Note 4. Derivative Instruments, Hedging Activities and Fair Value Measurements

In the normal course of our business operations, we are exposed to certain risks, including changes in interest rates and commodity prices. In order to manage risks associated with certain anticipated future transactions, we use derivative instruments. Substantially all of our derivatives are used for non-trading activities.

We are required to recognize derivative instruments at fair value as either assets or liabilities on our balance sheet unless such instruments meet certain normal purchase/normal sale criteria. While all derivatives are required to be reported at fair value on the balance sheet, changes in fair value of the derivative instruments are reported in different ways, depending on the nature and effectiveness of the hedging activities to which they relate. An effective hedge relationship is one in which the change in fair value of a derivative instrument can be expected to offset 80% to 125% of the changes in fair value of a hedged item at inception and throughout the life of the hedging relationship. Any ineffectiveness associated with a hedge relationship is recognized in earnings immediately. Ineffectiveness can be caused by, among other things, changes in the timing of forecasted transactions or a mismatch of terms between the derivative instrument and the hedged item.

A contract designated as a cash flow hedge of an anticipated transaction that is not probable of occurring is immediately recognized in earnings.

Certain of our derivative instruments do not qualify for hedge accounting treatment; therefore, they are accounted for using mark-to-market accounting.

Interest Rate Derivative Instruments

We may utilize interest rate swaps, forward starting swaps and similar derivative instruments to manage our exposure to changes in interest rates charged on borrowings under certain consolidated debt agreements. The following table summarizes our portfolio of interest rate swaps at March 31, 2012:

Hedged Transaction	Number and Type of Derivatives Outstanding	Notional Amount	Period of Hedge	Rate Swap	Accounting Treatment
Senior Notes AA	10 fixed-to-floating swaps	$750.0	1/11 to 2/16	3.2% to 1.5%	Fair value hedge
Undesignated swaps	6 floating-to-fixed swaps	$600.0	5/10 to 7/14	0.6% to 2.0%	Mark-to-market

Interest expense for the three months ended March 31, 2012 and 2011 reflects a benefit of $2.8 million and $9.7 million, respectively, attributable to interest rate swaps.

In February 2012, we settled 11 fixed-to-floating interest rate swaps having an aggregate notional amount of $800.0 million, resulting in gains totaling $37.7 million. These gains will be amortized to earnings (as a decrease in interest expense) using the effective interest method over the forecasted hedged period of approximately three years.

The following table summarizes our portfolio of forward starting swaps outstanding at March 31, 2012. Forward starting swaps hedge the expected underlying benchmark interest rates related to future issuances of debt.

Hedged Transaction	Number and Type of Derivatives Outstanding	Notional Amount	Expected Termination Date	Average Rate Locked	Accounting Treatment
Future debt offering	7 forward starting swaps	$350.0	8/12	3.7%	Cash flow hedge
Future debt offering	16 forward starting swaps	$1,000.0	3/13	3.7%	Cash flow hedge

In connection with the issuance of Senior Notes EE in February 2012 (see Note 9), we settled ten forward starting swaps having an aggregate notional value of $500.0 million, resulting in losses totaling $115.3 million. These losses are reflected in other comprehensive income for the three months ended March 31, 2012 and amortized to earnings (as an increase in interest expense) using the effective interest method over the forecasted hedge period of ten years.

Commodity Derivative Instruments

The prices of natural gas, NGLs, crude oil, refined products and certain petrochemical products are subject to fluctuations in response to changes in supply and demand, market conditions and a variety of additional factors that are beyond our control. In order to manage such price risks, we enter into commodity derivative instruments such as physical forward contracts, futures contracts, fixed-for-float swaps, basis swaps and options contracts. The following table summarizes our commodity derivative instruments outstanding at March 31, 2012:

	Volume (1)		Accounting
Derivative Purpose	Current (2)	Long-Term (2)	Treatment
Derivatives designated as hedging instruments:
Natural gas processing:
Forecasted natural gas purchases for plant thermal reduction ("PTR") (3)	27.7 Bcf	n/a	Cash flow hedge
Forecasted sales of NGLs (4)	2.4 MMBbls	n/a	Cash flow hedge
Octane enhancement:
Forecasted purchases of NGLs	0.3 MMBbls	n/a	Cash flow hedge
Forecasted sales of octane enhancement products	3.2 MMBbls	n/a	Cash flow hedge
Natural gas marketing:
Natural gas storage inventory management activities	10.5 Bcf	n/a	Fair value hedge
NGL marketing:
Forecasted purchases of NGLs and related hydrocarbon products	3.7 MMBbls	n/a	Cash flow hedge
Forecasted sales of NGLs and related hydrocarbon products	3.6 MMBbls	0.2 MMBbls	Cash flow hedge
Refined products marketing:
Forecasted purchases of refined products	0.4 MMBbls	n/a	Cash flow hedge
Forecasted sales of refined products	0.4 MMBbls	n/a	Cash flow hedge
Refined products inventory management activities	0.1 MMBbls	n/a	Fair value hedge
Crude oil marketing:
Forecasted purchases of crude oil	1.6 MMBbls	n/a	Cash flow hedge
Forecasted sales of crude oil	2.6 MMBbls	n/a	Cash flow hedge
Derivatives not designated as hedging instruments:
Natural gas risk management activities (5,6)	416.9 Bcf	69.6 Bcf	Mark-to-market
Refined products risk management activities (6)	0.4 MMBbls	n/a	Mark-to-market
Crude oil risk management activities (6)	6.1 MMBbls	n/a	Mark-to-market
(1) Volume for derivatives designated as hedging instruments reflects the total amount of volumes hedged whereas volume for derivatives not designated as hedging instruments reflects the absolute value of derivative notional volumes. (2) The maximum term for derivatives designated as cash flow hedges, derivatives designated as fair value hedges and derivatives not designated as hedging instruments is December 2013, May 2012 and October 2015, respectively. (3) PTR represents the British thermal unit ("Btu") equivalent of the NGLs extracted from natural gas by a processing plant, and includes the natural gas used as plant fuel to extract those liquids, plant flare and other shortages. (4) Forecasted sales of NGL volumes under natural gas processing exclude 4.9 MMBbls of additional hedges executed under contracts that have been designated as normal sales agreements. (5) Current volumes include approximately 104.2 Bcf of physical derivative instruments that are predominantly priced at an index plus a premium or minus a discount related to location differences. (6) Reflects the use of derivative instruments to manage risks associated with transportation, processing and storage assets.

Our predominant hedging strategies are: (i) hedging natural gas processing margins; (ii) hedging anticipated future contracted sales of NGLs, refined products and crude oil associated with volumes held in inventory; and (iii) hedging the fair value of natural gas in inventory. The following information summarizes these hedging strategies:

The objective of our natural gas processing strategy is to hedge an amount of gross margin associated with our natural gas processing activities. We achieve this objective by using physical and financial instruments to lock in the purchase prices of natural gas consumed as PTR and the sales prices of the related NGL products. This program consists of (i) the forward sale of a portion of our expected equity NGL production at fixed prices through December 2012, which is achieved through the use of forward physical sales contracts and commodity derivative instruments and (ii) the purchase of commodity derivative instruments having a notional amount based on the volume of natural gas expected to be consumed as PTR in the production of such equity NGL production.

§	The objective of our NGL, refined products and crude oil sales hedging program is to hedge the margins of anticipated future sales of inventory by locking in sales prices through the use of forward physical sales contracts and commodity derivative instruments.

§	The objective of our natural gas inventory hedging program is to hedge the fair value of natural gas currently held in inventory by locking in the sales price of the inventory through the use of commodity derivative instruments.

Tabular Presentation of Fair Value Amounts, and Gains and Losses on

Derivative Instruments and Related Hedged Items

The following table provides a balance sheet overview of our derivative assets and liabilities at the dates indicated:

	Asset Derivatives						Liability Derivatives
	March 31, 2012			December 31, 2011			March 31, 2012			December 31, 2011
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Interest rate derivatives	Other current assets	$	14.7	Other current assets	$	43.7	Other current liabilities	$	146.5	Other current liabilities	$	163.6
Interest rate derivatives	Other assets		22.7	Other assets		44.2	Other liabilities		--	Other liabilities		127.1
Total interest rate derivatives			37.4			87.9			146.5			290.7
Commodity derivatives	Other current assets		47.0	Other current assets		20.3	Other current liabilities		100.1	Other current liabilities		30.3
Commodity derivatives	Other assets		0.4	Other assets		--	Other liabilities		--	Other liabilities		0.2
Total commodity derivatives (1)			47.4			20.3			100.1			30.5
Total derivatives designated as hedging instruments		$	84.8		$	108.2		$	246.6		$	321.2

Derivatives not designated as hedging instruments
Interest rate derivatives	Other current assets	$	--	Other current assets	$	--	Other current liabilities	$	10.9	Other current liabilities	$	10.1
Interest rate derivatives	Other assets		--	Other assets		--	Other liabilities		9.7	Other liabilities		10.6
Total interest rate derivatives			--			--			20.6			20.7
Commodity derivatives	Other current assets		37.2	Other current assets		34.4	Other current liabilities		16.9	Other current liabilities		32.5
Commodity derivatives	Other assets		5.3	Other assets		12.6	Other liabilities		2.4	Other liabilities		2.0
Total commodity derivatives			42.5			47.0			19.3			34.5
Total derivatives not designated as hedging instruments		$	42.5		$	47.0		$	39.9		$	55.2

(1) Represents commodity derivative instrument transactions that have either not settled or have settled and not been invoiced. Settled and invoiced transactions are reflected in either accounts receivable or accounts payable depending on the outcome of the transaction.

The following tables present the effect of our derivative instruments designated as fair value hedges on our Unaudited Condensed Statements of Consolidated Operations for the periods presented:

Derivatives in Fair Value Hedging Relationships	Location	Gain/(Loss) Recognized in Income on Derivative
		For the Three Months Ended March 31,
		2012			2011
Interest rate derivatives	Interest expense	$	(1.5	)	$	(12.3	)
Commodity derivatives	Revenue		0.7			0.3
Total		$	(0.8	)	$	(12.0	)

Derivatives in Fair Value Hedging Relationships	Location	Gain/(Loss) Recognized in Income on Hedged Item
		For the Three Months Ended March 31,
		2012		2011
Interest rate derivatives	Interest expense	$	1.1	$	11.3
Commodity derivatives	Revenue		0.4		(1.3	)
Total		$	1.5	$	10.0

The following tables present the effect of our derivative instruments designated as cash flow hedges on our Unaudited Condensed Statements of Consolidated Operations and Unaudited Condensed Statements of Consolidated Comprehensive Income for the periods presented:

Derivatives in Cash Flow Hedging Relationships	Change in Value Recognized in Other Comprehensive Income/(Loss) on Derivative (Effective Portion)
	For the Three Months Ended March 31,
	2012			2011
Interest rate derivatives	$	28.9		$	14.1
Commodity derivatives - Revenue		(39.6	)		(155.4	)
Commodity derivatives - Operating costs and expenses		(20.0	)		4.0
Total	$	(30.7	)	$	(137.3	)

Derivatives in Cash Flow Hedging Relationships	Location	Gain/(Loss) Reclassified from Accumulated Other Comprehensive Income/(Loss) to Income (Effective Portion)
		For the Three Months
		Ended March 31,
		2012			2011
Interest rate derivatives	Interest expense	$	(2.7	)	$	(1.5	)
Commodity derivatives	Revenue		(10.0	)		(69.2	)
Commodity derivatives	Operating costs and expenses		(12.0	)		0.3
Total		$	(24.7	)	$	(70.4	)

Derivatives in Cash Flow Hedging Relationships	Location	Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion)
		For the Three Months
		Ended March 31,
		2012		2011
Commodity derivatives	Revenue	$	--	$	(0.1	)
Commodity derivatives	Operating costs and expenses		0.3		--
Total		$	0.3	$	(0.1	)

Over the next twelve months, we expect to reclassify $19.1 million of losses attributable to interest rate derivative instruments from accumulated other comprehensive loss to earnings as an increase in interest expense. Likewise, we expect to reclassify $59.3 million of losses attributable to commodity derivative instruments from accumulated other comprehensive loss to earnings, $18.2 million as an increase in operating costs and expenses and $41.1 million as a decrease in revenue.

The following table presents the effect of our derivative instruments not designated as hedging instruments on our Unaudited Condensed Statements of Consolidated Operations for the periods presented:

Derivatives Not Designated as Hedging Instruments	Location	Gain/(Loss) Recognized in Income on Derivative
		For the Three Months
		Ended March 31,
		2012			2011
Interest rate derivatives	Interest expense	$	(2.2	)	$	(2.1	)
Commodity derivatives	Revenue		20.8			3.8
Commodity derivatives	Operating costs and expenses		(2.8	)		--
Total		$	15.8		$	1.7

Fair Value Measurements

Our fair value estimates are based on either (i) actual market data or (ii) assumptions that other market participants would use in pricing an asset or liability, including estimates of risk, in the principal market of the asset or liability at a specified measure date. Recognized valuation techniques employ inputs such as contractual prices, quoted market prices or rates, operating costs, discount factors and business growth rates. These inputs may be either readily observable, corroborated by market data or generally unobservable. In developing our estimates of fair value, we endeavor to utilize the best information available and apply market-based data to the extent possible. Accordingly, we utilize valuation techniques (such as the market approach) that maximize the use of observable inputs and minimize the use of unobservable inputs.

A three-tier hierarchy has been established that classifies fair value amounts recognized or disclosed in the financial statements based on the observability of inputs used to estimate such fair values. The hierarchy considers fair value amounts based on observable inputs (Levels 1 and 2) to be more reliable and predictable than those based primarily on unobservable inputs (Level 3). At each balance sheet reporting date, we categorize our financial assets and liabilities using this hierarchy.

The following table sets forth, by level within the fair value hierarchy, the carrying values of our financial assets and liabilities at March 31, 2012. These assets and liabilities are measured on a recurring basis and are classified based on the lowest level of input that is significant to their respective fair value. Our assessment of the relative significance of such inputs requires judgment.

	At March 31, 2012
	Quoted Prices
	in Active
	Markets for		Significant		Significant
	Identical Assets		Observable		Unobservable
	and Liabilities		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Financial assets:
Investment in equity securities - available-for-sale (1)	$	119.8	$	--	$	--	$	119.8
Interest rate derivatives		--		37.4		--		37.4
Commodity derivatives		34.8		50.5		4.6		89.9
Total	$	154.6	$	87.9	$	4.6	$	247.1

Financial liabilities:
Interest rate derivatives	$	--	$	167.1	$	--	$	167.1
Commodity derivatives		89.9		25.8		3.7		119.4
Total	$	89.9	$	192.9	$	3.7	$	286.5

(1) See Note 7 for information related to our investment in Energy Transfer Equity common units, which trade on the NYSE under ticker symbol "ETE."

The following table sets forth a reconciliation of changes in the overall fair values of our Level 3 financial assets and liabilities for the periods presented:

		For the Three Months
		Ended March 31,
	Location	2012			2011
Balance, January 1		$	0.4		$	(25.9	)
Total gains (losses) included in:
Net income (1)	Revenue		0.5			(0.5	)
Other comprehensive income (loss)	Commodity derivative instruments - changes in fair value of cash flow hedges		0.5			16.2
Settlements			(0.5	)		0.8
Transfers out of Level 3 (2)			--			9.8
Balance, March 31		$	0.9		$	0.4

(1) There were unrealized gains of $0.1 million and losses of $0.2 million included in these amounts for the three months ended March 31, 2012 and 2011, respectively. (2) Transfers out of Level 3 into Level 2 during 2011 were primarily due to the change in observability of forward NGL prices.

The following table provides quantitative information about our Level 3 fair value measurements at March 31, 2012:

	Fair Value
	Financial Assets		Financial Liabilities		Valuation Techniques	Unobservable Input	Range
Commodity derivatives - Propane	$	0.6	$	--	Discounted cash flow	Forward commodity price	$1.27 - $1.33 /gallon
Commodity derivatives - Crude Oil		3.9		3.6	Discounted cash flow	Forward commodity price	$103.02 - $104.66 /barrel
Commodity derivatives - Natural gas		0.1		0.1	Discounted cash flow	Forward commodity price	$2.11 - $2.22 /MMBtu
Total	$	4.6	$	3.7

We believe certain forward commodity prices are the most significant unobservable inputs in determining our recurring Level 3 fair value measurements at March 31, 2012. In general, changes in the price of the underlying commodity increases or decreases the fair value of a commodity derivative depending on whether the derivative was purchased or sold. We generally expect changes in the fair value of our derivative instruments to be offset by corresponding changes in the fair value of our hedged exposures.

We have a risk management policy that covers our Level 3 commodity derivatives. Governance and oversight of risk management activities for these commodities are provided by our CEO with guidance and support from a risk management committee ("RMC"), which meets quarterly (or on a more frequent basis if needed). Members of executive management attend the RMC meetings, which are chaired by the head of our commodities risk control group. This group is responsible for preparing and distributing daily reports and risk analysis to members of the RMC and other appropriate members of management. These reports include mark-to-market valuations with the one-day and month-to-date changes in fair values. This group also develops and validates forward curves used to determine the fair values of our Level 3 commodity derivatives. These forward curves are based on published indexes, market quotes or are derived from other available inputs.

Nonfinancial Assets and Liabilities

Using appropriate valuation techniques, we reduced the carrying value of certain assets recorded as property, plant and equipment to an estimated fair value of $0.5 million based on the present value of expected future cash flows (Level 3), resulting in nonrecurring fair value adjustments (i.e., non-cash asset impairment charges) totaling $5.4 million during the three months ended March 31, 2012. These impairment charges recorded during the first quarter 2012 were recorded to reflect assets that are no longer in use or to reduce the fair value to what we can expect to receive from anticipated sales. We did not record any non-cash asset impairment charges during the three months ended March 31, 2011.

The following table summarizes our non-cash impairment charges, which are a component of operating costs and expenses, by business segment during the three months ended March 31, 2012:

NGL Pipelines & Services	$	5.1
Petrochemical & Refined Products Services		0.3
Total non-cash impairment charges	$	5.4

Forecast data and other assumptions supporting the fair value of fixed assets being tested for impairment are based on the nonfinancial assets' highest and best use, which includes estimated probabilities where multiple outcomes are possible. Such probability weights are generally obtained from business management personnel having oversight responsibilities for the assets in question. Key commercial assumptions (e.g., anticipated operating margins, growth rates and timing of cash flows) and test results are certified by members of senior management.

Other Fair Value Information

The carrying amounts of cash and cash equivalents (including restricted cash), accounts receivable and accounts payable approximate their fair values based on their short-term nature. The estimated total fair value of our fixed-rate long-term debt obligations was approximately $16.19 billion and $15.76 billion at March 31, 2012 and December 31, 2011, respectively. The aggregate carrying value of these debt obligations was $14.58 billion and $14.33 billion at March 31, 2012 and December 31, 2011, respectively. These values are based on quoted market prices for such debt or debt of similar terms and maturities (Level 2), our credit standing and the credit standing of our counterparties. Changes in market rates of interest affect the fair value of our fixed-rate debt. The carrying values of our variable-rate long-term debt obligations approximate their fair values since the associated interest rates are market-based. We do not have any long-term investments in debt or equity securities recorded at fair value.