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 assets, liabilities and certain anticipated future transactions, we use derivative instruments such as futures, forward contracts, swaps, options and other instruments with similar characteristics. 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 Unaudited Condensed Consolidated Balance Sheets 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 derivative instruments are reported in different ways, depending on the nature and effectiveness of the hedging activities to which they relate.

After meeting specified conditions, a qualified derivative may be designated as a total or partial hedge of:

§	Changes in the fair value of a recognized asset or liability, or an unrecognized firm commitment – In a fair value hedge, gains and losses for both the derivative instrument and the hedged item are recognized in income during the period of change.

§	Variable cash flows of a forecasted transaction – In a cash flow hedge, the effective portion of the hedge is reported in other comprehensive income (loss) and is reclassified into earnings when the forecasted transaction affects earnings.

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. The effective portion of a hedge relationship is the amount by which the derivative instrument exactly offsets the change in fair value of the hedged item during the reporting period. Conversely, ineffectiveness represents the change in the fair value of the derivative instrument that does not exactly offset the change in the fair value of the hedged item. 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 Hedging Activities

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. This strategy is a component in controlling our overall cost of capital associated with such borrowings. Interest rate swaps exchange the stated interest rate paid on a notional amount of existing debt for the fixed or floating interest rate stipulated in the derivative instrument. Forward starting swaps perform a similar function except that they are associated with interest rates underlying anticipated future issuances of debt.

The following table summarizes our portfolio of interest rate swaps at March 31, 2013:

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	1/2011 to 2/2016	3.2% to 1.3%	Fair value hedge
Undesignated swaps	6 floating-to-fixed swaps	$	600.0	5/2010 to 7/2014	0.3% to 2.0%	Mark-to-market

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 are being amortized to earnings (as a decrease in interest expense) using the effective interest method over the forecasted hedged period of three years.

At December 31, 2012, our portfolio of forward starting interest rate swaps consisted of 16 derivative instruments having a combined notional amount of $1.0 billion. Forward starting swaps hedge the expected underlying benchmark interest rates related to future issuances of debt. We accounted for these derivative instruments as cash flow hedges.

In connection with the issuance of Senior Notes II and HH in March 2013 (see Note 9), we settled all 16 forward starting swaps, which resulted in cash payments totaling $168.8 million. These losses are a component of accumulated other comprehensive income and are being amortized to earnings (as an increase in interest expense) over the forecasted hedge period of ten years using the effective interest method.

In connection with the issuance of Senior Notes EE in February 2012, we settled ten forward starting swaps having an aggregate notional amount of $500.0 million, resulting in aggregate cash payments of $115.3 million. These losses are a component of accumulated other comprehensive income and are being amortized to earnings (as an increase in interest expense) over the forecasted hedge period of ten years using the effective interest method.

Commodity Hedging Activities

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 option contracts. The following table summarizes our portfolio of commodity derivative instruments outstanding at March 31, 2013 (volume measures as noted):

	Volume (1)		Accounting
Derivative Purpose	Current (2)	Long-Term (2)	Treatment
Derivatives designated as hedging instruments:
Octane enhancement:
Forecasted purchases of NGLs (MMBbls)	1.5	n/a	Cash flow hedge
Forecasted sales of octane enhancement products (MMBbls)	3.2	n/a	Cash flow hedge
Natural gas marketing:
Forecasted sales of natural gas (Bcf)	0.1	n/a	Cash flow hedge
Natural gas storage inventory management activities (Bcf)	1.9	n/a	Fair value hedge
NGL marketing:
Forecasted purchases of NGLs and related hydrocarbon products (MMBbls)	3.4	n/a	Cash flow hedge
Forecasted sales of NGLs and related hydrocarbon products (MMBbls)	6.5	n/a	Cash flow hedge
Refined products marketing:
Refined products inventory management activities (MMBbls)	0.1	n/a	Fair value hedge
Crude oil marketing:
Forecasted purchases of crude oil (MMBbls)	3.9	n/a	Cash flow hedge
Forecasted sales of crude oil (MMBbls)	8.8	n/a	Cash flow hedge
Derivatives not designated as hedging instruments:
Natural gas risk management activities (Bcf) (3,4)	162.7	25.9	Mark-to-market
Refined products risk management activities (MMBbls) (4)	0.5	n/a	Mark-to-market
Crude oil risk management activities (MMBbls) (4)	3.7	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 March 2014, March 2014 and October 2015, respectively. (3) Current volumes include 89.5 Bcf of physical derivative instruments that are predominantly priced at a market-based index plus a premium or minus a discount related to location differences. (4) Reflects the use of derivative instruments to manage risks associated with transportation, processing and storage assets.

At March 31, 2013, our predominant commodity hedging strategies consisted of (i) hedging anticipated future contracted sales of NGLs, crude oil, and related products associated with volumes held in inventory and (ii) hedging the fair value of natural gas and refined products in inventory. The following information summarizes these hedging strategies:

§	The objective of our NGL, crude oil, and related products 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 and refined products inventory hedging program is to hedge the fair value of natural gas and refined products currently held in inventory by locking in the sales price of the inventory through the use of commodity derivative instruments.

At March 31, 2013, we did not have any hedges in place with respect to gross margins associated with our future natural gas processing activities. Management continues to evaluate market conditions to determine the appropriate timing to implement this strategy, if at all, during 2013.

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, 2013			December 31, 2012			March 31, 2013			December 31, 2012
	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	$	16.1	Other current assets	$	19.6	Other current liabilities	$	--	Other current liabilities	$	175.4
Interest rate derivatives	Other assets		22.3	Other assets		25.6	Other liabilities		--	Other liabilities		--
Total interest rate derivatives			38.4			45.2			--			175.4
Commodity derivatives	Other current assets		45.8	Other current assets		45.3	Other current liabilities		78.3	Other current liabilities		35.4
Commodity derivatives	Other assets		--	Other assets		--	Other liabilities		--	Other liabilities		0.5
Total commodity derivatives			45.8			45.3			78.3			35.9
Total derivatives designated as hedging instruments		$	84.2		$	90.5		$	78.3		$	211.3

Derivatives not designated as hedging instruments
Interest rate derivatives	Other current assets	$	--	Other current assets	$	--	Other current liabilities	$	12.1	Other current liabilities	$	12.2
Interest rate derivatives	Other assets		--	Other assets		--	Other liabilities		2.6	Other liabilities		5.0
Total interest rate derivatives			--			--			14.7			17.2
Commodity derivatives	Other current assets		6.0	Other current assets		15.7	Other current liabilities		7.8	Other current liabilities		8.9
Commodity derivatives	Other assets		0.3	Other assets		0.6	Other liabilities		1.0	Other liabilities		0.7
Total commodity derivatives			6.3			16.3			8.8			9.6
Total derivatives not designated as hedging instruments		$	6.3		$	16.3		$	23.5		$	26.8

Certain of our commodity derivative instruments are subject to master netting arrangements or similar agreements. The following tables present our derivative instruments subject to such arrangements at the dates indicated:

	Offsetting of Financial Assets and Derivative Assets
	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Balance Sheet		Amounts of Assets Presented in the Balance Sheet		Gross Amounts Not Offset in the Balance Sheet
	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Balance Sheet		Amounts of Assets Presented in the Balance Sheet		Financial Instruments			Cash Collateral Received			Amounts That Would Have Been Presented On Net Basis
	(i)		(ii)		(iii) = (i) – (ii)		(iv)						(v) = (iii) – (iv)
As of March 31, 2013:
Commodity derivatives	$	52.1	$	--	$	52.1	$	(52.0	)	$	--		$	0.1
As of December 31, 2012:
Commodity derivatives	$	61.6	$	--	$	61.6	$	(38.7	)	$	(15.2	)	$	7.7

	Offsetting of Financial Liabilities and Derivative Liabilities
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Balance Sheet		Amounts of Liabilities Presented in the Balance Sheet		Gross Amounts Not Offset in the Balance Sheet
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Balance Sheet		Amounts of Liabilities Presented in the Balance Sheet		Financial Instruments			Cash Collateral Paid			Amounts That Would Have Been Presented On Net Basis
	(i)		(ii)		(iii) = (i) – (ii)		(iv)						(v) = (iii) – (iv)
As of March 31, 2013:
Commodity derivatives	$	87.1	$	--	$	87.1	$	(52.0	)	$	(24.3	)	$	10.8
As of December 31, 2012:
Commodity derivatives	$	45.5	$	--	$	45.5	$	(38.7	)	$	(4.3	)	$	2.5

Derivative assets and liabilities recorded in our Unaudited Condensed Consolidated Balance Sheets are presented on a gross-basis and determined at the individual transaction level. This presentation method is applied regardless of whether the respective exchange clearing agreements, counterparty contracts or master netting agreements contain netting language often referred to as "rights of offset." Although derivative amounts are presented on a gross-basis, having rights of offset enable the settlement of a net as opposed to gross receivable or payable amount under a counterparty default or liquidation scenario.

Cash is paid and received as collateral under certain agreements, particularly for those associated with exchange transactions. For any cash collateral payments or receipts, corresponding assets or liabilities are recorded to reflect the variation margin deposits or receipts with exchange clearing brokers and customers. These balances are also presented on a gross-basis in our Unaudited Condensed Consolidated Balance Sheets.

The tabular presentation above provides a means for comparing the gross amount of derivative assets and liabilities, excluding associated accounts payable and receivable, to the net amount that would likely be receivable or payable under a default scenario based on the existence of rights of offset in the respective derivative agreements. Any cash collateral paid or received is reflected in this table, but only to the extent that it represents variation or maintenance margins. Any amounts associated with derivative prepayments or initial margins that are not influenced by the derivative asset or liability amounts or those that are determined solely on their volumetric notional amounts are excluded from this table.

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,
		2013			2012
Interest rate derivatives	Interest expense	$	(3.5	)	$	(1.5	)
Commodity derivatives	Revenue		(0.7	)		0.7
Total		$	(4.2	)	$	(0.8	)

Derivatives in Fair Value Hedging Relationships	Location	Gain (Loss) Recognized in Income on Hedged Item
		For the Three Months Ended March 31,
		2013			2012
Interest rate derivatives	Interest expense	$	3.4		$	1.1
Commodity derivatives	Revenue		(6.7	)		0.4
Total		$	(3.3	)	$	1.5

With respect to our derivative instruments designated as fair value hedges, amounts attributable to ineffectiveness and those excluded from the assessment of hedge effectiveness were not material to our consolidated financial statements during the periods presented.

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,
	2013			2012
Interest rate derivatives	$	6.7		$	28.9
Commodity derivatives – Revenue (1)		(47.6	)		(39.6	)
Commodity derivatives – Operating costs and expenses (1)		--			(20.0	)
Total	$	(40.9	)	$	(30.7	)

(1) The fair value of these derivative instruments would be reclassified to their respective locations on the Statement of Consolidated Operations upon settlement of the underlying derivative transactions, as appropriate.

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,
		2013			2012
Interest rate derivatives	Interest expense	$	(5.9	)	$	(2.7	)
Commodity derivatives	Revenue		(7.7	)		(10.0	)
Commodity derivatives	Operating costs and expenses		0.4			(12.0	)
Total		$	(13.2	)	$	(24.7	)

Derivatives in Cash Flow Hedging Relationships	Location	Gain (Loss) Recognized in Income on Derivative (Ineffective Portion)
		For the Three Months
		Ended March 31,
		2013		2012
Commodity derivatives	Operating costs and expenses	$	--	$	0.3
Total		$	--	$	0.3

Over the next twelve months, we expect to reclassify $31.1 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 $30.1 million of losses attributable to commodity derivative instruments from accumulated other comprehensive loss to earnings 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,
		2013			2012
Interest rate derivatives	Interest expense	$	0.1		$	(2.2	)
Commodity derivatives	Revenue		(5.3	)		20.8
Commodity derivatives	Operating costs and expenses		--			(2.8	)
Total		$	(5.2	)	$	15.8

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 measurement 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 highest 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 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.

Recurring Fair Value Measurements

The following table sets forth, by level within the fair value hierarchy, the carrying values of our financial assets and liabilities at March 31, 2013. These assets and liabilities are measured on a recurring basis and are classified based on the lowest level of input used to estimate their fair value. Our assessment of the relative significance of such inputs requires judgment.

	Fair Value Measurements Using
	Quoted Prices
	in Active		Significant
	Markets for		Other		Significant		Carrying
	Identical Assets		Observable		Unobservable		Value
	and Liabilities		Inputs		Inputs		at March 31,
	(Level 1)		(Level 2)		(Level 3)		2013
Financial assets:
Interest rate derivatives	$	--	$	38.4	$	--	$	38.4
Commodity derivatives		16.3		35.8		--		52.1
Total	$	16.3	$	74.2	$	--	$	90.5

Financial liabilities:
Interest rate derivatives	$	--	$	14.7	$	--	$	14.7
Commodity derivatives		39.1		47.4		0.6		87.1
Total	$	39.1	$	62.1	$	0.6	$	101.8

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

		For the Three Months
		Ended March 31,
Location		2013			2012
Financial Asset (Liability) Balance, Net, January 1		$	(1.5	)	$	0.4
Total gains (losses) included in:
Net income (1)	Revenue		(0.6	)		0.5
Other comprehensive income (loss)	Commodity derivative instruments – changes in fair value of cash flow hedges		--			0.5
Settlements	Revenue		1.5			(0.5	)
Financial Asset (Liability) Balance, Net, March 31		$	(0.6	)	$	0.9

(1) There were unrealized gains of $0.9 million and $0.1 million included in these amounts for the three months ended March 31, 2013 and 2012, respectively.

The following table provides quantitative information about our recurring Level 3 fair value measurements at March 31, 2013:

	Fair Value
	Financial Assets		Financial Liabilities		Valuation Techniques	Unobservable Input	Range
Commodity derivatives – Crude oil	$	--	$	0.6	Discounted cash flow	Forward commodity prices	$95.75-$112.88/barrel

We believe forward commodity prices are the most significant unobservable inputs in determining our Level 3 recurring fair value measurements at March 31, 2013. 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") that 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 the forward commodity price curves used to estimate the fair values of our Level 3 commodity derivatives. These forward curves incorporate published indexes, market quotes and other observable inputs to the extent available.

Nonrecurring Fair Value Measurements

We recorded $11.0 million of non-cash asset impairment charges during the three months ended March 31, 2013 related to the abandonment of assets classified as property, plant and equipment. Of this amount, $10.0 million relates to the abandonment of certain refined products terminal and storage assets located in southeast Texas and $1.0 million relates to an underground storage cavern taken out of service at our Hobbs NGL fractionation facility.

We recorded $5.4 million of non-cash asset impairment charges during the three months ended March 31, 2012. Of this amount, $5.1 million relates to the abandonment of certain NGL fractionation assets and a pipeline segment located in Texas classified as property, plant and equipment. The remaining $0.3 million relates to the sale of certain marine transportation assets, which were classified as assets held-for-sale (Level 3) at March 31, 2012.

The following table summarizes our non-cash impairment charges by segment during each of the periods presented:

	For the Three Months
	Ended March 31,
	2013		2012
NGL Pipelines & Services	$	1.0	$	5.1
Petrochemical & Refined Products Services		10.0		0.3
Total	$	11.0	$	5.4

Other Fair Value Information

The carrying amounts of cash and cash equivalents (including restricted cash balances), accounts receivable and accounts payable approximate their fair values based on their short-term nature. The estimated total fair value of our fixed-rate debt obligations was $19.54 billion and $18.42 billion at March 31, 2013 and December 31, 2012, respectively. The aggregate carrying value of these debt obligations was $17.53 billion and $16.18 billion at March 31, 2013 and December 31, 2012, 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.