Risk Management

Certain of our business activities expose us to risks associated with unfavorable changes in the market price of natural gas, natural gas liquids 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.

Energy Commodity Price Risk Management

As of September 30, 2012, we had entered into the following outstanding commodity forward contracts to hedge our forecast energy commodity purchases and sales:



	Net open position long/(short)
Derivatives designated as hedging contracts
Crude oil	(20.5) million barrels
Natural gas fixed price	(27.6) billion cubic feet
Natural gas basis	(27.6) billion cubic feet
Derivatives not designated as hedging contracts
Natural gas fixed price	(0.6) billion cubic feet

As of September 30, 2012, the maximum length of time over which we have hedged our exposure to the variability in future cash flows associated with energy commodity price risk is through December 2016.

Interest Rate Risk Management

As of September 30, 2012, we had a combined notional principal amount of $5,525 million of fixed-to-variable interest rate swap agreements, effectively converting the interest expense associated with certain series of our senior notes from fixed rates to variable rates based on an interest rate of London InterBank Offered Rate (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 September 30, 2012, 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.

As of December 31, 2011, we had a combined notional principal amount of $5,325 million of fixed-to-variable interest rate swap agreements. In March 2012, (i) we entered into four additional fixed-to-variable interest rate swap agreements having a combined notional principal amount of $500 million, effectively converting a portion of the interest expense associated with our 3.95% senior notes due September 1, 2022 from a fixed rate to a variable rate based on an interest rate of LIBOR plus a spread; and (ii) two separate fixed-to-variable interest rate swap agreements having a combined notional principal amount of $200 million and converting a portion of the interest expense associated with our 7.125% senior notes terminated upon the maturity of the associated notes. In addition, (i) in June 2012, we terminated an existing fixed-to-variable interest rate swap agreement having a notional amount of $100 million, and we received proceeds of $53 million from the early termination of this swap agreement; (ii) in August 2012, we entered into an additional fixed-to-variable interest rate swap agreement having a notional principal amount of $100 million, effectively converting a portion of the interest expense associated with our 3.45% senior notes due February 15, 2023 from a fixed rate to a variable rate based on an interest rate of LIBOR plus a spread; and (iii) in September 2012, a fixed-to-variable interest rate swap agreement having a combined notional principal amount of $100 million and effectively converting a portion of the interest expense associated with our 5.85% senior notes terminated upon the maturity of the associated notes.

Fair Value of Derivative Contracts

The fair values of our current and non-current asset and liability derivative contracts are each reported separately as “Fair value of derivative contracts” in the respective sections of our accompanying consolidated balance sheets, or, as of September 30, 2012 only, included within “Assets held for sale.” The following table summarizes the fair values of our derivative contracts included on our accompanying consolidated balance sheets as of September 30, 2012 and December 31, 2011 (in millions):

Fair Value of Derivative Contracts

		Asset derivatives				Liability derivatives
		September 30, 2012		December 31, 2011		September 30, 2012			December 31, 2011
	Balance sheet location	Fair value		Fair value		Fair value			Fair value
Derivatives designated as hedging contracts
Energy commodity derivative contracts	Current-Fair value of derivative contracts	$	58	$	66	$	(39	)	$	(116	)
	Current-Assets held for Sale / Accrued other current liabilities	1		—		—			—
	Non-current-Fair value of derivative contracts	52		39		(15		)	(39		)
Subtotal		111		105		(54		)	(155		)
Interest rate swap agreements	Current-Fair value of derivative contracts	—		3		—			—
	Non-current-Fair value of derivative contracts	652		593		—			—
Subtotal		652		596		—			—
Total		763		701		(54		)	(155		)

Derivatives not designated as hedging contracts
Energy commodity derivative contracts	Current-Fair value of derivative contracts	1		3		(2		)	(5		)
	Non-current-Fair value of derivative contracts	1		—		—			—
Total		2		3		(2		)	(5		)
Total derivatives		$	765	$	704	$	(56	)	$	(160	)

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 and any unamortized portion of proceeds received from the early termination of interest rate swap agreements. As of September 30, 2012, we had a combined unamortized debt premium amount of $378 million, and as of December 31, 2011, we had a combined debt discount amount of $24 million. As of September 30, 2012 and December 31, 2011, the unamortized premium from the termination of interest rate swap agreements totaled $500 million and $483 million, respectively, and as of September 30, 2012, the weighted average amortization period for this premium was approximately 18 years.

Effect of Derivative Contracts on the Income Statement

The following two tables summarize the impact of our derivative contracts on our accompanying consolidated statements of income for each of the three and nine months ended September 30, 2012 and 2011 (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(a)
		Three Months Ended September 30,						Nine Months Ended September 30,
		2012			2011			2012			2011
Interest rate swap agreements	Interest expense	$	28		$	437		$	109		$	501
Total		$	28		$	437		$	109		$	501

Fixed rate debt	Interest expense	$	(28	)	$	(437	)	$	(109	)	$	(501	)
Total		$	(28	)	$	(437	)	$	(109	)	$	(501	)

___________


(a)	Amounts reflect the change in the fair value of interest rate swap agreements and the change in the fair value of the associated fixed rate debt, which exactly offset each other as a result of no hedge ineffectiveness.



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)
	Three Months Ended September 30,						Three Months Ended September 30,							Three Months Ended September 30,
	2012			2011			2012			2011				2012			2011
Energy commodity derivative contracts	$	(90	)	$	387	Revenues-Natural gas sales	$	2		$	—		Revenues-Natural gas sales	$	—		$	—
						Revenues-Product sales and other	—			(51		)	Revenues-Product sales and other	(5		)	8
						Gas purchases and other costs of sales	8			2			Gas purchases and other costs of sales	—			—
Total	$	(90	)	$	387	Total	$	10		$	(49	)	Total	$	(5	)	$	8

	Nine Months Ended September 30,						Nine Months Ended September 30,							Nine Months Ended September 30,
	2012			2011			2012			2011				2012			2011
Energy commodity derivative contracts	$	99		$	289	Revenues-Natural gas sales	$	4		$	1		Revenues-Natural gas sales	$	—		$	—
						Revenues-Product sales and other	(31		)	(203		)	Revenues-Product sales and other	(8		)	10
						Gas purchases and other costs of sales	17			13			Gas purchases and other costs of sales	—			—
Total	$	99		$	289	Total	$	(10	)	$	(189	)	Total	$	(8	)	$	10

____________

(a)

We expect to reclassify an approximate $25 million gain associated with energy commodity price risk management activities and included in our Partners’ Capital as of September 30, 2012 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)

No material amounts were reclassified into earnings as a result of the discontinuance of cash flow hedges because it was probable that the original forecasted transactions would no longer occur by the end of the originally specified time period or within an additional two-month period of time thereafter, but rather, the amounts reclassified were the result of the hedged forecasted transactions actually affecting earnings (i.e., when the forecasted sales and purchase actually occurred).

For each of the three and nine months ended September 30, 2012 and 2011, we recognized no material gain or loss in income from derivative contracts not designated as hedging contracts.

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 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 over-the-counter 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 principally 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.

The maximum potential exposure to credit losses on our derivative contracts as of September 30, 2012 was (in millions):



	Asset position
Interest rate swap agreements	$	652
Energy commodity derivative contracts	113
Gross exposure	765
Netting agreement impact	(39		)
Cash collateral held	—
Net exposure	$	726

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 both September 30, 2012 and December 31, 2011, we had no outstanding letters of credit supporting our hedging of energy commodity price risks associated with the sale of natural gas, natural gas liquids and crude oil. As of September 30, 2012, we had cash margin deposits associated with our energy commodity contract positions and over-the-counter swap partners totaling $6 million, and we reported this amount as "Restricted deposits" in our accompanying consolidated balance sheet. As of December 31, 2011, our counterparties associated with our energy commodity contract positions and over-the-counter swap agreements had margin deposits with us totaling $10 million, and we reported this amount within “Accrued other current liabilities” in our accompanying consolidated balance sheet.

We also have agreements with certain counterparties to our derivative contracts that contain provisions requiring us to post additional collateral upon a decrease in our credit rating. As of September 30, 2012, we estimate that if our credit rating was downgraded one notch, we would be required to post no additional collateral to our counterparties. If we were downgraded two notches (that is, below investment grade), we would be required to post $8 million of additional collateral.