price of natural gas and NGLs fluctuate. We have mitigated a portion of our share of anticipated natural gas,
NGL and condensate commodity price risk associated with the equity volumes from our gathering and
processing operations through 2016 with derivative instruments.
Our hedging activities and the application of fair value measurements may have a material adverse effect
on our earnings, profitability, cash flows, liquidity and financial condition.
We are exposed to risks associated with fluctuations in commodity prices. The extent of our commodity
price risk is related largely to the effectiveness and scope of our hedging activities. For example, the derivative
instruments we utilize are based on posted market prices, which may differ significantly from the actual natural
gas, NGL and condensate prices that we realize in our operations. To mitigate a portion of our cash flow
exposure to fluctuations in the price of NGLs, we have entered into derivative financial instruments relating to
the future price of crude oil and NGLs. If the price relationship between NGLs and crude oil declines, our
commodity price risk will increase. Furthermore, we have entered into derivative transactions related to only a
portion of the volume of our expected natural gas supply and production of NGLs and condensate from our
processing plants; as a result, we will continue to have direct commodity price risk to the open portion. Our
actual future production may be significantly higher or lower than we estimate at the time we entered into the
derivative transactions for that period. If the actual amount is higher than we estimate, we will have greater
commodity price risk than we intended. If the actual amount is lower than the amount that is subject to our
derivative financial instruments, we might be forced to satisfy all or a portion of our derivative transactions
without the benefit of the cash flow from our sale of the underlying physical commodity, reducing our liquidity.
We have mitigated a portion of our expected natural gas, NGL and condensate commodity price risk
relating to the equity volumes from our gathering and processing operations through 2016 by entering into fixed
price derivative financial instruments. Additionally, we have entered into interest rate swap agreements to
convert a portion of the variable rate revolving debt under our 5-year credit agreement that matures in
November 2016, or the Credit Agreement, to a fixed rate obligation, thereby reducing the exposure to market
rate fluctuations. The intent of these arrangements is to reduce the volatility in our cash flows resulting from
fluctuations in commodity prices and interest rates.
We have mitigated a portion of our interest rate risk with interest rate swaps and forward-starting interest
rate swaps that reduce our exposure to market rate fluctuations by converting variable interest rates on our
existing debt to fixed interest rates and locking in rates on our anticipated future fixed-rate debt, respectively.
The interest rate swap agreements convert the interest rate associated with the indebtedness outstanding under
our revolving credit facility to a fixed-rate obligation, thereby reducing the exposure to market rate fluctuations.
The forward-starting interest rate swap agreements lock in the interest rate associated with our anticipated
future fixed-rate debt, thereby reducing the exposure to market rate fluctuations prior to issuance.
We record all of our derivative financial instruments at fair value on our balance sheets primarily using
information readily observable within the marketplace. In situations where market observable information is not
available, we may use a variety of data points that are market observable, or in certain instances, develop our
own expectation of fair value. We will continue to use market observable information as the basis for our fair
value calculations, however, there is no assurance that such information will continue to be available in the
future. In such instances, we may be required to exercise a higher level of judgment in developing our own
expectation of fair value, which may be significantly different from the historical fair values, and may increase
the volatility of our earnings.
We will continue to evaluate whether to enter into any new derivative arrangements, but there can be no
assurance that we will enter into any new derivative arrangement or that our future derivative arrangements will
be on terms similar to our existing derivative arrangements. Although we enter into derivative instruments to
mitigate a portion of our commodity price and interest rate risk, we also forego the benefits we would otherwise
experience if commodity prices or interest rates were to change in our favor.
The counterparties to our derivative instruments may require us to post collateral in the event that our
potential payment exposure exceeds a predetermined collateral threshold. Depending on the movement in
commodity prices, the amount of collateral posted may increase, reducing our liquidity.
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