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Derivatives and Hedging Instruments (Tables)
 12 Months Ended
Dec. 31, 2011
Derivatives and Hedging Instruments  
Terms of forward starting interest rate swaps

 

 

Hedged Transaction

 

Number and Types of

Derivatives Employed

 

Notional

Amount

 

Expected

Termination Date

 

Average Rate

Locked

 

Accounting

Treatment

 

Anticipated debt offering

 

4 forward starting swaps (10-year)

 

$

200

 

6/15/2012

 

3.46

%

Cash flow hedge

 

Anticipated debt offering

 

6 forward starting swaps (30-year)

 

$

250

 

6/17/2013

 

4.24

%

Cash flow hedge

 

Anticipated debt offering

 

2 forward starting swaps (30-year)

 

$

50

 

6/16/2014

 

3.94

%

Cash flow hedge

 

Anticipated debt offering

 

10 forward starting swaps (30-year)

 

$

250

 

6/15/2015

 

3.60

%

Cash flow hedge
Open foreign currency exchange contracts

 

 

 

 

CAD

 

USD

 

Average Exchange Rate

 

2012

 

$

15

 

$

15

 

CAD $1.01 to USD $1.00

 

2013

 

$

9

 

$

9

 

CAD $1.00 to USD $1.00
Impact of derivative activities recognized in earnings

 

 

 

 

Year Ended December 31, 2011

 

Year Ended December 31, 2010

 

 

 

 

 

Derivatives

 

 

 

 

 

Derivatives

 

 

 

 

 

Derivatives in

 

Not

 

 

 

Derivatives in

 

Not

 

 

 

 

 

Hedging

 

Designated

 

 

 

Hedging

 

Designated

 

 

 

Location of gain/(loss)

 

Relationships (1)(2)(3)(5)

 

as a Hedge (4)

 

Total

 

Relationships (1)(2)(3)

 

as a Hedge (4)

 

Total

 

Commodity Derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supply and Logistics segment revenues

 

$

(161

)

$

99

 

$

(62

)

$

14

 

$

 2

 

$

16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transportation segment revenues

 

—

 

—

 

—

 

2

 

—

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Facilities segment revenues

 

11

 

—

 

11

 

—

 

—

 

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases and related costs

 

6

 

—

 

6

 

8

 

(12

)

(4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Field operating costs

 

—

 

1

 

1

 

—

 

3

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

1

 

—

 

1

 

1

 

2

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign Exchange Derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supply and Logistics segment revenues

 

—

 

1

 

1

 

—

 

2

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases and related costs

 

—

 

—

 

—

 

—

 

2

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income/(expense), net

 

6

 

—

 

6

 

—

 

(1

)

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Gain/(Loss) on Derivatives Recognized in Income

 

$

(137

)

$

101

 

$

(36

)

$

25

 

$

 (2

)

$

23

 

 

(1)

Amounts represent derivative gains and losses that were reclassified from AOCI to earnings during the period to coincide with the earnings impact of the respective hedged transaction.

(2)

Amounts include losses of approximately $8 million and $1 million for the years ended December 31, 2011 and 2010, respectively, that represent the ineffective portion of our cash flow hedges. These amounts relate to commodity derivatives and were recognized in Supply and Logistics segment revenues during the respective periods.

(3)

Interest expense includes net gains of approximately $2 million and approximately $1 million for the years ended December 31, 2011 and 2010, respectively, associated with outstanding interest rate swaps, which are designated as a fair value hedge.

(4)

Includes realized and unrealized gains or losses for derivatives not designated for hedge accounting during the period.

(5)

Includes unrealized gains of approximately $6 million reclassified from AOCI to earnings during the period to offset a lower of cost or market adjustment relating to the carrying value of PNG’s inventory.
Summary of derivative assets and liabilities on consolidated balance sheet

 

 

 

 

Asset Derivatives

 

 

Liability Derivatives

 

 

 

Balance Sheet

 

 

 

 

Balance Sheet

 

 

 

 

 

Location

 

Fair Value

 

 

Location

 

Fair Value

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

Other current assets

 

$

72

 

 

Other current assets

 

$

(47

)

 

 

Other long-term assets

 

20

 

 

Other long-term assets

 

(2

)

Interest rate derivatives

 

Other current assets

 

1

 

 

Other current liabilities

 

(24

)

 

 

 

 

 

 

 

Other long-term liabilities

 

(114

)

Foreign currency derivatives

 

Other current assets

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total derivatives designated as hedging instruments

 

 

 

$

94

 

 

 

 

$

(187

)

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

Other current assets

 

$

87

 

 

Other current assets

 

$

(39

)

 

 

Other long-term assets

 

6

 

 

Other long-term assets

 

(3

)

 

 

 

 

 

 

 

Other current liabilities

 

(1

)

Total derivatives not designated as hedging instruments

 

 

 

$

93

 

 

 

 

$

(43

)

 

 

 

 

 

 

 

 

 

 

 

Total derivatives

 

 

 

$

187

 

 

 

 

$

(230

)

 

 

 

 

Asset Derivatives

 

 

Liability Derivatives

 

 

 

Balance Sheet

 

 

 

 

Balance Sheet

 

 

 

 

 

Location

 

Fair Value

 

 

Location

 

Fair Value

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

Other current assets

 

$

71

 

 

Other current assets

 

$

(70

)

 

 

 

 

 

 

 

Other long-term assets

 

(1

)

 

 

 

 

 

 

 

Other current liabilities

 

(1

)

Interest rate derivatives

 

Other current assets

 

10

 

 

 

 

 

 

Total derivatives designated as hedging instruments

 

 

 

$

81

 

 

 

 

$

(72

)

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

Other current assets

 

$

11

 

 

Other current assets

 

$

(68

)

 

 

Other long-term assets

 

20

 

 

 

 

 

 

 

 

Other current liabilities

 

2

 

 

Other current liabilities

 

(10

)

Interest rate derivatives

 

Other current assets

 

4

 

 

 

 

 

 

 

 

Other long-term assets

 

1

 

 

 

 

 

 

Foreign currency derivatives

 

Other current assets

 

1

 

 

 

 

 

 

Total derivatives not designated as hedging instruments

 

 

 

$

39

 

 

 

 

$

(78

)

 

 

 

 

 

 

 

 

 

 

 

Total derivatives

 

 

 

$

120

 

 

 

 

$

(150

)

 
Amounts of gain/(loss) recognized in AOCI on derivatives (effective portion)

 

 

 

 

For the Years Ended December 31,

 

 

 

2011

 

2010

 

Commodity derivatives, net

 

$

(15

)

$

(82

)

Foreign exchange derivatives, net

 

—

 

(2

)

Interest rate derivatives, net

 

(136

)

8

 

Total

 

$

(151

)

$

(76

)
Financial assets and liabilities within the fair value hierarchy accounted for at fair value on a recurring basis

 

 

 

 

Fair Value as of December 31, 2011
(in millions)

 

 

Fair Value as of December 31, 2010
(in millions)

 

Recurring Fair Value Measures (1)

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Commodity derivatives

 

$

80

 

$

1

 

$

12

 

$

93

 

 

$

(16

)

$

—

 

$

(30

)

$

(46

)

Interest rate derivatives

 

—

 

(137

)

—

 

(137

)

 

—

 

—

 

15

 

15

 

Foreign currency derivatives

 

—

 

1

 

—

 

1

 

 

—

 

—

 

1

 

1

 

Total

 

$

80

 

$

(135

)

$

12

 

$

(43

)

 

$

(16

)

$

—

 

$

(14

)

$

(30

)

 

(1)       Derivative assets and liabilities are presented above on a net basis but do not include related cash margin deposits.
Reconciliation of changes in fair value of derivatives classified as level 3

 

 

 

 

Year Ended December 31,

 

 

 

2011

 

2010

 

Beginning Balance

 

$

(14

)

$

(28

)

Unrealized gains/(losses):

 

 

 

 

 

Included in earnings (1)

 

17

 

(22

)

Included in other comprehensive income

 

2

 

3

 

Settlements

 

21

 

42

 

Derivatives entered into during the period

 

3

 

(9

)

Transfers out of level 3

 

(17

)

—

 

Ending Balance

 

$

12

 

$

(14

)

 

 

 

 

 

 

Change in unrealized gains/(losses) included in earnings relating to level 3 derivatives still held at the end of the periods

 

$

22

 

$

(27

)

 

(1)       We reported unrealized gains and losses associated with level 3 commodity derivatives in our consolidated statements of operations as Supply and Logistics segment revenues. Gains and losses associated with interest rate derivatives are reported in our consolidated statements of operations as Interest expense. Gains and losses associated with foreign currency derivatives are reported in our consolidated statements of operations as either Supply and Logistics segment revenues, Purchases and related costs, or Other income/(expense), net.