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Fair Value Measurements
9 Months Ended
Sep. 30, 2018
Fair Value Disclosures [Abstract]  
Fair Value Measurements

Note 16 — Fair Value Measurements

Under GAAP, our Consolidated Balance Sheets reflect a mixture of measurement methods for financial assets and liabilities (“financial instruments”). Derivative financial instruments and contingent consideration related to business acquisitions are reported at fair value on our Consolidated Balance Sheets. Other financial instruments are reported at historical cost or amortized cost on our Consolidated Balance Sheets. The following are additional qualitative and quantitative disclosures regarding fair value measurements of financial instruments.

Fair Value of Derivative Financial Instruments

Our derivative instruments consist of financially settled commodity swaps, futures, option contracts and fixed-price forward commodity contracts with certain counterparties. We determine the fair value of our derivative contracts using present value methods or standard option valuation models with assumptions about commodity prices based on those observed in underlying markets. We have consistently applied these valuation techniques in all periods presented and we believe we have obtained the most accurate information available for the types of derivative contracts we hold.

The fair values of our derivative instruments are sensitive to changes in forward pricing on natural gas, NGLs and crude oil. The financial position of these derivatives at September 30, 2018, a net liability position of $175.8 million, reflects the present value, adjusted for counterparty credit risk, of the amount we expect to receive or pay in the future on our derivative contracts. If forward pricing on natural gas, NGLs and crude oil were to increase by 10%, the result would be a fair value reflecting a net liability of $281.7 million, ignoring an adjustment for counterparty credit risk. If forward pricing on natural gas, NGLs and crude oil were to decrease by 10%, the result would be a fair value reflecting a net liability of $69.9 million, ignoring an adjustment for counterparty credit risk.

Fair Value of Other Financial Instruments

Due to their cash or near-cash nature, the carrying value of other financial instruments included in working capital (i.e., cash and cash equivalents, accounts receivable, accounts payable) approximates their fair value. Long-term debt is primarily the other financial instrument for which carrying value could vary significantly from fair value. We determined the supplemental fair value disclosures for our long-term debt as follows:

 

The TRC Revolver, TRP Revolver, and the Partnership’s accounts receivable securitization facility are based on carrying value, which approximates fair value as their interest rates are based on prevailing market rates; and

 

The Partnership’s senior unsecured notes are based on quoted market prices derived from trades of the debt.

Contingent consideration liabilities related to business acquisitions are carried at fair value.

Fair Value Hierarchy

We categorize the inputs to the fair value measurements of financial assets and liabilities at each balance sheet reporting date using a three-tier fair value hierarchy that prioritizes the significant inputs used in measuring fair value:

 

Level 1 – observable inputs such as quoted prices in active markets;

 

Level 2 – inputs other than quoted prices in active markets that we can directly or indirectly observe to the extent that the markets are liquid for the relevant settlement periods; and

 

Level 3 – unobservable inputs in which little or no market data exists, therefore we must develop our own assumptions.

The following table shows a breakdown by fair value hierarchy category for (1) financial instruments measurements included on our Consolidated Balance Sheets at fair value and (2) supplemental fair value disclosures for other financial instruments:

 

 

 

September 30, 2018

 

 

 

Carrying

 

 

Fair Value

 

 

 

Value

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Financial Instruments Recorded on Our

   Consolidated Balance Sheets at Fair Value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets from commodity derivative contracts (1)

 

$

67.7

 

 

$

67.7

 

 

$

 

 

$

67.7

 

 

$

 

Liabilities from commodity derivative contracts (1)

 

 

243.5

 

 

 

243.5

 

 

 

 

 

 

231.0

 

 

 

12.5

 

Permian Acquisition contingent consideration (2)

 

 

329.0

 

 

 

329.0

 

 

 

 

 

 

 

 

 

329.0

 

TPL contingent consideration (3)

 

 

2.5

 

 

 

2.5

 

 

 

 

 

 

 

 

 

2.5

 

Financial Instruments Recorded on Our

   Consolidated Balance Sheets at Carrying Value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

203.2

 

 

 

203.2

 

 

 

 

 

 

 

 

 

 

TRC Revolver

 

 

435.0

 

 

 

435.0

 

 

 

 

 

 

435.0

 

 

 

 

TRP Revolver

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Partnership's Senior unsecured notes

 

 

5,277.9

 

 

 

5,322.8

 

 

 

 

 

 

5,322.8

 

 

 

 

Partnership's accounts receivable securitization facility

 

 

290.0

 

 

 

290.0

 

 

 

 

 

 

290.0

 

 

 

 

 

 

 

December 31, 2017

 

 

 

Carrying

 

 

Fair Value

 

 

 

Value

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Financial Instruments Recorded on Our

   Consolidated Balance Sheets at Fair Value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets from commodity derivative contracts (1)

 

$

60.3

 

 

$

60.3

 

 

$

 

 

$

58.8

 

 

$

1.5

 

Liabilities from commodity derivative contracts (1)

 

 

98.5

 

 

 

98.5

 

 

 

 

 

 

93.3

 

 

 

5.2

 

Permian Acquisition contingent consideration (2)

 

 

317.0

 

 

 

317.0

 

 

 

 

 

 

 

 

 

317.0

 

TPL contingent consideration (3)

 

 

2.4

 

 

 

2.4

 

 

 

 

 

 

 

 

 

2.4

 

Financial Instruments Recorded on Our

   Consolidated Balance Sheets at Carrying Value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

137.2

 

 

 

137.2

 

 

 

 

 

 

 

 

 

 

TRC Revolver

 

 

435.0

 

 

 

435.0

 

 

 

 

 

 

435.0

 

 

 

 

TRP Revolver

 

 

20.0

 

 

 

20.0

 

 

 

 

 

 

20.0

 

 

 

 

Partnership's Senior unsecured notes

 

 

4,278.0

 

 

 

4,362.4

 

 

 

 

 

 

4,362.4

 

 

 

 

Partnership's accounts receivable securitization facility

 

 

350.0

 

 

 

350.0

 

 

 

 

 

 

350.0

 

 

 

 

 

(1)

The fair value of derivative contracts in this table is presented on a different basis than the Consolidated Balance Sheets presentation as disclosed in Note 15 – Derivative Instruments and Hedging Activities. The above fair values reflect the total value of each derivative contract taken as a whole, whereas the Consolidated Balance Sheets presentation is based on the individual maturity dates of estimated future settlements. As such, an individual contract could have both an asset and liability position when segregated into its current and long-term portions for Consolidated Balance Sheets classification purposes.

(2)

We have a contingent consideration liability related to the Permian Acquisition, which is carried at fair value. See Note 4 – Newly-Formed Joint Ventures, Acquisitions and Divestitures.

(3)

We have a contingent consideration liability for TPL’s previous acquisition of a gas gathering system and related assets, which is carried at fair value.

Additional Information Regarding Level 3 Fair Value Measurements Included on Our Consolidated Balance Sheets

We reported certain of our swaps and option contracts at fair value using Level 3 inputs due to such derivatives not having observable implied volatilities or market prices for substantially the full term of the derivative asset or liability. For valuations that include both observable and unobservable inputs, if the unobservable input is determined to be significant to the overall inputs, the entire valuation is categorized in Level 3. This includes derivatives valued using indicative price quotations whose contract length extends into unobservable periods.

The fair value of these swaps is determined using a discounted cash flow valuation technique based on a forward commodity basis curve. For these derivatives, the primary input to the valuation model is the forward commodity basis curve, which is based on observable or public data sources and extrapolated when observable prices are not available.

As of September 30, 2018, we had 16 commodity swap and option contracts categorized as Level 3. The significant unobservable inputs used in the fair value measurements of our Level 3 derivatives are (i) the forward natural gas liquids pricing curves, for which a significant portion of the derivative’s term is beyond available forward pricing and (ii) implied volatilities, which are unobservable as a result of inactive natural gas liquids options trading. The change in the fair value of Level 3 derivatives associated with a 10% change in the forward basis curve where prices are not observable is immaterial.

The fair value of the Permian Acquisition contingent consideration was determined using a Monte Carlo simulation model. Significant inputs used in the fair value measurement include expected gross margin (calculated in accordance with the terms of the purchase and sale agreements), term of the earn-out period, risk adjusted discount rate and volatility associated with the underlying assets. A significant decrease in expected gross margin during the earn-out period, or significant increase in the discount rate or volatility would result in a lower fair value estimate. The fair value of the TPL contingent consideration was determined using a probability-based model measuring the likelihood of meeting certain volumetric measures. The inputs for both models are not observable; therefore, the entire valuations of the contingent considerations are categorized in Level 3. Changes in the fair value of these liabilities are included in Other income (expense) in our Consolidated Statements of Operations.

The following table summarizes the changes in fair value of our financial instruments classified as Level 3 in the fair value hierarchy:

 

 

 

 

Commodity

 

 

 

 

 

 

 

 

Derivative Contracts

 

 

Contingent

 

 

 

 

Asset/(Liability)

 

 

Liability

 

Balance, December 31, 2017

 

$

(3.8

)

 

$

(319.4

)

 

Change in fair value of TPL contingent consideration

 

 

-

 

 

 

(0.1

)

 

Change in fair value of Permian Acquisition contingent consideration (1)

 

 

-

 

 

 

(12.0

)

 

New Level 3 derivative instruments

 

 

(1.0

)

 

 

-

 

 

Settlements included in Revenue

 

 

2.6

 

 

 

-

 

 

Unrealized gain/(loss) included in OCI

 

 

(10.3

)

 

 

-

 

Balance, September 30, 2018

 

$

(12.5

)

 

$

(331.5

)

 

 

(1)

Represents the change in fair value between December 31, 2017 and September 30, 2018 of the contingent consideration that arose as part of the Permian Acquisition in the first quarter of 2017. See Note 4 – Newly-Formed Joint Ventures, Acquisitions and Divestitures for discussion of the initial fair value.