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FAIR VALUE MEASUREMENTS (Notes)
 3 Months Ended
Mar. 31, 2020
Fair Value Disclosures [Abstract]  
FAIR VALUE MEASUREMENTS
FAIR VALUE MEASUREMENTS

Determining Fair Value - For our fair value measurements, we utilize market prices, third-party pricing services, present value methods and standard option valuation models to determine the price we would receive from the sale of an asset or the transfer of a liability in an orderly transaction at the measurement date. We measure the fair value of a group of financial assets and liabilities consistent with how a market participant would price the net risk exposure at the measurement date.

Many of the contracts in our derivative portfolio are executed in liquid markets where price transparency exists. Our financial commodity derivatives are generally settled through a NYMEX or Intercontinental Exchange (ICE) clearing broker account with daily margin requirements. We validate our valuation inputs with third-party information and settlement prices from other sources, where available.

We compute the fair value of our derivative portfolio by discounting the projected future cash flows from our derivative assets and liabilities to present value using interest-rate yields to calculate present-value discount factors derived from the implied forward LIBOR yield curve. The fair value of our forward-starting interest-rate swaps is determined using financial models that incorporate the implied forward LIBOR yield curve for the same period as the future interest-rate swap settlements. We consider current market data in evaluating counterparties’, as well as our own, nonperformance risk, net of collateral, by using counterparty-specific bond yields. Although we use our best estimates to determine the fair value of the derivative contracts we have executed, the ultimate market prices realized could differ materially from our estimates.

Fair Value Hierarchy - At each balance sheet date, we utilize a fair value hierarchy to classify fair value amounts recognized or disclosed in our financial statements based on the observability of inputs used to estimate such fair value. The levels of the hierarchy are described below:
•
Level 1 - fair value measurements are based on unadjusted quoted prices for identical securities in active markets. These balances are composed predominantly of exchange-traded derivative contracts for natural gas and crude oil.
•
Level 2 - fair value measurements are based on significant observable pricing inputs, including quoted prices for similar assets and liabilities in active markets and inputs from third-party pricing services supported with corroborative evidence. These balances are composed of over-the-counter interest-rate derivatives.
•
Level 3 - fair value measurements are based on inputs that may include one or more unobservable inputs, including internally developed commodity price curves that incorporate market data from broker quotes and third-party pricing services. These balances are composed predominantly of exchange-cleared and over-the-counter derivatives to hedge NGL price risk and natural gas basis risk between various transaction locations and the NYMEX Henry Hub. Our commodity derivatives are generally valued using forward quotes provided by third-party pricing services that are validated with other market data. We believe any measurement uncertainty at March 31, 2020, is immaterial as our Level 3 fair value measurements are based on unadjusted pricing information from broker quotes and third-party pricing services. We do not believe that our Level 3 fair value estimates have a material impact on our results of operations, as our derivatives are accounted for as hedges.

Determining the appropriate classification of our fair value measurements within the fair value hierarchy requires management’s judgment regarding the degree to which market data is observable or corroborated by observable market data. We categorize derivatives for which fair value is determined using multiple inputs within a single level, based on the lowest level input that is significant to the fair value measurement in its entirety.

Recurring Fair Value Measurements - The following tables set forth our recurring fair value measurements for the periods indicated:
 
March 31, 2020
 
Level 1
 
Level 2
 
Level 3
 
Total - Gross
 
Netting (a)
 
Total - Net
 
(Thousands of dollars)
Derivative assets
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts
 
 
 
 
 
 
 
 
 
 
 
Financial contracts
$
37,599

 
$
—

 
$
130,272

 
$
167,871

 
$
(140,707
)
 
$
27,164

Total derivative assets
$
37,599

 
$
—

 
$
130,272

 
$
167,871

 
$
(140,707
)
 
$
27,164

Derivative liabilities
 
 
 

 
 

 
 

 
 

 
 

Commodity contracts
 
 
 
 
 
 
 
 
 
 
 
Financial contracts
$
(911
)
 
$
—

 
$
(72,871
)
 
$
(73,783
)
 
$
73,783

 
$
—

Interest-rate contracts
—

 
(270,297
)
 
—

 
(270,297
)
 
—

 
(270,297
)
Total derivative liabilities
$
(911
)
 
$
(270,297
)
 
$
(72,871
)
 
$
(344,080
)
 
$
73,783

 
$
(270,297
)
(a) - Derivative assets and liabilities are presented in our Consolidated Balance Sheet on a net basis. We net derivative assets and liabilities when a legally enforceable master-netting arrangement exists between the counterparty to a derivative contract and us. At March 31, 2020, we posted no cash and held cash of $66.9 million from various counterparties, which offsets our derivative net asset position under master netting arrangements as shown in the table above.

 
December 31, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total - Gross
 
Netting (a)
 
Total - Net
 
(Thousands of dollars)
Derivative assets
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts
 
 
 
 
 
 
 
 
 
 
 
Financial contracts
$
10,892

 
$
—

 
$
55,557

 
$
66,449

 
$
(28,588
)
 
$
37,861

Interest-rate contracts
—

 
581

 
—

 
581

 
—

 
581

Total derivative assets
$
10,892

 
$
581

 
$
55,557

 
$
67,030

 
$
(28,588
)
 
$
38,442

Derivative liabilities
 

 
 

 
 

 
 

 
 

 
 

Commodity contracts
 
 
 
 
 
 
 
 
 
 
 
Financial contracts
$
(4,811
)
 
$
—

 
$
(24,785
)
 
$
(29,596
)
 
$
28,588

 
$
(1,008
)
Interest-rate contracts
—

 
(201,941
)
 
—

 
(201,941
)
 
—

 
(201,941
)
Total derivative liabilities
$
(4,811
)
 
$
(201,941
)
 
$
(24,785
)
 
$
(231,537
)
 
$
28,588

 
$
(202,949
)

(a) - Derivative assets and liabilities are presented in our Consolidated Balance Sheet on a net basis. We net derivative assets and liabilities when a legally enforceable master-netting arrangement exists between the counterparty to a derivative contract and us. At December 31, 2019, we held no cash and posted $8.8 million of cash with various counterparties, which is included in other current assets in our Consolidated Balance Sheet.

The following table sets forth a reconciliation of our Level 3 fair value measurements for the periods indicated:
 
Three Months Ended
 
March 31,
Derivative Assets (Liabilities)
2020
 
2019
 
(Thousands of dollars)
Net assets at beginning of period
$
30,772

 
$
40,484

Total changes in fair value:


 
 
Settlements included in net income (loss) (a)
(16,146
)
 
(25,361
)
New Level 3 derivatives included in other comprehensive income (loss) (b)
20,993

 
1,597

Unrealized change included in other comprehensive income (loss) (b)
21,782

 
(5,191
)
Net assets at end of period
$
57,401

 
$
11,529

(a) - Included in commodity sales revenues/cost of sales and fuel in our Consolidated Statements of Income.
(b) - Included in change in fair value of derivatives in our Consolidated Statements of Comprehensive Income.

During the three months ended March 31, 2020 and 2019, there were no transfers in or out of Level 3 of the fair value hierarchy.

Other Financial Instruments - The approximate fair value of cash and cash equivalents, accounts receivable, accounts payable and short-term borrowings is equal to book value due to the short-term nature of these items. Our cash and cash equivalents are composed of bank and money market accounts and are classified as Level 1. Our short-term borrowings are classified as Level 2 since the estimated fair value of the short-term borrowings can be determined using information available in the commercial paper market.

The estimated fair value of our consolidated long-term debt, including current maturities, was $11.9 billion and $13.8 billion at March 31, 2020, and December 31, 2019, respectively. The book value of our consolidated long-term debt, including current maturities, was $14.2 billion and $12.5 billion at March 31, 2020, and December 31, 2019, respectively. The estimated fair value of the aggregate long-term debt outstanding was determined using quoted market prices for similar issues with similar terms and maturities. The estimated fair value of our consolidated long-term debt is classified as Level 2.

Nonrecurring Fair Value Measurements - During the three months ended March 31, 2020, we recorded noncash impairment charges for certain long-lived assets and equity investments. The valuation of these assets and investments required the use of significant unobservable inputs. To estimate the fair value, we used two generally accepted valuation approaches, an income approach and a market approach. Under the income approach, our discounted cash flow analysis included the following inputs that are not readily available: a discount rate reflective of industry cost of capital, our estimated contract rates, volumes, operating and maintenance costs and capital expenditures. Under the market approach, our inputs included EBITDA multiples and forecasted EBITDA, which was estimated using commodity price forecasts consistent with third-party pricing services. The estimated fair value of these assets is classified as Level 3. See Note A for additional information about our impairment charges.