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Derivative Instruments, Hedging Activities and Fair Value Measurements | 12 Months Ended
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Dec. 31, 2012
Derivative Instruments, Hedging Activities and Fair Value Measurements [Abstract] |
Derivative Instruments, Hedging Activities and Fair Value Measurements | Note 6. Derivative Instruments, Hedging Activities and Fair Value Measurements In the normal course of our business operations, we are exposed to certain risks, including changes in interest rates and commodity prices. In order to manage risks associated with certain anticipated future transactions, we use derivative instruments such as futures, forward contracts, swaps, options and other instruments with similar characteristics. Substantially all of our derivatives are used for non-trading activities. We are required to recognize derivative instruments at fair value as either assets or liabilities on our Consolidated Balance Sheets unless such instruments meet certain normal purchase/normal sale criteria. While all derivatives are required to be reported at fair value on the balance sheet, changes in fair value of derivative instruments are reported in different ways, depending on the nature and effectiveness of the hedging activities to which they relate. After meeting specified conditions, a qualified derivative may be designated as a total or partial hedge of:
§ | Changes in the fair value of a recognized asset or liability, or an unrecognized firm commitment – In a fair value hedge, gains and losses for both the derivative instrument and the hedged item are recognized in income during the period of change.
§ | Variable cash flows of a forecasted transaction – In a cash flow hedge, the effective portion of the hedge is reported in other comprehensive income (loss) and is reclassified into earnings when the forecasted transaction affects earnings.
An effective hedge relationship is one in which the change in fair value of a derivative instrument can be expected to offset 80% to 125% of the changes in fair value of a hedged item at inception and throughout the life of the hedging relationship. The effective portion of a hedge relationship is the amount by which the derivative instrument exactly offsets the change in fair value of the hedged item during the reporting period. Conversely, ineffectiveness represents the change in the fair value of the derivative instrument that does not exactly offset the change in the fair value of the hedged item. Any ineffectiveness associated with a hedge relationship is recognized in earnings immediately. Ineffectiveness can be caused by, among other things, changes in the timing of forecasted transactions or a mismatch of terms between the derivative instrument and the hedged item. A contract designated as a cash flow hedge of an anticipated transaction that is not probable of occurring is immediately recognized in earnings. Certain of our derivative instruments do not qualify for hedge accounting treatment; therefore, they are accounted for using mark-to-market accounting. Interest Rate Hedging Activities We may utilize interest rate swaps, forward starting swaps and similar derivative instruments to manage our exposure to changes in interest rates charged on borrowings under certain consolidated debt agreements. This strategy is a component in controlling our overall cost of capital associated with such borrowings. Interest rate swaps exchange the stated interest rate paid on a notional amount of existing debt for the fixed or floating interest rate stipulated in the derivative instrument. Forward starting swaps perform a similar function except that they are associated with interest rates underlying anticipated future issuances of debt. The following table summarizes our portfolio of interest rate swaps at December 31, 2012:
Hedged Transaction | Number and Type of Derivatives Outstanding |  | Notional Amount |  | Period of Hedge | Rate Swap | Accounting Treatment
Senior Notes AA | 10 fixed-to-floating swaps |  | $ | 750.0 |  | 1/2011 to 2/2016 | 3.2% to 1.3% | Fair value hedge
Undesignated swaps | 6 floating-to-fixed swaps |  | $ | 600.0 |  | 5/2010 to 7/2014 | 0.4% to 2.0% | Mark-to-market
During 2012, we settled 11 fixed-to-floating interest rate swaps having an aggregate notional amount of $800.0 million, resulting in gains totaling $37.7 million. As fair value hedges, the unamortized portion of these gains are a component of long-term debt (see Note 12) and are being amortized to earnings (as a decrease in interest expense) using the effective interest method over the forecasted hedged period of approximately three years. Forward starting swaps hedge the expected underlying benchmark interest rates related to future issuances of debt. The following table summarizes our portfolio of forward starting swaps outstanding at December 31, 2012:
Hedged Transaction | Number and Type of Derivatives Outstanding |  | Notional Amount |  |  | Expected Termination Date |  |  | Average Rate Locked |  | Accounting Treatment
Future debt offering | 16 forward starting swaps |  | $ | 1,000.0 |  |  |  | 3/2013 |  |  |  | 3.7% |  | Cash flow hedge
In connection with the issuance of senior notes during 2012 (see Note 12), we settled 17 forward starting swaps having an aggregate notional amount of $850.0 million, resulting in cash losses totaling $185.5 million. These losses are reflected in accumulated other comprehensive loss and are being amortized to earnings (as an increase in interest expense) over the forecasted hedge period of ten years using the effective interest method. In connection with the issuance of senior notes during 2011, we settled three forward starting swaps and two treasury locks having notional amounts of $250.0 million and $1.23 billion, respectively. The settlement of the three forward starting swaps resulted in cash losses totaling $5.8 million. As cash flow hedges, these losses are reflected in accumulated other comprehensive loss and are being amortized to earnings (as an increase in interest expense) over the forecasted hedge period of ten years using the effective interest method. The settlement of the two treasury locks resulted in cash losses totaling $17.4 million, which are being amortized to earnings (as an increase in interest expense) over the weighted-average forecasted hedge period of 25 years using the effective interest method. In connection with the issuance of senior notes during 2010, we settled a forward starting swap having a notional amount of $50.0 million, resulting in a cash gain of $1.3 million, which is reflected in accumulated other comprehensive income and is being amortized to earnings (as a decrease in interest expense) over the forecasted hedge period of ten years using the effective interest method. Commodity Hedging Activities The prices of natural gas, NGLs, crude oil, refined products and certain petrochemical products are subject to fluctuations in response to changes in supply and demand, market conditions and a variety of additional factors that are beyond our control. In order to manage such price risks, we enter into commodity derivative instruments such as physical forward contracts, futures contracts, fixed-for-float swaps, basis swaps and options contracts. The following table summarizes our portfolio of commodity derivative instruments outstanding at December 31, 2012 (volume measures as noted):
| Volume (1) | Accounting
Derivative Purpose | Current (2) | Long-Term (2) | Treatment
Derivatives designated as hedging instruments: |  |  |
Octane enhancement: |  |  |
Forecasted purchases of NGLs (MMBbls) | 1.3 | n/a | Cash flow hedge
Forecasted sales of octane enhancement products (MMBbls) | 2.8 | 0.1 | Cash flow hedge
Natural gas marketing: |  |  |
Forecasted sales of natural gas (Bcf) | 3.2 | n/a | Cash flow hedge
Natural gas storage inventory management activities (Bcf) | 16.2 | n/a | Fair value hedge
NGL marketing: |  |  |
Forecasted purchases of NGLs and related hydrocarbon products (MMBbls) | 2.6 | n/a | Cash flow hedge
Forecasted sales of NGLs and related hydrocarbon products (MMBbls) | 5.5 | n/a | Cash flow hedge
Refined products marketing: |  |  |
Forecasted purchases of refined products (MMBbls) | 0.8 | n/a | Cash flow hedge
Forecasted sales of refined products (MMBbls) | 1.3 | n/a | Cash flow hedge
Refined products inventory management activities (MMBbls) | 0.1 | n/a | Fair value hedge
Crude oil marketing: |  |  |
Forecasted purchases of crude oil (MMBbls) | 3.1 | n/a | Cash flow hedge
Forecasted sales of crude oil (MMBbls) | 6.2 | n/a | Cash flow hedge
Derivatives not designated as hedging instruments: |  |  |
Natural gas risk management activities (Bcf) (3,4) | 138.6 | 24.7 | Mark-to-market
Refined products risk management activities (MMBbls) (4) | 0.8 | n/a | Mark-to-market
Crude oil risk management activities (MMBbls) (4) | 3.9 | n/a | Mark-to-market
(1) Volume for derivatives designated as hedging instruments reflects the total amount of volumes hedged whereas volume for derivatives not designated as hedging instruments reflects the absolute value of derivative notional volumes. (2) The maximum term for derivatives designated as cash flow hedges, derivatives designated as fair value hedges and derivatives not designated as hedging instruments is January 2014, October 2013 and October 2015, respectively. (3) Current volumes include 39.3 Bcf of physical derivative instruments that are predominantly priced at an index plus a premium or minus a discount related to location differences. (4) Reflects the use of derivative instruments to manage risks associated with transportation, processing and storage assets.
Our predominant commodity hedging strategies for the year ended December 31, 2012 were: (i) hedging natural gas processing margins; (ii) hedging anticipated future contracted sales of NGLs, refined products and crude oil associated with volumes held in inventory; and (iii) hedging the fair value of natural gas and refined products in inventory. The following information summarizes these hedging strategies:
§ | The objective of our natural gas processing strategy was to hedge an amount of gross margin associated with our natural gas processing activities. We achieved this objective by using physical and financial instruments to lock in the purchase prices of natural gas consumed as PTR and the sales prices of the related NGL products. This program consisted of (i) the forward sale of a portion of our expected equity NGL production at fixed prices through December 2012, which was achieved through the use of forward physical sales contracts and commodity derivative instruments and (ii) the purchase of commodity derivative instruments having a notional amount based on the volume of natural gas expected to be consumed as PTR in the production of such equity NGL production.
As of December 31, 2012, we did not have any hedges in place with respect to gross margins associated with our future natural gas processing activities. Management continues to evaluate market conditions to determine the appropriate timing, if at all, of implementing this strategy during 2013.
§ | The objective of our NGL, refined products and crude oil sales hedging program is to hedge the margins of anticipated future sales of inventory by locking in sales prices through the use of forward physical sales contracts and commodity derivative instruments.
§ | The objective of our natural gas and refined products inventory hedging program is to hedge the fair value of natural gas and refined products currently held in inventory by locking in the sales price of the inventory through the use of commodity derivative instruments.
Certain basis swaps, basis spread options and other derivative instruments not designated as hedging instruments are used to manage market risks associated with anticipated purchases and sales of natural gas necessary to optimize our owned and contractually committed transportation and storage capacity. There is some uncertainty involved in the timing of these transactions often due to the development of more favorable profit opportunities or when spreads are insufficient to cover variable costs thus reducing the likelihood that the transactions will occur as originally forecasted. As a result of this timing uncertainty, these derivative instruments do not qualify for hedge accounting even though they are effective at managing the risk exposures of these assets. The earnings volatility caused by fluctuations in non-cash, mark-to-market earnings cannot be predicted and the impact to earnings could be material. Tabular Presentation of Fair Value Amounts, and Gains and Losses on Derivative Instruments and Related Hedged Items The following table provides a balance sheet overview of our derivative assets and liabilities at the dates indicated:
| Asset Derivatives |  | Liability Derivatives |
| December 31, 2012 |  | December 31, 2011 |  | December 31, 2012 |  | December 31, 2011 |
| Balance Sheet Location |  | Fair Value |  | Balance Sheet Location |  | Fair Value |  | Balance Sheet Location |  | Fair Value |  | Balance Sheet Location |  | Fair Value |
Derivatives designated as hedging instruments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate derivatives | Other current assets |  | $ | 19.6 |  | Other current assets |  | $ | 43.7 |  | Other current liabilities |  | $ | 175.4 |  | Other current liabilities |  | $ | 163.6 |
Interest rate derivatives | Other assets |  |  | 25.6 |  | Other assets |  |  | 44.2 |  | Other liabilities |  |  | -- |  | Other liabilities |  |  | 127.1 |
Total interest rate derivatives |  |  |  | 45.2 |  |  |  |  | 87.9 |  |  |  |  | 175.4 |  |  |  |  | 290.7 |
Commodity derivatives | Other current assets |  |  | 45.3 |  | Other current assets |  |  | 20.3 |  | Other current liabilities |  |  | 35.4 |  | Other current liabilities |  |  | 30.3 |
Commodity derivatives | Other assets |  |  | -- |  | Other assets |  |  | -- |  | Other liabilities |  |  | 0.5 |  | Other liabilities |  |  | 0.2 |
Total commodity derivatives |  |  |  | 45.3 |  |  |  |  | 20.3 |  |  |  |  | 35.9 |  |  |  |  | 30.5 |
Total derivatives designated as hedging instruments |  |  | $ | 90.5 |  |  |  | $ | 108.2 |  |  |  | $ | 211.3 |  |  |  | $ | 321.2 |
Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate derivatives | Other current assets |  | $ | -- |  | Other current assets |  | $ | -- |  | Other current liabilities |  | $ | 12.2 |  | Other current liabilities |  | $ | 10.1 |
Interest rate derivatives | Other assets |  |  | -- |  | Other assets |  |  | -- |  | Other liabilities |  |  | 5.0 |  | Other liabilities |  |  | 10.6 |
Total interest rate derivatives |  |  |  | -- |  |  |  |  | -- |  |  |  |  | 17.2 |  |  |  |  | 20.7 |
Commodity derivatives | Other current assets |  |  | 15.7 |  | Other current assets |  |  | 34.4 |  | Other current liabilities |  |  | 8.9 |  | Other current liabilities |  |  | 32.5 |
Commodity derivatives | Other assets |  |  | 0.6 |  | Other assets |  |  | 12.6 |  | Other liabilities |  |  | 0.7 |  | Other liabilities |  |  | 2.0 |
Total commodity derivatives |  |  |  | 16.3 |  |  |  |  | 47.0 |  |  |  |  | 9.6 |  |  |  |  | 34.5 |
Total derivatives not designated as hedging instruments |  |  | $ | 16.3 |  |  |  | $ | 47.0 |  |  |  | $ | 26.8 |  |  |  | $ | 55.2 |
The following tables present the effect of our derivative instruments designated as fair value hedges on our Statements of Consolidated Operations for the periods presented:
Derivatives in Fair Value Hedging Relationships | Location |  | Gain/(Loss) Recognized in Income on Derivative |
|  |  | For Year Ended December 31, |
|  |  | 2012 |  |  | 2011 |  |  | 2010 |
Interest rate derivatives | Interest expense |  | $ | 2.7 |  |  | $ | 24.7 |  |  | $ | 16.3 |
Commodity derivatives | Revenue |  |  | (6.4 | ) |  |  | 17.1 |  |  |  | 3.3 |
Total |  |  | $ | (3.7 | ) |  | $ | 41.8 |  |  | $ | 19.6 |
Derivatives in Fair Value Hedging Relationships | Location |  | Gain/(Loss) Recognized in Income on Hedged Item |
|  |  | For Year Ended December 31, |
|  |  | 2012 |  |  | 2011 |  |  | 2010 |
Interest rate derivatives | Interest expense |  | $ | (2.9 | ) |  | $ | (24.5 | ) |  | $ | (16.2 | )
Commodity derivatives | Revenue |  |  | 19.1 |  |  |  | (14.9 | ) |  |  | (2.6 | )
Total |  |  | $ | 16.2 |  |  | $ | (39.4 | ) |  | $ | (18.8 | )
With respect to our derivative instruments designated as fair value hedges, amounts attributable to ineffectiveness and those excluded from the assessment of hedge effectiveness were not material to our consolidated financial statements during the years ended December 31, 2012, 2011 or 2010. The following tables present the effect of our derivative instruments designated as cash flow hedges on our Statements of Consolidated Operations and Statements of Consolidated Comprehensive Income for the periods presented:
Derivatives in Cash Flow Hedging Relationships |  | Change in Value Recognized in Other Comprehensive Income/(Loss) on Derivative (Effective Portion) |
|  | For Year Ended December 31, |
|  | 2012 |  |  | 2011 |  |  | 2010 |
Interest rate derivatives (1) |  | $ | (70.2 | ) |  | $ | (333.2 | ) |  | $ | (0.1 | )
Commodity derivatives – Revenue (2) |  |  | 31.0 |  |  |  | (192.3 | ) |  |  | (7.7 | )
Commodity derivatives – Operating costs and expenses |  |  | (13.7 | ) |  |  | (29.6 | ) |  |  | (68.6 | )
Foreign currency derivatives |  |  | -- |  |  |  | -- |  |  |  | (0.1 | )
Total |  | $ | (52.9 | ) |  | $ | (555.1 | ) |  | $ | (76.5 | )
(1) The increase in other comprehensive loss in 2011 and 2012 was primarily due to the impact of decreases in forward London Interbank Offered Rates ("LIBOR") on our forward starting interest rate swap portfolio. (2) The increase in other comprehensive loss in 2011 was primarily due to the impact of rising commodity prices on our cash flow hedges associated with physical future deliveries of crude oil, refined products and NGLs. |
Derivatives in Cash Flow Hedging Relationships | Location |  | Gain/(Loss) Reclassified from Accumulated Other Comprehensive Income/(Loss) to Income (Effective Portion) |
|  |  | For Year Ended December 31, |
|  |  | 2012 |  |  | 2011 |  |  | 2010 |
Interest rate derivatives | Interest expense |  | $ | (16.2 | ) |  | $ | (6.3 | ) |  | $ | (25.6 | )
Commodity derivatives | Revenue |  |  | 10.1 |  |  |  | (218.4 | ) |  |  | 2.1 |
Commodity derivatives | Operating costs and expenses |  |  | (24.3 | ) |  |  | (13.9 | ) |  |  | (46.1 | )
Foreign currency derivatives | Other expense |  |  | -- |  |  |  | -- |  |  |  | 0.3 |
Total |  |  | $ | (30.4 | ) |  | $ | (238.6 | ) |  | $ | (69.3 | )
Derivatives in Cash Flow Hedging Relationships | Location |  | Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion) |
|  |  | For Year Ended December 31, |
|  |  | 2012 |  |  | 2011 |  |  | 2010 |
Interest rate derivatives | Interest expense |  | $ | -- |  |  | $ | -- |  |  | $ | (0.1 | )
Commodity derivatives | Revenue |  |  | -- |  |  |  | 0.2 |  |  |  | -- |
Commodity derivatives | Operating costs and expenses |  |  | 0.3 |  |  |  | (0.3 | ) |  |  | (0.8 | )
Total |  |  | $ | 0.3 |  |  | $ | (0.1 | ) |  | $ | (0.9 | )
Over the next twelve months, we expect to reclassify $33.3 million of losses attributable to interest rate derivative instruments from accumulated other comprehensive loss to earnings as an increase in interest expense. Likewise, we expect to reclassify $10.7 million of gains attributable to commodity derivative instruments from accumulated other comprehensive income to earnings, $10.3 million as an increase in revenue and $0.4 million as a decrease in operating costs and expenses. The following table presents the effect of our derivative instruments not designated as hedging instruments on our Statements of Consolidated Operations for the periods presented:
Derivatives Not Designated as Hedging Instruments | Location |  | Gain/(Loss) Recognized in Income on Derivative |
|  |  | For Year Ended December 31, |
|  |  | 2012 |  |  | 2011 |  |  | 2010 |
Interest rate derivatives | Interest expense |  | $ | (5.6 | ) |  | $ | (18.5 | ) |  | $ | (20.1 | )
Commodity derivatives | Revenue |  |  | 22.7 |  |  |  | 39.9 |  |  |  | 24.4 |
Commodity derivatives | Operating costs and expense |  |  | (2.8 | ) |  |  | (3.7 | ) |  |  | -- |
Foreign currency derivatives | Other expense |  |  | -- |  |  |  | (0.5 | ) |  |  | 0.3 |
Total |  |  | $ | 14.3 |  |  | $ | 17.2 |  |  | $ | 4.6 |
Fair Value Measurements Our fair value estimates are based on either (i) actual market data or (ii) assumptions that other market participants would use in pricing an asset or liability, including estimates of risk, in the principal market of the asset or liability at a specified measurement date. Recognized valuation techniques employ inputs such as contractual prices, quoted market prices or rates, operating costs, discount factors and business growth rates. These inputs may be either readily observable, corroborated by market data or generally unobservable. In developing our estimates of fair value, we endeavor to utilize the best information available and apply market-based data to the extent possible. Accordingly, we utilize valuation techniques (such as the market approach) that maximize the use of observable inputs and minimize the use of unobservable inputs. A three-tier hierarchy has been established that classifies fair value amounts recognized in the financial statements based on the observability of inputs used to estimate such fair values. The hierarchy considers fair value amounts based on observable inputs (Levels 1 and 2) to be more reliable and predictable than those based primarily on unobservable inputs (Level 3). At each balance sheet reporting date, we categorize our financial assets and liabilities using this hierarchy. The characteristics of fair value amounts classified within each level of the hierarchy are described as follows:
§ | Level 1 fair values are based on quoted prices, which are available in active markets for identical assets or liabilities as of the measurement date. Active markets are defined as those in which transactions for identical assets or liabilities occur with sufficient frequency so as to provide pricing information on an ongoing basis (e.g., the New York Mercantile Exchange). Our Level 1 fair values consist of financial assets and liabilities such as exchange-traded commodity derivative instruments.
§ | Level 2 fair values are based on pricing inputs other than quoted prices in active markets (as reflected in Level 1 fair values) and are either directly or indirectly observable as of the measurement date. Level 2 fair values include instruments that are valued using financial models or other appropriate valuation methodologies. Such financial models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, the time value of money, volatility factors, current market and contractual prices for the underlying instruments and other relevant economic measures. Substantially all of these assumptions (i) are observable in the marketplace throughout the full term of the instrument; (ii) can be derived from observable data; or (iii) are validated by inputs other than quoted prices (e.g., interest rate and yield curves at commonly quoted intervals). Our Level 2 fair values primarily consist of commodity derivative instruments such as forwards, swaps and other instruments transacted on an exchange or over-the-counter and interest rate derivative instruments. The fair values of these derivative instruments are based on observable price quotes for similar products and locations. The fair value of our interest rate derivatives are determined using financial models that incorporate the implied forward LIBOR yield curve for the same period as the future interest rate swap settlements.
§ | Level 3 fair values are based on unobservable inputs. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. Unobservable inputs reflect management's ideas about the assumptions that market participants would use in pricing an asset or liability (including assumptions about risk). Unobservable inputs are based on the best information available to us in the circumstances, which might include our internally developed data. Level 3 inputs are typically used in connection with internally developed valuation methodologies where we make our best estimate of an instrument's fair value. Our Level 3 fair values primarily consist of ethane, propane, normal butane and natural gasoline-based contracts with terms greater than one year and certain options used to hedge natural gas storage inventory and transportation capacities. In addition, we often rely on price quotes from reputable brokers who publish price quotes on certain products and compare these prices to other reputable brokers for the same products in the same markets whenever possible. These prices, when combined with data from our commodity derivative instruments, are used in our models to determine the fair value of such instruments.
Transfers within the fair value hierarchy routinely occur for certain term contracts as prices and other inputs used for the valuation of future delivery periods become more observable with the passage of time. Other transfers are made periodically in response to changing market conditions that affect liquidity, price observability and other inputs used in determining valuations. We deem any such transfers to have occurred at the end of the quarter in which they transpired. Recurring Fair Value Measurements The following table sets forth, by level within the fair value hierarchy, the carrying values of our financial assets and liabilities at the dates indicated. These assets and liabilities are measured on a recurring basis and are classified based on the lowest level of input used to estimate their fair value. Our assessment of the relative significance of such inputs requires judgment.
|  | 2012 Fair Value Measurements Using |  |  |  |
|  | Quoted Prices |  |  |  |  |  |  |  |  |  |
|  | in Active |  |  | Significant |  |  |  |  |  |  |
|  | Markets for |  |  | Other |  |  | Significant |  |  | Carrying |
|  | Identical Assets |  |  | Observable |  |  | Unobservable |  |  | Value |
|  | and Liabilities |  |  | Inputs |  |  | Inputs |  |  | at December 31, |
|  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |  |  | 2012 |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |
Interest rate derivatives |  | $ | -- |  |  | $ | 45.2 |  |  | $ | -- |  |  | $ | 45.2 |
Commodity derivatives |  |  | 11.4 |  |  |  | 47.8 |  |  |  | 2.4 |  |  |  | 61.6 |
Total |  | $ | 11.4 |  |  | $ | 93.0 |  |  | $ | 2.4 |  |  | $ | 106.8 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate derivatives |  | $ | -- |  |  | $ | 192.6 |  |  | $ | -- |  |  | $ | 192.6 |
Commodity derivatives |  |  | 13.1 |  |  |  | 28.5 |  |  |  | 3.9 |  |  |  | 45.5 |
Total |  | $ | 13.1 |  |  | $ | 221.1 |  |  | $ | 3.9 |  |  | $ | 238.1 |
|  | 2011 Fair Value Measurements Using |  |  |  |
|  | Quoted Prices |  |  |  |  |  |  |  |  |  |
|  | in Active |  |  | Significant |  |  |  |  |  |  |
|  | Markets for |  |  | Other |  |  | Significant |  |  | Carrying |
|  | Identical Assets |  |  | Observable |  |  | Unobservable |  |  | Value |
|  | and Liabilities |  |  | Inputs |  |  | Inputs |  |  | at December 31, |
|  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |  |  | 2011 |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |
Interest rate derivatives |  | $ | -- |  |  | $ | 87.9 |  |  | $ | -- |  |  | $ | 87.9 |
Commodity derivatives |  |  | 28.4 |  |  |  | 38.1 |  |  |  | 0.8 |  |  |  | 67.3 |
Total |  | $ | 28.4 |  |  | $ | 126.0 |  |  | $ | 0.8 |  |  | $ | 155.2 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate derivatives |  | $ | -- |  |  | $ | 311.4 |  |  | $ | -- |  |  | $ | 311.4 |
Commodity derivatives |  |  | 29.9 |  |  |  | 34.7 |  |  |  | 0.4 |  |  |  | 65.0 |
Total |  | $ | 29.9 |  |  | $ | 346.1 |  |  | $ | 0.4 |  |  | $ | 376.4 |
The following table sets forth a reconciliation of changes in the overall fair values of our recurring Level 3 financial assets and liabilities for the periods presented:
|  |  | For Year Ended December 31, |
| Location |  | 2012 |  |  | 2011 |
Balance, January 1 |  |  | $ | 0.4 |  |  | $ | (25.9 | )
Total gains (losses) included in: |  |  |  |  |  |  |  |  |
Net income (1) | Revenue |  |  | (2.9 | ) |  |  | 2.3 |
Other comprehensive income (loss) | Commodity derivative instruments – changes in fair value of cash flow hedges |  |  | 10.1 |  |  |  | 16.2 |
Settlements |  |  |  | 0.8 |  |  |  | (2.0 | )
Transfers out of Level 3 (2) |  |  |  | (9.9 | ) |  |  | 9.8 |
Balance, December 31 |  |  | $ | (1.5 | ) |  | $ | 0.4 |
(1) There were $1.9 million of unrealized losses and $2.6 million of unrealized gains included in these amounts for the years ended December 31, 2012 and 2011, respectively. (2) Transfers out of Level 3 into Level 2 during 2012 were due to shorter remaining transaction maturities falling inside of the Level 2 range during the fourth quarter. Transfers out of Level 3 into Level 2 during 2011 were primarily due to the change in observability of forward NGL prices. |
The following table provides quantitative information about our recurring Level 3 fair value measurements at December 31, 2012:
|  | Fair Value |  |  |  |
|  | Financial Assets |  |  | Financial Liabilities |  | Valuation Techniques | Unobservable Input | Range
Commodity derivatives – Crude oil |  | $ | 2.4 |  |  | $ | 3.9 |  | Discounted cash flow | Forward commodity prices | $75.62-$92.28/barrel
We believe certain forward commodity prices are the most significant unobservable inputs in determining our recurring Level 3 fair value measurements at December 31, 2012. In general, changes in the price of the underlying commodity increases or decreases the fair value of a commodity derivative depending on whether the derivative was purchased or sold. We generally expect changes in the fair value of our derivative instruments to be offset by corresponding changes in the fair value of our hedged exposures. We have a risk management policy that covers our Level 3 commodity derivatives. Governance and oversight of risk management activities for these commodities are provided by our CEO with guidance and support from a risk management committee ("RMC"), which meets quarterly (or on a more frequent basis if needed). Members of executive management attend the RMC meetings, which are chaired by the head of our commodities risk control group. This group is responsible for preparing and distributing daily reports and risk analysis to members of the RMC and other appropriate members of management. These reports include mark-to-market valuations with the one-day and month-to-date changes in fair values. This group also develops and validates the forward commodity price curves used to estimate the fair values of our Level 3 commodity derivatives. These forward curves incorporate published indexes, market quotes and other observable inputs to the extent available. Nonrecurring Fair Value Measurements During the year ended December 31, 2012, we recorded $63.4 million of non-cash asset impairment charges. These charges primarily relate to the following:
§ | We recorded a $2.6 million impairment charge in connection with the removal of certain pipeline terminal assets classified as property, plant and equipment. The total carrying value of the pipeline terminal prior to the write-down was $4.8 million and the estimated fair value of the remaining terminal assets to be held and used was $2.2 million based on management's assumptions regarding their current market values (Level 3).
§ | We recorded $4.3 million of impairment charges in connection with sales of certain marine transportation assets and an offshore pipeline lateral that were classified as property, plant and equipment. These assets were sold as of December 31, 2012.
§ | We recorded $56.5 million of impairment charges primarily due to the abandonment of certain pipeline and natural gas processing assets classified as property, plant and equipment. Of this amount, $29.2 million relates to the abandonment of certain gathering pipeline segments of our Texas Intrastate System, $10.6 million relates to the abandonment of certain crude oil pipeline segments in Texas, and $5.7 million relates to the write-off of our undivided interest in the Yscloskey natural gas processing plant following the planned closure of this facility due to damage caused by Hurricane Isaac in August 2012. Of the assets written-off, management estimated that the salvage value of certain pipeline segments was $0.8 million based on current market values (Level 3).
The following table summarizes our non-recurring fair value measurements for the year ended December 31, 2012:
|  |  |  |  | Fair Value Measurements Using |  |  |  |
|  |  |  |  | Quoted Prices |  |  | Significant |  |  |  |  |  |  |
|  | Carrying |  |  | in Active |  |  | Other |  |  | Significant |  |  |  |
|  | Value at |  |  | Markets for |  |  | Observable |  |  | Unobservable |  |  | Total Non-Cash |
|  | December 31, |  |  | Identical Assets |  |  | Inputs |  |  | Inputs |  |  | Impairment |
|  | 2012 |  |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |  |  | Loss |
Impairment of long-lived assets held and used |  | $ | 2.2 |  |  | $ | -- |  |  | $ | -- |  |  | $ | 2.2 |  |  | $ | 2.6 |
Impairment of long-lived assets disposed of by sale |  |  | -- |  |  |  | -- |  |  |  | -- |  |  |  | -- |  |  |  | 4.3 |
Impairment of long-lived assets disposed of other than by sale |  |  | 0.8 |  |  |  | -- |  |  |  | -- |  |  |  | 0.8 |  |  |  | 56.5 |
Total |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | $ | 63.4 |
As presented in the preceding table, our estimated fair values were based on management's expectation of the market values for such assets based on their knowledge and experience in the industry (a Level 3 type measure involving significant unobservable inputs). In many cases, there are no active markets (Level 1) or other similar recent transactions (Level 2) to compare to. Our assumptions used in such analyses are based on the nonfinancial assets' highest and best use, which includes estimated probabilities where multiple cash flow outcomes are possible. When probability weights are used, they are generally obtained from business management personnel having oversight responsibilities for the assets being tested. Key commercial assumptions (e.g., anticipated operating margins, throughput or processing volume growth rates, timing of cash flows, etc.) that represent Level 3 unobservable inputs and test results are reviewed and certified by members of senior management. During the year ended December 31, 2011, we recorded $27.8 million of non-cash asset impairment charges. These charges primarily relate to the following:
§ | We recorded an $11.1 million impairment charge to recognize a decline in value of certain spare parts classified as a component of prepaid and other current assets (held and used). The total carrying value of the spare parts prior to the write-down was $13.8 million and the estimated fair value of the spare parts inventory was $2.7 million based on management's assumptions regarding their current market values (Level 3).
§ | We recorded $16.4 million of impairment charges primarily due to the abandonment of certain pipeline and storage assets classified as property, plant and equipment. Of this amount, $9.1 million relates to the abandonment of certain underground NGL storage caverns located in Texas, Mississippi, Utah and Ohio and $5.1 million relates to the abandonment of certain gathering pipeline segments of our Texas Intrastate System.
During the year ended December 31, 2010, we recorded $8.4 million of non-cash asset impairment charges primarily due to $3.7 million for the abandonment of certain gathering pipeline segments of our Texas Intrastate System and $2.6 million for the abandonment of certain underground NGL storage caverns at our Hobbs facility. These assets were classified as property, plant and equipment. The following table summarizes our non-cash impairment charges by segment during each of the periods presented:
|  | For Year Ended December 31, |
|  | 2012 |  |  | 2011 |  |  | 2010 |
NGL Pipelines & Services |  | $ | 16.3 |  |  | $ | 11.3 |  |  | $ | 2.8 |
Onshore Natural Gas Pipelines & Services |  |  | 29.2 |  |  |  | 10.4 |  |  |  | 5.2 |
Onshore Crude Oil Pipelines & Services |  |  | 10.6 |  |  |  | -- |  |  |  | -- |
Offshore Pipelines & Services |  |  | 4.0 |  |  |  | 5.5 |  |  |  | -- |
Petrochemical & Refined Products Services |  |  | 3.3 |  |  |  | 0.6 |  |  |  | 0.4 |
Total non-cash impairment charges |  | $ | 63.4 |  |  | $ | 27.8 |  |  | $ | 8.4 |
Other Fair Value Information The carrying amounts of cash and cash equivalents (including restricted cash balances), accounts receivable and accounts payable approximate their fair values based on their short-term nature. The estimated total fair value of our fixed-rate debt obligations was $18.42 billion and $15.76 billion at December 31, 2012 and 2011, respectively. The aggregate carrying value of these debt obligations was $16.18 billion and $14.33 billion December 31, 2012 and 2011, respectively. These values are based on quoted market prices for such debt or debt of similar terms and maturities (Level 2), our credit standing and the credit standing of our counterparties. Changes in market rates of interest affect the fair value of our fixed-rate debt. The carrying values of our variable-rate long-term debt obligations approximate their fair values since the associated interest rates are market-based. We do not have any long-term investments in debt or equity securities recorded at fair value.

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