FINANCIAL INSTRUMENTS

Fair Value Measurements

We apply recurring fair value measurements to our financial assets and liabilities. In estimating fair value, we generally use a market approach and incorporate assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation techniques. The fair value measurement inputs we use vary from readily observable inputs that represent market data obtained from independent sources to unobservable inputs that reflect our own market assumptions that cannot be validated through external pricing sources. Based on the observability of the inputs used in the valuation techniques, the financial assets and liabilities carried at fair value in the financial statements are classified as follows:


•	Level 1—Represents unadjusted quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date. This category primarily includes our cash and cash equivalents, accounts receivable and accounts payable.


•	Level 2—Represents quoted market prices for similar assets or liabilities in active markets, quoted market prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data. This category primarily includes variable rate debt, OTC swap contracts based upon natural gas price indices and interest rate swaps.


•	Level 3—Represents derivative instruments whose fair value is estimated based on internally developed models and methodologies utilizing significant inputs that are generally less readily observable from market sources. We do not have financial assets and liabilities classified as Level 3.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy must be determined based on the lowest level input that is significant to the fair value measurement. An assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset or liability.

Derivative Financial Instruments

Interest Rate Swaps

We manage a portion of our interest rate risk through interest rate swaps. In March 2012, we terminated an interest rate cap contract and entered into an interest rate swap contract with Wells Fargo, N.A. to reduce the risk associated with the variability of interest rates for our term loan borrowings. The interest rate swap has a notional value of $150.0 million, and a maturity date of June 30, 2014. We receive a floating rate based upon one-month LIBOR and pay a fixed rate under the interest rate swap of 0.54%.

The fair value of our interest rate swap is determined based on a discounted cash flow method using the contractual terms of the swap. The floating coupon rate is based on observable rates consistent with the frequency of the interest cash flows. As of March 31, 2014 and December 31, 2013, the current portion of the interest rate swap liability of $0.1 million and $0.3 million, respectively, was included within other current liabilities. As of March 31, 2014 and December 31, 2013, there was no non-current portion of the interest rate swap liability.

The fair value of the interest rate swap liabilities were as follows (in thousands):



	Significant Other Observable Inputs (Level 2)
	Fair value measurement as of
	March 31, 2014		December 31, 2013
Interest rate swap liabilities	$	145	$	263

The interest rate swap was designated as a cash flow hedge for accounting purposes at inception of the contract and, thus, to the extent the cash flow hedge was effective, unrealized gains and losses were recorded to accumulated other comprehensive income/(loss) and recognized in interest expense as the underlying hedged transactions (interest payments) were recorded. Any hedge ineffectiveness was recognized in interest expense immediately. We did not have any hedge ineffectiveness during the three months ended March 31, 2014 and 2013.

The effect of the interest rate swap designated as a cash flow hedge in our statements of changes in partners’ capital and comprehensive loss were as follows (in thousands):



	Three Months Ended March 31,
	2014			2013
Change in value recognized in other comprehensive loss - effective portion	$	(11	)	$	(69	)
Loss reclassified from accumulated other comprehensive loss to interest expense	115			94

There were no amounts of gains or losses reclassified into earnings as a result of the discontinuance of cash flow hedge accounting due to the lack of probability of the forecasted transaction occurring. We estimate that approximately $0.1 million of hedging losses related to the interest rate swap contract will be reclassified from accumulated other comprehensive income (loss) into statements of operations within the next 12 months.

The interest rate swap was being accounted for as a cash flow hedge until February 2014, at which time we discontinued cash flow hedge accounting on a prospective basis, as a result of the $148.5 million temporary repayment of borrowings under our Credit Facility (See Note 10). The fair value of the interest rate swap recorded in accumulated other comprehensive loss at the cash flow hedge de-designation date was $0.1 million. This balance will be reclassified into interest expense as interest on the hedged debt is recorded. No ineffectiveness was recorded as a result of the cash flow hedge de-designation. Changes in the fair value of the interest rate swap for the remainder of the contract term will be recognized in interest expense unless a new cash flow hedging relationship is designated.

The amounts recognized in interest expense associated with derivatives that are not designated as hedging instruments were as follows (in thousands):



	Three Months Ended March 31,
	2014		2013
Realized loss on interest rate derivative	$	27	$	27
Unrealized loss on interest rate swap derivative	12		—

Commodity Swaps

In our normal course of business, we periodically enter into month-ahead swap contracts to hedge our exposure to certain intra-month natural gas index pricing risk. The total volume for the outstanding month-ahead swap contracts as of March 31, 2014 and December 31, 2013 was 49,150 MMBtu per day and 33,722 MMBtu per day, respectively. We define these contracts as Level 2 because the index price associated with such contracts is observable and tied to a similarly quoted first-of-the-month natural gas index price. As of March 31, 2014 and December 31, 2013, the fair value of $0.2 million and $0.1 million was included within other current assets, respectively.

We have elected to present our commodity swaps net in the balance sheet. We did not have any cash collateral received or paid on our commodity swaps as of March 31, 2014. The effect of offsetting in our balance sheet was as follows (in thousands):



	March 31, 2014				December 31, 2013
	Other Current Assets		Other Current Liabilities		Other Current Assets			Other Current Liabilities
Gross Amounts of Recognized Assets / (Liabilities)	$	164	$	—	$	140		$	(20	)
Gross Amounts Offset in the Balance Sheet	—		—		(20		)	20
Net Amount	$	164	$	—	$	120		$	—

The realized and unrealized gain/(loss) on these derivatives, recognized in revenues in our statements of operations were as follows (in thousands):



	Three Months Ended March 31,
	2014			2013
Realized gain/(loss) on derivatives	$	(1,169	)	$	(46	)
Unrealized gain/(loss) on derivatives	44			—