Derivative Instruments and Hedging Activities (Notes)

9 Months Ended

Sep. 30, 2014

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Price Risk Management Assets and Liabilities

PRICE RISK MANAGMENT ASSETS AND LIABILITIES:

The Company is exposed to certain risks in its ongoing business operations.  The primary risk managed by using derivative instruments is interest rate risk.  Interest rate swaps and treasury rate locks are the principal derivative instruments used by the Company to manage interest rate risk associated with its long-term borrowings, although other interest rate derivative contracts may also be used from time to time.  Southern Union was also previously exposed to commodity price risk in its gathering and processing and distribution operations. Natural gas price swaps were the principal derivative instruments used by Southern Union to manage commodity price risk associated with purchases and/or sales of natural gas, although other commodity derivative contracts were used from time to time. The Company recognizes all derivative assets and liabilities at fair value on the consolidated balance sheets.

Interest Rate Contracts

The Company may enter into interest rate swaps to manage its exposure to changes in interest payments on long-term debt attributable to movements in market interest rates, and may enter into treasury rate locks to manage its exposure to changes in future interest payments attributable to changes in treasury rates prior to the issuance of new long-term debt instruments.

The Company has outstanding interest rate swap agreements to hedge floating rate notes with an aggregate notional amount of $125 million, all of which are for ten-year periods.  The Company settled $50 million of five-year swaps during the third quarter of 2013, $175 million of ten-year swaps during the fourth quarter of 2013, $25 million of five-year swaps during the fourth quarter of 2013 and $150 million of ten-year swaps during the third quarter of 2014. These interest rate swaps became effective on November 1, 2011.  The Company pays interest on the floating rate notes based on three-month LIBOR plus a credit spread of 3.0175% beginning November 1, 2011.  The interest rate swaps effectively fix the floating rate LIBOR-based portion of the interest payments on the swapped notes to a weighted average fixed rate of 3.820%.

Credit Risk

Credit risk refers to the risk that a shipper may default on its contractual obligations resulting in a credit loss to the Company. A credit policy has been approved and implemented to govern the Company’s portfolio of shippers with the objective of mitigating credit losses. This policy establishes guidelines, controls, and limits, consistent with FERC filed tariffs, to manage credit risk within approved tolerances by mandating an appropriate evaluation of the financial condition of existing and potential shippers, monitoring agency credit ratings, and by implementing credit practices that limit credit exposure according to the risk profiles of the shippers. Furthermore, the Company may, at times, require collateral under certain circumstances in order to mitigate credit risk as necessary.

The Company’s shippers consist of a diverse portfolio of customers across the energy industry, including oil and gas producers, midstream companies, municipalities, utilities, and commercial and industrial end users. Our overall exposure may be affected positively or negatively by macroeconomic or regulatory changes that could impact our shippers to one extent or another. Currently, management does not anticipate a material adverse effect in our financial position or results of operations as a consequence of shipper non-performance.

Summary Financial Statement Information

The consolidated balance sheets as of September 30, 2014 and December 31, 2013 included price risk management liabilities, all of which related to interest rate contracts that are not designated as hedging instruments and are recorded at fair value.

The following table summarizes the location and amount (excluding income tax effects) of derivative instrument gains and losses reported in the Company’s consolidated financial statements:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Cash Flow Hedges:
Commodity contracts — Gathering and Processing:
Change in fair value — decrease in accumulated other comprehensive income	$	—		$	—		$	—		$	(3	)
Economic Hedges:
Interest rate contracts:
Change in fair value — increase (decrease) in interest expense	(13		)	1			(6		)	(27		)
Commodity contracts:
Change in fair value — decrease in deferred natural gas purchases	—			(4		)	—			(7		)