Derivative Instruments and Hedging Activities

9 Months Ended

Sep. 30, 2012

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:

The Company is exposed to certain risks in its ongoing business operations.  The primary risks managed by using derivative instruments are interest rate risk and commodity price risk.  Interest rate swaps and treasury rate locks are the principal derivative instruments used by the Company to manage interest rate risk associated with its long-term borrowings, although other interest rate derivative contracts may also be used from time to time.  Natural gas and NGL price swaps as well as call options and NGL processing spread swaps are the principal derivative instruments used by the Company to manage commodity price risk associated with purchases and/or sales of natural gas and/or NGL, although other commodity derivative contracts may also be used from time to time.  

The Company recognizes all derivative instruments as assets or liabilities at fair value in the unaudited interim condensed consolidated balance sheets.

Interest Rate Contracts

The Company may enter into interest rate swaps to manage its exposure to changes in interest payments on long-term debt attributable to movements in market interest rates, and may enter into treasury rate locks to manage its exposure to changes in future interest payments attributable to changes in treasury rates prior to the issuance of new long-term debt instruments.

Interest Rate Swaps.  In 2011, the Company entered into interest rate swap agreements to hedge the $600 million Junior Subordinated Notes with an aggregate notional amount of $525 million, of which $450 million were for ten-year periods and $75 million were for five-year periods.  These interest rate swaps became effective on November 1, 2011.  The Company pays interest on the Junior Subordinated Notes at the floating rate of three-month LIBOR plus a credit spread of 3.0175% beginning November 1, 2011.  The interest rate swaps effectively fix the interest rate applicable to the floating rate on a portion of the Junior Subordinated Notes and are accounted for as cash flow hedges, with the effective portion of their settled value recorded in accumulated other comprehensive income and reclassified into interest expense in the same periods during which the related interest payments on long-term debt impact earnings.  The floating rate LIBOR-based portion of the interest payments was exchanged for weighted average fixed rate interest payments of 3.63%.  In conjunction with the Merger, the Company discontinued hedge accounting treatment on these interest rate swaps.  Therefore, future changes in fair value will be recognized in earnings.

The Company also had outstanding pay-fixed interest rate swaps with a total notional amount of $455 million to hedge the LNG Holdings $455 million term loan, which was refinanced in February 2012.  These interest rate swaps were accounted for as cash flow hedges, with the effective portion of changes in their fair value recorded in accumulated other comprehensive income and reclassified intointerest expense in the same periods during which the related interest payments on long-term debt impacted earnings.  These swaps terminated in the first quarter of 2012.

For the predecessor period in 2012 during which hedge accounting treatment was applied, there was no swap ineffectiveness.

Treasury Rate Locks.  As of September 30, 2012, the Company had no outstanding treasury rate locks.  However, certain of its treasury rate locks that settled in prior periods were associated with interest payments on outstanding long-term debt.  During the predecessor periods, these treasury rate locks were accounted for as cash flow hedges, with the effective portion of their settled value recorded in accumulated other comprehensive income and reclassified into interest expense in the same periods during which the related interest payments on long-term debt impact earnings.

Commodity Contracts – Gathering and Processing Segment

The Company primarily enters into natural gas and NGL price swaps and NGL processing spread swaps to manage its exposure to changes in margin on forecasted sales of natural gas and NGL volumes resulting from movements in market commodity prices.

Natural Gas Price Swaps.  As of September 30, 2012, the Company had outstanding receive-fixed natural gas price swaps with a total notional amount of 2,760,000 MMBtu for the remainder of 2012 and 10,037,500 MMBtu for 2013.  These natural gas price swaps are accounted for as cash flow hedges, with the effective portion of changes in their fair value recorded in accumulated other comprehensive income and reclassified into operating revenues in the same periods during which the forecasted natural gas sales impact earnings.  As of September 30, 2012, approximately $0.7 million of net after-tax losses in accumulated other comprehensive income related to these natural gas price swaps are expected to be recognized in operating revenues during the next twelve months.  Any ineffective portion of the cash flow hedge is reported in current-period earnings.

NGL Price Swaps.  As of September 30, 2012, the Company had outstanding receive-fixed NGL price swaps with a total notional amount of 16,449,048 gallons (2,319,300 MMBtu equivalent basis) for the remainder of 2012.  These NGL price swaps are accounted for as cash flow hedges, with the effective portion of changes in their fair value recorded in accumulated other comprehensive income and reclassified into operating revenues in the same periods during which the forecasted NGL sales impact earnings.  As of September 30, 2012, approximately $6.1 million of net after-tax losses in accumulated other comprehensive income related to these NGL price swaps are expected to be recognized in operating revenues during the next 12 months.  Any ineffective portion of the cash flow hedge is reported in current-period earnings.

Commodity Contracts - Distribution Segment

The Company enters into natural gas commodity financial instruments to manage the exposure to changes in the cost of natural gas passed through to utility customers that result from movements in market commodity prices.  The cost of the derivative instruments and settlement of the respective obligations are recovered from utility customers through the purchased natural gas adjustment clause as authorized by the applicable regulatory authority and therefore do not impact earnings.

Natural Gas Price Swaps.  As of September 30, 2012, the Company had outstanding pay-fixed natural gas price swaps and call options with total notional amounts of 3,660,000 MMBtu, 12,130,000 MMBtu and 2,640,000 MMBtu for the remainder of 2012, 2013 and 2014, respectively.  These natural gas price swaps and call options are accounted for as economic hedges, with changes in their fair value recorded to deferred natural gas purchases.

Summary Financial Statement Information

The following table summarizes the fair value amounts of the Company’s asset and liability derivative instruments and their location reported in the unaudited interim condensed consolidated balance sheets at the dates indicated:

	Fair Value
	Asset Derivatives				Liability Derivatives
	Successor		Predecessor		Successor		Predecessor
Balance Sheet Location	September 30, 2012		December 31, 2011		September 30, 2012		December 31, 2011
Cash Flow Hedges:
Interest rate contracts:
Derivative instruments — liabilities	$	—	$	—	$	—	$	19,936
Deferred credits	—		—		—		59,789
Commodity contracts — Gathering and Processing:
Natural gas price swaps
Prepayments and other assets	1,498		6,124		—		—
Accounts payable — related parties	—		—		7,135		—
NGL price swaps
Prepayments and other assets	4,323		—		—		1,996
Derivative instruments — liabilities	—		—		—		4,144
	$	5,821	$	6,124	$	7,135	$	85,865
Economic Hedges:
Interest rate contracts:
Derivative instruments — liabilities	$	—	$	—	$	17,310	$	—
Deferred credits	—		—		63,142		—
Commodity contracts — Gathering and Processing:
Other derivative instruments
Derivative instruments — liabilities	—		—		—		50
Commodity contracts — Distribution:
Natural gas price swaps
Other non-current assets	768		—		—		—
Derivative instruments — liabilities	—		—		7,958		34,468
Deferred credits	—		3		—		5,643
	$	768	$	3	$	88,410	$	40,161
Total	$	6,589	$	6,127	$	95,545	$	126,026

The Company has master netting arrangements with certain of its counterparties, which permit applicable obligations of the parties to be settled on a net versus gross basis.  If a right of offset exists, the fair value amounts for the derivative instruments are reported in the unaudited interim condensed consolidated balance sheet on a net basis and disclosed herein on a gross basis.

The following tables summarize the location and amount (excluding income tax effects) of derivative instrument gains and losses reported in the Company’s unaudited interim condensed consolidated financial statements for the periods presented:

	Successor			Predecessor
	Three months ended September 30, 2012			Three months ended September 30, 2011
Cash Flow Hedges:
Interest rate contracts:
Change in fair value - increase in accumulated other comprehensive income	$	—		$	50,283
Reclassification of unrealized loss from accumulated other comprehensive income - increase of interest expense	—			5,715
Commodity contracts - Gathering and Processing:
Change in fair value - increase/(decrease) in accumulated other comprehensive income	(5,526		)	8,434
Reclassification of unrealized gain from accumulated other comprehensive income - increase of operating revenues	6,011			5,598
Economic Hedges:
Interest rate contracts:
Change in fair value - increase ininterest expense	(4,294		)	—
Commodity contracts - Gathering and Processing:
Change in fair value of hedges - decrease in operating revenues	—			3,963
Commodity contracts - Distribution:
Change in fair value - increase/(decrease) in deferred natural gas purchases	(10,866		)	10,114

	Successor			Predecessor
	Period from Acquisition (March 26, 2012) to September 30, 2012			Period from January 1, 2012 to March 25, 2012			Nine months ended September 30, 2011
Cash Flow Hedges:
Interest rate contracts:
Change in fair value - increase in accumulated other comprehensive income	$	—		$	6,174		$	71,031
Reclassification of unrealized loss from accumulated other comprehensive income - increase of interest expense	—			8,085			16,881
Commodity contracts - Gathering and Processing:
Change in fair value - increase in accumulated other comprehensive income	5,851			4,619			7,420
Reclassification of unrealized gain from accumulated other comprehensive income	11,547			2,043			14,782
Economic Hedges:
Interest rate contracts:
Change in fair value - increase in interest expense	15,415			—			—
Commodity contracts - Gathering and Processing:
Change in fair value of other hedges - decrease in operating revenues	—			50			27,611
Commodity contracts - Distribution:
Change in fair value - decrease in deferred natural gas purchases	(30,961		)	(1,957		)	(13,658		)

Derivative Instrument Contingent Features

Certain of the Company’s derivative instruments contain provisions that require the Company’s debt to be maintained at an investment grade credit rating from each of the major credit rating agencies.  If the Company’s debt were to fall below investment grade, the Company would be in violation of these provisions, and the counterparties to the derivative instruments could potentially require the Company to post collateral for certain of the derivative instruments.  The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a net liability position at September 30, 2012 was $3.2 million.