Hedging Activities and Fair Value Measurements

12 Months Ended

Dec. 31, 2023

Hedging Activities and Fair Value Measurements [Abstract]

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”), treasury locks 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.

Treasury Locks

A treasury lock is an agreement that fixes the price (or yield) of a specified U.S. treasury security for an established period of time.  We use treasury lock agreements to hedge our exposure to interest rate changes and to reduce the volatility of financing costs on an expected future debt issuance.  Each of our treasury lock transactions was designated as a cash flow hedge of the interest payments associated with an anticipated debt issuance.

During the fourth quarter of 2023, we entered into three treasury lock transactions to fix the ten-year treasury rate at a weighted-average rate of approximately 4.48% on an aggregate notional amount of $600 million.  In January 2024, we entered into two additional treasury lock transactions to fix the ten-year treasury rate at 3.97% on a notional amount of $400 million and to fix the three-year treasury rate at 4.11% on a notional amount of $750 million.  The purpose of these transactions was to hedge the underlying interest rate risk associated with debt issuances expected to occur in January 2024 (see Note 20).  In January 2024, we terminated all of the treasury lock transactions simultaneously with our issuance of the three-year and ten-year notes and made total cash payments of $29 million.  As cash flow hedges, losses on these derivative instruments are reflected as a component of accumulated other comprehensive income and will be amortized to earnings as a component of interest expense over the full term of each issuance.

In January 2023, upon issuance of Senior Notes FFF and GGG (see Note 7), we terminated and settled treasury lock transactions with a combined notional amount of $1.5 billion and received total cash proceeds of $21 million.  As cash flow hedges, the gain realized on these derivative instruments was reflected as a component of accumulated other comprehensive income and is amortized to earnings as a reduction to interest expense over the full term of each issuance.

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 on the same notional amount.

During 2021, we terminated an aggregate $1.1 billion notional amount of forward-starting swaps, which resulted in net cash proceeds of $75 million.  Since the original swaptions associated with certain of these forward-starting swaps were not designated as hedging instruments and were subject to mark-to-market accounting, we previously incurred an unrealized, mark-to-market loss at inception of the forward starting swaps of $48 million that was reflected as an increase in interest expense in 2019.  Immediately following exercise of the swaptions and being put into the forward-starting swaps, these instruments were designated as cash flow hedges.  For the period from inception through the termination date in March 2021, we recognized cumulative gains on the forward-starting swaps of $123 million in accumulated other comprehensive income, of which $99 million is being reclassified to earnings (as a decrease in interest expense) over the 30-year life of the associated debt through February 2053 and $22 million is being reclassified to earnings (as a decrease in interest expense) over the cumulative life of the associated Senior Notes GGG (see Note 7) and future debt obligations.  We reclassified $2 million of the cumulative gain as a decrease in interest expense in 2021.

Commodity Hedging Activities

The prices of natural gas, NGLs, crude oil, petrochemicals and refined products and power 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, 2023, 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, (iii) hedging the fair value of commodity products held in inventory and (iv) hedging anticipated future purchases of power for certain operations in Southeast Texas.  

• 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 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 plant thermal reduction, 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 objective of our commercial energy hedging program is to hedge anticipated future purchases of power for certain operations in Southeast Texas by locking in purchase prices through the use of derivative instruments and related contracts.

The following table summarizes our portfolio of commodity derivative instruments outstanding at December 31, 2023 (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)	7.1	n/a	Cash flow hedge
Forecasted sales of natural gas (Bcf)	36.5	n/a	Cash flow hedge
Forecasted sales of NGLs (MMBbls)	2.7	n/a	Cash flow hedge
Octane enhancement:
Forecasted sales of octane enhancement products (MMBbls)	4.9	0.4	Cash flow hedge
Natural gas marketing:
Natural gas storage inventory management activities (Bcf)	1.0	n/a	Fair value hedge
NGL marketing:
Forecasted purchases of NGLs and related hydrocarbon products (MMBbls)	71.5	3.1	Cash flow hedge
Forecasted sales of NGLs and related hydrocarbon products (MMBbls)	65.3	11.2	Cash flow hedge
Refined products marketing:
Forecasted purchases of refined products (MMBbls)	1.2	0.1	Cash flow hedge
Crude oil marketing:
Forecasted purchases of crude oil (MMBbls)	16.1	n/a	Cash flow hedge
Forecasted sales of crude oil (MMBbls)	25.2	n/a	Cash flow hedge
Petrochemical marketing:
Forecasted sales of petrochemical products (MMBbls)	0.1	n/a	Cash flow hedge
Commercial energy:
Forecasted purchases of power related to asset operations (terawatt hours (“TWh”))	1.4	1.5	Cash flow hedge
Derivatives not designated as hedging instruments:
Natural gas risk management activities (Bcf) (3)	19.1	n/a	Mark-to-market
NGL risk management activities (MMBbls) (3)	12.5	7.8	Mark-to-market
Refined products risk management activities (MMBbls) (3)	5.1	n/a	Mark-to-market
Crude oil risk management activities (MMBbls) (3)	102.5	25.2	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 2025, February 2024 and December 2025, respectively.
(3)	Reflects the use of derivative instruments to manage risks associated with our transportation, processing and storage assets.

The carrying amount of our inventories subject to fair value hedges was $2 million and $12 million at December 31, 2023 and 2022, respectively.

Certain basis swaps 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, 2023			December 31, 2022			December 31, 2023			December 31, 2022
	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	$	26	Current  liabilities	$	31	Current  liabilities	$	–
Commodity derivatives	Current assets	$	118	Current assets	$	422	Current liabilities	$	136	Current liabilities	$	316
Commodity derivatives	Other assets		31	Other assets		43	Other liabilities		35	Other liabilities		58
Total commodity derivatives			149			465			171			374
Total derivatives designated as hedging instruments		$	149		$	491		$	202		$	374
Derivatives not designated as hedging instruments
Commodity derivatives	Current assets	$	229	Current assets	$	21	Current liabilities	$	229	Current liabilities	$	38
Commodity derivatives	Other assets		72	Other assets		–	Other liabilities		71	Other liabilities		–
Total commodity derivatives			301			21			300			38
Total derivatives not designated as hedging instruments		$	301		$	21		$	300		$	38

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 Received		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, 2023:
Commodity derivatives		$	450		$	–		$	450		$	(450	)	$	–	$	–			$	–
As of December 31, 2022:
Interest rate derivatives		$	26		$	–		$	26		$	–		$	–	$	–			$	26
Commodity derivatives			486			–			486			(411	)		–		(74	)			1

	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 Received			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, 2023:
Interest rate derivatives		$	31		$	–		$	31		$	–			$	–		$	–			$	31
Commodity derivatives			471			–			471			(450	)			1			(21	)			1
As of December 31, 2022:
Commodity derivatives		$	412		$	–		$	412		$	(411	)		$	–		$	–			$	1

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,
		2023		2022			2021
Commodity derivatives	Revenue	$	7	$	(103	)	$	(243	)
Total		$	7	$	(103	)	$	(243	)

Derivatives in Fair Value Hedging Relationships	Location	Gain (Loss) Recognized in Income on Hedged Item
		For the Year Ended December 31,
		2023			2022		2021
Commodity derivatives	Revenue	$	(7	)	$	66	$	226
Total		$	(7	)	$	66	$	226

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,
	2023				2022			2021
Interest rate derivatives		$	(36	)		$	26		$	183
Commodity derivatives – Revenue (1)			81				227			(658	)
Commodity derivatives – Operating costs and expenses (1)			12				27			(20	)
Total		$	57			$	280		$	(495	)

(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,
		2023		2022			2021
Interest rate derivatives	Interest expense	$	5	$	(19	)	$	(38	)
Commodity derivatives	Revenue		106		181			(893	)
Commodity derivatives	Operating costs and expenses		4		39			(15	)
Total		$	115	$	201		$	(946	)

Over the next twelve months, we expect to reclassify $9 million of gains attributable to interest rate derivative instruments from accumulated other comprehensive income to earnings as a decrease in interest expense.  Likewise, we expect to reclassify $146 million of net gains attributable to commodity derivative instruments from accumulated other comprehensive income to earnings, with $161 million as an increase in revenue and $15 million as an increase 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,
		2023		2022		2021
Commodity derivatives	Revenue	$	213	$	74	$	150
Commodity derivatives	Operating costs and expenses		–		14		1
Total		$	213	$	88	$	151

The $213 million net gain recognized for the year ended December 31, 2023 (as noted in the preceding table) from derivatives not designated as hedging instruments consists of $246 million of net realized gains and $33 million of net unrealized mark-to-market losses 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 were as follows for the years indicated:

	For the Year Ended December 31,
	2023			2022			2021
Mark-to-market gains (losses) in gross operating margin:
NGL Pipelines & Services	$	(25	)	$	(52	)	$	40
Crude Oil Pipelines & Services		(5	)		(30	)		(3	)
Natural Gas Pipelines & Services		(1	)		(3	)		(2	)
Petrochemical & Refined Products Services		(2	)		7			(8	)
Total mark-to-market impact on gross operating margin	$	(33	)	$	(78	)	$	27

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 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, 2023 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	$	431		$	297		$	–	$	728
Impact of CME Rule 814		(147	)		(131	)		–		(278	)
Total commodity derivatives		284			166			–		450
Total	$	284		$	166		$	–	$	450
Financial liabilities:
Interest rate derivatives:	$	–		$	31		$	–	$	31
Commodity derivatives:
Value before application of CME Rule 814		317			308			–		625
Impact of CME Rule 814		(22	)		(132	)		–		(154	)
Total commodity derivatives		295			176			–		471
Total	$	295		$	207		$	–	$	502

In the aggregate, the fair value of our commodity hedging portfolios at December 31, 2023 was a net derivative asset of $103 million prior to the impact of CME Rule 814.

	At December 31, 2022 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:	$	–		$	26		$	–	$	26
Commodity derivatives:
Value before application of CME Rule 814		166			1,170			–		1,336
Impact of CME Rule 814		(161	)		(689	)		–		(850	)
Total commodity derivatives		5			481			–		486
Total	$	5		$	507		$	–	$	512
Financial liabilities:
Commodity derivatives:
Value before application of CME Rule 814	$	95		$	1,118		$	–	$	1,213
Impact of CME Rule 814		(90	)		(711	)		–		(801	)
Total commodity derivatives		5			407			–		412
Total	$	5		$	407		$	–	$	412

Financial assets and liabilities recorded on the balance sheet at December 31, 2023 and 2022 using significant unobservable inputs (Level 3) and changes in the fair value of our recurring Level 3 financial assets and liabilities on a combined basis during the related periods were not material to the Consolidated Financial Statements.

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 $26.7 billion and $24.2 billion at December 31, 2023 and 2022, respectively.  The aggregate carrying value of these debt obligations was $28.0 billion and $27.5 billion at December 31, 2023 and 2022, 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.