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Derivative Assets And Liabilities
 6 Months Ended
Jun. 30, 2017
General Discussion of Derivative Instruments and Hedging Activities [Abstract]  
Price Risk Management Assets and Liabilities
DERIVATIVE ASSETS AND LIABILITIES
Commodity Price Risk
We are exposed to market risks related to the volatility of commodity prices. To manage the impact of volatility from these prices, we utilize various exchange-traded and OTC commodity financial instrument contracts. These contracts consist primarily of futures, swaps and options and are recorded at fair value in our consolidated balance sheets.
We use futures and basis swaps, designated as fair value hedges, to hedge our natural gas inventory stored in our Bammel storage facility. At hedge inception, we lock in a margin by purchasing gas in the spot market or off peak season and entering into a financial contract. Changes in the spreads between the forward natural gas prices and the physical inventory spot price result in unrealized gains or losses until the underlying physical gas is withdrawn and the related designated derivatives are settled. Once the gas is withdrawn and the designated derivatives are settled, the previously unrealized gains or losses associated with these positions are realized.
We use futures, swaps and options to hedge the sales price of natural gas we retain for fees in our intrastate transportation and storage segment and operational gas sales on our interstate transportation and storage segment. These contracts are not designated as hedges for accounting purposes.
We use NGL and crude derivative swap contracts to hedge forecasted sales of NGL and condensate equity volumes we retain for fees in our midstream segment whereby our subsidiaries generally gather and process natural gas on behalf of producers, sell the resulting residue gas and NGL volumes at market prices and remit to producers an agreed upon percentage of the proceeds based on an index price for the residue gas and NGL. These contracts are not designated as hedges for accounting purposes.
We use derivatives in our liquids transportation and services segment to manage our storage facilities and the purchase and sale of purity NGL. These contracts are not designated as hedges for accounting purposes.
We utilize swaps, futures and other derivative instruments to mitigate the risk associated with market movements in the price of refined products and NGLs. These contracts are not designated as hedges for accounting purposes.
We use financial commodity derivatives to take advantage of market opportunities in our trading activities which complement our transportation and storage segment's operations and are netted in cost of products sold in our consolidated statements of operations. We also have trading and marketing activities related to power and natural gas in our all other segment which are also netted in cost of products sold. As a result of our trading activities and the use of derivative financial instruments in our transportation and storage segment, the degree of earnings volatility that can occur may be significant, favorably or unfavorably, from period to period. We attempt to manage this volatility through the use of daily position and profit and loss reports provided to our risk oversight committee, which includes members of senior management, and the limits and authorizations set forth in our commodity risk management policy.
The following table details our outstanding commodity-related derivatives:
 
June 30, 2017
 
December 31, 2016
 
Notional Volume
 
Maturity
 
Notional Volume
 
Maturity
Mark-to-Market Derivatives
 
 
 
 
 
 
 
(Trading)
 
 
 
 
 
 
 
Natural Gas (MMBtu):
 
 
 
 
 
 
 
Fixed Swaps/Futures
465,000

 
2017
 
(682,500
)
 
2017
Basis Swaps IFERC/NYMEX(1)
33,112,500

 
2017
 
2,242,500

 
2017
Options – Puts
11,500,000

 
2018
 
—

 
—
Power (Megawatt):
 
 
 
 
 
 
 
Forwards
497,530

 
2017-2018
 
391,880

 
2017-2018
Futures
(212,880
)
 
2017-2018
 
109,564

 
2017-2018
Options – Puts
(364,000
)
 
2017
 
(50,400
)
 
2017
Options – Calls
607,200

 
2017
 
186,400

 
2017
Crude (Bbls) – Futures
(1,569,000
)
 
2017
 
(617,000
)
 
2017
(Non-Trading)
 
 
 
 
 
 
 
Natural Gas (MMBtu):
 
 
 
 
 
 
 
Basis Swaps IFERC/NYMEX
(3,630,000
)
 
2017-2018
 
10,750,000

 
2017-2018
Swing Swaps IFERC
39,900,000

 
2017
 
(5,662,500
)
 
2017
Fixed Swaps/Futures
(39,250,000
)
 
2017-2019
 
(52,652,500
)
 
2017-2019
Forward Physical Contracts
(9,302,540
)
 
2017
 
(22,492,489
)
 
2017
Natural Gas Liquid (Bbls) – Forwards/Swaps
(4,562,000
)
 
2017-2019
 
(5,786,627
)
 
2017
Refined Products (Bbls) – Futures
—

 
—
 
(2,240,000
)
 
2017
Fair Value Hedging Derivatives
 
 
 
 
 
 
 
(Non-Trading)
 
 
 
 
 
 
 
Natural Gas (MMBtu):
 
 
 
 
 
 
 
Basis Swaps IFERC/NYMEX
(32,440,000
)
 
2017
 
(36,370,000
)
 
2017
Fixed Swaps/Futures
(32,440,000
)
 
2017
 
(36,370,000
)
 
2017
Hedged Item – Inventory
32,440,000

 
2017
 
36,370,000

 
2017

(1) 
Includes aggregate amounts for open positions related to Houston Ship Channel, Waha Hub, NGPL TexOk, West Louisiana Zone and Henry Hub locations.
Interest Rate Risk
We are exposed to market risk for changes in interest rates. To maintain a cost effective capital structure, we borrow funds using a mix of fixed rate debt and variable rate debt. We also manage our interest rate exposure by utilizing interest rate swaps to achieve a desired mix of fixed and variable rate debt. We also utilize forward starting interest rate swaps to lock in the rate on a portion of our anticipated debt issuances.
The following table summarizes our interest rate swaps outstanding, none of which were designated as hedges for accounting purposes:
Term
 
Type(1)
 
Notional Amount Outstanding
June 30, 2017
 
December 31, 2016
July 2017(2)
 
Forward-starting to pay a fixed rate of 3.90% and receive a floating rate
 
$
—

 
$
500

July 2018(2)
 
Forward-starting to pay a fixed rate of 3.76% and receive a floating rate
 
300

 
200

July 2019(2)
 
Forward-starting to pay a fixed rate of 3.64% and receive a floating rate
 
300

 
200

July 2020(2)
 
Forward-starting to pay a fixed rate of 3.52% and receive a floating rate
 
400

 
—

December 2018
 
Pay a floating rate based on a 3-month LIBOR and receive a fixed rate of 1.53%
 
1,200

 
1,200

March 2019
 
Pay a floating rate based on a 3-month LIBOR and receive a fixed rate of 1.42%
 
300

 
300

(1) 
Floating rates are based on 3-month LIBOR.  
(2) 
Represents the effective date. These forward-starting swaps have terms of 30 years with a mandatory termination date the same as the effective date.  
Credit Risk
Credit risk refers to the risk that a counterparty may default on its contractual obligations resulting in a loss to the Partnership. Credit policies have been approved and implemented to govern the Partnership’s portfolio of counterparties with the objective of mitigating credit losses. These policies establish guidelines, controls and limits to manage credit risk within approved tolerances by mandating an appropriate evaluation of the financial condition of existing and potential counterparties, monitoring agency credit ratings, and by implementing credit practices that limit exposure according to the risk profiles of the counterparties. Furthermore, the Partnership may, at times, require collateral under certain circumstances to mitigate credit risk as necessary. The Partnership also uses industry standard commercial agreements which allow for the netting of exposures associated with transactions executed under a single commercial agreement. Additionally, we utilize master netting agreements to offset credit exposure across multiple commercial agreements with a single counterparty or affiliated group of counterparties.
The Partnership’s counterparties consist of a diverse portfolio of customers across the energy industry, including petrochemical companies, commercial and industrials, oil and gas producers, municipalities, gas and electric utilities, midstream companies and independent power generators. Our overall exposure may be affected positively or negatively by macroeconomic or regulatory changes that impact our counterparties to one extent or another. Currently, management does not anticipate a material adverse effect in our financial position or results of operations as a consequence of counterparty non-performance.
The Partnership has maintenance margin deposits with certain counterparties in the OTC market, primarily independent system operators, and with clearing brokers. Payments on margin deposits are required when the value of a derivative exceeds our pre-established credit limit with the counterparty. Margin deposits are returned to us on or about the settlement date for non-exchange traded derivatives, and we exchange margin calls on a daily basis for exchange traded transactions. Since the margin calls are made daily with the exchange brokers, the fair value of the financial derivative instruments are deemed current and netted in deposits paid to vendors within other current assets in the consolidated balance sheets.
For financial instruments, failure of a counterparty to perform on a contract could result in our inability to realize amounts that have been recorded on our consolidated balance sheets and recognized in net income or other comprehensive income.
Derivative Summary
The following table provides a summary of our derivative assets and liabilities:
 
 
Fair Value of Derivative Instruments
 
 
Asset Derivatives
 
Liability Derivatives
 
 
June 30, 2017
 
December 31, 2016
 
June 30, 2017
 
December 31, 2016
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
Commodity derivatives (margin deposits)
 
$
8

 
$
—

 
$
(1
)
 
$
(4
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Commodity derivatives (margin deposits)
 
127

 
338

 
(109
)
 
(416
)
Commodity derivatives
 
16

 
24

 
(13
)
 
(52
)
Interest rate derivatives
 
—

 
—

 
(201
)
 
(193
)
Embedded derivatives in Preferred Units
 
—

 
—

 
—

 
(1
)
 
 
143

 
362

 
(323
)
 
(662
)
Total derivatives
 
$
151

 
$
362

 
$
(324
)
 
$
(666
)

The following table presents the fair value of our recognized derivative assets and liabilities on a gross basis and amounts offset on the consolidated balance sheets that are subject to enforceable master netting arrangements or similar arrangements:
 
 
 
 
Asset Derivatives
 
Liability Derivatives
 
 
Balance Sheet Location
 
June 30, 2017
 
December 31, 2016
 
June 30, 2017
 
December 31, 2016
Derivatives without offsetting agreements
 
Derivative assets (liabilities)
 
$
—

 
$
—

 
$
(201
)
 
$
(194
)
Derivatives in offsetting agreements:
 
 
 
 
 
 
 
 
OTC contracts
 
Derivative assets (liabilities)
 
16

 
24

 
(13
)
 
(52
)
Broker cleared derivative contracts
 
Other current assets
 
135

 
338

 
(110
)
 
(420
)
Total gross derivatives
 
151

 
362

 
(324
)
 
(666
)
Offsetting agreements:
 
 
 
 
 
 
 
 
Counterparty netting
 
Derivative assets (liabilities)
 
(11
)
 
(4
)
 
11

 
4

Payments on margin deposit
 
Other current assets
 
(110
)
 
(338
)
 
110

 
338

Total net derivatives
 
$
30

 
$
20

 
$
(203
)
 
$
(324
)

We disclose the non-exchange traded financial derivative instruments as price risk management assets and liabilities on our consolidated balance sheets at fair value with amounts classified as either current or long-term depending on the anticipated settlement date.
The following tables summarize the amounts recognized with respect to our derivative financial instruments:
 
Location of Gain/(Loss) Recognized in Income on Derivatives
 
Amount of Gain/(Loss) Recognized in Income Representing Hedge Ineffectiveness and Amount Excluded from the Assessment of Effectiveness
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
 
2017
 
2016
 
2017
 
2016
Derivatives in fair value hedging relationships (including hedged item):
 
 
 
 
 
 
 
 
 
Commodity derivatives
Cost of products sold
 
$
6

 
$
21

 
$
2

 
$
17

Total
 
 
$
6

 
$
21

 
$
2

 
$
17


 
Location of Gain/(Loss) Recognized in Income on Derivatives
 
Amount of Gain/(Loss) Recognized in Income on Derivatives
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
 
2017
 
2016
 
2017
 
2016
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Commodity derivatives – Trading
Cost of products sold
 
$
15

 
$
(7
)
 
$
26

 
$
(16
)
Commodity derivatives – Non-trading
Cost of products sold
 
8

 
(48
)
 
(2
)
 
(43
)
Interest rate derivatives
Losses on interest rate derivatives
 
(25
)
 
(81
)
 
(20
)
 
(151
)
Embedded derivatives
Other, net
 
—

 
(4
)
 
1

 
(4
)
Total
 
 
$
(2
)
 
$
(140
)
 
$
5

 
$
(214
)