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Derivatives and Risk Management Activities (Tables)
 3 Months Ended
Mar. 31, 2012
Derivatives and Risk Management Activities  
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

 

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

 

$

11

 

$

11

 

CAD $1.01 to USD $1.00

 

2013

 

$

9

 

$

9

 

CAD $1.00 to USD $1.00

 
Impact of derivative activities recognized in earnings

 

 

 

 

Three Months Ended March 31, 2012

 

Three Months Ended March 31, 2011

 

 

 

 

 

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

 

$

34

 

$

(38

)

$

(4

)

 

$

(75

)

$

4

 

$

(71

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transportation segment revenues

 

—

 

—

 

—

 

 

—

 

—

 

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Facilities segment revenues

 

12

 

—

 

12

 

 

(1

)

—

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases and related costs

 

4

 

1

 

5

 

 

—

 

—

 

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Field operating costs

 

—

 

2

 

2

 

 

—

 

1

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(1

)

—

 

(1

)

 

1

 

—

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign Currency Derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supply and Logistics segment revenues

 

—

 

1

 

1

 

 

—

 

3

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income/(expense), net

 

1

 

—

 

1

 

 

1

 

—

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Gain/(Loss) on Derivatives Recognized in Net Income

 

$

50

 

$

(34

)

$

16

 

 

$

(74

)

$

8

 

$

(66

)

 

 

(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 $3 million and approximately $8 million for the three months ended March 31, 2012 and 2011, respectively, that represent the ineffective portion of our cash flow hedges. These amounts relate to commodity and interest rate derivatives.

(3)             Interest expense includes a net gain of approximately $1 million for both the three months ended March 31, 2012 and 2011, 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 $4 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

The following table summarizes the derivative assets and liabilities on our condensed consolidated balance sheet on a gross basis as of March 31, 2012 (in millions):

 

 

 

Asset Derivatives

 

 

Liability Derivatives

 

 

 

Balance Sheet

 

 

 

 

Balance Sheet

 

 

 

 

 

Location

 

Fair Value

 

 

Location

 

Fair Value

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

Other current assets

 

$

87

 

 

Other current assets

 

$

(54

)

 

 

Other long-term assets

 

7

 

 

Other long-term assets

 

(1

)

 

 

Other long-term liabilities

 

3

 

 

Other long-term liabilities

 

(3

)

Interest rate derivatives

 

Other current assets

 

1

 

 

Other current liabilities

 

(1

)

 

 

Other long-term assets

 

2

 

 

Other long-term liabilities

 

(65

)

Foreign currency derivatives

 

Other current assets

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total derivatives designated as hedging instruments

 

 

 

$

101

 

 

 

 

$

(124

)

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

Other current assets

 

$

44

 

 

Other current assets

 

$

(39

)

 

 

Other long-term liabilities

 

1

 

 

Other long-term assets

 

(6

)

 

 

 

 

 

 

 

 

 

 

 

Total derivatives not designated as hedging  instruments

 

 

 

$

45

 

 

 

 

$

(45

)

 

 

 

 

 

 

 

 

 

 

 

Total derivatives

 

 

 

$

146

 

 

 

 

$

(169

)

 

The following table summarizes the derivative assets and liabilities on our condensed consolidated balance sheet on a gross basis as of December 31, 2011 (in millions):

 

 

 

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

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

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

Commodity derivatives, net

 

$

25

 

$

(145

)

Foreign currency derivatives, net

 

—

 

(1

)

Interest rate derivatives, net

 

51

 

2

 

Total

 

$

76

 

$

(144

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

 

 

 

 

Fair Value as of March 31, 2012
(in millions)

 

 

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

 

Recurring Fair Value Measures (1)

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Commodity derivatives

 

$

37

 

$

—

 

$

2

 

$

39

 

 

$

80

 

$

1

 

$

12

 

$

93

 

Interest rate derivatives

 

—

 

(63

)

—

 

(63

)

 

—

 

(137

)

—

 

(137

)

Foreign currency derivatives

 

—

 

1

 

—

 

1

 

 

—

 

1

 

—

 

1

 

Total

 

$

37

 

$

(62

)

$

2

 

$

(23

)

 

$

80

 

$

(135

)

$

12

 

$

(43

)

 

 

(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

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

Beginning Balance

 

$

12

 

$

(14

)

Unrealized gains/(losses):

 

 

 

 

 

Included in earnings (1)

 

(4

)

6

 

Included in other comprehensive income

 

3

 

(2

)

Settlements

 

(12

)

32

 

Derivatives entered into during the period

 

3

 

(10

)

Transfers out of level 3

 

—

 

(17

)

Ending Balance

 

$

2

 

$

(5

)

 

 

 

 

 

 

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

 

$

(1

)

$

(3

)

 

 

(1)                      We reported unrealized gains and losses associated with level 3 commodity derivatives in our condensed consolidated statements of operations as Supply and Logistics segment revenues.