mark-to-market method of accounting. This resulted in $450.0 million of these swap agreements mitigating our
interest rate risk through June 2012, with $150.0 million extending from June 2012 through June 2014.
At December 31, 2011, the effective weighted-average interest rate on our outstanding debt was 4.45%,
taking into account our interest rate swap agreements totaling $450.0 million.
Based on the annualized unhedged borrowings under our credit facility of $72.0 million as of
December 31, 2011, a 0.5% movement in the base rate or LIBOR rate would result in an approximately $0.4
million annualized increase or decrease in interest expense.
Commodity Price Risk
We are exposed to the impact of market fluctuations in the prices of natural gas, NGLs and condensate as a
result of our gathering, processing, sales and storage activities. For gathering services, we receive fees or
commodities from producers to bring the natural gas from the wellhead to the processing plant. For processing and
storage services, we either receive fees or commodities as payment for these services, depending on the types of
contracts. We employ established policies and procedures to manage our risks associated with these market
fluctuations using various commodity derivatives, including forward contracts, swaps, costless collars and futures.
Commodity Cash Flow Protection Activities
— We closely monitor the risks associated with commodity
price changes on our future operations and, where appropriate, use various fixed price swaps and collar
arrangements to mitigate a portion of the effect pricing fluctuations may have on the value of our assets and
operations. Depending on our risk management objectives, we may periodically settle a portion of these
instruments prior to their maturity.
We enter into derivative financial instruments to mitigate a portion of the cash flow risk of decreased
natural gas, NGL and condensate prices associated with our percent-of-proceeds arrangements and gathering
operations. We also may enter into natural gas derivatives to lock in margin around our transportation or leased
storage assets. Historically, there has been a strong relationship between NGL prices and crude oil prices, with
some recent exceptions. Given the limited liquidity and tenor of the NGL financial market, we have historically
used crude oil swaps and costless collars to mitigate a portion of our NGL price risk. For the nearer tenor where
there is greater liquidity in the NGL derivatives market, we have periodically also utilized NGL derivatives.
When the relationship of NGL prices to crude oil prices is at a discount to historical ranges, we experience
additional exposure as a result of the relationship where we utilize crude oil swaps and costless collars to
mitigate NGL price exposure. When our crude oil swaps become short-term in nature, we have periodically
converted certain crude oil derivatives to NGL derivatives by entering into offsetting crude oil swaps while
adding NGL swaps, a portion of which are with DCP Midstream, LLC. As a result of these transactions, we
have mitigated a portion of our expected natural gas, NGL and condensate commodity price risk through 2016.
The derivative financial instruments we have entered into are typically referred to as “swap” contracts and
“collar” arrangements. The swap contracts entitle us to receive payment at settlement from the counterparty to
the contract to the extent that the reference price is below the swap price stated in the contract, and we are
required to make payment at settlement to the counterparty to the extent that the reference price is higher than
the swap price stated in the contract.
We also use commodity collar arrangements, which entitle us to receive payment at settlement from the
counterparty to the contract to the extent that the reference price is below the floor price stated in the contract.
Conversely, if the reference price is above the ceiling price stated in the contract, we are required to make
payment at settlement to the counterparty. If the reference price is between the floor price and the ceiling price,
no payment will be made at the settlement of the contract.
We are using the mark-to-market method of accounting for all commodity derivative instruments, which
has significantly increased the volatility of our results of operations as we recognize, in current earnings, all
non-cash gains and losses from the mark-to-market on derivative activity.
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