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RISK MANAGEMENT AND HEDGING ACTIVITIES USING DERIVATIVES (Notes) | 9 Months Ended
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Sep. 30, 2021
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 may 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 fee with POP contracts. Under certain fee with POP contracts, our fees and POP percentage may increase or decrease if production volumes, delivery pressures or commodity prices change relative to specified thresholds. In certain commodity price environments, our contractual fees on these fee with POP contracts may decrease, which would impact the average fee rate in our Natural Gas Gathering and Processing segment. 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 activities. 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 primarily exposed to commodity price risk on our intrastate pipelines because they consume natural gas in operations and retain natural gas from our customers for operations or as part of our fee for services provided. When the amount consumed in operations differs from the amount provided by our customers, our pipelines must buy or sell natural gas, or store or use natural gas 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 natural gas price fluctuations. At September 30, 2021, and December 31, 2020, there were no financial derivative instruments with respect to our natural gas pipeline operations. Interest-rate risk - We may manage interest-rate risk through the use of fixed-rate debt, floating-rate debt and interest-rate swaps. Interest-rate swaps are agreements to exchange interest payments at some future point based on specified notional amounts. At September 30, 2021, and December 31, 2020, we had forward-starting interest-rate swaps with notional amounts totaling $1.1 billion to hedge the variability of interest payments on a portion of our forecasted debt issuances. 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. 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, 2021 |  | December 31, 2020
| Location in our Consolidated Balance Sheets |  | Assets |  | (Liabilities) |  | Assets |  | (Liabilities)
Derivatives designated as hedging instruments |  | (Thousands of dollars)
Commodity contracts (a) |  |  |  |  |  |  |  |  |
Financial contracts (b) |  |  | $ | 503,132 |  |  | $ | (792,548) |  |  | $ | 107,461 |  |  | $ | (142,573) |
Interest-rate contracts | Other current liabilities |  | — |  |  | (91,081) |  |  | — |  |  | — |
| Other deferred credits |  | — |  |  | (54,510) |  |  | — |  |  | (203,407) |
Total derivatives designated as hedging instruments |  | 503,132 |  |  | (938,139) |  |  | 107,461 |  |  | (345,980) |
Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |
Commodity contracts (a) |  |  |  |  |  |  |  |  |
Financial contracts (b) |  |  | 6,653 |  |  | (6,639) |  |  | 3,037 |  |  | (3,038) |
Total derivatives not designated as hedging instruments |  | 6,653 |  |  | (6,639) |  |  | 3,037 |  |  | (3,038) |
Total derivatives |  |  | $ | 509,785 |  |  | $ | (944,778) |  |  | $ | 110,498 |  |  | $ | (349,018) |
(a) - Derivative assets and liabilities are presented in our Consolidated Balance Sheets on a net basis when a legally enforceable master-netting arrangement exists between the counterparty to a derivative contract and us. (b) - At September 30, 2021, and December 31, 2020, our derivative net liability positions under master-netting arrangements for financial contracts were fully offset by cash collateral of $289.4 million and $35.1 million, respectively. Notional Quantities for Derivative Instruments - The following table sets forth the notional quantities for derivative instruments held for the periods indicated:
|  | September 30, 2021 |  | December 31, 2020
| Contract Type | Net Purchased/Payor (Sold/Receiver)
Derivatives designated as hedging instruments: (a) |  |  |  |
Cash flow hedges |  |  |  |
Fixed price |  |  |  |
- Natural gas (Bcf) | Futures | (38.1) |  |  | (43.3) |
- Crude oil and NGLs (MMBbl) | Futures | (9.1) |  |  | (4.6) |
Basis |  |  |  |
- Natural gas (Bcf) | Futures | (35.8) |  |  | (43.3) |
Interest-rate contracts (Billions of dollars) | Swaps | $ | 1.1 |  |  | $ | 1.1 |
(a) - Notional amounts for derivatives not designated as hedging instruments are excluded from the table above due to fully offsetting notional quantities of 0.2 MMBbl and 0.8 MMBbl for NGLs fixed priced derivative instruments at September 30, 2021, and December 31, 2020, respectively. Cash Flow Hedges - The following table sets forth the unrealized change in fair value of cash flow hedges in other comprehensive loss for the periods indicated:
| Three Months Ended |  | Nine Months Ended
| September 30, |  | September 30,
2021 |  | 2020 |  | 2021 |  | 2020
| (Thousands of dollars)
Commodity contracts | $ | (171,665) |  |  | $ | (29,667) |  |  | $ | (410,572) |  |  | $ | 18,472 |
Interest-rate contracts | 800 |  |  | 9,213 |  |  | 57,816 |  |  | (237,200) |
Total unrealized change in fair value of cash flow hedges in other comprehensive loss | $ | (170,865) |  |  | $ | (20,454) |  |  | $ | (352,756) |  |  | $ | (218,728) |
The following table sets forth the effect of cash flow hedges on net income for the periods indicated:
| Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Net Income | Three Months Ended |  | Nine Months Ended
September 30, |  | September 30,
2021 |  | 2020 |  | 2021 |  | 2020
|  | (Thousands of dollars)
Commodity contracts | Commodity sales revenues | $ | (223,741) |  |  | $ | 2,167 |  |  | $ | (439,421) |  |  | $ | 100,304 |
| Cost of sales and fuel | 147,360 |  |  | (1,568) |  |  | 283,153 |  |  | (31,057) |
Interest-rate contracts (a) | Interest expense | (9,902) |  |  | (8,998) |  |  | (29,483) |  |  | (83,817) |
Total change in fair value of cash flow hedges reclassified from accumulated other comprehensive loss into net income on derivatives | $ | (86,283) |  |  | $ | (8,399) |  |  | $ | (185,751) |  |  | $ | (14,570) |
(a) - The nine months ended September 30, 2020, include a loss of $48.3 million on the settlement of $1.3 billion of interest-rate swaps used to hedge our LIBOR-based interest payments. 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. Our financial commodity derivatives are generally settled through a NYMEX or ICE clearing broker account with daily margin requirements. However, we may enter into financial derivative instruments that contain provisions that require us to maintain an investment-grade credit rating from S&P, Fitch 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, 2021. 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, 2021, 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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 40 -Section 50 -Paragraph 5 -Subparagraph (f) -URI http://asc.fasb.org/extlink&oid=123477628&loc=d3e90205-114008 + Details
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