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Derivative Instruments and Hedging Activities
9 Months Ended
Sep. 30, 2018
Derivative Instruments And Hedging Activities Disclosure [Abstract]  
Derivative Instruments and Hedging Activities

Note 15 — Derivative Instruments and Hedging Activities

The primary purpose of our commodity risk management activities is to manage our exposure to commodity price risk and reduce volatility in our operating cash flow due to fluctuations in commodity prices. We have entered into derivative instruments to hedge the commodity price risks associated with a portion of our expected (i) natural gas, NGL, and condensate equity volumes in our Gathering and Processing operations that result from percent-of-proceeds processing arrangements and (ii) future commodity purchases and sales in our Logistics and Marketing segment. These hedge positions will move favorably in periods of falling commodity prices and unfavorably in periods of rising commodity prices. We have designated these derivative contracts as cash flow hedges for accounting purposes.

The hedges generally match the NGL product composition and the NGL delivery points of our physical equity volumes. Our natural gas hedges are a mixture of specific gas delivery points and Henry Hub. The NGL hedges may be transacted as specific NGL hedges or as baskets of ethane, propane, normal butane, isobutane and natural gasoline based upon our expected equity NGL composition. We believe this approach avoids uncorrelated risks resulting from employing hedges on crude oil or other petroleum products as “proxy” hedges of NGL prices. Our natural gas and NGL hedges are settled using published index prices for delivery at various locations.

We hedge a portion of our condensate equity volumes using crude oil hedges that are based on the NYMEX futures contracts for West Texas Intermediate light, sweet crude, which approximates the prices received for condensate. This exposes us to a market differential risk if the NYMEX futures do not move in exact parity with the sales price of our underlying condensate equity volumes.

We also enter into derivative instruments to help manage other short-term commodity-related business risks. We have not designated these derivatives as hedges and record changes in fair value and cash settlements to revenues.

At September 30, 2018, the notional volumes of our commodity derivative contracts were:

 

Commodity

Instrument

Unit

2018

 

2019

 

2020

 

2021

 

2022

 

2023

 

Natural Gas

Swaps

MMBtu/d

 

210,109

 

 

158,246

 

 

31,630

 

 

11,821

 

 

-

 

 

-

 

Natural Gas

Basis Swaps

MMBtu/d

 

158,478

 

 

109,281

 

 

70,417

 

 

56,658

 

 

40,000

 

 

20,000

 

NGL

Swaps

Bbl/d

 

19,820

 

 

16,269

 

 

11,607

 

 

2,434

 

 

-

 

 

-

 

NGL

Futures

Bbl/d

 

33,620

 

 

2,890

 

 

3,115

 

 

-

 

 

-

 

 

-

 

NGL

Options

Bbl/d

 

1,310

 

 

410

 

 

-

 

 

-

 

 

-

 

 

-

 

Condensate

Swaps

Bbl/d

 

4,990

 

 

3,413

 

 

1,170

 

 

388

 

 

-

 

 

-

 

Condensate

Options

Bbl/d

 

590

 

 

590

 

 

-

 

 

-

 

 

-

 

 

-

 

 

Our derivative contracts are subject to netting arrangements that permit our contracting subsidiaries to net cash settle offsetting asset and liability positions with the same counterparty within the same Targa entity. We record derivative assets and liabilities on our Consolidated Balance Sheets on a gross basis, without considering the effect of master netting arrangements. The following schedules reflect the fair values of our derivative instruments and their location on our Consolidated Balance Sheets as well as pro forma reporting assuming that we reported derivatives subject to master netting agreements on a net basis:

 

 

 

 

 

Fair Value as of September 30, 2018

 

 

Fair Value as of December 31, 2017

 

 

 

Balance Sheet

 

Derivative

 

 

Derivative

 

 

Derivative

 

 

Derivative

 

 

 

Location

 

Assets

 

 

Liabilities

 

 

Assets

 

 

Liabilities

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts

 

Current

 

$

57.5

 

 

$

164.1

 

 

$

37.9

 

 

$

78.6

 

 

 

Long-term

 

 

6.9

 

 

 

65.2

 

 

 

23.2

 

 

 

18.7

 

Total derivatives designated as hedging instruments

 

 

 

$

64.4

 

 

$

229.3

 

 

$

61.1

 

 

$

97.3

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts

 

Current

 

$

2.1

 

 

$

12.2

 

 

$

 

 

$

1.1

 

 

 

Long-term

 

 

1.5

 

 

 

2.3

 

 

 

 

 

 

0.9

 

Total derivatives not designated as hedging instruments

 

 

 

$

3.6

 

 

$

14.5

 

 

$

 

 

$

2.0

 

Total current position

 

 

 

$

59.6

 

 

$

176.3

 

 

$

37.9

 

 

$

79.7

 

Total long-term position

 

 

 

 

8.4

 

 

 

67.5

 

 

 

23.2

 

 

 

19.6

 

Total derivatives

 

 

 

$

68.0

 

 

$

243.8

 

 

$

61.1

 

 

$

99.3

 

 

The pro forma impact of reporting derivatives on our Consolidated Balance Sheets on a net basis is as follows:

 

 

 

Gross Presentation

 

 

Pro Forma Net Presentation

 

September 30, 2018

Asset

 

 

Liability

 

 

Collateral

 

 

Asset

 

 

Liability

 

Current Position

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Counterparties with offsetting positions or collateral

$

59.6

 

 

$

(163.6

)

 

$

39.0

 

 

$

11.3

 

 

$

(76.3

)

 

Counterparties without offsetting positions - assets

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

Counterparties without offsetting positions - liabilities

 

-

 

 

 

(12.7

)

 

 

-

 

 

 

-

 

 

 

(12.7

)

 

 

 

59.6

 

 

 

(176.3

)

 

 

39.0

 

 

 

11.3

 

 

 

(89.0

)

Long Term Position

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Counterparties with offsetting positions or collateral

 

8.4

 

 

 

(42.2

)

 

 

-

 

 

 

-

 

 

 

(33.8

)

 

Counterparties without offsetting positions - assets

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

Counterparties without offsetting positions - liabilities

 

-

 

 

 

(25.3

)

 

 

-

 

 

 

-

 

 

 

(25.3

)

 

 

 

8.4

 

 

 

(67.5

)

 

 

-

 

 

 

-

 

 

 

(59.1

)

Total Derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Counterparties with offsetting positions or collateral

 

68.0

 

 

 

(205.8

)

 

 

39.0

 

 

 

11.3

 

 

 

(110.1

)

 

Counterparties without offsetting positions - assets

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

Counterparties without offsetting positions - liabilities

 

-

 

 

 

(38.0

)

 

 

-

 

 

 

-

 

 

 

(38.0

)

 

 

$

68.0

 

 

$

(243.8

)

 

$

39.0

 

 

$

11.3

 

 

$

(148.1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Presentation

 

 

Pro Forma Net Presentation

 

December 31, 2017

Asset

 

 

Liability

 

 

Collateral

 

 

Asset

 

 

Liability

 

Current Position

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Counterparties with offsetting positions or collateral

$

37.9

 

 

$

(74.7

)

 

$

22.9

 

 

$

13.8

 

 

$

(27.7

)

 

Counterparties without offsetting positions - assets

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

Counterparties without offsetting positions - liabilities

 

-

 

 

 

(5.0

)

 

 

-

 

 

 

-

 

 

 

(5.0

)

 

 

 

37.9

 

 

 

(79.7

)

 

 

22.9

 

 

 

13.8

 

 

 

(32.7

)

Long Term Position

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Counterparties with offsetting positions or collateral

 

23.2

 

 

 

(17.3

)

 

 

-

 

 

 

14.8

 

 

 

(8.9

)

 

Counterparties without offsetting positions - assets

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

Counterparties without offsetting positions - liabilities

 

-

 

 

 

(2.3

)

 

 

-

 

 

 

-

 

 

 

(2.3

)

 

 

 

23.2

 

 

 

(19.6

)

 

 

-

 

 

 

14.8

 

 

 

(11.2

)

Total Derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Counterparties with offsetting positions or collateral

 

61.1

 

 

 

(92.0

)

 

 

22.9

 

 

 

28.6

 

 

 

(36.6

)

 

Counterparties without offsetting positions - assets

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

Counterparties without offsetting positions - liabilities

 

-

 

 

 

(7.3

)

 

 

-

 

 

 

-

 

 

 

(7.3

)

 

 

$

61.1

 

 

$

(99.3

)

 

$

22.9

 

 

$

28.6

 

 

$

(43.9

)

 

 

Our payment obligations in connection with a majority of these hedging transactions are secured by a first priority lien in the collateral securing the TRP Revolver that ranks equal in right of payment with liens granted in favor of the Partnership’s senior secured lenders. Some of our hedges are futures contracts executed through a broker that clears the hedges through an exchange. We maintain a margin deposit with the broker in an amount sufficient enough to cover the fair value of our open futures positions. The margin deposit is considered collateral, which is located within other current assets on our Consolidated Balance Sheets and is not offset against the fair values of our derivative instruments.

The fair value of our derivative instruments, depending on the type of instrument, was determined by the use of present value methods or standard option valuation models with assumptions about commodity prices based on those observed in underlying markets. The estimated fair value of our derivative instruments was a net liability of $175.8 million as of September 30, 2018. The estimated fair value is net of an adjustment for credit risk based on the default probabilities as indicated by market quotes for the counterparties’ credit default swap rates. The credit risk adjustment was immaterial for all periods presented. Our futures contracts that are cleared through an exchange are margined daily and do not require any credit adjustment.

The following tables reflect amounts recorded in Other Comprehensive Income and amounts reclassified from OCI to revenue and expense for the periods indicated:

 

 

 

Gain (Loss) Recognized in OCI on

Derivatives (Effective Portion)

 

Derivatives in Cash Flow

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

Hedging Relationships

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Commodity contracts

 

$

(139.6

)

 

$

(106.8

)

 

$

(178.0

)

 

$

(10.5

)

 

 

 

Gain (Loss) Reclassified from OCI into

Income (Effective Portion)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

Location of Gain (Loss)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues

 

$

(23.9

)

 

$

(2.1

)

 

$

(58.3

)

 

$

(2.2

)

 

Our consolidated earnings are also affected by the use of the mark-to-market method of accounting for derivative instruments that do not qualify for hedge accounting or that have not been designated as hedges. The changes in fair value of these instruments are recorded on the balance sheet and through earnings rather than being deferred until the anticipated transaction settles. The use of mark-to-market accounting for financial instruments can cause non-cash earnings volatility due to changes in the underlying commodity price indices.

 

 

 

Location of Gain

 

Gain (Loss) Recognized in Income on Derivatives

 

Derivatives Not Designated

 

Recognized in Income on

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

as Hedging Instruments

 

Derivatives

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Commodity contracts

 

Revenue

 

$

(1.1

)

 

$

(1.5

)

 

$

(14.1

)

 

$

(2.9

)

 

Based on valuations as of September 30, 2018, we expect to reclassify commodity hedge-related deferred losses of $164.9 million included in accumulated other comprehensive income into earnings before income taxes through the end of 2021, with $106.6 million of losses to be reclassified over the next twelve months.

See Note 16 – Fair Value Measurements and Note 22 – Segment Information for additional disclosures related to derivative instruments and hedging activities.