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RISK MANAGEMENT AND HEDGING ACTIVITIES USING DERIVATIVES (Notes) | 9 Months Ended
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Sep. 30, 2018
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
RISK MANAGEMENT AND HEDGING ACTIVITIES USING DERIVATIVES | RISK-MANAGEMENT AND HEDGING ACTIVITIES USING DERIVATIVES Risk-Management Activities - We are sensitive to changes in natural gas, crude oil and NGL prices, principally as a result of contractual terms under which these commodities are processed, purchased and sold. We are also subject to the risk of interest-rate fluctuation in the normal course of business. We use physical-forward purchases and sales and financial derivatives to secure a certain price for a portion of our natural gas, condensate and NGL products; to reduce our exposure to commodity price and interest-rate fluctuations; and to achieve more predictable cash flows. We follow established policies and procedures to assess risk and approve, monitor and report our risk-management activities. We have not used these instruments for trading purposes. Commodity price risk - Commodity price risk refers to the risk of loss in cash flows and future earnings arising from adverse changes in the price of natural gas, NGLs and condensate. We use the following commodity derivative instruments to reduce the near-term commodity price risk associated with a portion of the forecasted sales of these commodities:
• | Futures contracts - Standardized contracts to purchase or sell natural gas and crude oil for future delivery or settlement under the provisions of exchange regulations;
• | Forward contracts - Nonstandardized commitments between two parties to purchase or sell natural gas, crude oil or NGLs for future physical delivery. These contracts are typically nontransferable and can only be canceled with the consent of both parties;
• | Swaps - Exchange of one or more payments based on the value of one or more commodities. These instruments transfer the financial risk associated with a future change in value between the counterparties of the transaction, without also conveying ownership interest in the asset or liability; and
• | Options - Contractual agreements that give the holder the right, but not the obligation, to buy or sell a fixed quantity of a commodity at a fixed price within a specified period of time. Options may either be standardized and exchange-traded or customized and nonexchange-traded.
We may also use other instruments including collars to mitigate commodity price risk. A collar is a combination of a purchased put option and a sold call option, which places a floor and a ceiling price for commodity sales being hedged. In our Natural Gas Gathering and Processing segment, we are exposed to commodity price risk as a result of retaining a portion of the commodity sales proceeds associated with our POP with fee contracts. Under certain POP with fee contracts, our fees and POP percentage may increase or decrease if production volumes, delivery pressures or commodity prices change relative to specified thresholds. We also are exposed to basis risk between the various production and market locations where we buy and sell commodities. As part of our hedging strategy, we use the previously described commodity derivative financial instruments and physical-forward contracts to reduce the impact of price fluctuations related to natural gas, NGLs and condensate. In our Natural Gas Liquids segment, we are primarily exposed to commodity price risk resulting from the relative values of the various NGL products to each other, the value of NGLs in storage and the relative value of NGLs to natural gas. We are also exposed to location price differential risk as a result of the relative value of NGL purchases at one location and sales at another location, primarily related to our optimization and marketing businesses. As part of our hedging strategy, we utilize physical-forward contracts and commodity derivative financial instruments to reduce the impact of price fluctuations related to NGLs. In our Natural Gas Pipelines segment, we are exposed to commodity price risk because our intrastate and interstate natural gas pipelines retain natural gas from our customers for operations or as part of our fee for services provided. When the amount of natural gas consumed in operations by these pipelines differs from the amount provided by our customers, our pipelines must buy or sell natural gas, or store or use natural gas from inventory, which can expose this segment to commodity price risk depending on the regulatory treatment for this activity. To the extent that commodity price risk in our Natural Gas Pipelines segment is not mitigated by fuel cost-recovery mechanisms, we may use physical-forward sales or purchases to reduce the impact of price fluctuations related to natural gas. At September 30, 2018, and December 31, 2017, there were no financial derivative instruments with respect to our natural gas pipeline operations. Interest-rate risk - We manage interest-rate risk through the use of fixed-rate debt, floating-rate debt, interest-rate swaps and treasury lock contracts. Interest-rate swaps are agreements to exchange interest payments at some future point based on specified notional amounts. In 2018, we entered into $1.5 billion of forward-starting interest-rate swaps and treasury lock contracts to hedge the variability of interest payments on a portion of our forecasted debt issuances that may result from changes in the benchmark interest rate before the debt is issued. We also settled $1.0 billion of our forward-starting interest rate swaps and treasury lock contracts related to our underwritten public offering of $1.25 billion senior unsecured notes completed in July 2018, and the remaining $500 million of our interest-rate swaps used to hedge our LIBOR-based interest payments. At September 30, 2018, and December 31, 2017, we had forward-starting interest-rate swaps with notional amounts totaling $1.8 billion and $1.3 billion, respectively, to hedge the variability of interest payments on a portion of our forecasted debt issuances. At December 31, 2017, we had interest-rate swaps with a notional amount totaling $500 million to hedge the variability of our LIBOR-based interest payments. All of our interest-rate swaps are designated as cash flow hedges. Accounting Treatment - Our accounting treatment of derivative instruments is consistent with that disclosed in Note A of the Notes to Consolidated Financial Statements in our Annual Report, updated for the adoption of ASU 2017-12. Fair Values of Derivative Instruments - See Note B for a discussion of the inputs associated with our fair value measurements. The following table sets forth the fair values of our derivative instruments presented on a gross basis for the periods indicated:
|  |  | September 30, 2018 |  | December 31, 2017
| Location in our Consolidated Balance Sheets |  | Assets |  | (Liabilities) |  | Assets |  | (Liabilities)
|  |  | (Thousands of dollars)
Derivatives designated as hedging instruments |  |  |  |  |  |  |  |
Commodity contracts |  |  |  |  |  |  |  |  |
Financial contracts | Other current assets/other current liabilities |  | $ | 46,411 |  |  | $ | (84,174 | ) |  | $ | 16,978 |  |  | $ | (42,819 | )
| Other assets/other deferred credits |  | 3,461 |  |  | (11,938 | ) |  | — |  |  | (3,838 | )
Physical contracts | Other current liabilities |  | — |  |  | (1,898 | ) |  | — |  |  | (4,781 | )
| Other deferred credits |  | — |  |  | (112 | ) |  | — |  |  | — |
Interest-rate contracts | Other current assets |  | — |  |  | — |  |  | 1,330 |  |  | — |
| Other assets |  | 50,509 |  |  | — |  |  | 48,630 |  |  | — |
Total derivatives designated as hedging instruments |  | 100,381 |  |  | (98,122 | ) |  | 66,938 |  |  | (51,438 | )
Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |
Commodity contracts |  |  |  |  |  |  |  |  |
Financial contracts | Other current assets/other current liabilities |  | 4,257 |  |  | (4,238 | ) |  | 7,477 |  |  | (7,311 | )
Total derivatives not designated as hedging instruments |  | 4,257 |  |  | (4,238 | ) |  | 7,477 |  |  | (7,311 | )
Total derivatives |  |  | $ | 104,638 |  |  | $ | (102,360 | ) |  | $ | 74,415 |  |  | $ | (58,749 | )
Notional Quantities for Derivative Instruments - The following table sets forth the notional quantities for derivative instruments held for the periods indicated:
|  | September 30, 2018 |  | December 31, 2017
| Contract Type | Purchased/ Payor |  | Sold/ Receiver |  | Purchased/ Payor |  | Sold/ Receiver
Derivatives designated as hedging instruments: |  |  |  |  |  |  |
Cash flow hedges |  |  |  |  |  |  |  |
Fixed price |  |  |  |  |  |  |  |
- Natural gas (Bcf) | Futures and swaps | — |  |  | (36.1 | ) |  | — |  |  | (24.5 | )
- Crude oil and NGLs (MMBbl) | Futures, forwards and swaps | 7.2 |  |  | (16.5 | ) |  | 3.5 |  |  | (11.1 | )
Basis |  |  |  |  |  |  |  |  |  |
- Natural gas (Bcf) | Futures and swaps | — |  |  | (36.1 | ) |  | — |  |  | (24.5 | )
Interest-rate contracts (Millions of dollars) | Swaps | $ | 1,750.0 |  |  | $ | — |  |  | $ | 1,750.0 |  |  | $ | — |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |
Fixed price |  |  |  |  |  |  |  |
- NGLs (MMBbl) | Futures, forwards and swaps | 0.2 |  |  | (0.2 | ) |  | 0.8 |  |  | (0.8 | )
These notional amounts are used to summarize the volume of financial instruments; however, they do not reflect the extent to which the positions offset one another and, consequently, do not reflect our actual exposure to market or credit risk. Cash Flow Hedges - At September 30, 2018, our Consolidated Balance Sheet reflected a net loss of $158.1 million in accumulated other comprehensive loss. The portion of accumulated other comprehensive loss attributable to our commodity derivative financial instruments is an unrealized loss of $37.2 million, net of tax, which is expected to be realized within the next 27 months as the forecasted transactions affect earnings. If commodity prices remain at current levels, we will realize approximately $30.5 million in net losses, net of tax, over the next 12 months and approximately $6.7 million in net losses, net of tax, thereafter. The amount deferred in accumulated other comprehensive loss attributable to our settled interest-rate swaps is a loss of $43.9 million, net of tax, which will be recognized over the life of the long-term, fixed-rate debt, including losses of $13.6 million, net of tax, that will be reclassified into earnings during the next 12 months as the hedged items affect earnings. The remaining amounts in accumulated other comprehensive loss are attributable primarily to our pension and postretirement benefit plan obligations, which are expected to be amortized over the average remaining service period of employees participating in these plans. The following table sets forth the unrealized effect of cash flow hedges recognized in other comprehensive income (loss) for the periods indicated:
| Three Months Ended |  | Nine Months Ended
Derivatives in Cash Flow Hedging Relationships | September 30, |  | September 30,
2018 |  | 2017 |  | 2018 |  | 2017
| (Thousands of dollars)
Commodity contracts | $ | (30,783 | ) |  | $ | (42,450 | ) |  | $ | (56,246 | ) |  | $ | (6,123 | )
Interest-rate contracts | 26,203 |  |  | 9,613 |  |  | 70,179 |  |  | (3,853 | )
Total unrealized gain (loss) recognized in other comprehensive income (loss) on derivatives | $ | (4,580 | ) |  | $ | (32,837 | ) |  | $ | 13,933 |  |  | $ | (9,976 | )
The following table sets forth the effect of cash flow hedges in our Consolidated Statements of Income for the periods indicated:
Derivatives in Cash Flow Hedging Relationships | Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Net Income | Three Months Ended |  | Nine Months Ended
September 30, |  | September 30,
2018 |  | 2017 |  | 2018 |  | 2017
|  | (Thousands of dollars)
Commodity contracts | Commodity sales revenues | $ | (20,630 | ) |  | $ | (15,913 | ) |  | $ | (42,430 | ) |  | $ | (38,028 | )
Interest-rate contracts | Interest expense | (4,383 | ) |  | (4,820 | ) |  | (13,929 | ) |  | (15,321 | )
Total gain (loss) reclassified from accumulated other comprehensive loss into net income on derivatives | $ | (25,013 | ) |  | $ | (20,733 | ) |  | $ | (56,359 | ) |  | $ | (53,349 | )
Credit Risk - We monitor the creditworthiness of our counterparties and compliance with policies and limits established by our Risk Oversight and Strategy Committee. We maintain credit policies with regard to our counterparties that we believe minimize overall credit risk. These policies include an evaluation of potential counterparties’ financial condition (including credit ratings, bond yields and credit default swap rates), collateral requirements under certain circumstances and the use of standardized master-netting agreements that allow us to net the positive and negative exposures associated with a single counterparty. We use internally developed credit ratings for counterparties that do not have a credit rating. From time to time, we may enter into financial derivative instruments that contain provisions that require us to maintain an investment-grade credit rating from S&P and/or Moody’s. If our credit ratings on our senior unsecured long-term debt were to decline below investment grade, the counterparties to the derivative instruments could request collateralization on derivative instruments in net liability positions. There were no financial derivative instruments with contingent features related to credit risk at September 30, 2018. The counterparties to our derivative contracts typically consist of major energy companies, financial institutions and commercial and industrial end users. This concentration of counterparties may affect our overall exposure to credit risk, either positively or negatively, in that the counterparties may be affected similarly by changes in economic, regulatory or other conditions. Based on our policies, exposures, credit and other reserves, we do not anticipate a material adverse effect on our financial position or results of operations as a result of counterparty nonperformance. At September 30, 2018, the credit exposure from our derivative assets is with investment-grade companies in the financial services sector.

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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