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Derivative Instruments and Hedging Activities | 6 Months Ended
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Jun. 30, 2020
Derivative Instruments And Hedging Activities Disclosure [Abstract] |
Derivative Instruments and Hedging Activities | Note 11 — Derivative Instruments and Hedging Activities The primary purposes of our commodity risk management activities are to manage our exposure to commodity price risk and reduce volatility in our operating cash flow due to fluctuations in commodity prices. We have entered into derivative instruments to hedge the commodity price risks associated with a portion of our expected (i) natural gas, NGL, and condensate equity volumes in our Gathering and Processing operations that result from percent-of-proceeds processing arrangements, (ii) future commodity purchases and sales in our Logistics and Transportation segment and (iii) natural gas transportation basis risk in our Logistics and Transportation segment. The hedge positions associated with (i) and (ii) above will move favorably in periods of falling commodity prices and unfavorably in periods of rising commodity prices and are designated as cash flow hedges for accounting purposes. The hedges generally match the NGL product composition and the NGL delivery points of our physical equity volumes. Our natural gas hedges are a mixture of specific gas delivery points and Henry Hub. The NGL hedges may be transacted as specific NGL hedges or as baskets of ethane, propane, normal butane, isobutane and natural gasoline based upon our expected equity NGL composition. We believe this approach avoids uncorrelated risks resulting from employing hedges on crude oil or other petroleum products as “proxy” hedges of NGL prices. Our natural gas and NGL hedges are settled using published index prices for delivery at various locations. We hedge a portion of our condensate equity volumes using crude oil hedges that are based on the NYMEX futures contracts for West Texas Intermediate light, sweet crude, which approximates the prices received for condensate. This exposes us to a market differential risk if the NYMEX futures do not move in exact parity with the sales price of our underlying condensate equity volumes. We also enter into derivative instruments to help manage other short-term commodity-related business risks. We have not designated these derivatives as hedges and record changes in fair value and cash settlements to revenues. At June 30, 2020, the notional volumes of our commodity derivative contracts were:
Commodity | Instrument | Unit | 2020 |  | 2021 |  | 2022 |  | 2023 |  | 2024 |  | 2025 |
Natural Gas | Swaps | MMBtu/d |  | 167,230 |  |  | 166,216 |  |  | 86,100 |  |  | 20,000 |  |  | - |  |  | - |
Natural Gas | Basis Swaps | MMBtu/d |  | 416,374 |  |  | 450,566 |  |  | 295,390 |  |  | 250,000 |  |  | 90,000 |  |  | 5,000 |
NGL | Swaps | Bbl/d |  | 30,814 |  |  | 23,729 |  |  | 12,371 |  |  | - |  |  | - |  |  | - |
NGL | Futures | Bbl/d |  | 39,370 |  |  | 12,288 |  |  | - |  |  | - |  |  | - |  |  | - |
Condensate | Swaps | Bbl/d |  | 5,190 |  |  | 5,864 |  |  | 1,610 |  |  | - |  |  | - |  |  | - |
Our derivative contracts are subject to netting arrangements that permit our contracting subsidiaries to net cash settle offsetting asset and liability positions with the same counterparty within the same Targa entity. We record derivative assets and liabilities on our Consolidated Balance Sheets on a gross basis, without considering the effect of master netting arrangements. The following schedules reflect the fair value of our derivative instruments and their location on our Consolidated Balance Sheets as well as pro forma reporting assuming that we reported derivatives subject to master netting agreements on a net basis:
|  |  |  | Fair Value as of June 30, 2020 |  |  | Fair Value as of December 31, 2019 |
|  | Balance Sheet |  | Derivative |  |  | Derivative |  |  | Derivative |  |  | Derivative |
|  | Location |  | Assets |  |  | Liabilities |  |  | Assets |  |  | Liabilities |
Derivatives designated as hedging instruments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commodity contracts |  | Current |  | $ | 99.2 |  |  | $ | 74.6 |  |  | $ | 102.1 |  |  | $ | 11.6 |
|  | Long-term |  |  | 36.1 |  |  |  | 32.6 |  |  |  | 33.7 |  |  |  | 6.4 |
Total derivatives designated as hedging instruments |  |  |  | $ | 135.3 |  |  | $ | 107.2 |  |  | $ | 135.8 |  |  | $ | 18.0 |
Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commodity contracts |  | Current |  | $ | 22.8 |  |  | $ | 5.9 |  |  | $ | 1.2 |  |  | $ | 92.5 |
|  | Long-term |  |  | 7.2 |  |  |  | 20.3 |  |  |  | 1.8 |  |  |  | 34.4 |
Total derivatives not designated as hedging instruments |  |  |  | $ | 30.0 |  |  | $ | 26.2 |  |  | $ | 3.0 |  |  | $ | 126.9 |
Total current position |  |  |  | $ | 122.0 |  |  | $ | 80.5 |  |  | $ | 103.3 |  |  | $ | 104.1 |
Total long-term position |  |  |  |  | 43.3 |  |  |  | 52.9 |  |  |  | 35.5 |  |  |  | 40.8 |
Total derivatives |  |  |  | $ | 165.3 |  |  | $ | 133.4 |  |  | $ | 138.8 |  |  | $ | 144.9 |
The pro forma impact of reporting derivatives on our Consolidated Balance Sheets on a net basis is as follows:
|  | Gross Presentation |  |  | Pro Forma Net Presentation |
June 30, 2020 | Asset |  |  | Liability |  |  | Collateral |  |  | Asset |  |  | Liability |
Current Position |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Counterparties with offsetting positions or collateral | $ | 108.9 |  |  | $ | (80.5 | ) |  | $ | 48.2 |  |  | $ | 76.6 |  |  | $ | - |
| Counterparties without offsetting positions - assets |  | 13.1 |  |  |  | - |  |  |  | - |  |  |  | 13.1 |  |  |  | - |
| Counterparties without offsetting positions - liabilities |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
|  |  | 122.0 |  |  |  | (80.5 | ) |  |  | 48.2 |  |  |  | 89.7 |  |  |  | - |
Long Term Position |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Counterparties with offsetting positions or collateral |  | 31.5 |  |  |  | (49.3 | ) |  |  | - |  |  |  | 6.6 |  |  |  | (24.4 | )
| Counterparties without offsetting positions - assets |  | 11.8 |  |  |  | - |  |  |  | - |  |  |  | 11.8 |  |  |  | - |
| Counterparties without offsetting positions - liabilities |  | - |  |  |  | (3.6 | ) |  |  | - |  |  |  | - |  |  |  | (3.6 | )
|  |  | 43.3 |  |  |  | (52.9 | ) |  |  | - |  |  |  | 18.4 |  |  |  | (28.0 | )
Total Derivatives |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Counterparties with offsetting positions or collateral |  | 140.4 |  |  |  | (129.8 | ) |  |  | 48.2 |  |  |  | 83.2 |  |  |  | (24.4 | )
| Counterparties without offsetting positions - assets |  | 24.9 |  |  |  | - |  |  |  | - |  |  |  | 24.9 |  |  |  | - |
| Counterparties without offsetting positions - liabilities |  | - |  |  |  | (3.6 | ) |  |  | - |  |  |  | - |  |  |  | (3.6 | )
|  | $ | 165.3 |  |  | $ | (133.4 | ) |  | $ | 48.2 |  |  | $ | 108.1 |  |  | $ | (28.0 | )
|  | Gross Presentation |  |  | Pro Forma Net Presentation |
December 31, 2019 | Asset |  |  | Liability |  |  | Collateral |  |  | Asset |  |  | Liability |
Current Position |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Counterparties with offsetting positions or collateral | $ | 99.8 |  |  | $ | (85.0 | ) |  | $ | (4.9 | ) |  | $ | 56.0 |  |  | $ | (46.1 | )
| Counterparties without offsetting positions - assets |  | 3.5 |  |  |  | - |  |  |  | - |  |  |  | 3.5 |  |  |  | - |
| Counterparties without offsetting positions - liabilities |  | - |  |  |  | (19.1 | ) |  |  | - |  |  |  | - |  |  |  | (19.1 | )
|  |  | 103.3 |  |  |  | (104.1 | ) |  |  | (4.9 | ) |  |  | 59.5 |  |  |  | (65.2 | )
Long Term Position |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Counterparties with offsetting positions or collateral |  | 33.3 |  |  |  | (40.5 | ) |  |  | - |  |  |  | 18.1 |  |  |  | (25.3 | )
| Counterparties without offsetting positions - assets |  | 2.2 |  |  |  | - |  |  |  | - |  |  |  | 2.2 |  |  |  | - |
| Counterparties without offsetting positions - liabilities |  | - |  |  |  | (0.3 | ) |  |  | - |  |  |  | - |  |  |  | (0.3 | )
|  |  | 35.5 |  |  |  | (40.8 | ) |  |  | - |  |  |  | 20.3 |  |  |  | (25.6 | )
Total Derivatives |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Counterparties with offsetting positions or collateral |  | 133.1 |  |  |  | (125.5 | ) |  |  | (4.9 | ) |  |  | 74.1 |  |  |  | (71.4 | )
| Counterparties without offsetting positions - assets |  | 5.7 |  |  |  | - |  |  |  | - |  |  |  | 5.7 |  |  |  | - |
| Counterparties without offsetting positions - liabilities |  | - |  |  |  | (19.4 | ) |  |  | - |  |  |  | - |  |  |  | (19.4 | )
|  | $ | 138.8 |  |  | $ | (144.9 | ) |  | $ | (4.9 | ) |  | $ | 79.8 |  |  | $ | (90.8 | )
Our payment obligations in connection with a majority of these hedging transactions are secured by a first priority lien in the collateral securing the TRP Revolver that ranks equal in right of payment with liens granted in favor of the Partnership’s senior secured lenders. Some of our hedges are futures contracts executed through brokers that clear the hedges through an exchange. We maintain a margin deposit with the brokers in an amount sufficient enough to cover the fair value of our open futures positions. The margin deposit is considered collateral, which is located within Deposits on our Consolidated Balance Sheets and is not offset against the fair value of our derivative instruments. The fair value of our derivative instruments, depending on the type of instrument, was determined by the use of present value methods or standard option valuation models with assumptions about commodity prices based on those observed in underlying markets. The estimated fair value of our derivative instruments was a net asset of $31.9 million as of June 30, 2020. The estimated fair value is net of an adjustment for credit risk based on the default probabilities as indicated by market quotes for the counterparties’ credit default swap rates. The credit risk adjustment was immaterial for all periods presented. Our futures contracts that are cleared through an exchange are margined daily and do not require any credit adjustment. The following tables reflect amounts recorded in Other comprehensive income (“OCI”) and amounts reclassified from OCI to revenue for the periods indicated:
|  | Gain (Loss) Recognized in OCI on Derivatives (Effective Portion) |
Derivatives in Cash Flow |  | Three Months Ended June 30, |  |  | Six Months Ended June 30, |
Hedging Relationships |  | 2020 |  |  | 2019 |  |  | 2020 |  |  | 2019 |
Commodity contracts |  | $ | (133.0 | ) |  | $ | 88.4 |  |  | $ | 26.2 |  |  | $ | 49.6 |
|  | Gain (Loss) Reclassified from OCI into Income (Effective Portion) |
|  | Three Months Ended June 30, |  |  | Six Months Ended June 30, |
Location of Gain (Loss) |  | 2020 |  |  | 2019 |  |  | 2020 |  |  | 2019 |
Revenues |  | $ | 60.2 |  |  | $ | 43.3 |  |  | $ | 120.3 |  |  | $ | 64.6 |
Based on valuations as of June 30, 2020, we expect to reclassify commodity hedge-related deferred gains of $29.8 million included in accumulated other comprehensive income into earnings before income taxes through the end of 2023, with $26.3 million of gains to be reclassified over the next twelve months. Our consolidated earnings are also affected by the use of the mark-to-market method of accounting for derivative instruments that do not qualify for hedge accounting or that have not been designated as hedges. The changes in fair value of these instruments are recorded on the balance sheet and through earnings rather than being deferred until the anticipated transaction settles. The use of mark-to-market accounting for financial instruments can cause non-cash earnings volatility due to changes in the underlying commodity price indices. For the three and six months ended June 30, 2020, the unrealized mark-to-market gains are primarily attributable to favorable movements in natural gas forward basis prices, as compared to our hedged positions.
|  | Location of Gain |  | Gain (Loss) Recognized in Income on Derivatives |
Derivatives Not Designated |  | Recognized in Income on |  | Three Months Ended June 30, |  |  | Six Months Ended June 30, |
as Hedging Instruments |  | Derivatives |  | 2020 |  |  | 2019 |  |  | 2020 |  |  | 2019 |
Commodity contracts |  | Revenue |  | $ | 8.1 |  |  | $ | (1.1 | ) |  | $ | 107.8 |  |  | $ | (10.5 | )
See Note 12 – Fair Value Measurements and Note 17 – Segment Information for additional disclosures related to derivative instruments and hedging activities.

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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 + Details
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