Derivative Financial Instruments And Hedging Activities | 9 Months Ended |
Sep. 30, 2013 |
Derivative Financial Instruments And Hedging Activities | ' |
Derivative Financial Instruments And Hedging Activities | ' |
7. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES |
Our net income and cash flows are subject to volatility stemming from fluctuations in commodity prices of natural gas, NGLs, condensate and fractionation margins. Fractionation margins represent the relative difference between the price we receive from NGL and condensate sales and the corresponding cost of natural gas we purchase for processing. Our exposure to commodity price risk exists within both of our segments. We use derivative financial instruments (i.e., futures, forwards, swaps, options and other financial instruments with similar characteristics) to manage the risks associated with market fluctuations in commodity prices, as well as to reduce the volatility in our cash flows. Based on our risk management policies, all of our derivative financial instruments are employed in connection with an underlying asset, liability and/or forecasted transaction and are not entered into with the objective of speculating on commodity prices. We have hedged a portion of our exposure to variability in future cash flows associated with commodity price risks through 2016 in accordance with our risk management policies. |
Accounting Treatment |
We record all derivative financial instruments in our consolidated financial statements at fair market value, which we adjust each period for changes in the fair market value, and refer to as marking to market, or mark-to-market. The fair market value of these derivative financial instruments reflects the estimated amounts that we would pay to transfer a liability or receive to sell an asset in an orderly transaction with market participants to terminate or close the contracts at the reporting date, taking into account the current unrealized losses or gains on open contracts. We apply a mid-market pricing convention, which we refer to as the market approach, to value substantially all of our derivative instruments. Actively traded external market quotes, data from pricing services and published indices are used to value our derivative instruments, which are fair-valued on a recurring basis. We may also use these inputs with internally developed methodologies that result in our best estimates of fair value. |
In accordance with the applicable authoritative accounting guidance, if a derivative financial instrument does not qualify as a hedge, or is not designated as a hedge, the derivative is marked-to-market each period with the increases and decreases in fair market value recorded in our consolidated statements of income as increases and decreases in “Cost of natural gas and natural gas liquids” or “Operating revenue” for our commodity-based derivatives. Cash flow is only impacted to the extent the actual derivative contract is settled by making or receiving a payment to or from the counterparty or by making or receiving a payment for entering into a contract that exactly offsets the original derivative contract. Typically, we settle our derivative contracts when the physical transaction that underlies the derivative financial instrument occurs. |
If a derivative financial instrument qualifies and is designated as a cash flow hedge, which is a hedge of a forecasted transaction or future cash flows, any unrealized mark-to-market gain or loss is deferred in “Accumulated other comprehensive income,” also referred to as AOCI, a component of “Partners' capital,” until the underlying hedged transaction occurs. To the extent that the hedge instrument is effective in offsetting the transaction being hedged, there is no impact to the income statement until the underlying transaction occurs. At inception and on a quarterly basis, we formally assess whether the hedge contract is highly effective in offsetting changes in cash flows of hedged items. Any ineffective portion of a cash flow hedge's change in fair market value is recognized each period in earnings. Realized gains and losses on derivative financial instruments that are designated as hedges and qualify for hedge accounting are included in “Cost of natural gas and natural gas liquids” for commodity hedges in the period in which the hedged transaction occurs. Gains and losses deferred in AOCI related to cash flow hedges for which hedge accounting has been discontinued remain in AOCI until the underlying physical transaction occurs unless it is probable that the forecasted transaction will not occur by the end of the originally specified time period or within an additional two month period of time thereafter. Generally, our preference is for our derivative financial instruments to receive hedge accounting treatment whenever possible to mitigate the non-cash earnings volatility that arises from recording the changes in fair value of our derivative financial instruments through earnings. To qualify for cash flow hedge accounting treatment as set forth in the authoritative accounting guidance, very specific requirements must be met in terms of hedge structure, hedge objective and hedge documentation. |
Non-Qualified Hedges |
Many of our derivative financial instruments qualify for hedge accounting treatment as set forth in the authoritative accounting guidance. However, we have derivative financial instruments associated with our commodity activities where the hedge structure does not meet the requirements to apply hedge accounting. As a result, these derivative financial instruments do not qualify for hedge accounting and are referred to as non-qualifying. These non-qualifying derivative financial instruments are marked-to-market each period with the change in fair value, representing unrealized gains and losses, included in “Cost of natural gas and natural gas liquids” in our consolidated statements of income. These mark-to-market adjustments produce a degree of earnings volatility that can often be significant from period to period, but have no cash flow impact relative to changes in market prices. The cash flow impact occurs when the underlying physical transaction takes place in the future and the associated financial instrument contract settlement is made. |
The following transaction types do not qualify for hedge accounting and contribute to volatility in our earnings and in our cash flows upon settlement: |
Commodity Price Exposures: |
• Transportation—In our logistics and marketing business, when we transport natural gas from one location to another, the pricing index used for natural gas sales is usually different from the pricing index used for natural gas purchases, which exposes us to market price risk relative to changes in those two indices. By entering into a basis swap, where we exchange one pricing index for another, we can effectively lock in the margin, representing the difference between the sales price and the purchase price, on the combined natural gas purchase and natural gas sale, removing any market price risk on the physical transactions. Although this represents a sound economic hedging strategy, the derivative financial instruments (i.e., the basis swaps) we use to manage the commodity price risk associated with these transportation contracts do not qualify for hedge accounting, since only the future margin has been fixed and not the future cash flow. As a result, the changes in fair value of these derivative financial instruments are recorded in earnings. |
• Storage—In our logistics and marketing business, we use derivative financial instruments (i.e., natural gas swaps) to hedge the relative difference between the injection price paid to purchase and store natural gas and the withdrawal price at which the natural gas is sold from storage. The intent of these derivative financial instruments is to lock in the margin, representing the difference between the price paid for the natural gas injected and the price received upon withdrawal of the natural gas from storage in a future period. We do not pursue cash flow hedge accounting treatment for these storage transactions since the underlying forecasted injection or withdrawal of natural gas may not occur in the period as originally forecast. This can occur because we have the flexibility to make changes in the underlying injection or withdrawal schedule, based on changes in market conditions. In addition, since the physical natural gas or NGLs are recorded at the lower of cost or market, timing differences can result when the derivative financial instrument is settled in a period that is different from the period the physical natural gas is sold from storage. As a result, derivative financial instruments associated with our natural gas and NGL storage activities can increase volatility due to fluctuations in NGL prices until the underlying transactions are settled or offset. |
• Optional Natural Gas Processing Volumes—In our gathering, processing and transportation business, we use derivative financial instruments to hedge the volumes of NGLs produced from our natural gas processing facilities. Some of our natural gas contracts allow us the choice of processing natural gas when it is economical and to cease doing so when processing becomes uneconomic. We have entered into derivative financial instruments to fix the sales price of a portion of the NGLs that we produce at our discretion and to fix the associated purchase price of natural gas required for processing. We typically designate derivative financial instruments associated with NGLs we produce per contractual processing requirements as cash flow hedges when the processing of natural gas is probable of occurrence. However, we are precluded from designating the derivative financial instruments as qualifying hedges of the respective commodity price risk when the discretionary processing volumes are subject to change. As a result, our operating income is subject to increased volatility due to fluctuations in NGL prices until the underlying transactions are settled or offset. |
• NGL Forward Contracts—In our logistics and marketing business, we use forward contracts to fix the price of NGLs we purchase and store in inventory and to fix the price of NGLs that we sell from inventory to meet the demands of our customers that sell and purchase NGLs. In the second quarter of 2009, we determined that a sub-group of physical NGL sales contracts with terms allowing for economic net settlement did not qualify for the normal purchases and normal sales, or NPNS, scope exception and are being marked-to-market each period with the changes in fair value recorded in earnings. The forward contracts for which we have revoked the NPNS election do not qualify for hedge accounting and are being marked-to-market each period with the changes in fair value recorded in earnings. As a result, our operating income is subject to additional volatility associated with fluctuations in NGL prices until the forward contracts are settled. |
• Natural Gas Forward Contracts—In our logistics and marketing business, we use forward contracts to sell natural gas to our customers. Historically, we have not considered these contracts to be derivatives under the NPNS exception allowed by authoritative accounting guidance. In the first quarter of 2010, we determined that a sub-group of physical natural gas sales contracts with terms allowing for economic net settlement did not qualify for the NPNS scope exception, and are being marked-to-market each period with the changes in fair value recorded in earnings. As a result, our operating income is subject to additional volatility associated with the changes in fair value of these contracts. |
• Crude Forward Contracts—In our logistics and marketing business, we use forward contracts to fix the price of crude we purchase and store in inventory and to fix the price of crude that we sell from inventory. A sub-group of physical crude contracts with terms allowing for economic net settlement do not qualify for the normal purchases and normal sales, or NPNS, scope exception and are being marked-to-market each period with the changes in fair value recorded in earnings. As a result, our operating income is subject to additional volatility associated with fluctuations in crude prices until the forward contracts are settled. |
• Natural Gas and NGL Options—In our gathering, processing and transportation business, we use options to hedge the forecasted commodity exposure of our NGLs and natural gas. Although options can qualify for hedge accounting treatment, pursuant to the authoritative accounting guidance, we have elected non-qualifying treatment. As such, our option premiums are expensed as incurred. These derivatives are being marked-to-market, with the changes in fair value recorded to earnings each period. As a result, our operating income is subject to volatility due to movements in the prices of NGLs and natural gas until the underlying long-term transactions are settled. |
In all instances related to the commodity exposures described above, the underlying physical purchase, storage and sale of the commodity is accounted for on a historical cost or net realizable value basis rather than on the mark-to-market basis we employ for the derivative financial instruments used to mitigate the commodity price risk associated with our storage and transportation assets. This difference in accounting (i.e., the derivative financial instruments are recorded at fair market value while the physical transactions are recorded at the lower of historical cost or net realizable value) can and has resulted in volatility in our reported net income, even though the economic margin is essentially unchanged from the date the transactions were consummated. |
Derivative Positions |
Our derivative financial instruments are included at their fair values in the consolidated statements of financial position as follows: |
| | | September 30, | | December 31, | | | | | | | | | | | | | | | | | | |
| | | 2013 | | 2012 | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (in millions) | | | | | | | | | | | | | | | | | | |
| Other current assets | | $ | 138.3 | | $ | 275 | | | | | | | | | | | | | | | | | | |
| Other assets, net | | | 72.5 | | | 78.1 | | | | | | | | | | | | | | | | | | |
| Accounts payable and other | | | -151.2 | | | -259.9 | | | | | | | | | | | | | | | | | | |
| Other long-term liabilities | | | -64 | | | -78 | | | | | | | | | | | | | | | | | | |
| | | $ | -4.4 | | $ | 15.2 | | | | | | | | | | | | | | | | | | |
The changes in the net assets and liabilities associated with our derivatives are primarily attributable to the effects of new derivative transactions we have entered at prevailing market prices, settlement of maturing derivatives and the change in forward market prices of our remaining hedges. Our portfolio of derivative financial instruments is largely comprised of long-term natural gas, NGL and crude oil sales and purchase contracts. |
We record the change in fair value of our highly effective cash flow hedges in AOCI until the derivative financial instruments are settled, at which time they are reclassified to earnings. Also included in AOCI are unrecognized losses of approximately $0.6 million associated with derivative financial instruments that qualified for and were classified as cash flow hedges of forecasted transactions that were subsequently de-designated. These losses are reclassified to earnings over the periods during which the originally hedged forecasted transactions affect earnings. During the nine month period ended September 30, 2013, unrealized commodity hedge gains of $1.7 million were de-designated as a result of the hedges no longer meeting hedge accounting criteria. We estimate that approximately $4.5 million, representing unrealized net losses from our cash flow hedging activities based on pricing and positions at September 30, 2013, will be reclassified from AOCI to earnings during the next 12 months. |
The table below summarizes our derivative balances by counterparty credit quality (negative amounts represent our net obligations to pay the counterparty). |
| | | September 30, | | December 31, | | | | | | | | | | | | | | | | | | |
| | | 2013 | | 2012 | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (in millions) | | | | | | | | | | | | | | | | | | |
| Counterparty Credit Quality (1) | | | | | | | | | | | | | | | | | | | | | | | | |
| AAA | | $ | 0.1 | | $ | - | | | | | | | | | | | | | | | | | | |
| AA | | | -57.8 | | | -116.6 | | | | | | | | | | | | | | | | | | |
| A | | | -84.5 | | | -150.4 | | | | | | | | | | | | | | | | | | |
| Lower than A | | | 137.8 | | | 282.2 | | | | | | | | | | | | | | | | | | |
| | | $ | -4.4 | | $ | 15.2 | | | | | | | | | | | | | | | | | | |
| ______________________________ | | | | | | | | | | | | | | | | | | | | | | | | |
| (1)As determined by nationally-recognized statistical ratings organizations. | | | | | | | | | | | | | | | | | | | | | | | | |
As the net value of our derivative financial instruments has decreased in response to changes in forward commodity prices, our outstanding financial exposure to third parties has also decreased. When credit thresholds are met pursuant to the terms of our International Swaps and Derivatives Association, Inc., or ISDA®, financial contracts, we have the right to require collateral from our counterparties. We would include any cash collateral received in the balances listed above, however, as of September 30, 2013 and December 31, 2012, we were not holding any cash collateral on our asset exposures. When we are in a position of posting collateral to cover our counterparties' exposure to our non-performance, the collateral is provided through letters of credit, which are not reflected above. |
The ISDA® agreements and associated credit support, which govern our financial derivative transactions, contain no credit rating downgrade triggers that would accelerate the maturity dates of our outstanding transactions. A change in ratings is not an event of default under these instruments, and the maintenance of a specific minimum credit rating is not a condition to transacting under the ISDA® agreements. In the event of a credit downgrade, additional collateral may be required to be posted under the agreement if we are in a liability position to our counterparty, but the agreement will not automatically terminate and require immediate settlement of all future amounts due. |
The ISDA® agreements, in combination with our master netting agreements, and credit arrangements governing our commodity swaps require that collateral be posted per tiered contractual thresholds based on the credit rating of each counterparty. EEP generally provides letters of credit to satisfy such collateral requirements under our ISDA® agreements. These agreements will require additional collateral postings of up to 100% on net liability positions in the event of a credit downgrade below investment grade. Automatic termination clauses which exist are related only to non-performance activities, such as the refusal to post collateral when contractually required to do so. When we are holding an asset position, our counterparties are likewise required to post collateral on their liability (our asset) exposures, also determined by tiered contractual collateral thresholds. Counterparty collateral may consist of cash or letters of credit, both of which must be fulfilled with immediately available funds. |
At September 30, 2013 and December 31, 2012, we had credit concentrations in the following industry sectors, as presented below: |
| | | September 30, | | December 31, | | | | | | | | | | | | | | | | | | |
| | | 2013 | | 2012 | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (in millions) | | | | | | | | | | | | | | | | | | |
| United States financial institutions and investment banking entities | | $ | -114.5 | | $ | -204.7 | | | | | | | | | | | | | | | | | | |
| Non-United States financial institutions | | | -28 | | | -87.4 | | | | | | | | | | | | | | | | | | |
| Integrated oil companies | | | -3.8 | | | 4.5 | | | | | | | | | | | | | | | | | | |
| General Partner and affiliates | | | 143.1 | | | 297.2 | | | | | | | | | | | | | | | | | | |
| Other | | | -1.2 | | | 5.6 | | | | | | | | | | | | | | | | | | |
| | | $ | -4.4 | | $ | 15.2 | | | | | | | | | | | | | | | | | | |
Gross derivative balances are presented below before the effects of collateral received or posted and without the effects of master netting arrangements. Both our assets and liabilities are adjusted for non-performance risk, which is statistically derived. This credit valuation adjustment model considers existing derivative asset and liability balances in conjunction with contractual netting and collateral arrangements, current market data such as credit default swap rates and bond spreads and probability of default assumptions to quantify an adjustment to fair value. For credit modeling purposes, collateral received is included in the calculation of our assets, while any collateral posted is excluded from the calculation of the credit adjustment. Our credit exposure for these over-the-counter derivatives is directly with our counterparty and continues until the maturity or termination of the contracts. A reconciliation between the derivative balances presented at gross values rather than the net amounts we present in our other derivative disclosures, is also provided below. |
Effect of Derivative Instruments on the Consolidated Statements of Financial Position | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Asset Derivatives | | Liability Derivatives | | | | | | | | | | |
| | | | | Fair Value at | | Fair Value at | | | | | | | | | | |
| | | Financial Position | | September 30, | | December 31, | | September 30, | | December 31, | | | | | | | | | | |
| | | Location | | 2013 | | 2012(3) | | 2013 | | 2012(3) | | | | | | | | | | |
| | | | | (in millions) | | | | | | | | | | |
Derivatives designated as | | | | | | | | | | | | | | | | | | | | | | | | |
| hedging instruments(1) | | | | | | | | | | | | | | | | | | | | | | | | |
Commodity contracts | | Other current assets | | $ | 2.4 | | $ | 12.2 | | $ | -1.8 | | $ | -4.2 | | | | | | | | | | |
Commodity contracts | | Other assets, net | | | 4.8 | | | 2.5 | | | -1.2 | | | -1.1 | | | | | | | | | | |
Commodity contracts | | Accounts payable and other | | | 4.2 | | | 4.7 | | | -8.5 | | | -5.7 | | | | | | | | | | |
Commodity contracts | | Other long-term liabilities | | | 0.2 | | | 2 | | | -1.2 | | | -4.5 | | | | | | | | | | |
| | | | | | 11.6 | | | 21.4 | | | -12.7 | | | -15.5 | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Derivatives not designated | | | | | | | | | | | | | | | | | | | | | | | | |
| as hedging instruments | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate contracts | | Other current assets(2) | | | 123 | | | 246.9 | | | - | | | - | | | | | | | | | | |
Interest rate contracts | | Other assets, net(2) | | | 83.2 | | | 68.3 | | | -27.9 | | | -3.3 | | | | | | | | | | |
Interest rate contracts | | Accounts payable and other(2) | | | - | | | - | | | -123 | | | -246.9 | | | | | | | | | | |
Interest rate contracts | | Other long-term liabilities(2) | | | 2.3 | | | 3.3 | | | -57.6 | | | -68.3 | | | | | | | | | | |
Commodity contracts | | Other current assets(2) | | | 17.2 | | | 27.2 | | | -2.5 | | | -7.1 | | | | | | | | | | |
Commodity contracts | | Other assets, net(2) | | | 14.4 | | | 11.8 | | | -0.9 | | | -0.1 | | | | | | | | | | |
Commodity contracts | | Accounts payable and other(2) | | | 9.2 | | | 0.8 | | | -32.9 | | | -12.8 | | | | | | | | | | |
Commodity contracts | | Other long-term liabilities(2) | | | 0.2 | | | 1.6 | | | -8 | | | -12.1 | | | | | | | | | | |
| | | | | | 249.5 | | | 359.9 | | | -252.8 | | | -350.6 | | | | | | | | | | |
Total derivative instruments | | | | $ | 261.1 | | $ | 381.3 | | $ | -265.5 | | $ | -366.1 | | | | | | | | | | |
______________________________ | | | | | | | | | | |
(1) | Includes items currently designated as hedging instruments. Excludes the portion of de-designated hedges which may have a component remaining in AOCI. | | | | | | | | | | |
(2) | Includes both affiliate and third party transactions. | | | | | | | | | | |
(3) | The effect of derivative instruments on the consolidated statements of financial position, as of December 31, 2012, was revised to disclose the financial position location on a gross basis. The revisions to the disclosures are not considered material to and had no impact on amounts previously reported in the consolidated statements of financial position. | | | | | | | | | | |
Effect of Derivative Instruments on the Consolidated Statements of Income and Accumulated Other Comprehensive Income | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Amount of gain | | | | | | | | | |
| | | | | | | | | | | | | | | (loss) recognized in | | | | | | | | | |
| | | | | | | | | | | | Location of gain | | earnings on | | | | | | | | | |
| | | | | | | | | | | | (loss) recognized in | | derivative | | | | | | | | | |
| | | | | | | | | | | | earnings on derivative | | (Ineffective Portion | | | | | | | | | |
| | | Amount of gain | | | | | | | | (Ineffective Portion | | and Amount | | | | | | | | | |
Derivatives in Cash | | (loss) recognized in | | Location of gain (loss) | | Amount of gain (loss) | | and Amount | | Excluded from | | | | | | | | | |
Flow Hedging | | AOCI on Derivative | | reclassified from | | reclassified from | | Excluded from | | Effectiveness | | | | | | | | | |
Relationships | | (Effective Portion) | | AOCI to earnings | | AOCI to earnings | | Effectiveness Testing)(1) | | Testing)(1) | | | | | | | | | |
| (in millions) | | | | | | | | | |
For the three month period ended September 30, 2013 | | | | | | | | | |
| | | | | | Cost of natural gas and | | | | | Cost of natural gas and | | | | | | | | | | | | |
Commodity contracts | | $ | -17.2 | | | natural gas liquids | | $ | -0.6 | | | natural gas liquids | | $ | -0.5 | | | | | | | | | |
Total | | $ | -17.2 | | | | | $ | -0.6 | | | | | $ | -0.5 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
For the three month period ended September 30, 2012 | | | | | | | | | |
| | | | | | Cost of natural gas and | | | | | Cost of natural gas and | | | | | | | | | | | | |
Commodity contracts | | $ | -22.9 | | | natural gas liquids | | $ | 4.6 | | | natural gas liquids | | $ | -3.9 | | | | | | | | | |
Total | | $ | -22.9 | | | | | $ | 4.6 | | | | | $ | -3.9 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
For the nine month period ended September 30, 2013 | | | | | | | | | |
| | | | | | Cost of natural gas and | | | | | Cost of natural gas and | | | | | | | | | | | | |
Commodity contracts | | $ | -8.8 | | | natural gas liquids | | $ | 3 | | | natural gas liquids | | $ | 1.8 | | | | | | | | | |
Total | | $ | -8.8 | | | | | $ | 3 | | | | | $ | 1.8 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
For the nine month period ended September 30, 2012 | | | | | | | | | |
| | | | | | Cost of natural gas and | | | | | Cost of natural gas and | | | | | | | | | | | | |
Commodity contracts | | $ | 47.2 | | | natural gas liquids | | $ | -3.4 | | | natural gas liquids | | $ | 1.2 | | | | | | | | | |
Total | | $ | 47.2 | | | | | $ | -3.4 | | | | | $ | 1.2 | | | | | | | | | |
______________________________ | | | | | | | | | | | | | | | | | | | | | |
(1) | Includes only the ineffective portion of derivatives that are designated as hedging instruments and does not include net gains or losses associated with derivatives that do not qualify for hedge accounting treatment. | | | | | | | | | |
Components of Accumulated Other Comprehensive Income/(Loss) | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Cash Flow | | | | | | | | | | | | | | | | | | | | |
| | | | Hedges | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | (in millions) | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2012 | | $ | 7.1 | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Other comprehensive income (loss) before reclassifications | | | -2.7 | | | | | | | | | | | | | | | | | | | | |
| Amounts reclassified from AOCI (1) | | | -3 | | | | | | | | | | | | | | | | | | | | |
| | Net other comprehensive income (loss) | | | -5.7 | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at September 30, 2013 | | $ | 1.4 | | | | | | | | | | | | | | | | | | | | |
_______________________________________ | | | | | | | | | | | | | | | | | | | | |
(1)For additional details on the amounts reclassified from AOCI, reference the Reclassifications from Accumulated Other Comprehensive Income table below. | | | | | | | | | | | | | | | | | | | | |
Reclassifications from Accumulated Other Comprehensive Income | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | For the three month period ended September 30, | | For the nine month period ended September 30, | | | | | | | | | | | |
| | | | 2013 | | 2012 | | 2013 | | 2012 | | | | | | | | | | | |
| | (in millions) | | | | | | | | | | | |
Losses (gains) on cash flow hedges: | | | | | | | | | | | | | | | | | | | | | | | |
| Commodity Contracts (1) | | $ | 0.6 | | $ | -4.6 | | $ | -3 | | $ | 3.4 | | | | | | | | | | | |
| | Total Reclassifications from AOCI | | $ | 0.6 | | $ | -4.6 | | $ | -3 | | $ | 3.4 | | | | | | | | | | | |
______________________________ | | | | | | | | | | | |
(1)Loss (gain) reported within “Cost of natural gas and natural gas liquids" in the consolidated statements of income. | | | | | | | | | | | |
Effect of Derivative Instruments on Consolidated Statements of Income | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | For the three month period | | For the nine month period | | | | | | | | | |
| | | | | | ended September 30, | | ended September 30, | | | | | | | | | |
| | | | | | 2013 | | 2012 | | 2013 | | 2012 | | | | | | | | | |
Derivatives Not Designated | | Location of Gain or (Loss) | | Amount of Gain or (Loss) | | Amount of Gain or (Loss) | | | | | | | | | |
as Hedging Instruments | | Recognized in Earnings(1) | | Recognized in Earnings(2) | | Recognized in Earnings(2) | | | | | | | | | |
| | | | | | (in millions) | | | | | | | | | |
| | | Cost of natural gas and | | | | | | | | | | | | | | | | | | | | | |
Commodity contracts | | | natural gas liquids(3) | | $ | -28.1 | | $ | -12.4 | | $ | -8.9 | | $ | 21.7 | | | | | | | | | |
Commodity contracts | | Operating revenue | | | -6.2 | | | - | | | -6.2 | | | - | | | | | | | | | |
Total | | | | | $ | -34.3 | | $ | -12.4 | | $ | -15.1 | | $ | 21.7 | | | | | | | | | |
________________________ | | | | | | | | | |
(1) | Does not include settlements associated with derivative instruments that settle through physical delivery. | | | | | | | | | |
(2) | Includes only net gains or losses associated with those derivatives that do not qualify for hedge accounting treatment and does not include the ineffective portion of derivatives that are designated as hedging instruments. | | | | | | | | | |
(3) | Includes settlements losses of $0.2 million for the three month period ended September 30, 2013, settlement gains of $8.3 million for the three month period ended September 30, 2012 and settlement gains of $0.5 million and $15.0 million for the nine month periods ended September 30, 2013 and September 30, 2012, respectively. | | | | | | | | | |
Gross to Net Presentation Reconciliation of Derivative Assets and Liabilities | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | 30-Sep-13 | | December 31, 2012 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Assets | | Liabilities | | Total | | Assets | | Liabilities | | Total | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | (in millions) | | | | | | | |
Fair value of derivatives—gross presentation | | $ | 261.1 | | $ | -265.5 | | $ | -4.4 | | $ | 381.3 | | $ | -366.1 | | $ | 15.2 | | | | | | | |
Effects of netting agreements | | | -50.3 | | | 50.3 | | | - | | | -28.2 | | | 28.2 | | | - | | | | | | | |
Fair value of derivatives—net presentation | | $ | 210.8 | | $ | -215.2 | | $ | -4.4 | | $ | 353.1 | | $ | -337.9 | | $ | 15.2 | | | | | | | |
We record the fair market value of our derivative financial and physical instruments in the consolidated statements of financial position as current and long-term assets or liabilities on a net basis by counterparty. The terms of the ISDA®, which governs our financial contracts and our other master netting agreements, allow the parties to elect in respect of all transactions under the agreement, in the event of a default and upon notice to the defaulting party, for the non-defaulting party to set-off all settlement payments, collateral held and any other obligations (whether or not then due), which the non-defaulting party owes to the defaulting party. |
Offsetting of Financial Assets and Derivative Assets | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | As of September 30, 2013 | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Gross | | Gross Amount | | Net Amount of Assets | | Gross Amount | | | | | | | | | | | |
| | | | Amount of | | Offset in the | | Presented in the | | Not Offset in the | | | | | | | | | | | |
| | | | Recognized | | Statement of | | Statement of | | Statement of | | Net | | | | | | | | |
| | | | Assets | | Financial Position | | Financial Position | | Financial Position | | Amount | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | (in millions) | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Description: | | | | | | | | | | | | | | | | | | | | | | | |
| Derivatives | | $ | 261.1 | | $ | -50.3 | | $ | 210.8 | | $ | -4.8 | | $ | 206 | | | | | | | | |
| | Total | | $ | 261.1 | | $ | -50.3 | | $ | 210.8 | | $ | -4.8 | | $ | 206 | | | | | | | | |
Offsetting of Financial Liabilities and Derivative Liabilities | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | As of September 30, 2013 | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Gross | | Gross Amount | | Net Amount of Liabilities | | Gross Amount | | | | | | | | | | | |
| | | | Amount of | | Offset in the | | Presented in the | | Not Offset in the | | | | | | | | | | | |
| | | | Recognized | | Statement of | | Statement of | | Statement of | | Net | | | | | | | | |
| | | | Liabilities | | Financial Position | | Financial Position | | Financial Position | | Amount | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | (in millions) | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Description: | | | | | | | | | | | | | | | | | | | | | | | |
| Derivatives | | $ | -265.5 | | $ | 50.3 | | $ | -215.2 | | $ | 4.8 | | $ | -210.4 | | | | | | | | |
| | Total | | $ | -265.5 | | $ | 50.3 | | $ | -215.2 | | $ | 4.8 | | $ | -210.4 | | | | | | | | |
Inputs to Fair Value Derivative Instruments |
The following table sets forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2013 and December 31, 2012. We classify financial assets and liabilities in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect our valuation of the financial assets and liabilities and their placement within the fair value hierarchy. |
| | | 30-Sep-13 | | December 31, 2012 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (in millions) |
Commodity contracts: | | | | | | | | | | | | | | | | | | | | | | | | |
| Financial | | $ | - | | $ | -7 | | $ | 0.8 | | $ | -6.2 | | $ | - | | $ | -7 | | $ | 8.4 | | $ | 1.4 |
| Physical | | | - | | | - | | | -5.1 | | | -5.1 | | | - | | | - | | | 7.4 | | | 7.4 |
Commodity options | | | - | | | - | | | 6.9 | | | 6.9 | | | - | | | - | | | 6.4 | | | 6.4 |
Total | | $ | - | | $ | -7 | | $ | 2.6 | | $ | -4.4 | | $ | - | | $ | -7 | | $ | 22.2 | | $ | 15.2 |
Qualitative Information about Level 3 Fair Value Measurements |
Data from pricing services and published indices are used to value our Level 3 derivative instruments, which are fair-valued on a recurring basis. We may also use these inputs with internally developed methodologies that result in our best estimate of fair value. The inputs listed in the table below would have a direct impact on the fair values of the listed instruments. The significant unobservable inputs used in the fair value measurement of the commodity derivatives (Natural Gas, NGLs and Crude Oil) are forward commodity prices. The significant unobservable inputs used in determining the fair value measurement of options are price and volatility. Increases/(decreases) in the forward commodity price in isolation would result in significantly higher/(lower) fair values for long positions, with offsetting impacts to short positions. Increases/(decreases) in volatility would increase/(decrease) the value for the holder of the option. Generally, a change in the estimate of forward commodity prices is unrelated to a change in the estimate of volatility of prices. An increase to the credit valuation adjustment would change the fair value of the positions. |
|
Quantitative Information About Level 3 Fair Value Measurements | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value at | | | | | | Range (1) | | | | | | | | | | | | | |
| | | September 30, | | Valuation | | Unobservable | | | | Weighted | | | | | | | | | | | | | |
Contract Type | | 2013 (2) | | Technique | | Input | | Lowest | Highest | Average | Units | | | | | | | | | | | | |
Commodity Contracts - Financial | | (in millions) | | | | | | | | | | | | | | | | | | | | | |
| Natural Gas | | $ | 2.6 | | Market Approach | | Forward Gas Price | | 3.24 | 4.19 | 3.69 | MMBtu | | | | | | | | | | | | |
| NGLs | | $ | -1.8 | | Market Approach | | Forward NGL Price | | 0.25 | 2.08 | 1.25 | Gal | | | | | | | | | | | | |
Commodity Contracts - Physical | | | | | | | | | | | | | | | | | | | | | | | | |
| Natural Gas | | $ | 0.9 | | Market Approach | | Forward Gas Price | | 3.24 | 4.35 | 3.72 | MMBtu | | | | | | | | | | | | |
| Crude Oil | | $ | -1.1 | | Market Approach | | Forward Crude Price | | 83.41 | 107.67 | 99.42 | Bbl | | | | | | | | | | | | |
| NGLs | | $ | -4.9 | | Market Approach | | Forward NGL Price | | 0.01 | 2.28 | 0.95 | Gal | | | | | | | | | | | | |
Commodity Options | | | | | | | | | | | | | | | | | | | | | | | | |
| Natural Gas, Crude and NGLs | | $ | 6.9 | | Option Model | | Option Volatility | | 24% | 145% | 41% | | | | | | | | | | | | | |
Total Fair Value | | $ | 2.6 | | | | | | | | | | | | | | | | | | | | | |
_______________________________________ | | | | | | | | | | | | |
(1) | Prices are in dollars per Millions of British Thermal Units, or MMBtu, for Natural Gas, dollars per Gallon, or Gal, for NGLs and dollars per barrel, or Bbl, for Crude Oil. | | | | | | | | | | | | |
(2) | Fair values are presented in millions of dollars and include credit valuation adjustments of approximately $0.3 million of losses. | | | | | | | | | | | | |
Quantitative Information About Level 3 Fair Value Measurements | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value at | | | | | | Range(1) | | | | | | | | | | | | | |
| | | December 31, | | Valuation | | Unobservable | | | | Weighted | | | | | | | | | | | | | |
Contract Type | | 2012(2) | | Technique | | Input | | Lowest | Highest | Average | Units | | | | | | | | | | | | |
Commodity Contracts - Financial | | (in millions) | | | | | | | | | | | | | | | | | | | | | |
| Natural Gas | | $ | 8.8 | | Market Approach | | Forward Gas Price | | 3.21 | 4.31 | 3.54 | MMBtu | | | | | | | | | | | | |
| NGLs | | $ | -0.4 | | Market Approach | | Forward NGL Price | | 0.25 | 2.21 | 1.4 | Gal | | | | | | | | | | | | |
Commodity Contracts - Physical | | | | | | | | | | | | | | | | | | | | | | | | |
| Natural Gas | | $ | 1.7 | | Market Approach | | Forward Gas Price | | 3.19 | 4.58 | 3.73 | MMBtu | | | | | | | | | | | | |
| Crude Oil | | $ | 2.6 | | Market Approach | | Forward Crude Price | | 65.22 | 116.56 | 94.31 | Bbl | | | | | | | | | | | | |
| NGLs | | $ | 3.1 | | Market Approach | | Forward NGL Price | | - | 2.22 | 0.61 | Gal | | | | | | | | | | | | |
Commodity Options | | | | | | | | | | | | | | | | | | | | | | | | |
| Natural Gas, Crude and NGLs | | $ | 6.4 | | Option Model | | Option Volatility | | 29% | 104% | 40% | | | | | | | | | | | | | |
Total Fair Value | | $ | 22.2 | | | | | | | | | | | | | | | | | | | | | |
_______________________________ | | | | | | | | | | | | |
(1) | Prices are in dollars per MMBtu, for Natural Gas, dollars per Gal, for NGLs and dollars per Bbl, for Crude Oil. | | | | | | | | | | | | |
(2) | Fair values are presented in millions and include credit valuation adjustments of approximately $0.1 million of losses. | | | | | | | | | | | | |
Level 3 Fair Value Reconciliation |
The table below provides a reconciliation of changes in the fair value of our Level 3 financial assets and liabilities measured on a recurring basis from January 1, 2013 to September 30, 2013. No transfers of assets between any of the Levels occurred during the period. |
| | | | Commodity | | Commodity | | | | | | | | | | | | | | | | | |
| | | | Financial | | Physical | | Commodity | | | | | | | | | | | | | | |
| | | | Contracts | | Contracts | | Options | | Total | | | | | | | | | | | |
| | | | (in millions) | | | | | | | | | | | |
Beginning balance as of January 1, 2013 | | $ | 8.4 | | $ | 7.4 | | $ | 6.4 | | $ | 22.2 | | | | | | | | | | | |
| Transfer out of Level 3 (1) | | | - | | | - | | | - | | | - | | | | | | | | | | | |
Gains or losses: | | | | | | | | | | | | | | | | | | | | | | | |
| Included in earnings (or changes in net assets) | | | 1.7 | | | 21.7 | | | -0.5 | | | 22.9 | | | | | | | | | | | |
| Included in other comprehensive income | | | 3.4 | | | - | | | - | | | 3.4 | | | | | | | | | | | |
Purchases, issuances, sales and settlements: | | | | | | | | | | | | | | | | | | | | | | | |
| Purchases | | | - | | | - | | | 3 | | | 3 | | | | | | | | | | | |
| Settlements (2) | | | -12.7 | | | -34.2 | | | -2 | | | -48.9 | | | | | | | | | | | |
Ending balance as of September 30, 2013 | | $ | 0.8 | | $ | -5.1 | | $ | 6.9 | | $ | 2.6 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Amount of changes in net assets attributable to the change in unrealized | | | | | | | | | | | | | | | | | | | | | | | |
| gains or losses related to assets still held at the reporting date | | $ | 0.6 | | $ | -6.2 | | $ | 4 | | $ | -1.6 | | | | | | | | | | | |
Amounts reported in operating revenue | | $ | - | | $ | -6.2 | | $ | - | | $ | -6.2 | | | | | | | | | | | |
_________________ | | | | | | | | | | | | | | | | | | | | | | | |
(1) | Our policy is to recognize transfers as of the last day of the reporting period. | | | | | | | | | | | |
(2) | Settlements represent the realized portion of forward contracts. | | | | | | | | | | | |
Fair Value Measurements of Commodity Derivatives |
The following table provides summarized information about the fair values of expected cash flows of our outstanding commodity based swaps and physical contracts at September 30, 2013 and December 31, 2012. |
|
| | | | At September 30, 2013 | | At December 31, 2012 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Wtd. Average Price (2) | | Fair Value (3) | | Fair Value (3) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Commodity | | Notional (1) | | Receive | | Pay | | Asset | | Liability | | Asset | | Liability | |
Portion of contracts maturing in 2013 | | | | | | | | | | | | | | | | | | | | | | |
| Swaps | | | | | | | | | | | | | | | | | | | | | | | |
| | Receive variable/pay fixed | | Natural Gas | | 1,058,748 | | $ | 3.49 | | $ | 3.59 | | $ | 0.1 | | $ | -0.2 | | $ | 0.2 | | $ | -0.3 | |
| | | | NGL | | 985,200 | | $ | 46.8 | | $ | 45.4 | | $ | 1.8 | | $ | -0.5 | | $ | 1.4 | | $ | - | |
| | | | Crude Oil | | 257,664 | | $ | 101.36 | | $ | 102.95 | | $ | 0.2 | | $ | -0.7 | | $ | 0.2 | | $ | -3.9 | |
| | Receive fixed/pay variable | | Natural Gas | | 2,361,000 | | $ | 4.36 | | $ | 3.55 | | $ | 1.9 | | $ | - | | $ | 7.8 | | $ | - | |
| | | | NGL | | 1,854,028 | | $ | 50.19 | | $ | 52.46 | | $ | 3 | | $ | -7.2 | | $ | 9.3 | | $ | -9.9 | |
| | | | Crude Oil | | 591,548 | | $ | 94.24 | | $ | 101.48 | | $ | 0.6 | | $ | -4.8 | | $ | 6.3 | | $ | -8.8 | |
| | Receive variable/pay variable | | Natural Gas | | 13,277,500 | | $ | 3.53 | | $ | 3.51 | | $ | 0.3 | | $ | -0.1 | | $ | 1.2 | | $ | -0.2 | |
| Physical Contracts | | | | | | | | | | | | | | | | | | | | | | | |
| | Receive variable/pay fixed | | NGL | | 2,330,976 | | $ | 37.27 | | $ | 36.89 | | $ | 3.3 | | $ | -2.4 | | $ | 0.6 | | $ | -0.8 | |
| | | | Crude Oil | | 255,010 | | $ | 102.19 | | $ | 105.97 | | $ | - | | $ | -1 | | $ | 0.4 | | $ | -0.4 | |
| | Receive fixed/pay variable | | NGL | | 3,844,386 | | $ | 39.72 | | $ | 41.85 | | $ | 3.3 | | $ | -11.4 | | $ | 2.6 | | $ | -2.2 | |
| | | | Crude Oil | | 339,200 | | $ | 105.55 | | $ | 102.04 | | $ | 1.2 | | $ | - | | $ | 0.2 | | $ | -1 | |
| | Receive variable/pay variable | | Natural Gas | | 19,866,685 | | $ | 3.53 | | $ | 3.52 | | $ | 0.3 | | $ | -0.2 | | $ | 0.9 | | $ | - | |
| | | | NGL | | 6,135,041 | | $ | 47.4 | | $ | 47.2 | | $ | 3.6 | | $ | -2.4 | | $ | 5.2 | | $ | -2.3 | |
| | | | Crude Oil | | 1,120,690 | | $ | 98.78 | | $ | 99.06 | | $ | 1.4 | | $ | -1.7 | | $ | 6.4 | | $ | -3 | |
Portion of contracts maturing in 2014 | | | | | | | | | | | | | | | | | | | | | | |
| Swaps | | | | | | | | | | | | | | | | | | | | | | | |
| | Receive variable/pay fixed | | Natural Gas | | 21,870 | | $ | 3.75 | | $ | 5.22 | | $ | - | | $ | - | | $ | - | | $ | - | |
| | | | NGL | | 286,250 | | $ | 82.33 | | $ | 83.05 | | $ | - | | $ | -0.2 | | $ | - | | $ | - | |
| | | | Crude Oil | | 506,255 | | $ | 95.33 | | $ | 101.95 | | $ | - | | $ | -3.3 | | $ | - | | $ | -5 | |
| | Receive fixed/pay variable | | Natural Gas | | 3,006,890 | | $ | 3.97 | | $ | 3.73 | | $ | 0.7 | | $ | - | | $ | 0.2 | | $ | - | |
| | | | NGL | | 2,208,800 | | $ | 53.93 | | $ | 53.67 | | $ | 5.6 | | $ | -5 | | $ | 0.9 | | $ | -2.7 | |
| | | | Crude Oil | | 1,573,205 | | $ | 94.43 | | $ | 95.41 | | $ | 3.6 | | $ | -5.2 | | $ | 5.4 | | $ | -2.7 | |
| | Receive variable/pay variable | | Natural Gas | | 13,842,500 | | $ | 3.77 | | $ | 3.76 | | $ | 0.2 | | $ | - | | $ | 0.1 | | $ | -0.1 | |
| Physical Contracts | | | | | | | | | | | | | | | | | | | | | | | |
| | Receive variable/pay fixed | | NGL | | 45,000 | | $ | 43.79 | | $ | 45.45 | | $ | - | | $ | -0.1 | | $ | - | | $ | - | |
| | Receive fixed/pay variable | | NGL | | 325,617 | | $ | 53.43 | | $ | 55.69 | | $ | 0.1 | | $ | -0.8 | | $ | - | | $ | - | |
| | Receive variable/pay variable | | Natural Gas | | 34,169,685 | | $ | 3.77 | | $ | 3.76 | | $ | 0.9 | | $ | -0.4 | | $ | 0.5 | | $ | - | |
| | | | NGL | | 7,037,705 | | $ | 33.02 | | $ | 32.9 | | $ | 1.8 | | $ | -0.9 | | $ | - | | $ | - | |
Portion of contracts maturing in 2015 | | | | | | | | | | | | | | | | | | | | | | |
| Swaps | | | | | | | | | | | | | | | | | | | | | | | |
| | Receive variable/pay fixed | | Crude Oil | | 515,015 | | $ | 88.53 | | $ | 100.93 | | $ | - | | $ | -6.3 | | $ | - | | $ | -5.6 | |
| | Receive fixed/pay variable | | NGL | | 292,000 | | $ | 56.76 | | $ | 54.04 | | $ | 1.2 | | $ | -0.5 | | $ | 0.7 | | $ | -0.2 | |
| | | | Crude Oil | | 865,415 | | $ | 97.72 | | $ | 88.53 | | $ | 7.9 | | $ | - | | $ | 6.8 | | $ | -0.2 | |
| | Receive variable/pay variable | | Natural Gas | | 900,000 | | $ | 4.05 | | $ | 4.04 | | $ | - | | $ | - | | $ | - | | $ | - | |
| Physical Contracts | | | | | | | | | | | | | | | | | | | | | | | |
| | Receive variable/pay variable | | Natural Gas | | 8,541,825 | | $ | 4.1 | | $ | 4.06 | | $ | 0.5 | | $ | -0.1 | | $ | 0.4 | | $ | - | |
Portion of contracts maturing in 2016 | | | | | | | | | | | | | | | | | | | | | | |
| Swaps | | | | | | | | | | | | | | | | | | | | | | | |
| | Receive fixed/pay variable | | Crude Oil | | 45,750 | | $ | 99.31 | | $ | 84.81 | | $ | 0.6 | | $ | - | | $ | 0.5 | | $ | - | |
| Physical Contracts | | | | | | | | | | | | | | | | | | | | | | | |
| | Receive variable/pay variable | | Natural Gas | | 783,240 | | $ | 4.28 | | $ | 4.17 | | $ | 0.1 | | $ | - | | $ | 0.1 | | $ | - | |
______________________________ | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
(1) | Volumes of natural gas are measured in MMBtu, whereas volumes of NGL and crude oil are measured in Bbl. | |
(2) | Weighted average prices received and paid are in $/MMBtu for natural gas and $/Bbl for NGL and crude oil. | |
(3) | The fair value is determined based on quoted market prices at September 30, 2013 and December 31, 2012, respectively, discounted using the swap rate for the respective periods to consider the time value of money. Fair values are presented in millions of dollars and exclude credit valuation adjustments of approximately $0.2 million of losses at September 30, 2013 and $0.2 million of losses at December 31, 2012. | |
The following table provides summarized information about the fair values of expected cash flows of our outstanding commodity options at September 30, 2013 and December 31, 2012. |
| | | | At September 30, 2013 | | At December 31, 2012 | |
| | | | | | | | Strike | | Market | | Fair Value (3) | | Fair Value (3) | |
| | | | Commodity | | Notional (1) | | Price (2) | | Price (2) | | Asset | | Liability | | Asset | | Liability | |
Portion of option contracts maturing in 2013 | | | | | | | | | | | | | | | | | | | | | |
| | Puts (purchased) | | Natural Gas | | 414,000 | | $ | 4.18 | | $ | 3.48 | | $ | 0.3 | | $ | - | | $ | 1.4 | | $ | - | |
| | | | NGL | | 138,000 | | $ | 31.26 | | $ | 27.76 | | $ | 1.1 | | $ | - | | $ | 3.7 | | $ | - | |
| | Puts (written) | | NGL | | 69,000 | | $ | 26.18 | | $ | 10.68 | | $ | - | | $ | -1.1 | | $ | - | | $ | - | |
Portion of option contracts maturing in 2014 | | | | | | | | | | | | | | | | | | | | | |
| | Puts (purchased) | | NGL | | 401,500 | | $ | 52.21 | | $ | 50.44 | | $ | 3.1 | | $ | - | | $ | 1.3 | | $ | - | |
| | Calls (written) | | NGL | | 273,750 | | $ | 57.93 | | $ | 48.65 | | $ | - | | $ | -0.9 | | $ | - | | $ | - | |
Portion of option contracts maturing in 2015 | | | | | | | | | | | | | | | | | | | | | |
| | Puts (purchased) | | NGL | | 547,500 | | $ | 53.76 | | $ | 52.52 | | $ | 4.5 | | $ | - | | $ | - | | $ | - | |
______________________________ | |
(1) | Volumes of natural gas are measured in MMBtu, whereas volumes of NGL and crude oil are measured in Bbl. | |
(2) | Strike and market prices are in $/MMBtu for natural gas and in $/Bbl for NGL and crude oil. | |
(3) | The fair value is determined based on quoted market prices at September 30, 2013 and December 31, 2012, respectively, discounted using the swap rate for the respective periods to consider the time value of money. | |
Fair Value Measurements of Commodity Derivatives |
The following table provides summarized information about the fair values of expected cash flows of our outstanding commodity based swaps and physical contracts at September 30, 2013 and December 31, 2012. |
|
| | | | At September 30, 2013 | | At December 31, 2012 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Wtd. Average Price (2) | | Fair Value (3) | | Fair Value (3) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Commodity | | Notional (1) | | Receive | | Pay | | Asset | | Liability | | Asset | | Liability | |
Portion of contracts maturing in 2013 | | | | | | | | | | | | | | | | | | | | | | |
| Swaps | | | | | | | | | | | | | | | | | | | | | | | |
| | Receive variable/pay fixed | | Natural Gas | | 1,058,748 | | $ | 3.49 | | $ | 3.59 | | $ | 0.1 | | $ | -0.2 | | $ | 0.2 | | $ | -0.3 | |
| | | | NGL | | 985,200 | | $ | 46.8 | | $ | 45.4 | | $ | 1.8 | | $ | -0.5 | | $ | 1.4 | | $ | - | |
| | | | Crude Oil | | 257,664 | | $ | 101.36 | | $ | 102.95 | | $ | 0.2 | | $ | -0.7 | | $ | 0.2 | | $ | -3.9 | |
| | Receive fixed/pay variable | | Natural Gas | | 2,361,000 | | $ | 4.36 | | $ | 3.55 | | $ | 1.9 | | $ | - | | $ | 7.8 | | $ | - | |
| | | | NGL | | 1,854,028 | | $ | 50.19 | | $ | 52.46 | | $ | 3 | | $ | -7.2 | | $ | 9.3 | | $ | -9.9 | |
| | | | Crude Oil | | 591,548 | | $ | 94.24 | | $ | 101.48 | | $ | 0.6 | | $ | -4.8 | | $ | 6.3 | | $ | -8.8 | |
| | Receive variable/pay variable | | Natural Gas | | 13,277,500 | | $ | 3.53 | | $ | 3.51 | | $ | 0.3 | | $ | -0.1 | | $ | 1.2 | | $ | -0.2 | |
| Physical Contracts | | | | | | | | | | | | | | | | | | | | | | | |
| | Receive variable/pay fixed | | NGL | | 2,330,976 | | $ | 37.27 | | $ | 36.89 | | $ | 3.3 | | $ | -2.4 | | $ | 0.6 | | $ | -0.8 | |
| | | | Crude Oil | | 255,010 | | $ | 102.19 | | $ | 105.97 | | $ | - | | $ | -1 | | $ | 0.4 | | $ | -0.4 | |
| | Receive fixed/pay variable | | NGL | | 3,844,386 | | $ | 39.72 | | $ | 41.85 | | $ | 3.3 | | $ | -11.4 | | $ | 2.6 | | $ | -2.2 | |
| | | | Crude Oil | | 339,200 | | $ | 105.55 | | $ | 102.04 | | $ | 1.2 | | $ | - | | $ | 0.2 | | $ | -1 | |
| | Receive variable/pay variable | | Natural Gas | | 19,866,685 | | $ | 3.53 | | $ | 3.52 | | $ | 0.3 | | $ | -0.2 | | $ | 0.9 | | $ | - | |
| | | | NGL | | 6,135,041 | | $ | 47.4 | | $ | 47.2 | | $ | 3.6 | | $ | -2.4 | | $ | 5.2 | | $ | -2.3 | |
| | | | Crude Oil | | 1,120,690 | | $ | 98.78 | | $ | 99.06 | | $ | 1.4 | | $ | -1.7 | | $ | 6.4 | | $ | -3 | |
Portion of contracts maturing in 2014 | | | | | | | | | | | | | | | | | | | | | | |
| Swaps | | | | | | | | | | | | | | | | | | | | | | | |
| | Receive variable/pay fixed | | Natural Gas | | 21,870 | | $ | 3.75 | | $ | 5.22 | | $ | - | | $ | - | | $ | - | | $ | - | |
| | | | NGL | | 286,250 | | $ | 82.33 | | $ | 83.05 | | $ | - | | $ | -0.2 | | $ | - | | $ | - | |
| | | | Crude Oil | | 506,255 | | $ | 95.33 | | $ | 101.95 | | $ | - | | $ | -3.3 | | $ | - | | $ | -5 | |
| | Receive fixed/pay variable | | Natural Gas | | 3,006,890 | | $ | 3.97 | | $ | 3.73 | | $ | 0.7 | | $ | - | | $ | 0.2 | | $ | - | |
| | | | NGL | | 2,208,800 | | $ | 53.93 | | $ | 53.67 | | $ | 5.6 | | $ | -5 | | $ | 0.9 | | $ | -2.7 | |
| | | | Crude Oil | | 1,573,205 | | $ | 94.43 | | $ | 95.41 | | $ | 3.6 | | $ | -5.2 | | $ | 5.4 | | $ | -2.7 | |
| | Receive variable/pay variable | | Natural Gas | | 13,842,500 | | $ | 3.77 | | $ | 3.76 | | $ | 0.2 | | $ | - | | $ | 0.1 | | $ | -0.1 | |
| Physical Contracts | | | | | | | | | | | | | | | | | | | | | | | |
| | Receive variable/pay fixed | | NGL | | 45,000 | | $ | 43.79 | | $ | 45.45 | | $ | - | | $ | -0.1 | | $ | - | | $ | - | |
| | Receive fixed/pay variable | | NGL | | 325,617 | | $ | 53.43 | | $ | 55.69 | | $ | 0.1 | | $ | -0.8 | | $ | - | | $ | - | |
| | Receive variable/pay variable | | Natural Gas | | 34,169,685 | | $ | 3.77 | | $ | 3.76 | | $ | 0.9 | | $ | -0.4 | | $ | 0.5 | | $ | - | |
| | | | NGL | | 7,037,705 | | $ | 33.02 | | $ | 32.9 | | $ | 1.8 | | $ | -0.9 | | $ | - | | $ | - | |
Portion of contracts maturing in 2015 | | | | | | | | | | | | | | | | | | | | | | |
| Swaps | | | | | | | | | | | | | | | | | | | | | | | |
| | Receive variable/pay fixed | | Crude Oil | | 515,015 | | $ | 88.53 | | $ | 100.93 | | $ | - | | $ | -6.3 | | $ | - | | $ | -5.6 | |
| | Receive fixed/pay variable | | NGL | | 292,000 | | $ | 56.76 | | $ | 54.04 | | $ | 1.2 | | $ | -0.5 | | $ | 0.7 | | $ | -0.2 | |
| | | | Crude Oil | | 865,415 | | $ | 97.72 | | $ | 88.53 | | $ | 7.9 | | $ | - | | $ | 6.8 | | $ | -0.2 | |
| | Receive variable/pay variable | | Natural Gas | | 900,000 | | $ | 4.05 | | $ | 4.04 | | $ | - | | $ | - | | $ | - | | $ | - | |
| Physical Contracts | | | | | | | | | | | | | | | | | | | | | | | |
| | Receive variable/pay variable | | Natural Gas | | 8,541,825 | | $ | 4.1 | | $ | 4.06 | | $ | 0.5 | | $ | -0.1 | | $ | 0.4 | | $ | - | |
Portion of contracts maturing in 2016 | | | | | | | | | | | | | | | | | | | | | | |
| Swaps | | | | | | | | | | | | | | | | | | | | | | | |
| | Receive fixed/pay variable | | Crude Oil | | 45,750 | | $ | 99.31 | | $ | 84.81 | | $ | 0.6 | | $ | - | | $ | 0.5 | | $ | - | |
| Physical Contracts | | | | | | | | | | | | | | | | | | | | | | | |
| | Receive variable/pay variable | | Natural Gas | | 783,240 | | $ | 4.28 | | $ | 4.17 | | $ | 0.1 | | $ | - | | $ | 0.1 | | $ | - | |
______________________________ | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
(1) | Volumes of natural gas are measured in MMBtu, whereas volumes of NGL and crude oil are measured in Bbl. | |
(2) | Weighted average prices received and paid are in $/MMBtu for natural gas and $/Bbl for NGL and crude oil. | |
(3) | The fair value is determined based on quoted market prices at September 30, 2013 and December 31, 2012, respectively, discounted using the swap rate for the respective periods to consider the time value of money. Fair values are presented in millions of dollars and exclude credit valuation adjustments of approximately $0.2 million of losses at September 30, 2013 and $0.2 million of losses at December 31, 2012. | |
The following table provides summarized information about the fair values of expected cash flows of our outstanding commodity options at September 30, 2013 and December 31, 2012. |
| | | | At September 30, 2013 | | At December 31, 2012 | |
| | | | | | | | Strike | | Market | | Fair Value (3) | | Fair Value (3) | |
| | | | Commodity | | Notional (1) | | Price (2) | | Price (2) | | Asset | | Liability | | Asset | | Liability | |
Portion of option contracts maturing in 2013 | | | | | | | | | | | | | | | | | | | | | |
| | Puts (purchased) | | Natural Gas | | 414,000 | | $ | 4.18 | | $ | 3.48 | | $ | 0.3 | | $ | - | | $ | 1.4 | | $ | - | |
| | | | NGL | | 138,000 | | $ | 31.26 | | $ | 27.76 | | $ | 1.1 | | $ | - | | $ | 3.7 | | $ | - | |
| | Puts (written) | | NGL | | 69,000 | | $ | 26.18 | | $ | 10.68 | | $ | - | | $ | -1.1 | | $ | - | | $ | - | |
Portion of option contracts maturing in 2014 | | | | | | | | | | | | | | | | | | | | | |
| | Puts (purchased) | | NGL | | 401,500 | | $ | 52.21 | | $ | 50.44 | | $ | 3.1 | | $ | - | | $ | 1.3 | | $ | - | |
| | Calls (written) | | NGL | | 273,750 | | $ | 57.93 | | $ | 48.65 | | $ | - | | $ | -0.9 | | $ | - | | $ | - | |
Portion of option contracts maturing in 2015 | | | | | | | | | | | | | | | | | | | | | |
| | Puts (purchased) | | NGL | | 547,500 | | $ | 53.76 | | $ | 52.52 | | $ | 4.5 | | $ | - | | $ | - | | $ | - | |
______________________________ | |
(1) | Volumes of natural gas are measured in MMBtu, whereas volumes of NGL and crude oil are measured in Bbl. | |
(2) | Strike and market prices are in $/MMBtu for natural gas and in $/Bbl for NGL and crude oil. | |
(3) | The fair value is determined based on quoted market prices at September 30, 2013 and December 31, 2012, respectively, discounted using the swap rate for the respective periods to consider the time value of money. | |
| | | September 30, | | December 31, | | | | | | | | | | | | | | | | | | |
| | | 2013 | | 2012 | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (in millions) | | | | | | | | | | | | | | | | | | |
| Counterparty Credit Quality (1) | | | | | | | | | | | | | | | | | | | | | | | | |
| AAA | | $ | 0.1 | | $ | - | | | | | | | | | | | | | | | | | | |
| AA | | | -57.8 | | | -116.6 | | | | | | | | | | | | | | | | | | |
| A | | | -84.5 | | | -150.4 | | | | | | | | | | | | | | | | | | |
| Lower than A | | | 137.8 | | | 282.2 | | | | | | | | | | | | | | | | | | |
| | | $ | -4.4 | | $ | 15.2 | | | | | | | | | | | | | | | | | | |
| ______________________________ | | | | | | | | | | | | | | | | | | | | | | | | |
| (1)As determined by nationally-recognized statistical ratings organizations. | | | | | | | | | | | | | | | | | | | | | | | | |