Fair Value
The fair values of our financial instruments are separated into three broad levels (Levels 1, 2 and 3) based on our assessment of the availability of observable market data and the significance of non-observable data used to determine fair value. Each fair value measurement must be assigned to a level corresponding to the lowest level input that is significant to the fair value measurement in its entirety.
The three broad levels of inputs defined by the fair value hierarchy are as follows:
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• | Level 1 Inputs—quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date; |
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• | Level 2 Inputs—inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability; and |
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• | Level 3 Inputs—unobservable inputs for the asset or liability. These unobservable inputs reflect the entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances (which might include the reporting entity’s own data). |
Fair Value of Derivative Contracts
The following two tables summarize the fair value measurements of our (i) energy commodity derivative contracts; and (ii) interest rate swap agreements as of March 31, 2014 and December 31, 2013, based on the three levels established by the Codification. Also, certain of our derivative contracts are subject to master netting agreements. The following tables present our derivative contracts subject to such netting agreements as of March 31, 2014 and December 31, 2013 (in millions):
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| Balance Sheet asset fair value measurements using | | Amounts not offset in the Balance Sheet | | Net Amount |
| Level 1 | | Level 2 | | Level 3 | | Gross Amount | | Financial Instruments | | Cash Collateral Held(b) |
As of March 31, 2014 | | | | | | | | | | | | | |
Energy commodity derivative contracts(a) | $ | 6 |
| | $ | 29 |
| | $ | 16 |
| | $ | 51 |
| | $ | (40 | ) | | $ | — |
| | $ | 11 |
|
Interest rate swap agreements | $ | — |
| | $ | 292 |
| | $ | — |
| | $ | 292 |
| | $ | (44 | ) | | $ | — |
| | $ | 248 |
|
As of December 31, 2013 | | | | | | | | | | | | | |
Energy commodity derivative contracts(a) | $ | 4 |
| | $ | 46 |
| | $ | 48 |
| | $ | 98 |
| | $ | (62 | ) | | $ | — |
| | $ | 36 |
|
Interest rate swap agreements | $ | — |
| | $ | 259 |
| | $ | — |
| | $ | 259 |
| | $ | (28 | ) | | $ | — |
| | $ | 231 |
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| Balance Sheet liability fair value measurements using | | Amounts not offset in the Balance Sheet | | Net Amount |
| Level 1 | | Level 2 | | Level 3 | | Gross Amount | | Financial Instruments | | Cash Collateral Held(c) |
As of March 31, 2014 | | | | | | | | | | | | | |
Energy commodity derivative contracts(a) | $ | (14 | ) | | $ | (50 | ) | | $ | (116 | ) | | $ | (180 | ) | | $ | 40 |
| | $ | 22 |
| | $ | (118 | ) |
Interest rate swap agreements | $ | — |
| | $ | (94 | ) | | $ | — |
| | $ | (94 | ) | | $ | 44 |
| | $ | — |
| | $ | (50 | ) |
As of December 31, 2013 | | | | | | | | | | | | | |
Energy commodity derivative contracts(a) | $ | (6 | ) | | $ | (31 | ) | | $ | (158 | ) | | $ | (195 | ) | | $ | 62 |
| | $ | 17 |
| | $ | (116 | ) |
Interest rate swap agreements | $ | — |
| | $ | (116 | ) | | $ | — |
| | $ | (116 | ) | | $ | 28 |
| | $ | — |
| | $ | (88 | ) |
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(a) | Level 1 consists primarily of New York Mercantile Exchange natural gas futures. Level 2 consists primarily of OTC WTI swaps. Level 3 consists primarily of WTI options, WTI basis swaps, NGL options, NGL swaps and power derivative contracts. |
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(b) | Cash margin deposits held by KMP associated with its energy commodity contract positions and OTC swap agreements and reported within “Other current liabilities” in our accompanying consolidated balance sheets. |
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(c) | Cash margin deposits posted by KMP associated with energy commodity contract positions and OTC swap agreements and reported within “Other current assets” in our accompanying consolidated balance sheets. |
The table below provides a summary of changes in the fair value of our Level 3 energy commodity derivative contracts for each of the three months ended March 31, 2014 and 2013 (in millions):
Significant unobservable inputs (Level 3) |
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| Three Months Ended March 31, |
| 2014 | | 2013 |
Derivatives-net asset (liability) | | | |
Beginning of Period | $ | (110 | ) | | $ | (155 | ) |
Total gains or (losses) | | | |
Included in earnings | 7 |
| | 5 |
|
Included in other comprehensive loss | (1 | ) | | (1 | ) |
Settlements | 4 |
| | 9 |
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End of Period | $ | (100 | ) |
| $ | (142 | ) |
The amount of total gains or (losses) for the period included in earnings attributable to the change in unrealized gains or (losses) relating to assets held at the reporting date | $ | 3 |
| | $ | (1 | ) |
As of March 31, 2014, our Level 3 derivative assets and liabilities consisted primarily of WTI options, WTI basis swaps, NGL options, NGL swaps and power derivative contracts, where a significant portion of fair value is calculated from underlying market data that is not readily observable. The derived values use industry standard methodologies that may consider the historical relationships among various commodities, modeled market prices, time value, volatility factors and other relevant economic measures. The use of these inputs results in our management’s best estimate of fair value.
Fair Value of Financial Instruments
The estimated fair value of our outstanding debt balances (both short-term and long-term and including debt fair value adjustments), is disclosed below (in millions): |
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| March 31, 2014 | | December 31, 2013 |
| Carrying Value | | Estimated Fair Value | | Carrying Value | | Estimated Fair Value |
Total debt | $ | 37,211 |
| | $ | 37,917 |
| | $ | 36,193 |
| | $ | 36,248 |
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We used Level 2 input values to measure the estimated fair value of our outstanding debt balances as of both March 31, 2014 and December 31, 2013.