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Derivative Instruments, Hedging Activities and Fair Value Measurements | 3 Months Ended
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Mar. 31, 2020
Derivative Instruments, Hedging Activities and Fair Value Measurements [Abstract] |
Derivative Instruments, Hedging Activities and Fair Value Measurements | Note 14. 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. Forward-Starting Swaps The following table summarizes our portfolio of 30-year forward-starting swaps at March 31, 2020, 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 | $75.0 | 4/2021 | 2.41% | Cash flow hedge
Future long-term debt offering | 5 forward-starting swaps | $500.0 | 4/2021 | 2.13% | Cash flow hedge
Future long-term debt offering | 2 forward-starting swaps (1) | $150.0 | 2/2022 | 1.72% | Cash flow hedge
Future long-term debt offering | 1 forward starting swap (1) | $100.0 | 4/2021 | 1.46% | Cash flow hedge
Future long-term debt offering | 2 forward starting swaps (1) | $150.0 | 2/2022 | 1.48% | Cash flow hedge
Future long-term debt offering | 2 forward starting swaps (1) | $100.0 | 2/2022 | 0.95% | Cash flow hedge
(1) | These swaps were entered into during the three months ended March 31, 2020.
In total, the notional amount of forward-starting swaps outstanding at March 31, 2020 was $1.08 billion. The weighted-average fixed interest rate of these derivative instruments is 1.83%. In January 2020, we terminated an aggregate $575 million notional amount of forward-starting swaps, which resulted in net cash payments of $33.3 million. These swaps were unwound in connection with our issuance of Senior Notes BBB due January 2051. 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, 2020, 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 and (iii) hedging natural gas processing margins. The following table summarizes our portfolio of commodity derivative instruments outstanding at March 31, 2020 (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”)) | 11.9 | n/a | Cash flow hedge
Octane enhancement: |  |  |
Forecasted purchase of NGLs (MMBbls) | 0.7 | n/a | Cash flow hedge
Forecasted sales of octane enhancement products (MMBbls) | 13.6 | n/a | Cash flow hedge
Natural gas marketing: |  |  |
Forecasted purchase of natural gas (Bcf) | 4.5 | n/a | Cash flow hedge
Natural gas storage inventory management activities (Bcf) | 4.4 | n/a | Fair value hedge
NGL marketing: |  |  |
Forecasted purchases of NGLs and related hydrocarbon products (MMBbls) | 126.3 | 0.4 | Cash flow hedge
Forecasted sales of NGLs and related hydrocarbon products (MMBbls) | 140.0 | 2.2 | Cash flow hedge
NGLs inventory management activities (MMBbls) | 0.8 | n/a | Fair value hedge
Refined products marketing: |  |  |
Forecasted purchases of refined products (MMBbls) | 5.1 | n/a | Cash flow hedge
Forecasted sales of refined products (MMBbls) | 6.8 | n/a | Cash flow hedge
Refined products inventory management activities (MMBbls) | 0.5 | n/a | Fair value hedge
Crude oil marketing: |  |  |
Forecasted purchases of crude oil (MMBbls) | 24.5 | n/a | Cash flow hedge
Forecasted sales of crude oil (MMBbls) | 31.4 | n/a | Cash flow hedge
Propylene marketing: |  |  |
Forecasted sales of NGLs for propylene marketing activities (MMBbls) | 0.6 | n/a | Cash flow hedge
Commercial energy: |  |  |
Forecasted purchases of power related to asset operations (terawatt hours (“TWh”)) | 0.2 | n/a | Cash flow hedge
Derivatives not designated as hedging instruments: |  |  |
Natural gas risk management activities (Bcf) (3) | 54.5 | 0.3 | Mark-to-market
NGL risk management activities (MMBbls) (3) | 15.7 | n/a | Mark-to-market
Refined products risk management activities (MMBbls) (3) | 5.1 | n/a | Mark-to-market
Crude oil risk management activities (MMBbls) (3) | 33.9 | 9.0 | Mark-to-market
Commercial energy risk management activities (TWh) (3) | 0.1 | 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 December 2021, December 2020 and December 2022, respectively.
(3) | Reflects the use of derivative instruments to manage risks associated with transportation, processing, storage assets and end use power requirements.
The carrying amount of our inventories subject to fair value hedges was $28.1 million and $31.7 million at March 31, 2020 and December 31, 2019, 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, 2020 |  | December 31, 2019 |  | March 31, 2020 |  | December 31, 2019
| 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 | $ | – |  | Current liabilities | $ | 6.7
Interest rate derivatives | Other assets |  | – |  | Other assets |  | – |  | Other liabilities |  | 258.3 |  | Other liabilities |  | 6.8
Total interest rate derivatives |  |  | – |  |  |  | – |  |  |  | 258.3 |  |  |  | 13.5
Commodity derivatives | Current assets |  | 310.7 |  | Current assets |  | 116.5 |  | Current liabilities |  | 244.6 |  | Current liabilities |  | 107.1
Commodity derivatives | Other assets |  | – |  | Other assets |  | – |  | Other liabilities |  | – |  | Other liabilities |  | –
Total commodity derivatives |  |  | 310.7 |  |  |  | 116.5 |  |  |  | 244.6 |  |  |  | 107.1
Total derivatives designated as hedging instruments |  | $ | 310.7 |  |  | $ | 116.5 |  |  | $ | 502.9 |  |  | $ | 120.6
Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commodity derivatives | Current assets | $ | 55.1 |  | Current assets | $ | 10.7 |  | Current liabilities | $ | 24.6 |  | Current liabilities | $ | 8.6
Commodity derivatives | Other assets |  | 5.1 |  | Other assets |  | 0.6 |  | Other liabilities |  | 3.0 |  | Other liabilities |  | 0.5
Total commodity derivatives |  |  | 60.2 |  |  |  | 11.3 |  |  |  | 27.6 |  |  |  | 9.1
Total derivatives not designated as hedging instruments |  | $ | 60.2 |  |  | $ | 11.3 |  |  | $ | 27.6 |  |  | $ | 9.1
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, 2020: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commodity derivatives |  | $ | 370.9 |  |  | $ | – |  |  | $ | 370.9 |  |  | $ | (267.0 | ) |  | $ | – |  |  | $ | (100.6 | ) |  | $ | 3.3 |
As of December 31, 2019: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commodity derivatives |  | $ | 127.8 |  |  | $ | – |  |  | $ | 127.8 |  |  | $ | (115.3 | ) |  | $ | – |  |  | $ | (11.0 | ) |  | $ | 1.5 |
| 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, 2020: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate derivatives |  | $ | 258.3 |  |  | $ | – |  |  | $ | 258.3 |  |  | $ | – |  |  | $ | – |  |  | $ | – |  |  | $ | 258.3 |
Commodity derivatives |  |  | 272.2 |  |  |  | – |  |  |  | 272.2 |  |  |  | (267.0 | ) |  |  | – |  |  |  | – |  |  |  | 5.2 |
As of December 31, 2019: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate derivatives |  | $ | 13.5 |  |  | $ | – |  |  | $ | 13.5 |  |  | $ | – |  |  | $ | – |  |  | $ | – |  |  | $ | 13.5 |
Commodity derivatives |  |  | 116.2 |  |  |  | – |  |  |  | 116.2 |  |  |  | (115.3 | ) |  |  | – |  |  |  | – |  |  |  | 0.9 |
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, |
|  |  | 2020 |  |  | 2019 |
Commodity derivatives | Revenue |  | $ | 3.9 |  |  | $ | (8.5 | )
Total |  |  | $ | 3.9 |  |  | $ | (8.5 | )
Derivatives in Fair Value Hedging Relationships | Location |  | Gain (Loss) Recognized in Income on Hedged Item |
|  |  | For the Three Months Ended March 31, |
|  |  | 2020 |  |  | 2019 |
Commodity derivatives | Revenue |  | $ | (8.2 | ) |  | $ | 9.9 |
Total |  |  | $ | (8.2 | ) |  | $ | 9.9 |
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, |
|  | 2020 |  |  | 2019 |
Interest rate derivatives |  | $ | (292.0 | ) |  | $ | – |
Commodity derivatives – Revenue (1) |  |  | 477.8 |  |  |  | (86.7 | )
Commodity derivatives – Operating costs and expenses (1) |  |  | (2.7 | ) |  |  | (8.5 | )
Total |  | $ | 183.1 |  |  | $ | (95.2 | )
(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, |
|  |  | 2020 |  |  | 2019 |
Interest rate derivatives | Interest expense |  | $ | (23.5 | ) |  | $ | (9.2 | )
Commodity derivatives | Revenue |  |  | 154.4 |  |  |  | 65.3 |
Commodity derivatives | Operating costs and expenses |  |  | 1.2 |  |  |  | (7.0 | )
Total |  |  | $ | 132.1 |  |  | $ | 49.1 |
Over the next twelve months, we expect to reclassify $39.8 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 $363.1 million of gains attributable to commodity derivative instruments from accumulated other comprehensive income to earnings, $366.7 million as an increase in revenue and $3.6 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, |
|  |  | 2020 |  |  | 2019 |
Commodity derivatives | Revenue |  | $ | 63.5 |  |  | $ | 95.1 |
Commodity derivatives | Operating costs and expenses |  |  | (0.1 | ) |  |  | 0.1 |
Total |  |  | $ | 63.4 |  |  | $ | 95.2 |
The $63.4 million gain recognized for the three months ended March 31, 2020 (as noted in the preceding table) from derivatives not designated as hedging instruments consists of $20.6 million of realized gains and $42.8 million of net unrealized mark-to-market gains attributable to commodity 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 March 31, 2020 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 |  | $ | 764.5 |  |  | $ | 938.1 |  |  | $ | 14.3 |  |  | $ | 1,716.9 |
Impact of CME Rule 814 |  |  | (723.9 | ) |  |  | (609.7 | ) |  |  | (12.4 | ) |  |  | (1,346.0 | )
Total commodity derivatives |  |  | 40.6 |  |  |  | 328.4 |  |  |  | 1.9 |  |  |  | 370.9 |
Total |  | $ | 40.6 |  |  | $ | 328.4 |  |  | $ | 1.9 |  |  | $ | 370.9 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate derivatives |  | $ | – |  |  | $ | 258.3 |  |  | $ | – |  |  | $ | 258.3 |
Commodity derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Value before application of CME Rule 814 |  |  | 531.1 |  |  |  | 912.9 |  |  |  | 5.3 |  |  |  | 1,449.3 |
Impact of CME Rule 814 |  |  | (490.9 | ) |  |  | (685.5 | ) |  |  | (0.7 | ) |  |  | (1,177.1 | )
Total commodity derivatives |  |  | 40.2 |  |  |  | 227.4 |  |  |  | 4.6 |  |  |  | 272.2 |
Total |  | $ | 40.2 |  |  | $ | 485.7 |  |  | $ | 4.6 |  |  | $ | 530.5 |
|  | At December 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 |  | $ | 53.4 |  |  | $ | 343.7 |  |  | $ | 0.1 |  |  | $ | 397.2 |
Impact of CME Rule 814 |  |  | (47.0 | ) |  |  | (222.4 | ) |  |  | – |  |  |  | (269.4 | )
Total commodity derivatives |  |  | 6.4 |  |  |  | 121.3 |  |  |  | 0.1 |  |  |  | 127.8 |
Total |  | $ | 6.4 |  |  | $ | 121.3 |  |  | $ | 0.1 |  |  | $ | 127.8 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Liquidity Option (see Note 8) |  | $ | – |  |  | $ | – |  |  | $ | 509.6 |  |  | $ | 509.6 |
Interest rate derivatives |  |  | – |  |  |  | 13.5 |  |  |  | – |  |  |  | 13.5 |
Commodity derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Value before application of CME Rule 814 |  |  | 88.1 |  |  |  | 273.6 |  |  |  | 0.3 |  |  |  | 362.0 |
Impact of CME Rule 814 |  |  | (81.9 | ) |  |  | (163.9 | ) |  |  | – |  |  |  | (245.8 | )
Total commodity derivatives |  |  | 6.2 |  |  |  | 109.7 |  |  |  | 0.3 |  |  |  | 116.2 |
Total |  | $ | 6.2 |  |  | $ | 123.2 |  |  | $ | 509.9 |  |  | $ | 639.3 |
In the aggregate, the fair value of our commodity hedging portfolios at March 31, 2020 was a net derivative asset of $267.6 million prior to the impact of CME Rule 814. Financial assets and liabilities recorded on the balance sheet at March 31, 2020 using significant unobservable inputs (Level 3) are not material to the Unaudited Condensed Consolidated Financial Statements. Refer to Note 8 for discussion of the settlement of the Liquidity Option in March 2020 and Note 11 for the income tax impact related to this transaction. Nonrecurring Fair Value Measurements Non-cash asset impairment charges for the three months ended March 31, 2020 were $1.6 million compared to $4.8 million for the three months ended March 31, 2019. Charges for 2020 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 $28.77 billion and $30.37 billion at March 31, 2020 and December 31, 2019, respectively. The aggregate carrying value of these debt obligations was $29.65 billion and $27.15 billion at March 31, 2020 and December 31, 2019, 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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