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Derivative Instruments, Hedging Activities and Fair Value Measurements

9 Months Ended

Sep. 30, 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, options to enter into forward-starting swaps (“swaptions”), 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.

Swaptions

In January and July 2019, we sold options to be put into forward-starting swaps, or swaptions, if the market rate of interest fell below the strike rate of the option upon expiration of the derivative instrument. The premiums we realized upon sale of the swaptions are reflected as a $13.3 million and $23.1 million reduction in interest expense for the three and nine months ended September 30, 2019, respectively.

Due to declining interest rates, the counterparties to the swaptions sold in July 2019 exercised their right to put us into ten forward-starting swaps on September 30, 2019 having an aggregate notional value of $1.0 billion on September 30, 2019. Forward-starting swaps hedge the risk of an increase in underlying benchmark interest rates during the period of time between the inception date of the swap agreement and the future date of debt issuance. Under the terms of the forward-starting swaps, we will pay to the counterparties (at the expected settlement dates of the instruments) amounts based on a 30-year fixed interest rate applied to the notional amount and receive from the counterparties an amount equal to a 30-year variable interest rate on the same notional amount. On September 30, 2019, the weighted-average fixed interest rate of the ten forward-starting swaps was 2.12%, which was 0.41% higher than the then applicable variable interest rate. As a result, we incurred an unrealized, mark-to-market loss at inception totaling $94.9 million that is reflected as an increase in interest expense for the three and nine months ended September 30, 2019. Prospectively, we will account for the forward-starting swaps as cash flow hedges, with any subsequent gains or losses on these derivative instruments reflected as a component of other comprehensive income and amortized to earnings (through interest expense) over the 30-year period of the associated future debt issuance.

Although we incurred a loss upon the exercise of these derivative instruments, we believe that the fixed interest rates that we will pay in connection with these forward-starting swaps are very favorable when compared to historical 30-year rates. Settlement of amounts accrued under the ten forward-starting swaps, including any gains or losses incurred from changes in interest rates between now and the contractual settlement dates, will occur at their respective expiration dates in September 2020 and April 2021.

Forward-Starting Swaps

The following table summarizes our portfolio of 30-year forward-starting swaps at September 30, 2019, all of which are associated with the expected future issuance of senior notes.

Hedged Transaction	Number and Type of Derivatives Outstanding	Notional Amount	Expected Settlement Date	Weighted-Average Fixed Rate Locked	Accounting Treatment
Future long-term debt offering	1 forward-starting swap (1)	$75.0	9/2020	2.39%	Cash flow hedge
Future long-term debt offering	1 forward-starting swap (1)	$75.0	4/2021	2.41%	Cash flow hedge
Future long-term debt offering	5 forward-starting swaps (2)	$500.0	9/2020	2.12%	Cash flow hedge
Future long-term debt offering	5 forward-starting swaps (2)	$500.0	4/2021	2.13%	Cash flow hedge

(1)	These swaps were entered into in May 2019.
(2)	These swaps were entered into in September 2019 as a result of the swaption exercise.

In total, the notional amount of forward-starting swaps outstanding at September 30, 2019 was $1.15 billion. The weighted-average fixed interest rate of these derivative instruments is 2.16%.

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 September 30, 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 September 30, 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”))	15.2	n/a	Cash flow hedge
Forecasted sales of NGLs (million barrels (“MMBbls”))	1.8	n/a	Cash flow hedge
Octane enhancement:
Forecasted purchase of NGLs (MMBbls)	1.0	n/a	Cash flow hedge
Forecasted sales of octane enhancement products (MMBbls)	8.1	1.6	Cash flow hedge
Natural gas marketing:
Natural gas storage inventory management activities (Bcf)	3.2	n/a	Fair value hedge
NGL marketing:
Forecasted purchases of NGLs and related hydrocarbon products (MMBbls)	100.0	1.5	Cash flow hedge
Forecasted sales of NGLs and related hydrocarbon products (MMBbls)	121.7	1.2	Cash flow hedge
NGLs inventory management activities (MMBbls)	0.3	n/a	Fair value hedge
Refined products marketing:
Forecasted purchases of refined products (MMBbls)	0.9	n/a	Cash flow hedge
Forecasted sales of refined products (MMBbls)	0.9	n/a	Cash flow hedge
Crude oil marketing:
Forecasted purchases of crude oil (MMBbls)	10.4	n/a	Cash flow hedge
Forecasted sales of crude oil (MMBbls)	13.8	n/a	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)	38.2	0.6	Mark-to-market
NGL risk management activities (MMBbls) (3)	2.4	n/a	Mark-to-market
Refined products risk management activities (MMBbls) (3)	7.6	n/a	Mark-to-market
Crude oil risk management activities (MMBbls) (3)	22.2	6.1	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 2021, December 2019 and December 2022, respectively.
(3)	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 $21.1 million and $50.2 million at September 30, 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
	September 30, 2019			December 31, 2018			September 30, 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
Interest rate derivatives	Current assets	$	–	Current assets	$	–	Current liabilities	$	11.8	Current liabilities	$	–
Interest rate derivatives	Other assets		–	Other assets		–	Other liabilities		11.9	Other liabilities		–
Total interest rate derivatives			–			–			23.7			–
Commodity derivatives	Current assets		149.3	Current assets		138.5	Current liabilities		139.2	Current liabilities		115.0
Commodity derivatives	Other assets		5.6	Other assets		5.6	Other liabilities		6.8	Other liabilities		11.1
Total commodity derivatives			154.9			144.1			146.0			126.1
Total derivatives designated as hedging instruments		$	154.9		$	144.1		$	169.7		$	126.1

Derivatives not designated as hedging instruments
Interest rate derivatives	Current assets	$	–	Current assets	$	–	Current liabilities	$	47.2	Current liabilities	$	–
Interest rate derivatives	Other assets		–	Other assets		–	Other liabilities		47.7	Other liabilities		–
Total interest rate derivatives			–			–			94.9			–
Commodity derivatives	Current assets		16.7	Current assets		15.9	Current liabilities		4.2	Current liabilities		33.2
Commodity derivatives	Other assets		1.0	Other assets		1.9	Other liabilities		0.3	Other liabilities		3.1
Total commodity derivatives			17.7			17.8			4.5			36.3
Total derivatives not designated as hedging instruments		$	17.7		$	17.8		$	99.4		$	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
	Gross Amounts of Recognized Assets			Gross Amounts Offset in the Balance Sheet			Amounts of Assets Presented in the Balance Sheet			Financial Instruments				Cash Collateral Received			Cash Collateral Paid				Amounts That Would Have Been Presented On Net Basis
	(i)			(ii)			(iii) = (i) – (ii)			(iv)											(v) = (iii) + (iv)
As of September 30, 2019:
Commodity derivatives		$	172.6		$	–		$	172.6		$	(149.0	)		$	–		$	(22.4	)		$	1.2
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
	Gross Amounts of Recognized Liabilities			Gross Amounts Offset in the Balance Sheet			Amounts of Liabilities Presented in the Balance Sheet			Financial Instruments				Cash Collateral Received		Cash Collateral Paid			Amounts That Would Have Been Presented On Net Basis
	(i)			(ii)			(iii) = (i) – (ii)			(iv)									(v) = (iii) + (iv)
As of September 30, 2019:
Interest rate derivatives		$	118.6		$	–		$	118.6		$	–		$	–	$	–			$	118.6
Commodity derivatives			150.5			–			150.5			(149.0	)		–		0.3				1.8
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 September 30,						For the Nine Months Ended September 30,
		2019			2018			2019			2018
Interest rate derivatives	Interest expense	$	–		$	–		$	–		$	1.3
Commodity derivatives	Revenue		(0.4	)		(1.4	)		(2.0	)		3.2
Total		$	(0.4	)	$	(1.4	)	$	(2.0	)	$	4.5

Derivatives in Fair Value Hedging Relationships	Location	Gain (Loss) Recognized in Income on Hedged Item
		For the Three Months Ended September 30,				For the Nine Months Ended September 30,
		2019		2018		2019		2018
Interest rate derivatives	Interest expense	$	–	$	–	$	–	$	(1.4	)
Commodity derivatives	Revenue		2.4		3.7		8.7		1.9
Total		$	2.4	$	3.7	$	8.7	$	0.5

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 September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
Interest rate derivatives	$	(18.6	)	$	6.1		$	(23.8	)	$	20.7
Commodity derivatives – Revenue (1)		73.5			(145.5	)		71.1			(156.7	)
Commodity derivatives – Operating costs and expenses (1)		(1.2	)		(0.3	)		(12.5	)		0.7
Total	$	53.7		$	(139.7	)	$	34.8		$	(135.3	)

(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 September 30,						For the Nine Months Ended September 30,
		2019			2018			2019			2018
Interest rate derivatives	Interest expense	$	(9.4	)	$	(9.1	)	$	(27.8	)	$	(29.0	)
Commodity derivatives	Revenue		93.6			53.9			161.4			28.5
Commodity derivatives	Operating costs and expenses		(2.1	)		(0.4	)		(9.4	)		0.3
Total		$	82.1		$	44.4		$	124.2		$	(0.2	)

Over the next twelve months, we expect to reclassify $39.1 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 $66.3 million of gains attributable to commodity derivative instruments from accumulated other comprehensive income to earnings, $68.1 million as an increase in revenue and $1.8 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 September 30,						For the Nine Months Ended September 30,
		2019			2018			2019			2018
Interest rate derivatives	Interest expense	$	(94.9	)	$	–		$	(94.9	)	$	–
Commodity derivatives	Revenue		21.8			21.8			96.7			(538.0	)
Commodity derivatives	Operating costs and expenses		(1.6	)		(2.7	)		(6.3	)		(4.2	)
Total		$	(74.7	)	$	19.1		$	(4.5	)	$	(542.2	)

The $4.5 million loss recognized for the nine months ended September 30, 2019 (as noted in the preceding table) from designated as hedging instruments consists of (i) $0.7 million of realized losses and $91.1 million of net unrealized mark-to-market gains attributable to commodity derivatives and (ii) $94.9 million of unrealized mark-to-market losses attributable to interest rate derivatives.

In total and inclusive of both fair value hedges and derivatives not designated as hedging instruments, we recognized a net $2.0 million mark-to-market loss for the nine months ended September 30, 2019 consisting of (i) $92.9 million of net unrealized mark-to-market gains attributable to commodity derivatives and (ii) $94.9 million of unrealized mark-to-market losses attributable to interest rate derivatives.

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 September 30, 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	$	54.0		$	365.4		$	14.5		$	433.9
Impact of CME Rule 814		(44.8	)		(206.3	)		(10.2	)		(261.3	)
Total commodity derivatives		9.2			159.1			4.3			172.6
Total	$	9.2		$	159.1		$	4.3		$	172.6

Financial liabilities:
Liquidity Option Agreement (see Note 15)	$	–		$	–		$	513.1		$	513.1
Interest rate derivatives		–			118.6			–			118.6
Commodity derivatives:
Value before application of CME Rule 814		39.8			268.3			47.9			356.0
Impact of CME Rule 814		(31.0	)		(138.5	)		(36.0	)		(205.5	)
Total commodity derivatives		8.8			129.8			11.9			150.5
Total	$	8.8		$	248.4		$	525.0		$	782.2

	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 September 30, 2019 was a net derivative asset of $77.9 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 September 30, 2019:

	Fair Value
	Financial Assets		Financial Liabilities		Valuation Techniques	Unobservable Input	Range
Commodity derivatives – Crude oil	$	0.5	$	0.2	Discounted cash flow	Forward commodity prices	$54.11-$54.78/barrel
Commodity derivatives – Propane		1.2		3.7	Discounted cash flow	Forward commodity prices	$0.43-$0.49/gallon
Commodity derivatives – Natural gasoline		–		4.3	Discounted cash flow	Forward commodity prices	$0.96-$1.04/gallon
Commodity derivatives – Ethane		1.5		1.3	Discounted cash flow	Forward commodity prices	$0.18-$0.19/gallon
Commodity derivatives – Normal Butane		0.5		2.2	Discounted cash flow	Forward commodity prices	$0.48-$0.56/gallon
Commodity derivatives – Isobutane		0.6		0.2	Discounted cash flow	Forward commodity prices	$0.53-$0.64/gallon
Total	$	4.3	$	11.9

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 September 30, 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:

test		For the Nine Months Ended September 30,
test	Location	2019			2018
Financial asset (liability) balance, net, January 1		$	(395.9	)	$	(332.7	)
Total gains (losses) included in:
Net income (1)	Revenue		3.1			(0.5	)
Net income	Other expense, net		(57.8	)		(7.5	)
Other comprehensive income	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 asset (liability) balance, net, March 31			(446.9	)		(341.9	)
Total gains (losses) included in:
Net income (1)	Revenue		(0.1	)		1.3
Net income	Other expense, net		(26.6	)		(8.9	)
Other comprehensive income	Commodity derivative instruments – changes in fair value of cash flow hedges		(2.9	)		–
Settlements (1)	Revenue		(3.1	)		0.5
Transfers out of Level 3			–			–
Financial asset (liability) balance, net, June 30			(479.6	)		(349.0	)
Total gains (losses) included in:
Net income (1)	Revenue		0.8			(0.2	)
Net income	Other expense, net		(38.7	)		(18.5	)
Other comprehensive income	Commodity derivative instruments – changes in fair value of cash flow hedges		(3.2	)		2.8
Settlements (1)	Revenue		–			(1.3	)
Transfers out of Level 3			–			–
Financial asset (liability) balance, net, September 30		$	(520.7	)	$	(366.2	)

(1)

There were $0.8 million and $0.6 million of unrealized gains included in these amounts for the three and nine months ended September 30, 2019, respectively. There were unrealized losses of $1.5 million and $1.4 million, respectively, included in these amounts for the three and nine months ended September 30, 2018.

Nonrecurring Fair Value Measurements

Non-cash asset impairment charges for the nine months ended September 30, 2019 were $51.3 million compared to $21.4 million for the nine months ended September 30, 2018. Charges for 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 $31.01 billion and $25.97 billion at September 30, 2019 and December 31, 2018, respectively. The aggregate carrying value of these debt obligations was $27.95 billion and $26.15 billion at September 30, 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.