Hedging Activities and Fair Value Measurements

12 Months Ended

Dec. 31, 2020

Derivative Instruments, Hedging Activities and Fair Value Measurements [Abstract]

Derivative Instruments, Hedging Activities and Fair Value Measurements

Note 14.  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.

Interest Rate Hedging Activities

We may utilize interest rate swaps, forward-starting swaps, options to enter into forward-starting swaps (“swaptions”), and similar derivative instruments to manage our exposure to changes in interest rates charged on borrowings under certain consolidated debt agreements.  This strategy may be used in controlling our overall cost of capital associated with such borrowings.

Swaptions

In 2019 and 2018, we sold options to be put into forward-starting swaps, or swaptions, if the market rate of interest fell below the strike rate of the option upon expiration of the derivative instrument.  The premiums we realized upon sale of the swaptions are reflected as a $23.1 million and $29.4 million reduction in interest expense for the year ended December 31, 2019 and 2018, respectively.

Due to declining interest rates, the counterparties to swaptions we sold in July 2019 exercised their right to put us into ten forward-starting swaps in September 2019 having an aggregate notional value of $1.0 billion. Since the swaptions were not designated as hedging instruments and were subject to mark-to-market accounting, we incurred an unrealized, mark-to-market loss at inception of the forward-starting swaps totaling $94.9 million that is reflected as an increase in interest expense for the year ended December 31, 2019.  The ten forward-starting swaps resulting from the swaption exercise in September 2019 were designated as hedging instruments and are subject to cash flow hedge accounting.

Forward-Starting Swaps

Forward-starting swaps hedge the risk of an increase in underlying benchmark interest rates during the period of time between the inception date of the swap agreement and the future date of a debt issuance. Under the terms of the forward-starting swaps, we pay to the counterparties (at the expected settlement dates of the instruments) amounts based on a fixed interest rate applied to a notional amount and receive from the counterparties an amount equal to a variable interest rate (based on LIBOR or an equivalent index rate) on the same notional amount.

The following table summarizes our portfolio of 30-year forward-starting swaps at December 31, 2020, all of which are associated with the expected future issuance of senior notes.

Hedged Transaction	Number and Type of Derivatives Outstanding	Notional Amount	Expected Settlement Date	Weighted-Average Fixed Rate Locked	Accounting Treatment
Future long-term debt offering	1 forward-starting swap	$75.0	4/2021	2.41%	Cash flow hedge
Future long-term debt offering	5 forward-starting swaps	$500.0	4/2021	2.13%	Cash flow hedge
Future long-term debt offering	2 forward-starting swaps (1)	$150.0	2/2022	1.72%	Cash flow hedge
Future long-term debt offering	1 forward starting swap (1)	$100.0	4/2021	1.46%	Cash flow hedge
Future long-term debt offering	2 forward starting swaps (1)	$150.0	2/2022	1.48%	Cash flow hedge
Future long-term debt offering	2 forward starting swaps (1)	$100.0	2/2022	0.95%	Cash flow hedge

(1) These swaps were entered into during the first quarter of 2020.

In total, the notional amount of forward-starting swaps outstanding at December 31, 2020 was $1.08 billion.  The weighted-average fixed interest rate of these derivative instruments is 1.83%.

As a result of market conditions, we terminated an aggregate $575 million notional amount of forward-starting swaps in 2020, which resulted in net cash payments of $33.3 million.  As cash flow hedges, losses on these derivative instruments are reflected as a component of accumulated other comprehensive loss and are being amortized to earnings (as an increase in interest expense) over the 30-year life of the associated debt through January 2051. These swaps were unwound in connection with our issuance of Senior Notes BBB.  During 2018, we terminated an aggregate $275 million notional amount of forward-starting swaps, which resulted in cash proceeds totaling $22.1 million.  As cash flow hedges, gains on these derivative instruments are reflected as a component of accumulated other comprehensive income and are being amortized to earnings (as a decrease in interest expense) over the 30-year life of the associated debt through February 2049.

Commodity Hedging Activities

The prices of natural gas, NGLs, crude oil, petrochemicals and refined 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 and basis swaps.

At December 31, 2020, our predominant commodity hedging strategies consisted of (i) hedging anticipated future purchases and sales of commodity products associated with transportation, storage and blending activities, (ii) hedging natural gas processing margins and (iii) hedging the fair value of commodity products held in inventory.  

• The objective of our anticipated future commodity purchases and sales hedging program is to hedge the margins of certain transportation, storage, blending and operational activities by locking in purchase and sale prices through the use of derivative instruments and related contracts.

• The objective of our natural gas processing hedging program is to hedge an amount of earnings associated with these activities. We achieve this objective by executing fixed-price sales for a portion of our expected equity NGL production using derivative instruments and related contracts. For certain natural gas processing contracts, the hedging of expected equity NGL production also involves the purchase of natural gas for shrinkage, which is hedged using derivative instruments and related contracts.

• The objective of our inventory hedging program is to hedge the fair value of commodity products currently held in inventory by locking in the sales price of the inventory through the use of derivative instruments and related contracts.

The following table summarizes our portfolio of commodity derivative instruments outstanding at December 31, 2020 (volume measures as noted):

	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 (Bcf)	6.0	n/a	Cash flow hedge
Forecasted sales of NGLs (MMBbls)	0.6	n/a	Cash flow hedge
Natural gas marketing:
Natural gas storage inventory management activities (Bcf)	4.0	n/a	Fair value hedge
NGL marketing:
Forecasted purchases of NGLs and related hydrocarbon products (MMBbls)	142.8	1.6	Cash flow hedge
Forecasted sales of NGLs and related hydrocarbon products (MMBbls)	172.1	4.5	Cash flow hedge
NGLs inventory management activities (MMBbls)	1.9	n/a	Fair value hedge
Refined products marketing:
Forecasted purchases of refined products (MMBbls)	41.2	n/a	Cash flow hedge
Forecasted sales of refined products (MMBbls)	51.1	3.3	Cash flow hedge
Refined products inventory management activities (MMBbls)	0.8	n/a	Fair value hedge
Crude oil marketing:
Forecasted purchases of crude oil (MMBbls)	32.9	n/a	Cash flow hedge
Forecasted sales of crude oil (MMBbls)	44.5	n/a	Cash flow hedge
Petrochemical marketing:
Forecasted purchases of petrochemical products (MMBbls)	0.4	n/a	Cash flow hedge
Forecasted sales of petrochemical products (MMBbls)	0.5	n/a	Cash flow hedge
Derivatives not designated as hedging instruments:
Natural gas risk management activities (Bcf) (3)	10.3	0.4	Mark-to-market
NGL risk management activities (MMBbls) (3)	26.5	7.9	Mark-to-market
Refined products risk management activities (MMBbls) (3)	6.9	n/a	Mark-to-market
Crude oil risk management activities (MMBbls) (3)	32.5	2.6	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 2022, December 2021 and October 2023, respectively.
(3)	Reflects the use of derivative instruments to manage risks associated with transportation, processing and storage assets.

The carrying amount of our inventories subject to fair value hedges was $144.0 million and $31.7 million at December 31, 2020 and 2019, respectively.

Certain basis swaps, basis spread options and other derivative instruments not designated as hedging instruments are used to manage market risks associated with anticipated purchases and sales of commodity products.  There is some uncertainty involved in the timing of these transactions often due to the development of more favorable profit opportunities or when spreads are insufficient to cover variable costs thus reducing the likelihood that the transactions will occur during the periods originally forecasted.  In accordance with derivatives accounting guidance, these instruments do not qualify for hedge accounting even though they are effective at managing the risk exposures of the underlying assets.  Due to volatility in commodity prices, any non-cash, mark-to-market earnings variability cannot be predicted.

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
	December 31, 2020			December 31, 2019			December 31, 2020			December 31, 2019
	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	Current assets	$	–	Current assets	$	–	Current liabilities	$	109.1	Current liabilities	$	6.7
Interest rate derivatives	Other assets		12.4	Other assets		–	Other liabilities		11.0	Other liabilities		6.8
Total interest rate derivatives			12.4			–			120.1			13.5
Commodity derivatives	Current assets		210.5	Current assets		116.5	Current liabilities		234.0	Current liabilities		107.1
Commodity derivatives	Other assets		0.4	Other assets		–	Other liabilities		6.1	Other liabilities		–
Total commodity derivatives			210.9			116.5			240.1			107.1
Total derivatives designated as hedging instruments		$	223.3		$	116.5		$	360.2		$	120.6
Derivatives not designated as hedging instruments
Commodity derivatives	Current assets		18.1	Current assets		10.7	Current liabilities		6.1	Current liabilities		8.6
Commodity derivatives	Other assets		0.2	Other assets		0.6	Other liabilities		0.1	Other liabilities		0.5
Total commodity derivatives			18.3			11.3			6.2			9.1
Total derivatives not designated as hedging instruments		$	18.3		$	11.3		$	6.2		$	9.1

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 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 Paid			Cash Collateral Received		Amounts That Would Have Been Presented On Net Basis
	(i)			(ii)			(iii) = (i) – (ii)			(iv)									(v) = (iii) + (iv)
As of December 31, 2020:
Interest rate derivatives		$	12.4		$	–		$	12.4		$	–		$	–		$	–		$	12.4
Commodity derivatives			229.2			–			229.2			(228.5	)		–			–			0.7
As of December 31, 2019:
Commodity derivatives		$	127.8			–		$	127.8		$	(115.3	)	$	(11.0	)	$	–		$	1.5

	Offsetting of Financial Liabilities and Derivative Liabilities
										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 December 31, 2020:
Interest rate derivatives		$	120.1		$	–		$	120.1		$	–			$	–			$	120.1
Commodity derivatives			246.3			–			246.3			(228.5	)			(17.3	)			0.5
As of December 31, 2019:
Interest rate derivatives		$	13.5		$	–		$	13.5		$	–			$	–			$	13.5
Commodity derivatives			116.2			–			116.2			(115.3	)			–				0.9

Derivative assets and liabilities recorded on our 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 on our 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 these tables, but only to the extent that it represents variation 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 these tables.

The following tables present the effect of our derivative instruments designated as fair value hedges on our Statements of Consolidated Operations for the years indicated:

Derivatives in Fair Value Hedging Relationships	Location	Gain (Loss) Recognized in Income on Derivative
		For the Year Ended December 31,
		2020			2019		2018
Interest rate derivatives	Interest expense	$	–		$	–	$	1.3
Commodity derivatives	Revenue		(88.0	)		2.2		9.9
Total		$	(88.0	)	$	2.2	$	11.2

Derivatives in Fair Value Hedging Relationships	Location	Gain (Loss) Recognized in Income on Hedged Item
		For the Year Ended December 31,
		2020		2019		2018
Interest rate derivatives	Interest expense	$	–	$	–	$	(1.4	)
Commodity derivatives	Revenue		168.1		6.9		(6.9	)
Total		$	168.1	$	6.9	$	(8.3	)

The gain (loss) corresponding to the hedge ineffectiveness on the fair value hedges was negligible for all periods presented. The remaining gain (loss) for each period presented is primarily attributable to prompt-to-forward month price differentials that were excluded from the assessment of hedge effectiveness.

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

Derivatives in Cash Flow Hedging Relationships	Change in Value Recognized in Other Comprehensive Income (Loss) On Derivative
	For the Year Ended December 31,
	2020				2019				2018
Interest rate derivatives		$	(127.5	)		$	81.4			$	22.2
Commodity derivatives – Revenue (1)			134.7				55.8				293.0
Commodity derivatives – Operating costs and expenses (1)			(10.3	)			(11.7	)			0.2
Total		$	(3.1	)		$	125.5			$	315.4

(1) The fair value of these derivative instruments will be reclassified to their respective locations on the Statement of Consolidated Operations when the forecasted transactions affect earnings.

Derivatives in Cash Flow Hedging Relationships	Location	Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) to Income
		For the Year Ended December 31,
		2020			2019			2018
Interest rate derivatives	Interest expense	$	(39.3	)	$	(37.3	)	$	(38.1	)
Commodity derivatives	Revenue		282.6			152.4			131.7
Commodity derivatives	Operating costs and expenses		(9.9	)		(10.7	)		(1.3	)
Total		$	233.4		$	104.4		$	92.3

Over the next twelve months, we expect to reclassify $41.2 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 $35.6 million of losses attributable to commodity derivative instruments from accumulated other comprehensive loss to earnings, with $36.0 million as a decrease in revenue and $0.4 million as a decrease in operating costs and expenses.

The following table presents the effect of our derivative instruments not designated as hedging instruments on our Statements of Consolidated Operations for the years indicated:

Derivatives Not Designated as Hedging Instruments	Location	Gain (Loss) Recognized in Income on Derivative
		For the Year Ended December 31,
		2020			2019			2018
Interest rate derivatives	Interest expense	$	–		$	(94.9	)	$	–
Commodity derivatives	Revenue		166.0			102.2			(462.9	)
Commodity derivatives	Operating costs and expenses		(0.2	)		(12.4	)		8.2
Total		$	165.8		$	(5.1	)	$	(454.7	)

The $165.8 million gain recognized for the year ended December 31, 2020 (as noted in the preceding table) from derivatives not designated as hedging instruments consists of $92.1 million of realized gains and $73.7 million of net unrealized mark-to-market gains attributable to commodity derivatives.

In total and inclusive of both fair value hedges and derivatives not designated as hedging instruments, unrealized mark-to-market gains (losses) included in gross operating margin and interest expense for the years indicated:

	For the Year Ended December 31,
	2020		2019			2018
Mark-to-market gains (losses) in gross operating margin:
NGL Pipelines & Services	$	48.4	$	(5.5	)	$	18.0
Crude Oil Pipelines & Services		20.1		80.6			(44.1	)
Natural Gas Pipelines & Services		6.3		(0.2	)		6.7
Petrochemical & Refined Products Services		4.5		(7.2	)		1.7
Total mark-to-market impact on gross operating margin		79.3		67.7			(17.7	)
Mark-to-market gains (losses) in interest expense		–		(94.9	)		(0.1	)
Total	$	79.3	$	(27.2	)	$	(17.8	)

Fair Value Measurements

The following tables set forth, by level within the Level 1, 2 and 3 fair value hierarchy (see Note 2), the carrying values of our financial assets and liabilities at the dates indicated. 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.

The values for commodity derivatives are presented before and after the application of Chicago Mercantile Exchange (“CME”) Rule 814, which deems that financial instruments cleared by the CME are settled daily in connection with variation margin payments.  As a result of this exchange rule, CME-related derivatives are considered to have no fair value at the balance sheet date for financial reporting purposes; however, the derivatives remain outstanding and subject to future commodity price fluctuations until they are settled in accordance with their contractual terms.  Derivative transactions cleared on exchanges other than the CME (e.g., the Intercontinental Exchange or ICE) continue to be reported on a gross basis.

	At December 31, 2020 Fair Value Measurements Using
	Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total
Financial assets:
Interest rate derivatives	$	–		$	12.4		$	–		$	12.4
Commodity derivatives:
Value before application of CME Rule 814		678.6			878.6			12.9			1,570.1
Impact of CME Rule 814 change		(678.6	)		(650.4	)		(11.9	)		(1,340.9	)
Total commodity derivatives		–			228.2			1.0			229.2
Total	$	–		$	240.6		$	1.0		$	241.6
Financial liabilities:
Interest rate derivatives	$	–		$	120.1		$	–		$	120.1
Commodity derivatives:
Value before application of CME Rule 814		1,065.6			1,047.4			25.9			2,138.9
Impact of CME Rule 814 change		(1,065.6	)		(807.3	)		(19.7	)		(1,892.6	)
Total commodity derivatives		–			240.1			6.2			246.3
Total	$	–		$	360.2		$	6.2		$	366.4

In the aggregate, the fair value of our commodity hedging portfolios at December 31, 2020 was a net derivative liability of $568.8 million prior to the impact of CME Rule 814.

	At December 31, 2019 Fair Value Measurements Using
	Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Total
Financial assets:
Commodity derivatives:
Value before application of CME Rule 814	$	53.4		$	343.7		$	0.1	$	397.2
Impact of CME Rule 814 change		(47.0	)		(222.4	)		–		(269.4	)
Total commodity derivatives		6.4			121.3			0.1		127.8
Total	$	6.4		$	121.3		$	0.1	$	127.8
Financial liabilities:
Liquidity Option (see Note 17)	$	–		$	–		$	509.6	$	509.6
Interest rate derivatives		–			13.5			–		13.5
Commodity derivatives:
Value before application of CME Rule 814		88.1			273.6			0.3		362.0
Impact of CME Rule 814 change		(81.9	)		(163.9	)		–		(245.8	)
Total commodity derivatives		6.2			109.7			0.3		116.2
Total	$	6.2		$	123.2		$	509.9	$	639.3

Prior to being settled on March 5, 2020, the recurring fair value measurement pertaining to the Liquidity Option was based on a number of Level 3 inputs.  For information regarding the Liquidity Option prior to its settlement, see Note 17.

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 years indicated:

test		For the Year Ended December 31,
test	Location	2020			2019
Financial liability balance, net, January 1		$	(509.8	)	$	(395.9	)
Total gains (losses) included in:
Net income (1)	Revenue		(1.6	)		3.7
Net income	Other expense, net – Liquidity Option		(2.3	)		(119.6	)
Other comprehensive income (loss)	Commodity derivative instruments – changes in fair value of cash flow hedges		(23.7	)		(2.1	)
Settlements (1)	Revenue		3.2			(3.5	)
Transfer out of Level 3 – Liquidity Option (2)			511.9			–
Other transfers out of Level 3			17.1			7.6
Financial liability balance, net, December 31		$	(5.2	)	$	(509.8	)

(1)	There were $0.7 million and $0.2 million of unrealized gains included in these amounts for the years ended December 31, 2020 and 2019, respectively.
(2)	In March 2020, the Liquidity Option settled and was transferred out of Level 3.  See Note 17 for information regarding the Liquidity Option.

Nonrecurring Fair Value Measurements

We wrote down the assets comprising our marine transportation business and certain natural gas gathering and processing activities to their estimated fair values in 2020 (see Note 4).  Apart from these matters, we did not have any significant nonrecurring fair value measurements during the years ended December 31, 2020, 2019 or 2018.  The following table presents information regarding our significant nonrecurring fair value measurements at December 31, 2020:

	Components of Carrying Value at December 31, 2020 by Level of Fair Value Measurement
	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Carrying Values at December 31, 2020			Impairment Charges Recognized in 2020
Long-lived assets held and used: (1)
Marine transportation business		$	–		$	–		$	410.0		$	410.0		$	256.7
South Texas natural gas gathering and processing			–			–			21.3			21.3			125.7

(1) Our fair value estimates for these assets were based on an income approach (i.e., a discounted cash flow approach).

Our fair value estimate of $410.0 million for the marine transportation business is based on the income approach to fair value, which relies on the use of a discounted cash flow model.  Our valuation estimate for this business at December 31, 2020 incorporates several Level 3 inputs such as: (i) management’s long-term forecast of cash flows generated by the business; (ii) a discount rate of 9.3%; and (iii) a growth rate of 2.1% for terminal year cash flows.  The discount rate used in this analysis is based on an estimated weighted-average cost of capital for market participants engaged in marine transportation activities.

Our fair value estimate for the South Texas natural gas gathering and processing assets of $21.3 million is based primarily on management expectations of the residual values of such facilities and pipelines based on historical experience.

Other Fair Value Information

The carrying amounts of cash and cash equivalents (including restricted cash balances), accounts receivable, commercial paper notes 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 $35.00 billion and $30.37 billion at December 31, 2020 and 2019, respectively.  The aggregate carrying value of these debt obligations was $29.90 billion and $27.15 billion at December 31, 2020 and 2019, respectively.  These values are primarily based on quoted market prices for such debt or debt of similar terms and maturities (Level 2) and our credit standing.  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.