Risk Management

Certain of our business activities expose us to risks associated with unfavorable changes in the market price of natural gas, NGL and crude oil. We also have exposure to interest rate risk as a result of the issuance of our debt obligations. Pursuant to our management’s approved risk management policy, we use derivative contracts to hedge or reduce our exposure to certain of these risks.

As part of the EP acquisition, we acquired power forward and swap contracts. We have entered into offsetting positions that eliminate the price risks associated with our power contracts.

As of December 31, 2014, we discontinued hedge accounting on certain of our crude derivative contracts as we do not expect them to be highly effective, for accounting purposes, in offsetting the variability in cash flows. This was caused primarily by volatility in basis differentials. As the forecasted transactions are still probable, accumulated gains and losses remain in other comprehensive income until earnings are impacted by the forecasted transactions. Future changes in the derivative contracts’ fair value subsequent to the discontinuance of hedge accounting will be reported in earnings. We may re-designate certain of these hedging relationships if their expected effectiveness improves.

Energy Commodity Price Risk Management

As of December 31, 2014, we had entered into the following outstanding commodity forward contracts to hedge our forecasted energy commodity purchases and sales:



	Net open position long/(short)
Derivatives designated as hedging contracts
Crude oil fixed price	(10.9	)	MMBbl
Crude oil basis	(10.8	)	MMBbl
Natural gas fixed price	(27.2	)	Bcf
Natural gas basis	(8.0	)	Bcf
Derivatives not designated as hedging contracts
Crude oil fixed price	(14.9	)	MMBbl
Natural gas fixed price	2.0		Bcf
Natural gas basis	6.5		Bcf
NGL fixed price	(2.1	)	MMBbl

_______

As of December 31, 2014, the maximum length of time over which we have hedged, for accounting purposes, our exposure to the variability in future cash flows associated with energy commodity price risk is through December 2017. We have additional economic hedge contracts through December 2018.

Interest Rate Risk Management

As of December 31, 2014 and 2013, we had a combined notional principal amount of $9,200 million and $5,400 million, respectively, of fixed-to-variable interest rate swap agreements, effectively converting the interest expense associated with certain series of senior notes from fixed rates to variable rates based on an interest rate of LIBOR plus a spread. All of our swap agreements have termination dates that correspond to the maturity dates of the related series of senior notes and, as of December 31, 2014, the maximum length of time over which we have hedged a portion of our exposure to the variability in the value of this debt due to interest rate risk is through March 15, 2035.

In February 2014, we entered into four separate fixed-to-variable interest rate swap agreements having a combined notional principal amount of $500 million. These agreements effectively convert a portion of the interest expense associated with our 3.50% senior notes due March 1, 2021, from a fixed rate to a variable rate. In September 2014, we entered into five separate fixed-to-variable interest rate swap agreements having a combined notional principal amount of $600 million. These agreements effectively convert a portion of the interest expense associated with our 4.25% senior notes due September 1, 2024, from a fixed rate to a variable rate. Additionally, in November 2014, we entered into twenty-one separate fixed-to-variable interest rate swap agreements having a combined notional principal amount of $3,000 million. These agreements effectively convert a portion of the interest expense associated with our 4.30% senior notes due June 1, 2025 and 3.05% senior notes due December 1, 2019, from a fixed rate to a variable rate.

Fair Value of Derivative Contracts

The following table summarizes the fair values of our derivative contracts included on our accompanying consolidated balance sheets (in millions):



Fair Value of Derivative Contracts
		Asset derivatives				Liability derivatives
		December 31,				December 31,
		2014		2013		2014			2013
	Balance sheet location	Fair value				Fair value
Derivatives designated as hedging contracts
Natural gas and crude derivative contracts	Other current assets/(Other current liabilities)	$	309	$	18	$	(34	)	$	(33	)
	Deferred charges and other assets/(Other long-term liabilities and deferred credits)	6		58		—			(30		)
Subtotal		315		76		(34		)	(63		)
Interest rate swap agreements	Other current assets/(Other current liabilities)	143		87		—			—
	Deferred charges and other assets/(Other long-term liabilities and deferred credits)	260		172		(53		)	(116		)
Subtotal		403		259		(53		)	(116		)
Total		718		335		(87		)	(179		)
Derivatives not designated as hedging contracts
Natural gas, crude and NGL derivative contracts	Other current assets/(Other current liabilities)	73		4		(2		)	(5		)
	Deferred charges and other assets/(Other long-term liabilities and deferred credits)	196		—		—			—
Subtotal		269		4		(2		)	(5		)
Power derivative contracts	Other current assets/(Other current liabilities)	10		7		(57		)	(54		)
	Deferred charges and other assets/(Other long-term liabilities and deferred credits)	—		11		(16		)	(73		)
Subtotal		10		18		(73		)	(127		)
Total		279		22		(75		)	(132		)
Total derivatives		$	997	$	357	$	(162	)	$	(311	)

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Debt Fair Value Adjustments

The offsetting entry to adjust the carrying value of the debt securities whose fair value was being hedged is included within “Debt fair value adjustments” on our accompanying consolidated balance sheets. Our “Debt fair value adjustments” also include all unamortized debt discount/premium amounts, purchase accounting on our debt balances, and any unamortized portion of proceeds received from the early termination of interest rate swap agreements. As of December 31, 2014 and 2013, these fair value adjustments to our debt balances included (i) $1,221 million and $1,379 million, respectively, associated with fair value adjustments to our debt previously recorded in purchase accounting; (ii) $347 million and $143 million, respectively, associated with the offsetting entry for hedged debt; (iii) $454 million and $517 million respectively, associated with unamortized premium from the termination of interest rate swap agreements; and offset by (iv) $88 million and $62 million, respectively, associated with unamortized debt discount amounts. As of December 31, 2014, the weighted-average amortization period of the unamortized premium from the termination of the interest rate swaps was approximately 16 years.

Effect of Derivative Contracts on the Income Statement

The following tables summarize the impact of our derivative contracts on our accompanying consolidated statements of income (in millions):



Derivatives in fair value hedging relationships	Location of gain/(loss)recognized in income on derivatives	Amount of gain/(loss)recognized in income on derivatives and related hedged item
		Year Ended December 31,
		2014			2013			2012
Interest rate swap agreements	Interest expense	$	207		$	(425	)	$	55
Total		$	207		$	(425	)	$	55
Fixed rate debt	Interest expense	$	(204	)	$	425		$	(55	)
Total		$	(204	)	$	425		$	(55	)

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Derivatives in cash flow hedging relationships	Amount of gain/(loss) recognized in OCI on derivative (effective portion)(a)									Location of gain/(loss) reclassified from Accumulated OCI into income (effective portion)	Amount of gain/(loss) reclassified from Accumulated OCI into income (effective portion)(b)									Location of gain/(loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing)	Amount of gain/(loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing)
	Year Ended										Year Ended										Year Ended
	December 31,										December 31,										December 31,
	2014			2013			2012				2014			2013			2012				2014		2013		2012
Energy commodity derivative contracts	$	423		$	(45	)	$	87		Revenues—Natural gas sales	$	(1	)	$	—		$	4		Revenues—Natural gas sales	$	—	$	—	$	—
										Revenues—Product sales and other	26			(13		)	(15		)	Revenues—Product sales and other	11		3		(11		)
										Costs of sales	4			—			17			Costs of sales	—		—		—
Interest rate swap agreements	(15		)	7			(5		)	Interest expense	(4		)	2			2			Interest expense	—		—		—
Total	$	408		$	(38	)	$	82		Total	$	25		$	(11	)	$	8		Total	$	11	$	3	$	(11	)

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(a)

We expect to reclassify an approximate $208 million gain associated with energy commodity price risk management activities included in our accumulated other comprehensive loss balance as of December 31, 2014 into earnings during the next twelve months (when the associated forecasted sales and purchases are also expected to occur), however, actual amounts reclassified into earnings could vary materially as a result of changes in market prices.


(b)	Amounts reclassified were the result of the hedged forecasted transactions actually affecting earnings (i.e., when the forecasted sales and purchases actually occurred).



Derivatives not designated as accounting hedges	Location of gain/(loss) recognized in income on derivatives	Amount of gain/(loss) recognized in income on derivatives
		Year Ended December 31,
		2014			2013			2012
Energy commodity derivative contracts	Revenues—Natural gas sales	$	(7	)	$	—		$	1
	Revenues—Product sales and other	20			(10		)	(4		)
	Costs of sales	—			2			—
	Other expense (income)	(2		)	(2		)	—
Total		$	11		$	(10	)	$	(3	)

Credit Risks

We have counterparty credit risk as a result of our use of financial derivative contracts. Our counterparties consist primarily of financial institutions, major energy companies, natural gas and electric utilities and local distribution companies. This concentration of counterparties may impact our overall exposure to credit risk, either positively or negatively, in that the counterparties may be similarly affected by changes in economic, regulatory or other conditions.

We maintain credit policies with regard to our counterparties that we believe minimize our overall credit risk. These policies include (i) an evaluation of potential counterparties’ financial condition (including credit ratings); (ii) collateral requirements under certain circumstances; and (iii) the use of standardized agreements which allow for netting of positive and negative exposure associated with a single counterparty. Based on our policies, exposure, credit and other reserves, our management does not anticipate a material adverse effect on our financial position, results of operations, or cash flows as a result of counterparty performance.

Our OTC swaps and options are entered into with counterparties outside central trading organizations such as futures, options or stock exchanges. These contracts are with a number of parties, all of which have investment grade credit ratings. While we enter into derivative transactions with investment grade counterparties and actively monitor their ratings, it is nevertheless possible that from time to time losses will result from counterparty credit risk in the future.

In conjunction with the purchase of exchange-traded derivative contracts or when the market value of our derivative contracts with specific counterparties exceeds established limits, we are required to provide collateral to our counterparties, which may include posting letters of credit or placing cash in margin accounts. As of December 31, 2014 and 2013, we had $20 million and $167 million, respectively, of outstanding letters of credit supporting our commodity price risks associated with the sale of power.

We also have agreements with certain counterparties to our derivative contracts that contain provisions requiring the posting of additional collateral upon a decrease in our credit rating. As of December 31, 2014, we estimate that if our credit rating was downgraded one or two notches, we would be required to post no additional collateral to our counterparties.

Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income

Cumulative revenues, expenses, gains and losses that under GAAP are included within our comprehensive income but excluded from our earnings are reported as “Accumulated other comprehensive loss” within “Stockholders’ Equity” in our consolidated balance sheets. Changes in the components of our “Accumulated other comprehensive loss” not including non-controlling interests are summarized as follows (in millions):



	Net unrealized gains/(losses) on cash flow hedge derivatives			Foreign currency translation adjustments			Pension and other postretirement liability adjustments			Total Accumulated other comprehensive income/(loss)
Balance as of December 31, 2011	$	(20	)	$	37		$	(132	)	$	(115	)
Other comprehensive income before reclassifications	32			14			(53		)	(7		)
Amounts reclassified from accumulated other comprehensive loss	(5		)	—			9			4
Net current-period other comprehensive income	27			14			(44		)	(3		)
Balance as of December 31, 2012	7			51			(176		)	(118		)
Other comprehensive income before reclassifications	(14		)	(49		)	151			88
Amounts reclassified from accumulated other comprehensive loss	4			—			2			6
Net current-period other comprehensive income	(10		)	(49		)	153			94
Balance as of December 31, 2013	(3		)	2			(23		)	(24		)
Other comprehensive income before reclassifications	254			(68		)	(212		)	(26		)
Amounts reclassified from accumulated other comprehensive loss	(22		)	—			(1		)	(23		)
Impact of Merger Transactions (See Note 1)	98			(42		)	—			56
Net current-period other comprehensive income	330			(110		)	(213		)	7
Balance as of December 31, 2014	$	327		$	(108	)	$	(236	)	$	(17	)