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Derivative Instruments, Hedging Activities and Fair Value Measurements | 3 Months Ended
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Mar. 31, 2019
Derivative Instruments, Hedging Activities and Fair Value Measurements [Abstract] |
Derivative Instruments, Hedging Activities and Fair Value Measurements | Note 13. 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. 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 may be used in controlling our overall cost of capital associated with such borrowings. We sold swaptions related to our interest rate hedging activities that resulted in the recognition of $9.8 million of cash gains that were reflected as a reduction in interest expense for the first quarter of 2019. Commodity Hedging Activities The prices of natural gas, NGLs, crude oil, petrochemicals and refined 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 and basis swaps. At March 31, 2019, 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 natural gas processing margins and (iii) hedging the fair value of commodity products held in inventory. The following table summarizes our portfolio of commodity derivative instruments outstanding at March 31, 2019 (volume measures as noted):
| Volume (1) | Accounting
Derivative Purpose | Current (2) | Long-Term (2) | Treatment
Derivatives designated as hedging instruments: |  |  |
Natural gas processing: |  |  |
Forecasted natural gas purchases for plant thermal reduction (billion cubic feet (“Bcf”)) | 14.4 | n/a | Cash flow hedge
Forecasted sales of NGLs (million barrels (“MMBbls”)) | 3.5 | n/a | Cash flow hedge
Octane enhancement: |  |  |
Forecasted purchase of NGLs (MMBbls) | 1.7 | n/a | Cash flow hedge
Forecasted sales of octane enhancement products (MMBbls) | 2.5 | n/a | Cash flow hedge
Natural gas marketing: |  |  |
Natural gas storage inventory management activities (Bcf) | 1.5 | n/a | Fair value hedge
NGL marketing: |  |  |
Forecasted purchases of NGLs and related hydrocarbon products (MMBbls) | 51.6 | 3.3 | Cash flow hedge
Forecasted sales of NGLs and related hydrocarbon products (MMBbls) | 56.1 | 1.1 | Cash flow hedge
NGLs inventory management activities (MMBbls) | 0.9 | n/a | Fair value hedge
Refined products marketing: |  |  |
Forecasted purchase of refined products (MMBbls) | 0.8 | n/a | Cash flow hedge
Forecasted sales of refined products (MMBbls) | 1.0 | n/a | Cash flow hedge
Refined products inventory management activities (MMBbls) | 0.2 | n/a | Fair value hedge
Crude oil marketing: |  |  |
Forecasted purchases of crude oil (MMBbls) | 23.8 | 1.9 | Cash flow hedge
Forecasted sales of crude oil (MMBbls) | 25.5 | 1.9 | Cash flow hedge
Propylene marketing: |  |  |
Forecasted sales of NGLs for propylene marketing activities (MMBbls) | 0.3 | n/a | Cash flow hedge
Derivatives not designated as hedging instruments: |  |  |
Natural gas risk management activities (Bcf) (3,4) | 58.2 | 0.1 | Mark-to-market
NGL risk management activities (MMBbls) (4) | 4.5 | n/a | Mark-to-market
Refined products risk management activities (MMBbls) (4) | 1.3 | n/a | Mark-to-market
Crude oil risk management activities (MMBbls) (4) | 36.4 | 2.4 | 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 December 2020, December 2019 and December 2020, respectively. (3) Current volumes include 14.0 Bcf of physical derivative instruments that are predominantly priced at a market-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.
The carrying amount of our inventories subject to fair value hedges was $60.0 million and $50.2 million at March 31, 2019 and December 31, 2018, respectively. 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 |
|  |  | March 31, 2019 |  | December 31, 2018 |  | March 31, 2019 |  | December 31, 2018 |
|  |  | 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 |
Commodity derivatives |  | Current assets |  |  | 102.5 |  | Current assets |  |  | 138.5 |  | Current liabilities |  |  | 81.7 |  | Current liabilities |  |  | 115.0 |
Commodity derivatives |  | Other assets |  |  | 10.3 |  | Other assets |  |  | 5.6 |  | Other liabilities |  |  | 12.2 |  | Other liabilities |  |  | 11.1 |
Total |  |  |  | $ | 112.8 |  |  |  | $ | 144.1 |  |  |  | $ | 93.9 |  |  |  | $ | 126.1 |
Derivatives not designated as hedging instruments |
Commodity derivatives |  | Current assets |  | $ | 23.6 |  | Current assets |  | $ | 15.9 |  | Current liabilities |  | $ | 13.2 |  | Current liabilities |  | $ | 33.2 |
Commodity derivatives |  | Other assets |  |  | 2.0 |  | Other assets |  |  | 1.9 |  | Other liabilities |  |  | 1.3 |  | Other liabilities |  |  | 3.1 |
Total |  |  |  | $ | 25.6 |  |  |  | $ | 17.8 |  |  |  | $ | 14.5 |  |  |  | $ | 36.3 |
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 March 31, 2019: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commodity derivatives |  | $ | 138.4 |  |  | $ | -- |  |  | $ | 138.4 |  |  | $ | (108.1 | ) |  | $ | -- |  |  | $ | -- |  |  | $ | 30.3 |
As of December 31, 2018: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commodity derivatives |  | $ | 161.9 |  |  | $ | -- |  |  | $ | 161.9 |  |  | $ | (158.6 | ) |  | $ | -- |  |  | $ | -- |  |  | $ | 3.3 |
| 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 Received |  | Cash Collateral Paid |
| (i) |  | (ii) |  | (iii) = (i) – (ii) |  | (iv) |  | (v) = (iii) + (iv) |
As of March 31, 2019: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commodity derivatives |  | $ | 108.4 |  |  | $ | -- |  |  | $ | 108.4 |  |  | $ | (108.1 | ) |  | $ | -- |  |  | $ | 27.3 |  |  | $ | 27.6 |
As of December 31, 2018: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commodity derivatives |  | $ | 162.4 |  |  | $ | -- |  |  | $ | 162.4 |  |  | $ | (158.6 | ) |  | $ | -- |  |  | $ | (2.3 | ) |  | $ | 1.5 |
Derivative assets and liabilities recorded on our Unaudited Condensed Consolidated Balance Sheets are presented on a gross-basis and determined at the individual transaction level. 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 these tables, 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 these tables. 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 Ended March 31, |
|  |  | 2019 |  |  | 2018 |
Interest rate derivatives | Interest expense |  | $ | -- |  |  | $ | 0.7 |
Commodity derivatives | Revenue |  |  | (8.5 | ) |  |  | (0.2 | )
Total |  |  | $ | (8.5 | ) |  | $ | 0.5 |
Derivatives in Fair Value Hedging Relationships | Location |  | Gain (Loss) Recognized in Income on Hedged Item |
|  |  | For the Three Months Ended March 31, |
|  |  | 2019 |  |  | 2018 |
Interest rate derivatives | Interest expense |  | $ | -- |  |  | $ | (0.8 | )
Commodity derivatives | Revenue |  |  | 9.9 |  |  |  | 3.1 |
Total |  |  | $ | 9.9 |  |  | $ | 2.3 |
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 |
|  | For the Three Months Ended March 31, |
|  | 2019 |  |  | 2018 |
Interest rate derivatives |  | $ | -- |  |  | $ | 11.1 |
Commodity derivatives – Revenue (1) |  |  | (86.7 | ) |  |  | 3.0 |
Commodity derivatives – Operating costs and expenses (1) |  |  | (8.5 | ) |  |  | 0.4 |
Total |  | $ | (95.2 | ) |  | $ | 14.5 |
(1) The fair value of these derivative instruments will be reclassified to their respective locations on the Unaudited Condensed 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 |
|  |  | For the Three Months Ended March 31, |
|  |  | 2019 |  |  | 2018 |
Interest rate derivatives | Interest expense |  | $ | (9.2 | ) |  | $ | (10.5 | )
Commodity derivatives | Revenue |  |  | 65.3 |  |  |  | 14.0 |
Commodity derivatives | Operating costs and expenses |  |  | (7.0 | ) |  |  | 0.5 |
Total |  |  | $ | 49.1 |  |  | $ | 4.0 |
Over the next twelve months, we expect to reclassify $37.8 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 $6.0 million of gains attributable to commodity derivative instruments from accumulated other comprehensive loss to earnings, $6.2 million as an increase in revenue and $0.2 million as an increase in operating costs and expenses. 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 Ended March 31, |
|  |  | 2019 |  |  | 2018 |
Commodity derivatives | Revenue |  | $ | 95.1 |  |  | $ | (153.5 | )
Commodity derivatives | Operating costs and expenses |  |  | 0.1 |  |  |  | (1.5 | )
Total |  |  | $ | 95.2 |  |  | $ | (155.0 | )
The $95.2 million gain recognized in 2019 from derivatives not designated as hedging instruments (as noted in the preceding table) reflects $1.0 million of realized losses and $96.2 million of net unrealized mark-to-market gains. In the aggregate, our unrealized mark-to-market gain for the three months ended March 31, 2019 attributable to derivatives designated as fair value hedges and derivatives not designated as hedging instruments was $96.2 million. Fair Value Measurements The following tables set forth, by level within the Level 1, 2 and 3 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. The values for commodity derivatives are presented before and after the application of Chicago Mercantile Exchange (“CME”) Rule 814, which deems that financial instruments cleared by the CME are settled daily in connection with variation margin payments. As a result of this exchange rule, CME-related derivatives are considered to have no fair value at the balance sheet date for financial reporting purposes; however, the derivatives remain outstanding and subject to future commodity price fluctuations until they are settled in accordance with their contractual terms. Derivative transactions cleared on exchanges other than the CME (e.g., the Intercontinental Exchange or ICE) continue to be reported on a gross basis.
|  | At March 31, 2019 Fair Value Measurements Using |  |  |  |
|  | Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |  |  | Total |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |
Commodity derivatives: |  |  |  |  |  |  |  |  |  |  |  |
Value before application of CME Rule 814 |  | $ | 82.9 |  |  | $ | 219.9 |  |  | $ | 6.5 |  |  | $ | 309.3 |
Impact of CME Rule 814 |  |  | (47.9 | ) |  |  | (120.4 | ) |  |  | (2.6 | ) |  |  | (170.9 | )
Total commodity derivatives |  |  | 35.0 |  |  |  | 99.5 |  |  |  | 3.9 |  |  |  | 138.4 |
Total |  | $ | 35.0 |  |  | $ | 99.5 |  |  | $ | 3.9 |  |  | $ | 138.4 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Liquidity Option Agreement (see Note 15) |  | $ | -- |  |  | $ | -- |  |  | $ | 447.8 |  |  | $ | 447.8 |
Commodity derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Value before application of CME Rule 814 |  |  | 87.6 |  |  |  | 145.5 |  |  |  | 10.9 |  |  |  | 244.0 |
Impact of CME Rule 814 |  |  | (53.1 | ) |  |  | (74.6 | ) |  |  | (7.9 | ) |  |  | (135.6 | )
Total commodity derivatives |  |  | 34.5 |  |  |  | 70.9 |  |  |  | 3.0 |  |  |  | 108.4 |
Total |  | $ | 34.5 |  |  | $ | 70.9 |  |  | $ | 450.8 |  |  | $ | 556.2 |
|  | At December 31, 2018 Fair Value Measurements Using |  |  |  |
|  | Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |  |  | Total |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |
Commodity derivatives: |  |  |  |  |  |  |  |  |  |  |  |
Value before application of CME Rule 814 |  | $ | 172.3 |  |  | $ | 282.4 |  |  | $ | 2.2 |  |  | $ | 456.9 |
Impact of CME Rule 814 |  |  | (134.8 | ) |  |  | (159.3 | ) |  |  | (0.9 | ) |  |  | (295.0 | )
Total commodity derivatives |  |  | 37.5 |  |  |  | 123.1 |  |  |  | 1.3 |  |  |  | 161.9 |
Total |  | $ | 37.5 |  |  | $ | 123.1 |  |  | $ | 1.3 |  |  | $ | 161.9 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Liquidity Option Agreement (see Note 15) |  | $ | -- |  |  | $ | -- |  |  | $ | 390.0 |  |  | $ | 390.0 |
Commodity derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Value before application of CME Rule 814 |  |  | 85.5 |  |  |  | 291.2 |  |  |  | 21.4 |  |  |  | 398.1 |
Impact of CME Rule 814 |  |  | (48.6 | ) |  |  | (172.9 | ) |  |  | (14.2 | ) |  |  | (235.7 | )
Total commodity derivatives |  |  | 36.9 |  |  |  | 118.3 |  |  |  | 7.2 |  |  |  | 162.4 |
Total |  | $ | 36.9 |  |  | $ | 118.3 |  |  | $ | 397.2 |  |  | $ | 552.4 |
In the aggregate, the fair value of our commodity hedging portfolios at March 31, 2019 was a net derivative asset of $65.3 million prior to the impact of CME Rule 814. The following table provides quantitative information regarding our recurring Level 3 fair value measurements for commodity derivatives at March 31, 2019:
|  | Fair Value |  |  |  |
|  | Financial Assets |  |  | Financial Liabilities |  | Valuation Techniques | Unobservable Input | Range
Commodity derivatives – Crude oil |  | $ | 3.2 |  |  | $ | 0.1 |  | Discounted cash flow | Forward commodity prices | $59.44-$66.48/barrel
Commodity derivatives – Propane |  |  | -- |  |  |  | 0.8 |  | Discounted cash flow | Forward commodity prices | $0.62-$0.69/gallon
Commodity derivatives – Natural gasoline |  |  | -- |  |  |  | 0.5 |  | Discounted cash flow | Forward commodity prices | $1.18-1.24/gallon
Commodity derivatives – Ethane |  |  | 0.7 |  |  |  | 1.3 |  | Discounted cash flow | Forward commodity prices | $0.23-$0.26/gallon
Commodity derivatives – Normal Butane |  |  | -- |  |  |  | 0.3 |  | Discounted cash flow | Forward commodity prices | $0.71-$0.80/gallon
Total |  | $ | 3.9 |  |  | $ | 3.0 |  |  |  |
With respect to commodity derivatives, we believe forward commodity prices are the most significant unobservable inputs in determining our Level 3 recurring fair value measurements at March 31, 2019. 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. 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 Three Months Ended March 31, |
| Location |  | 2019 |  |  | 2018 |
Financial liability balance, net, December 31, 2018 |  |  | $ | (395.9 | ) |  | $ | (332.7 | )
Total gains (losses) included in: |  |  |  |  |  |  |  |  |
Net income (1) | Revenue |  |  | 3.1 |  |  |  | (0.5 | )
Net income | Other expense, net – Liquidity Option Agreement |  |  | (57.8 | ) |  |  | (7.5 | )
Other comprehensive income (loss) | Commodity derivative instruments – changes in fair value of cash flow hedges |  |  | 4.0 |  |  |  | -- |
Settlements (1) | Revenue |  |  | (0.1 | ) |  |  | (1.2 | )
Transfers out of Level 3 |  |  |  | (0.2 | ) |  |  | -- |
Financial liability balance, net, March 31, 2019 |  |  | $ | (446.9 | ) |  | $ | (341.9 | )
(1)There were unrealized gains of $3.0 million and unrealized losses of $1.7 million included in these amounts for the three months ended March 31, 2019 and 2018, respectively. |
Nonrecurring Fair Value Measurements Non-cash asset impairment charges for the three months ended March 31, 2019 were $4.8 million compared to $0.9 million for the three months ended March 31, 2018. Charges for the first quarter of 2019 primarily relate to assets retired during the quarter whose operations have ceased. Impairment charges are a component of “Operating costs and expenses” on our Unaudited Condensed Statements of Consolidated Operations. 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 $26.82 billion and $25.97 billion at March 31, 2019 and December 31, 2018, respectively. The aggregate carrying value of these debt obligations was $25.45 billion and $26.15 billion at March 31, 2019 and December 31, 2018, respectively. These values are primarily based on quoted market prices for such debt or debt of similar terms and maturities (Level 2) and our credit standing. 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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