services. We validate the data provided by independent pricing services by comparing such pricing against other third party pricing data.

Interest Rate Derivative Instruments — The fair value of the interest rate derivative instruments is estimated using a combined income and market valuation methodology based upon observable forward interest rates and volatility curves. The curves are obtained from independent pricing services. We validate the data provided by independent pricing services by comparing such pricing against other third party pricing data.

Available for Sale Securities — The fair value of the available-for-sale securities are estimated using actual trade data, broker/dealer quotes, and other similar data, which are obtained from quoted market prices, independent pricing vendors, or other sources. We validate the data provided by independent pricing services to make assessments and determinations as to the ultimate valuation of its investment portfolio by comparing such pricing against other third party pricing data.

Deferred Class B Unit Obligation — The Deferred Class B Unit Obligation represents consideration for the GP Buyout. The fair value of the deferred Class B unit obligation as of September 30, 2014 is based on the weighted average probability of the obligation being achieved based on: (i) the reduced number of units contemplated in the Merger Agreement using quoted market prices as of September 30, 2014, which value is subject to future market price fluctuations, and (ii) the previously applied methodology using a Monte-Carlo valuation model based on the existing terms of the deferred Class B unit obligation. The previously applied methodology estimates the value using a combination of quoted market prices and the probability of achieving operating performance related to (a) the distribution rate, (b) Distribution Coverage Ratio (as defined in our Partnership Agreement), and (c) Total Debt to EBITDAX (as defined in our Partnership Agreement) (collectively “the Class B Criteria”). The Class B Criteria represent significant unobservable inputs.

We utilize the most observable inputs available for the valuation technique utilized. The financial assets and liabilities are classified in their entirety based on the lowest level of input that is of significance to the fair value measurement. The following table sets forth, by level within the hierarchy, the fair value of our financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2014 and December 31, 2013. All fair values reflected below have been adjusted for nonperformance risk.



As of September 30, 2014		Total		Level 1		Level 2		Level 3
Assets from commodity derivative instruments	$	63,109	$	-	$	63,109	$	-
Assets from interest rate derivative instruments		316		-		316		-
Total assets from derivative instruments		63,425		-		63,425		-
Available for sale securities:
Equities		3,997		3,997		-		-
Mutual funds		10,517		10,517		-		-
Exchange traded funds		4,741		4,741		-		-
Total available for sale securities		19,255		19,255		-		-
	$	82,680	$	19,255	$	63,425	$	-

Liabilities from commodity derivative instruments	$	4,928	$	-	$	4,928	$	-
Liabilities from interest rate derivative instruments		7,733		-		7,733		-
Deferred Class B Unit Obligation		134,894		-		-		134,894
	$	147,555	$	-	$	12,661	$	134,894

As of December 31, 2013		Total		Level 1		Level 2		Level 3
Assets from commodity derivative instruments	$	89,616	$	-	$	89,616	$	-
Available for sale securities:
Equities		3,967		3,967		-		-
Mutual funds		11,639		11,639		-		-
Exchange traded funds		3,140		3,140		-		-
Total available for sale securities		18,746		18,746		-		-
	$	108,362	$	18,746	$	89,616	$	-

Liabilities from commodity derivative instruments	$	7,093	$	-	$	7,093	$	-
Liabilities from interest rate derivative instruments		10,391		-		10,391		-
	$	17,484	$	-	$	17,484	$	-

The table below presents a reconciliation of the liabilities classified as Level 3 in the fair value hierarchy for the nine months ended September 30, 2014. There were no Level 3 instruments for the nine months ended September 30, 2013. The Level 3 instruments presented in the table consists of the entitlement our former general partner owners have to receive up to an aggregate of 11.6 million Class B units.


		Nine Months Ended
		September 30, 2014
Balance at beginning of period	$	-
Recognition of deferred Class B unit obligation		141,777
Changes in fair value		(6,883)
Transfers in and (out) of Level 3		-
Balance at end of period	$	134,894
Gain on deferred Class B unit obligation attributable to the change in fair value still held at the end of the period	$	(6,883)

The fair value of the Level 3 deferred Class B unit obligation has been determined using available market information and commonly accepted valuation methodologies, as described above. The key assumptions of the valuation model consist of performance criteria as described in Note 13 – Partners’ Capital and include EBITDA volatility of 20% and equity volatility at 30%. Considerable judgment is required in interpreting the market data to develop the estimate of fair value. Accordingly, our estimates are not necessarily indicative of the amounts that we, or holders of the obligation, could realize in a current market exchange. The use of different assumptions and/or estimation methodologies could have a material effect on the estimated fair values. These amounts have not been revalued since the period indicated above, and current estimates of fair value could differ significantly from the amounts presented.

Fair Value of Other Financial Instruments

Fair value guidance requires certain fair value disclosures, such as those on our long-term debt, to be presented in both interim and annual reports. The estimated fair value amounts of financial instruments have been determined using available market information and valuation methodologies described below.

Revolving Credit Facility — The fair value of our revolving credit facility depends primarily on the current active market LIBOR. The carrying value of our revolving credit facility as of September 30, 2014 approximates fair value based on the current LIBOR and is classified as a Level 2 input in the fair value hierarchy.

Derivative Premiums – The fair value of the deferred premiums on our commodity derivatives is based on the current active market LIBOR. The carrying value of the premiums as of September 30, 2014 approximates fair value based on the current LIBOR and is classified as a Level 2 input in the fair value hierarchy. Refer to Note 6 – Derivative Activities for further information on the derivative premiums.

Senior Notes – The fair value of our senior notes is measured based on inputs from quoted, unadjusted prices from over-the-counter markets for debt instruments. If the senior notes had been measured at fair value, we would classify them as Level 1 under the fair value hierarchy. The fair value of our senior notes as of September 30, 2014 was $339.8 million.

There have been no transfers between levels within the fair value measurement hierarchy during the nine months ended September 30, 2014.