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Derivative Instruments, Hedging Activities and Fair Value Measurements | 9 Months Ended
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Sep. 30, 2013
Derivative Instruments, Hedging Activities and Fair Value Measurements [Abstract] |
Derivative Instruments, Hedging Activities and Fair Value Measurements | Note 4. 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 assets, liabilities and 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 Unaudited Condensed 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. The following table summarizes our portfolio of interest rate swaps at September 30, 2013:
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 1.2% | Fair value hedge
Undesignated swaps | 6 floating-to-fixed swaps |  | $ | 600.0 |  | 5/2010 to 7/2014 | 0.3% to 2.0% | Mark-to-market
In February 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. These gains are being amortized to earnings (as a decrease in interest expense) using the effective interest method over the forecasted hedged period of three years. At December 31, 2012, our portfolio of forward starting interest rate swaps consisted of 16 derivative instruments having an aggregate notional amount of $1.0 billion. Forward starting swaps hedge the expected underlying benchmark interest rates related to future issuances of debt. We accounted for these derivative instruments as cash flow hedges. In connection with the issuance of Senior Notes II and HH in March 2013 (see Note 9), we settled all 16 forward starting swaps that were outstanding at December 31, 2012, which resulted in cash payments totaling $168.8 million. These losses are a component of 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 EE in February 2012, we settled ten forward starting swaps having an aggregate notional amount of $500.0 million, resulting in cash payments totaling $115.3 million. These losses are a component of 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 EPO's issuance of Senior Notes FF and Senior Notes GG in August 2012, we settled seven forward starting swaps having an aggregate notional amount of $350.0 million, resulting in cash losses of $70.2 million. These losses are reflected in accumulated other comprehensive loss and will be amortized to earnings (as an increase in interest expense) over the forecasted hedged period of ten years using the effective interest method. Commodity Hedging Activities The prices of natural gas, NGLs, crude oil, refined products and 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 option contracts. The following table summarizes our portfolio of commodity derivative instruments outstanding at September 30, 2013 (volume measures as noted):
| Volume (1) | Accounting
Derivative Purpose | Current (2) | Long-Term (2) | Treatment
Derivatives designated as hedging instruments: |  |  |
Natural gas processing: |  |  |
Forecasted sales of NGLs (MMBbls) | 0.1 | n/a | Cash flow hedge
Octane enhancement: |  |  |
Forecasted purchases of NGLs (MMBbls) | 1.0 | n/a | Cash flow hedge
Forecasted sales of octane enhancement products (MMBbls) | 3.2 | 0.7 | Cash flow hedge
Natural gas marketing: |  |  |
Forecasted sales of natural gas (Bcf) | 2.4 | n/a | Cash flow hedge
Natural gas storage inventory management activities (Bcf) | 10.0 | n/a | Fair value hedge
NGL marketing: |  |  |
Forecasted purchases of NGLs and related hydrocarbon products (MMBbls) | 3.6 | n/a | Cash flow hedge
Forecasted sales of NGLs and related hydrocarbon products (MMBbls) | 7.3 | 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) | 1.0 | n/a | Cash flow hedge
Crude oil marketing: |  |  |
Forecasted purchases of crude oil (MMBbls) | 3.7 | 0.3 | Cash flow hedge
Forecasted sales of crude oil (MMBbls) | 5.1 | 0.5 | Cash flow hedge
Derivatives not designated as hedging instruments: |  |  |
Natural gas risk management activities (Bcf) (3,4) | 112.2 | 23.8 | Mark-to-market
Refined products risk management activities (MMBbls) (4) | 0.6 | n/a | Mark-to-market
Crude oil risk management activities (MMBbls) (4) | 11.0 | 0.9 | 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 2015, May 2014 and October 2016, respectively. (3) Current and long-term volumes include 52.0 Bcf and 0.3 Bcf, respectively, of physical derivative instruments that are predominantly priced at a marked-based 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.
At September 30, 2013, our predominant commodity hedging strategies consisted of (i) hedging anticipated future purchases and sales of commodity products associated with transportation, storage and blending activities, (ii) hedging the fair value of commodity products held in inventory, (iii) hedging natural gas processing margins, and (iv) hedging octane enhancement margins. The following information summarizes these hedging strategies:
§ | The objective of our anticipated future commodity purchases and sales hedging program is to hedge the margins of certain transportation, storage and blending activities by locking in purchases and sales prices through the use of forward contracts and derivative instruments.
§ | The objective of our inventory hedging program is to hedge the fair value of commodity products currently held in inventory by locking in the sales price of the inventory through the use of forward contracts and derivative instruments.
§ | The objective of our natural gas processing hedging program is to hedge an amount of gross margin associated with these activities. We achieve this objective by executing forward fixed-price sales of a portion of our expected equity NGL production using forward contracts and commodity derivative instruments. For certain natural gas processing contracts, the hedging of expected equity NGL production also involves the purchase of natural gas for plant thermal reduction, which is hedged by executing forward fixed-price purchases using forward contracts and derivative instruments.
§ | The objective of our octane enhancement hedging program is to hedge an amount of gross margin associated with these activities. We achieve this objective by executing forward fixed-price sales of a portion of our expected octane enhancement product volumes and forward fixed-price purchases of NGL feedstocks using forward contracts and 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 commodity products. 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 during the periods originally forecasted. In accordance with derivatives accounting guidance, these instruments do not qualify for hedge accounting even though they are effective at managing the risk exposures of the underlying assets. Due to volatility in commodity prices, any non-cash, mark-to-market earnings variability cannot be predicted. Tabular Presentation of Fair Value Amounts, 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 |
|  | September 30, 2013 |  | December 31, 2012 |  | September 30, 2013 |  | December 31, 2012 |
|  | 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 |  | $ | 16.5 |  | Other current assets |  | $ | 19.6 |  | Other current liabilities |  | $ | -- |  | Other current liabilities |  | $ | 175.4 |
Interest rate derivatives |  | Other assets |  |  | 14.9 |  | Other assets |  |  | 25.6 |  | Other liabilities |  |  | -- |  | Other liabilities |  |  | -- |
Total interest rate derivatives |  |  |  |  | 31.4 |  |  |  |  | 45.2 |  |  |  |  | -- |  |  |  |  | 175.4 |
Commodity derivatives |  | Other current assets |  |  | 46.6 |  | Other current assets |  |  | 45.3 |  | Other current liabilities |  |  | 45.8 |  | Other current liabilities |  |  | 35.4 |
Commodity derivatives |  | Other assets |  |  | 4.2 |  | Other assets |  |  | -- |  | Other liabilities |  |  | 1.6 |  | Other liabilities |  |  | 0.5 |
Total commodity derivatives |  |  |  |  | 50.8 |  |  |  |  | 45.3 |  |  |  |  | 47.4 |  |  |  |  | 35.9 |
Total derivatives designated as hedging instruments |  |  |  | $ | 82.2 |  |  |  | $ | 90.5 |  |  |  | $ | 47.4 |  |  |  | $ | 211.3 |
Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate derivatives |  | Other current assets |  | $ | -- |  | Other current assets |  | $ | -- |  | Other current liabilities |  | $ | 10.3 |  | Other current liabilities |  | $ | 12.2 |
Interest rate derivatives |  | Other assets |  |  | -- |  | Other assets |  |  | -- |  | Other liabilities |  |  | -- |  | Other liabilities |  |  | 5.0 |
Total interest rate derivatives |  |  |  |  | -- |  |  |  |  | -- |  |  |  |  | 10.3 |  |  |  |  | 17.2 |
Commodity derivatives |  | Other current assets |  |  | 16.1 |  | Other current assets |  |  | 15.7 |  | Other current liabilities |  |  | 2.5 |  | Other current liabilities |  |  | 8.9 |
Commodity derivatives |  | Other assets |  |  | 2.6 |  | Other assets |  |  | 0.6 |  | Other liabilities |  |  | 2.0 |  | Other liabilities |  |  | 0.7 |
Total commodity derivatives |  |  |  |  | 18.7 |  |  |  |  | 16.3 |  |  |  |  | 4.5 |  |  |  |  | 9.6 |
Total derivatives not designated as hedging instruments |  |  |  | $ | 18.7 |  |  |  | $ | 16.3 |  |  |  | $ | 14.8 |  |  |  | $ | 26.8 |
Certain of our commodity derivative instruments are subject to master netting arrangements or similar agreements. The following tables present our derivative instruments subject to such arrangements at the dates indicated:
|  | Offsetting of Financial Assets and Derivative Assets |
|  | Gross Amounts of Recognized Assets |  |  | Gross Amounts Offset in the Balance Sheet |  |  | Amounts of Assets Presented in the Balance Sheet |  |  | Gross Amounts Not Offset in the Balance Sheet |  |  | Amounts That Would Have Been Presented On Net Basis |
|  | Financial Instruments |  |  | Cash Collateral Received |  |  | Cash Collateral Paid |
|  | (i) |  |  | (ii) |  |  | (iii) = (i) – (ii) |  |  | (iv) |  |  | (v) = (iii) + (iv) |
As of September 30, 2013: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commodity derivatives |  | $ | 69.5 |  |  | $ | -- |  |  | $ | 69.5 |  |  | $ | (44.9 | ) |  | $ | -- |  |  | $ | (16.1 | ) |  | $ | 8.5 |
As of December 31, 2012: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commodity derivatives |  | $ | 61.6 |  |  | $ | -- |  |  | $ | 61.6 |  |  | $ | (38.7 | ) |  | $ | (15.2 | ) |  | $ | -- |  |  | $ | 7.7 |
|  | Offsetting of Financial Liabilities and Derivative Liabilities |
|  | Gross Amounts of Recognized Liabilities |  |  | Gross Amounts Offset in the Balance Sheet |  |  | Amounts of Liabilities Presented in the Balance Sheet |  |  | Gross Amounts Not Offset in the Balance Sheet |  |  | Amounts That Would Have Been Presented On Net Basis |
|  | Financial Instruments |  |  | Cash Collateral Paid |
|  | (i) |  |  | (ii) |  |  | (iii) = (i) – (ii) |  |  | (iv) |  |  | (v) = (iii) + (iv) |
As of September 30, 2013: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commodity derivatives |  | $ | 51.9 |  |  | $ | -- |  |  | $ | 51.9 |  |  | $ | (44.9 | ) |  | $ | -- |  |  | $ | 7.0 |
As of December 31, 2012: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commodity derivatives |  | $ | 45.5 |  |  | $ | -- |  |  | $ | 45.5 |  |  | $ | (38.7 | ) |  | $ | (4.3 | ) |  | $ | 2.5 |
Derivative assets and liabilities recorded in our Unaudited Condensed Consolidated Balance Sheets are presented on a gross-basis and determined at the individual transaction level. This presentation method is applied regardless of whether the respective exchange clearing agreements, counterparty contracts or master netting agreements contain netting language often referred to as "rights of offset." Although derivative amounts are presented on a gross-basis, having rights of offset enable the settlement of a net as opposed to gross receivable or payable amount under a counterparty default or liquidation scenario. Cash is paid and received as collateral under certain agreements, particularly for those associated with exchange transactions. For any cash collateral payments or receipts, corresponding assets or liabilities are recorded to reflect the variation margin deposits or receipts with exchange clearing brokers and customers. These balances are also presented on a gross-basis in our Unaudited Condensed Consolidated Balance Sheets. The tabular presentation above provides a means for comparing the gross amount of derivative assets and liabilities, excluding associated accounts payable and receivable, to the net amount that would likely be receivable or payable under a default scenario based on the existence of rights of offset in the respective derivative agreements. Any cash collateral paid or received is reflected in this table, but only to the extent that it represents variation margins. Any amounts associated with derivative prepayments or initial margins that are not influenced by the derivative asset or liability amounts or those that are determined solely on their volumetric notional amounts are excluded from this table. The following tables present the effect of our derivative instruments designated as fair value hedges on our Unaudited Condensed Statements of Consolidated Operations for the periods indicated:
Derivatives in Fair Value Hedging Relationships | Location |  | Gain (Loss) Recognized in Income on Derivative |
|  |  | For the Three Months |  |  | For the Nine Months |
|  |  | Ended September 30, |  |  | Ended September 30, |
|  |  | 2013 |  |  | 2012 |  |  | 2013 |  |  | 2012 |
Interest rate derivatives | Interest expense |  | $ | (0.5 | ) |  | $ | 3.0 |  |  | $ | (10.6 | ) |  | $ | 6.1 |
Commodity derivatives | Revenue |  |  | (3.1 | ) |  |  | (0.4 | ) |  |  | 3.1 |  |  |  | (16.1 | )
Total |  |  | $ | (3.6 | ) |  | $ | 2.6 |  |  | $ | (7.5 | ) |  | $ | (10.0 | )
Derivatives in Fair Value Hedging Relationships | Location |  | Gain (Loss) Recognized in Income on Hedged Item |
|  |  | For the Three Months |  |  | For the Nine Months |
|  |  | Ended September 30, |  |  | Ended September 30, |
|  |  | 2013 |  |  | 2012 |  |  | 2013 |  |  | 2012 |
Interest rate derivatives | Interest expense |  | $ | 0.4 |  |  | $ | (2.9 | ) |  | $ | 10.3 |  |  | $ | (6.3 | )
Commodity derivatives | Revenue |  |  | (0.4 | ) |  |  | (1.8 | ) |  |  | (12.0 | ) |  |  | 14.5 |
Total |  |  | $ | -- |  |  | $ | (4.7 | ) |  | $ | (1.7 | ) |  | $ | 8.2 |
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 periods indicated. The following tables present the effect of our derivative instruments designated as cash flow hedges on our Unaudited Condensed Statements of Consolidated Operations and Unaudited Condensed Statements of Consolidated Comprehensive Income for the periods indicated:
Derivatives in Cash Flow Hedging Relationships |  | Change in Value Recognized in Other Comprehensive Income (Loss) on Derivative (Effective Portion) |
|  | For the Three Months |  |  | For the Nine Months |
|  | Ended September 30, |  |  | Ended September 30, |
|  | 2013 |  |  | 2012 |  |  | 2013 |  |  | 2012 |
Interest rate derivatives |  | $ | -- |  |  | $ | (20.2 | ) |  | $ | 6.7 |  |  | $ | (75.3 | )
Commodity derivatives – Revenue (1) |  |  | (8.6 | ) |  |  | (59.5 | ) |  |  | (22.1 | ) |  |  | 0.7 |
Commodity derivatives – Operating costs and expenses (1) |  |  | -- |  |  |  | 1.0 |  |  |  | -- |  |  |  | (13.8 | )
Total |  | $ | (8.6 | ) |  | $ | (78.7 | ) |  | $ | (15.4 | ) |  | $ | (88.4 | )
(1) The fair value of these derivative instruments would be reclassified to their respective locations on the Statement of Consolidated Operations upon settlement of the underlying derivative transactions, as appropriate. |
Derivatives in Cash Flow Hedging Relationships | Location |  | Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) to Income (Effective Portion) |
|  |  | For the Three Months |  |  | For the Nine Months |
|  |  | Ended September 30, |  |  | Ended September 30, |
|  |  | 2013 |  |  | 2012 |  |  | 2013 |  |  | 2012 |
Interest rate derivatives | Interest expense |  | $ | (7.7 | ) |  | $ | (4.5 | ) |  | $ | (21.4 | ) |  | $ | (10.9 | )
Commodity derivatives | Revenue |  |  | (14.6 | ) |  |  | 0.3 |  |  |  | (15.1 | ) |  |  | (12.3 | )
Commodity derivatives | Operating costs and expenses |  |  | -- |  |  |  | (1.2 | ) |  |  | 0.4 |  |  |  | (24.8 | )
Total |  |  | $ | (22.3 | ) |  | $ | (5.4 | ) |  | $ | (36.1 | ) |  | $ | (48.0 | )
Derivatives in Cash Flow Hedging Relationships | Location |  | Gain (Loss) Recognized in Income on Derivative (Ineffective Portion) |
|  |  | For the Three Months |  |  | For the Nine Months |
|  |  | Ended September 30, |  |  | Ended September 30, |
|  |  | 2013 |  |  | 2012 |  |  | 2013 |  |  | 2012 |
Commodity derivatives | Revenue |  | $ | 0.1 |  |  | $ | (1.1 | ) |  | $ | -- |  |  | $ | (0.2 | )
Commodity derivatives | Operating costs and expenses |  |  | -- |  |  |  | 0.1 |  |  |  | -- |  |  |  | 0.4 |
Total |  |  | $ | 0.1 |  |  | $ | (1.0 | ) |  | $ | -- |  |  | $ | 0.2 |
Over the next twelve months, we expect to reclassify $31.7 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 $0.2 million of gains attributable to commodity derivative instruments from accumulated other comprehensive loss to earnings as an increase in revenue. The following table presents the effect of our derivative instruments not designated as hedging instruments on our Unaudited Condensed Statements of Consolidated Operations for the periods indicated:
Derivatives Not Designated as Hedging Instruments | Location |  | Gain (Loss) Recognized in Income on Derivative |
|  |  | For the Three Months |  |  | For the Nine Months |
|  |  | Ended September 30, |  |  | Ended September 30, |
|  |  | 2013 |  |  | 2012 |  |  | 2013 |  |  | 2012 |
Interest rate derivatives | Interest expense |  | $ | (0.5 | ) |  | $ | (2.2 | ) |  | $ | (0.6 | ) |  | $ | (5.5 | )
Commodity derivatives | Revenue |  |  | 8.1 |  |  |  | (3.9 | ) |  |  | 17.0 |  |  |  | 26.2 |
Commodity derivatives | Operating costs and expenses |  |  | -- |  |  |  | -- |  |  |  | -- |  |  |  | (2.8 | )
Total |  |  | $ | 7.6 |  |  | $ | (6.1 | ) |  | $ | 16.4 |  |  | $ | 17.9 |
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 highest 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. Recurring Fair Value Measurements The following tables set forth, by level within the fair value hierarchy, the carrying values of our financial assets and liabilities at December 31, 2012 and September 30, 2013. 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.
|  | December 31, 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 |
|  | September 30, 2013 Fair Value Measurements Using |  |  |  |
|  | Quoted Prices |  |  |  |  |  |  |  |  |  |
|  | in Active |  |  | Significant |  |  |  |  |  |  |
|  | Markets for |  |  | Other |  |  | Significant |  |  | Carrying |
|  | Identical Assets |  |  | Observable |  |  | Unobservable |  |  | Value |
|  | and Liabilities |  |  | Inputs |  |  | Inputs |  |  | at September 30, |
|  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |  |  | 2013 |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |
Interest rate derivatives |  | $ | -- |  |  | $ | 31.4 |  |  | $ | -- |  |  | $ | 31.4 |
Commodity derivatives |  |  | 34.0 |  |  |  | 33.2 |  |  |  | 2.3 |  |  |  | 69.5 |
Total |  | $ | 34.0 |  |  | $ | 64.6 |  |  | $ | 2.3 |  |  | $ | 100.9 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate derivatives |  | $ | -- |  |  | $ | 10.3 |  |  | $ | -- |  |  | $ | 10.3 |
Commodity derivatives |  |  | 19.5 |  |  |  | 30.2 |  |  |  | 2.2 |  |  |  | 51.9 |
Total |  | $ | 19.5 |  |  | $ | 40.5 |  |  | $ | 2.2 |  |  | $ | 62.2 |
The following table sets forth a reconciliation of changes in the fair values of our recurring Level 3 financial assets and liabilities on a combined basis for the periods indicated:
|  |  | For the Nine Months Ended September 30, |
| Location |  | 2013 |  |  | 2012 |
Financial asset (liability) balance, net, January 1 |  |  | $ | (1.5 | ) |  | $ | 0.4 |
Total gains (losses) included in: |  |  |  |  |  |  |  |  |
Net income (1) | Revenue |  |  | (0.6 | ) |  |  | 0.5 |
Other comprehensive income | Commodity derivative instruments – changes in fair value of cash flow hedges |  |  | -- |  |  |  | 0.5 |
Settlements | Revenue |  |  | 1.5 |  |  |  | (0.5 | )
Financial asset (liability) balance, net, March 31 |  |  |  | (0.6 | ) |  |  | 0.9 |
Total gains (losses) included in: |  |  |  |  |  |  |  |  |
Net income (1) | Revenue |  |  | (0.2 | ) |  |  | (1.3 | )
Other comprehensive income | Commodity derivative instruments – changes in fair value of cash flow hedges |  |  | -- |  |  |  | 6.0 |
Settlements | Revenue |  |  | 0.6 |  |  |  | (0.7 | )
Financial asset (liability) balance, net, June 30 |  |  |  | (0.2 | ) |  |  | 4.9 |
Total gains (losses) included in: |  |  |  |  |  |  |  |  |
Net income (1) | Revenue |  |  | 1.1 |  |  |  | (0.6 | )
Other comprehensive income | Commodity derivative instruments – changes in fair value of cash flow hedges |  |  | (0.9 | ) |  |  | 3.5 |
Settlements | Revenue |  |  | 0.1 |  |  |  | 1.4 |
Financial asset (liability) balance, net, September 30 (2) |  |  | $ | 0.1 |  |  | $ | 9.2 |
(1) There were unrealized gains of $1.1 million and $2.4 million included in these amounts for the three and nine months ended September 30, 2013, respectively. There were $0.8 million of unrealized gains and $1.1 million of unrealized losses included in these amounts for the three and nine months ended September 30, 2012, respectively. (2) There were no transfers into or out of Level 3 during the three or nine months ended September 30, 2013. |
The following table provides quantitative information about our recurring Level 3 fair value measurements at September 30, 2013:
|  | Fair Value |  |  |  |
|  | Financial Assets |  |  | Financial Liabilities |  | Valuation Techniques | Unobservable Input | Range
Commodity derivatives: |  |  |  |  |  |  |  |  |
Crude oil |  | $ | 1.4 |  |  | $ | 0.2 |  | Discounted cash flow | Forward commodity prices | $91.87-$103.07/barrel
Propane |  |  | 0.1 |  |  |  | -- |  | Discounted cash flow | Forward commodity prices | $0.97-$1.07/gallon
Normal butane |  |  | -- |  |  |  | 0.1 |  | Discounted cash flow | Forward commodity prices | $1.26-$1.38/gallon
Natural gasoline |  |  | 0.6 |  |  |  | 1.4 |  | Discounted cash flow | Forward commodity prices | $1.92-$2.07/gallon
Natural gas |  |  | 0.2 |  |  |  | 0.5 |  | Discounted cash flow | Forward commodity prices | $3.26-$3.99/MMBtu
Total |  | $ | 2.3 |  |  | $ | 2.2 |  |  |  |
We believe forward commodity prices are the most significant unobservable inputs in determining our Level 3 recurring fair value measurements at September 30, 2013. 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") that 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 The following table summarizes our non-cash asset impairment charges by segment during each of the periods indicated:
|  | For the Three Months Ended September 30, |  |  | For the Nine Months Ended September 30, |
|  | 2013 |  |  | 2012 |  |  | 2013 |  |  | 2012 |
NGL Pipelines & Services |  | $ | 0.3 |  |  | $ | 8.3 |  |  | $ | 10.0 |  |  | $ | 16.3 |
Onshore Natural Gas Pipelines & Services |  |  | -- |  |  |  | 29.2 |  |  |  | -- |  |  |  | 29.2 |
Onshore Crude Oil Pipelines & Services |  |  | -- |  |  |  | -- |  |  |  | 16.6 |  |  |  | 6.2 |
Offshore Pipelines & Services |  |  | 13.2 |  |  |  | 4.0 |  |  |  | 13.2 |  |  |  | 4.0 |
Petrochemical & Refined Products Services |  |  | 1.7 |  |  |  | 1.6 |  |  |  | 13.5 |  |  |  | 1.9 |
Total |  | $ | 15.2 |  |  | $ | 43.1 |  |  | $ | 53.3 |  |  | $ | 57.6 |
These impairment charges are a component of operating costs and expenses on our Unaudited Condensed Statements of Consolidated Operations. During the nine months ended September 30, 2013, we recorded $53.3 million of non-cash asset impairment charges primarily due to the abandonment of assets classified as property, plant and equipment. The following table summarizes our non-recurring fair value measurements for the nine months ended September 30, 2013:
|  |  |  |  | Fair Value Measurements Using |  |  |  |
|  |  |  |  | Quoted Prices |  |  |  |  |  |  |  |  |  |
|  |  |  |  | in Active |  |  | Significant |  |  |  |  |  |  |
|  | Carrying |  |  | Markets for |  |  | Other |  |  | Significant |  |  | Total |
|  | Value at |  |  | Identical |  |  | Observable |  |  | Unobservable |  |  | Non-Cash |
|  | September 30, |  |  | Assets |  |  | Inputs |  |  | Inputs |  |  | Impairment |
|  | 2013 |  |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |  |  | Loss |
Impairment of long-lived assets disposed of other than by sale (1) |  | $ | -- |  |  | $ | -- |  |  | $ | -- |  |  | $ | -- |  |  | $ | 43.3 |
Impairment of long-lived assets held and used |  |  | 6.1 |  |  |  | -- |  |  |  | -- |  |  |  | 6.1 |  |  |  | 4.2 |
Impairment of long-lived assets to be disposed of by sale |  |  | 11.7 |  |  |  | 11.7 |  |  |  | -- |  |  |  | -- |  |  |  | 5.8 |
Total |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | $ | 53.3 |
(1) Our non-cash asset impairment charges for the nine months ended September 30, 2013 primarily represent the abandonment of crude oil and natural gas pipeline segments in Texas, Oklahoma and the Gulf of Mexico, certain refined products terminal assets in Texas, and an NGL storage cavern in Arizona. |
During the nine months ended September 30, 2012, we recorded $57.6 million of non-cash asset impairment charges primarily due to the abandonment of assets classified as property, plant and equipment. The following table summarizes our non-recurring fair value measurements for the nine months ended September 30, 2012:
|  |  |  |  | Fair Value Measurements Using |  |  |  |
|  |  |  |  | Quoted Prices |  |  |  |  |  |  |  |  |  |
|  |  |  |  | in Active |  |  | Significant |  |  |  |  |  |  |
|  | Carrying |  |  | Markets for |  |  | Other |  |  | Significant |  |  | Total |
|  | Value at |  |  | Identical |  |  | Observable |  |  | Unobservable |  |  | Non-Cash |
|  | September 30, |  |  | Assets |  |  | Inputs |  |  | Inputs |  |  | Impairment |
|  | 2012 |  |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |  |  | Loss |
Impairment of long-lived assets disposed of other than by sale (1) |  | $ | -- |  |  | $ | -- |  |  | $ | -- |  |  | $ | -- |  |  | $ | 50.7 |
Impairment of long-lived assets held and used |  |  | 2.2 |  |  |  | -- |  |  |  | -- |  |  |  | 2.2 |  |  |  | 2.6 |
Impairment of long-lived assets to be disposed of by sale |  |  | -- |  |  |  | -- |  |  |  | -- |  |  |  | -- |  |  |  | 4.3 |
Total |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | $ | 57.6 |
(1) Our non-cash asset impairment charges for the nine months ended September 30, 2012 primarily represent the abandonment of crude oil and natural gas pipeline segments in Texas and the Gulf of Mexico. |
Other Fair Value Information The carrying amounts of cash and cash equivalents (including restricted cash balances), accounts receivable, commercial paper notes 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 at September 30, 2013 and December 31, 2012. The aggregate carrying value of these debt obligations was $17.43 billion and $16.18 billion at September 30, 2013 and December 31, 2012, 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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