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Derivatives and Risk Management Activities | 9 Months Ended
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Sep. 30, 2017
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivatives and Risk Management Activities | Derivatives and Risk Management Activities We identify the risks that underlie our core business activities and use risk management strategies to mitigate those risks when we determine that there is value in doing so. Our policy is to use derivative instruments for risk management purposes and not for the purpose of speculating on hydrocarbon commodity (referred to herein as “commodity”) price changes. We use various derivative instruments to manage our exposure to (i) commodity price risk, as well as to optimize our profits, (ii) interest rate risk and (iii) currency exchange rate risk. Our commodity price risk management policies and procedures are designed to help ensure that our hedging activities address our risks by monitoring our derivative positions, as well as physical volumes, grades, locations, delivery schedules and storage capacity. Our interest rate and currency exchange rate risk management policies and procedures are designed to monitor our derivative positions and ensure that those positions are consistent with our objectives and approved strategies. When we apply hedge accounting, our policy is to formally document all relationships between hedging instruments and hedged items, as well as our risk management objectives for undertaking the hedge. This process includes specific identification of the hedging instrument and the hedged transaction, the nature of the risk being hedged and how the hedging instrument’s effectiveness will be assessed. Both at the inception of the hedge and throughout the hedging relationship, we assess whether the derivatives employed are highly effective in offsetting changes in cash flows of anticipated hedged transactions. Commodity Price Risk Hedging Our core business activities involve certain commodity price-related risks that we manage in various ways, including through the use of derivative instruments. Our policy is to (i) only purchase inventory for which we have a market, (ii) structure our sales contracts so that price fluctuations do not materially affect our operating income and (iii) not acquire and hold physical inventory or derivatives for the purpose of speculating on commodity price changes. The material commodity-related risks inherent in our business activities can be divided into the following general categories: Commodity Purchases and Sales — In the normal course of our operations, we purchase and sell commodities. We use derivatives to manage the associated risks and to optimize profits. As of September 30, 2017, net derivative positions related to these activities included:
• | A net long position of 6.9 million barrels associated with our crude oil purchases, which was unwound ratably during October 2017 to match monthly average pricing.
• | A net short time spread position of 3.5 million barrels, which hedges a portion of our anticipated crude oil lease gathering purchases through December 2018.
• | A crude oil grade basis position of 25.2 million barrels through December 2019. These derivatives allow us to lock in grade basis differentials.
• | A net short position of 14.4 million barrels through December 2020 related to anticipated net sales of our crude oil and NGL inventory.
Pipeline Loss Allowance Oil — As is common in the pipeline transportation industry, our tariffs incorporate a loss allowance factor that is intended to, among other things, offset losses due to evaporation, measurement and other losses in transit. We utilize derivative instruments to hedge a portion of the anticipated sales of the loss allowance oil that is to be collected under our tariffs. As of September 30, 2017, our PLA hedges included a long call option position of 1.0 million barrels through December 2019. Natural Gas Processing/NGL Fractionation — We purchase natural gas for processing and operational needs. Additionally, we purchase NGL mix for fractionation and sell the resulting individual specification products (including ethane, propane, butane and condensate). In conjunction with these activities, we hedge the price risk associated with the purchase of the natural gas and the subsequent sale of the individual specification products. As of September 30, 2017, we had a long natural gas position of 63.9 Bcf which hedges our natural gas processing and operational needs through December 2020. We also had a short propane position of 10.0 million barrels through December 2018, a short butane position of 3.0 million barrels through December 2018 and a short WTI position of 1.0 million barrels through December 2018. In addition, we had a long power position of 0.4 million megawatt hours, which hedges a portion of our power supply requirements at our Canadian natural gas processing and fractionation plants through December 2019. Physical commodity contracts that meet the definition of a derivative but are ineligible, or not designated, for the normal purchases and normal sales scope exception are recorded on the balance sheet at fair value, with changes in fair value recognized in earnings. We have determined that substantially all of our physical commodity contracts qualify for the normal purchases and normal sales scope exception. Interest Rate Risk Hedging We use interest rate derivatives to hedge the benchmark interest rate risk associated with interest payments occurring as a result of debt issuances. The derivative instruments we use to manage this risk consist of forward starting interest rate swaps and treasury locks. These derivatives are designated as cash flow hedges. As such, changes in fair value are deferred in AOCI and are reclassified to interest expense as we incur the interest expense associated with the underlying debt. The following table summarizes the terms of our outstanding interest derivatives as of September 30, 2017 (notional amounts in millions):
Hedged Transaction |  | Number and Types of Derivatives Employed |  | Notional Amount |  | Expected Termination Date |  | Average Rate Locked |  | Accounting Treatment
Anticipated interest payments |  | 16 forward starting swaps (30-year) |  | $ | 400 |  |  | 6/15/2018 |  | 2.86 | % |  | Cash flow hedge
Anticipated interest payments |  | 8 forward starting swaps (30-year) |  | $ | 200 |  |  | 6/14/2019 |  | 2.83 | % |  | Cash flow hedge
Currency Exchange Rate Risk Hedging Because a significant portion of our Canadian business is conducted in CAD and, at times, a portion of our debt is denominated in CAD, we use foreign currency derivatives to minimize the risk of unfavorable changes in exchange rates. These instruments include foreign currency exchange contracts, forwards and options. As of September 30, 2017, our outstanding foreign currency derivatives include derivatives we use to hedge currency exchange risk (i) associated with USD-denominated commodity purchases and sales in Canada and (ii) created by the use of USD-denominated commodity derivatives to hedge commodity price risk associated with CAD-denominated commodity purchases and sales. The following table summarizes our open forward exchange contracts as of September 30, 2017 (in millions):
|  |  |  | USD |  | CAD |  | Average Exchange Rate USD to CAD
Forward exchange contracts that exchange CAD for USD: |  |  |  |  |  |  |  |  |  |
|  | 2017 |  | $ | 174 |  |  | $ | 215 |  |  | $1.00 - $1.24
|  | 2018 |  | $ | 12 |  |  | $ | 15 |  |  | $1.00 - $1.22
Forward exchange contracts that exchange USD for CAD: |  |  |  |  |  |  |  |  |  |
|  | 2017 |  | $ | 307 |  |  | $ | 385 |  |  | $1.00 - $1.26
|  | 2018 |  | $ | 118 |  |  | $ | 147 |  |  | $1.00 - $1.25
Preferred Distribution Rate Reset Option A derivative feature embedded in a contract that does not meet the definition of a derivative in its entirety must be bifurcated and accounted for separately if the economic characteristics and risks of the embedded derivative are not clearly and closely related to those of the host contract. The Preferred Distribution Rate Reset Option of our Series A preferred units is an embedded derivative that must be bifurcated from the related host contract, our partnership agreement, and recorded at fair value on our Condensed Consolidated Balance Sheets. Corresponding changes in fair value are recognized in “Other income/(expense), net” in our Condensed Consolidated Statement of Operations. At September 30, 2017 and December 31, 2016, the fair value of this embedded derivative was a liability of approximately $33 million and $32 million, respectively. We recognized a gain of approximately $2 million during the three months ended September 30, 2017 and a net gain of less than $1 million during the nine months ended September 30, 2017. We recognized gains of approximately $17 million and $42 million during the three and nine months ended September 30, 2016. See Note 11 to our Consolidated Financial Statements included in Part IV of our 2016 Annual Report on Form 10-K for additional information regarding the Preferred Distribution Rate Reset Option. Summary of Financial Impact We record all open derivatives on the balance sheet as either assets or liabilities measured at fair value. Changes in the fair value of derivatives are recognized currently in earnings unless specific hedge accounting criteria are met. For derivatives that qualify as cash flow hedges, changes in fair value of the effective portion of the hedges are deferred in AOCI and recognized in earnings in the periods during which the underlying physical transactions are recognized in earnings. Derivatives that do not qualify for hedge accounting and the portion of cash flow hedges that are not highly effective in offsetting changes in cash flows of the hedged items are recognized in earnings each period. Cash settlements associated with our derivative activities are classified within the same category as the related hedged item in our Condensed Consolidated Statements of Cash Flows. A summary of the impact of our derivative activities recognized in earnings is as follows (in millions):
|  | Three Months Ended September 30, 2017 |  |  | Three Months Ended September 30, 2016
Location of Gain/(Loss) |  | Derivatives in Hedging Relationships (1) |  | Derivatives Not Designated as a Hedge |  | Total |  |  | Derivatives in Hedging Relationships (1) |  | Derivatives Not Designated as a Hedge |  | Total
Commodity Derivatives |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Supply and Logistics segment revenues |  | $ | — |  |  | $ | (226 | ) |  | $ | (226 | ) |  |  | $ | 1 |  |  | $ | 10 |  |  | $ | 11 |
Transportation segment revenues |  | — |  |  | — |  |  | — |  |  |  | — |  |  | 1 |  |  | 1 |
Field operating costs |  | — |  |  | (4 | ) |  | (4 | ) |  |  | — |  |  | (2 | ) |  | (2 | )
Interest Rate Derivatives |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest expense, net |  | (10 | ) |  | — |  |  | (10 | ) |  |  | (2 | ) |  | — |  |  | (2 | )
Foreign Currency Derivatives |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Supply and Logistics segment revenues |  | — |  |  | 3 |  |  | 3 |  |  |  | — |  |  | (1 | ) |  | (1 | )
Preferred Distribution Rate Reset Option |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Other income/(expense), net |  | — |  |  | 2 |  |  | 2 |  |  |  | — |  |  | 17 |  |  | 17 |
Total Gain/(Loss) on Derivatives Recognized in Net Income |  | $ | (10 | ) |  | $ | (225 | ) |  | $ | (235 | ) |  |  | $ | (1 | ) |  | $ | 25 |  |  | $ | 24 |
|  | Nine Months Ended September 30, 2017 |  |  | Nine Months Ended September 30, 2016
Location of Gain/(Loss) |  | Derivatives in Hedging Relationships (1) |  | Derivatives Not Designated as a Hedge |  | Total |  |  | Derivatives in Hedging Relationships (1) |  | Derivatives Not Designated as a Hedge |  | Total
Commodity Derivatives |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Supply and Logistics segment revenues |  | $ | — |  |  | $ | (31 | ) |  | $ | (31 | ) |  |  | $ | 1 |  |  | $ | (118 | ) |  | $ | (117 | )
Transportation segment revenues |  | — |  |  | — |  |  | — |  |  |  | — |  |  | 4 |  |  | 4 |
Field operating costs |  | — |  |  | (8 | ) |  | (8 | ) |  |  | — |  |  | (2 | ) |  | (2 | )
Depreciation and amortization |  | (3 | ) |  | — |  |  | (3 | ) |  |  | — |  |  | — |  |  | — |
Interest Rate Derivatives |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest expense, net |  | (16 | ) |  | — |  |  | (16 | ) |  |  | (8 | ) |  | — |  |  | (8 | )
Foreign Currency Derivatives |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Supply and Logistics segment revenues |  | — |  |  | 5 |  |  | 5 |  |  |  | — |  |  | 4 |  |  | 4 |
Preferred Distribution Rate Reset Option |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Other income/(expense), net |  | — |  |  | — |  |  | — |  |  |  | — |  |  | 42 |  |  | 42 |
Total Gain/(Loss) on Derivatives Recognized in Net Income |  | $ | (19 | ) |  | $ | (34 | ) |  | $ | (53 | ) |  |  | $ | (7 | ) |  | $ | (70 | ) |  | $ | (77 | )
(1) | During the three and nine months ended September 30, 2017, we reclassified losses of approximately $8 million and $10 million to Interest expense, net, respectively, due to anticipated hedged transactions being probable of not occurring. During the nine months ended September 30, 2016 we reclassified losses of approximately $2 million and $2 million to Supply and Logistics segment revenues and Interest expense, net, respectively, due to anticipated hedged transactions being probable of not occurring.
The following table summarizes the derivative assets and liabilities on our Condensed Consolidated Balance Sheet on a gross basis as of September 30, 2017 (in millions):
| Asset Derivatives |  |  | Liability Derivatives
| Balance Sheet Location |  | Fair Value |  |  | Balance Sheet Location |  | Fair Value
Derivatives designated as hedging instruments: |  |  |  |  |  |  |  |  |  |
Interest rate derivatives | Other current liabilities |  | $ | 2 |  |  |  | Other current liabilities |  | $ | (26 | )
|  |  |  |  |  |  | Other long-term liabilities and deferred credits |  | (10 | )
Total derivatives designated as hedging instruments |  |  | $ | 2 |  |  |  |  |  | $ | (36 | )
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |
Commodity derivatives | Other current assets |  | $ | 74 |  |  |  | Other current assets |  | $ | (184 | )
| Other long-term assets, net |  | 1 |  |  |  | Other current liabilities |  | (97 | )
| Other current liabilities |  | 10 |  |  |  | Other long-term liabilities and deferred credits |  | (19 | )
| Other long-term liabilities and deferred credits |  | 5 |  |  |  |  |  |
Foreign currency derivatives | Other current assets |  | 6 |  |  |  | Other current assets |  | (2 | )
|  |  |  |  |  |  | Other current liabilities |  | (2 | )
Preferred Distribution Rate Reset Option |  |  | — |  |  |  | Other long-term liabilities and deferred credits |  | (33 | )
Total derivatives not designated as hedging instruments |  |  | $ | 96 |  |  |  |  |  | $ | (337 | )
Total derivatives |  |  | $ | 98 |  |  |  |  |  | $ | (373 | )
The following table summarizes the derivative assets and liabilities on our Condensed Consolidated Balance Sheet on a gross basis as of December 31, 2016 (in millions):
| Asset Derivatives |  |  | Liability Derivatives
| Balance Sheet Location |  | Fair Value |  |  | Balance Sheet Location |  | Fair Value
Derivatives designated as hedging instruments: |  |  |  |  |  |  |  |  |  |
Interest rate derivatives |  |  | $ | — |  |  |  | Other current liabilities |  | $ | (23 | )
|  |  |  |  |  |  | Other long-term liabilities and deferred credits |  | (27 | )
Total derivatives designated as hedging instruments |  |  | $ | — |  |  |  |  |  | $ | (50 | )
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |
Commodity derivatives | Other current assets |  | $ | 101 |  |  |  | Other current assets |  | $ | (344 | )
| Other long-term assets, net |  | 2 |  |  |  | Other long-term assets, net |  | (1 | )
| Other long-term liabilities and deferred credits |  | 2 |  |  |  | Other current liabilities |  | (14 | )
|  |  |  |  |  |  | Other long-term liabilities and deferred credits |  | (34 | )
Foreign currency derivatives | Other current liabilities |  | 3 |  |  |  | Other current liabilities |  | (6 | )
Preferred Distribution Rate Reset Option |  |  | — |  |  |  | Other long-term liabilities and deferred credits |  | (32 | )
Total derivatives not designated as hedging instruments |  |  | $ | 108 |  |  |  |  |  | $ | (431 | )
Total derivatives |  |  | $ | 108 |  |  |  |  |  | $ | (481 | )
Our derivative transactions are governed through ISDA (International Swaps and Derivatives Association) master agreements and clearing brokerage agreements. These agreements include stipulations regarding the right of set off in the event that we or our counterparty default on performance obligations. If a default were to occur, both parties have the right to net amounts payable and receivable into a single net settlement between parties. Our accounting policy is to offset derivative assets and liabilities executed with the same counterparty when a master netting arrangement exists. Accordingly, we also offset derivative assets and liabilities with amounts associated with cash margin. Our exchange-traded derivatives are transacted through clearing brokerage accounts and are subject to margin requirements as established by the respective exchange. On a daily basis, our account equity (consisting of the sum of our cash balance and the fair value of our open derivatives) is compared to our initial margin requirement resulting in the payment or return of variation margin. The following table provides the components of our net broker receivable:
| September 30, 2017 |  | December 31, 2016
Initial margin | $ | 51 |  |  | $ | 119 |
Variation margin posted | 143 |  |  | 291 |
Net broker receivable | $ | 194 |  |  | $ | 410 |
The following table presents information about derivative financial assets and liabilities that are subject to offsetting, including enforceable master netting arrangements (in millions):
| September 30, 2017 |  |  | December 31, 2016
| Derivative Asset Positions |  | Derivative Liability Positions |  |  | Derivative Asset Positions |  | Derivative Liability Positions
Netting Adjustments: |  |  |  |  |  |  |  |  |  |  |  |
Gross position - asset/(liability) | $ | 98 |  |  | $ | (373 | ) |  |  | $ | 108 |  |  | $ | (481 | )
Netting adjustment | (203 | ) |  | 203 |  |  |  | (350 | ) |  | 350 |
Cash collateral paid | 194 |  |  | — |  |  |  | 410 |  |  | — |
Net position - asset/(liability) | $ | 89 |  |  | $ | (170 | ) |  |  | $ | 168 |  |  | $ | (131 | )
Balance Sheet Location After Netting Adjustments: |  |  |  |  |  |  |  |  |  |  |  |
Other current assets | $ | 88 |  |  | $ | — |  |  |  | $ | 167 |  |  | $ | — |
Other long-term assets, net | 1 |  |  | — |  |  |  | 1 |  |  | — |
Other current liabilities | — |  |  | (113 | ) |  |  | — |  |  | (40 | )
Other long-term liabilities and deferred credits | — |  |  | (57 | ) |  |  | — |  |  | (91 | )
| $ | 89 |  |  | $ | (170 | ) |  |  | $ | 168 |  |  | $ | (131 | )
As of September 30, 2017, there was a net loss of $224 million deferred in AOCI. The deferred net loss recorded in AOCI is expected to be reclassified to future earnings contemporaneously with (i) the earnings recognition of the underlying hedged commodity transaction or (ii) interest expense accruals associated with underlying debt instruments. Of the total net loss deferred in AOCI at September 30, 2017, we expect to reclassify a net loss of $8 million to earnings in the next twelve months. The remaining deferred loss of $216 million is expected to be reclassified to earnings through 2049. A portion of these amounts is based on market prices as of September 30, 2017; thus, actual amounts to be reclassified will differ and could vary materially as a result of changes in market conditions. The following table summarizes the net deferred loss recognized in AOCI for derivatives (in millions):
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2017 |  | 2016 |  | 2017 |  | 2016
Interest rate derivatives, net | $ | (3 | ) |  | $ | (20 | ) |  | $ | (15 | ) |  | $ | (178 | )
At September 30, 2017 and December 31, 2016, none of our outstanding derivatives contained credit-risk related contingent features that would result in a material adverse impact to us upon any change in our credit ratings. Although we may be required to post margin on our cleared derivatives as described above, we do not require our non-cleared derivative counterparties to post collateral with us. Recurring Fair Value Measurements Derivative Financial Assets and Liabilities The following table sets forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis (in millions):
|  | Fair Value as of September 30, 2017 |  |  | Fair Value as of December 31, 2016
Recurring Fair Value Measures (1) |  | Level 1 |  | Level 2 |  | Level 3 |  | Total |  |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Commodity derivatives |  | $ | (4 | ) |  | $ | (198 | ) |  | $ | (8 | ) |  | $ | (210 | ) |  |  | $ | (113 | ) |  | $ | (171 | ) |  | $ | (4 | ) |  | $ | (288 | )
Interest rate derivatives |  | — |  |  | (34 | ) |  | — |  |  | (34 | ) |  |  | — |  |  | (50 | ) |  | — |  |  | (50 | )
Foreign currency derivatives |  | — |  |  | 2 |  |  | — |  |  | 2 |  |  |  | — |  |  | (3 | ) |  | — |  |  | (3 | )
Preferred Distribution Rate Reset Option |  | — |  |  | — |  |  | (33 | ) |  | (33 | ) |  |  | — |  |  | — |  |  | (32 | ) |  | (32 | )
Total net derivative liability |  | $ | (4 | ) |  | $ | (230 | ) |  | $ | (41 | ) |  | $ | (275 | ) |  |  | $ | (113 | ) |  | $ | (224 | ) |  | $ | (36 | ) |  | $ | (373 | )
(1) | Derivative assets and liabilities are presented above on a net basis but do not include related cash margin deposits.
Level 1 Level 1 of the fair value hierarchy includes exchange-traded commodity derivatives such as futures and options. The fair value of exchange-traded commodity derivatives is based on unadjusted quoted prices in active markets. Level 2 Level 2 of the fair value hierarchy includes exchange-cleared commodity derivatives and over-the-counter commodity, interest rate and foreign currency derivatives that are traded in active markets. In addition, it includes certain physical commodity contracts. The fair value of these derivatives is based on broker price quotations which are corroborated with market observable inputs. Level 3 Level 3 of the fair value hierarchy includes certain physical commodity contracts and the Preferred Distribution Rate Reset Option contained in our partnership agreement which is classified as an embedded derivative. The fair value of our Level 3 physical commodity contracts is based on a valuation model utilizing timing estimates, which involve management judgment. Significant changes in timing could result in a material change in fair value to our physical commodity contracts. We report unrealized gains and losses associated with these physical commodity contracts in our Condensed Consolidated Statements of Operations as Supply and Logistics segment revenues. The fair value of the embedded derivative feature contained in our partnership agreement is based on a valuation model that estimates the fair value of the Series A preferred units with and without the Preferred Distribution Rate Reset Option. This model contains inputs, including our common unit price, ten-year U.S. treasury rates, default probabilities and timing estimates which involve management judgment. A significant increase or decrease in the value of these inputs could result in a material change in fair value to this embedded derivative feature. We report unrealized gains and losses associated with this embedded derivative in our Condensed Consolidated Statements of Operations as “Other income/(expense), net.” To the extent any transfers between levels of the fair value hierarchy occur, our policy is to reflect these transfers as of the beginning of the reporting period in which they occur. Rollforward of Level 3 Net Asset/(Liability) The following table provides a reconciliation of changes in fair value of the beginning and ending balances for our derivatives classified as Level 3 (in millions):
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2017 |  | 2016 |  | 2017 |  | 2016
Beginning Balance | $ | (30 | ) |  | $ | (35 | ) |  | $ | (36 | ) |  | $ | 11 |
Net gains/(losses) for the period included in earnings | (8 | ) |  | 17 |  |  | (1 | ) |  | 41 |
Settlements | (1 | ) |  | — |  |  | 4 |  |  | (10 | )
Derivatives entered into during the period | (2 | ) |  | 1 |  |  | (8 | ) |  | (59 | )
Ending Balance | $ | (41 | ) |  | $ | (17 | ) |  | $ | (41 | ) |  | $ | (17 | )
Change in unrealized gains/(losses) included in earnings relating to Level 3 derivatives still held at the end of the period | $ | (10 | ) |  | $ | 18 |  |  | $ | (8 | ) |  | $ | 43 |

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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://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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