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Derivatives and Risk Management Activities (Tables)
6 Months Ended
Jun. 30, 2012
Derivatives and Risk Management Activities  
Terms of forward starting interest rate swaps

The following table summarizes the terms of our forward starting interest rate swaps as of June 30, 2012 (notional amounts in millions):

 

Hedged Transaction

 

Number and Types of
Derivatives Employed

 

Notional
Amount

 

Expected
Termination Date

 

Average Rate
Locked

 

Accounting
Treatment

Anticipated debt offering

 

6 forward starting swaps (30-year)

 

$

250

 

6/17/2013

 

4.24

%

Cash flow hedge

Anticipated debt offering

 

5 forward starting swaps (30-year)

 

$

125

 

6/16/2014

 

3.39

%

Cash flow hedge

Anticipated debt offering

 

10 forward starting swaps (30-year)

 

$

250

 

6/15/2015

 

3.60

%

Cash flow hedge

 

Open foreign currency exchange contracts

The following table summarizes our open forward exchange contracts that exchange CAD for USD on a net basis (in millions):

 

 

 

CAD

 

USD

 

Average Exchange Rate

 

2012

 

$

64

 

$

64

 

CAD $1.01 to USD $1.00

 

2013

 

$

41

 

$

40

 

CAD $1.02 to USD $1.00

 

 

Impact of derivative activities recognized in earnings

A summary of the impact of our derivative activities recognized in earnings for the three and six months ended June 30, 2012 and 2011 is as follows (in millions):

 

 

 

Three Months Ended June 30, 2012

 

Three Months Ended June 30, 2011

 

 

 

 

 

Derivatives

 

 

 

 

 

Derivatives

 

 

 

 

 

Derivatives in

 

Not

 

 

 

Derivatives in

 

Not

 

 

 

 

 

Hedging

 

Designated

 

 

 

Hedging

 

Designated

 

 

 

Location of gain/(loss)

 

Relationships (1)(2)(3)

 

as a Hedge (4)

 

Total

 

Relationships (1)(2)

 

as a Hedge (4)

 

Total

 

Commodity Derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supply and Logistics segment revenues

 

$

(96

)

$

199

 

$

103

 

$

(161

)

$

36

 

$

(125

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Facilities segment revenues

 

1

 

 

1

 

(6

)

1

 

(5

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases and related costs

 

37

 

(1

)

36

 

 

(1

)

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Field operating costs

 

 

(4

)

(4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign Currency Derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supply and Logistics segment revenues

 

 

(1

)

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income/(expense), net

 

1

 

 

1

 

1

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Gain/(Loss) on Derivatives Recognized in Net Income

 

$

(57

)

$

193

 

$

136

 

$

(166

)

$

36

 

$

(130

)

 

 

 

Six Months Ended June 30, 2012 

 

Six Months Ended June 30, 2011

 

 

 

 

 

Derivatives

 

 

 

 

 

Derivatives

 

 

 

 

 

Derivatives in 

 

Not 

 

 

 

Derivatives in 

 

Not

 

 

 

 

 

Hedging

 

Designated

 

 

 

Hedging

 

Designated

 

 

 

Location of gain/(loss)

 

Relationships (1)(2)(3)

 

as a Hedge (4)

 

Total

 

Relationships (1)(2)(3)

 

as a Hedge (4)

 

Total

 

Commodity Derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supply and Logistics segment revenues

 

$

(61

)

$

161

 

$

100

 

$

(236

)

$

40

 

$

(196

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Facilities segment revenues

 

13

 

 

13

 

(7

)

1

 

(6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases and related costs

 

41

 

 

41

 

 

(1

)

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Field operating costs

 

 

(2

)

(2

)

 

1

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(1

)

 

(1

)

1

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign Currency Derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supply and Logistics segment revenues

 

 

 

 

 

3

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income/(expense), net

 

2

 

 

2

 

2

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Gain/(Loss) on Derivatives Recognized in Net Income

 

$

(6

)

$

159

 

$

153

 

$

(240

)

$

44

 

$

(196

)

 

(1)             Amounts represent derivative gains and losses that were reclassified from AOCI to earnings during the period to coincide with the earnings impact of the respective hedged transaction.

(2)             Amounts include gains of approximately $1 million for the three months ended June 30, 2012 and losses of approximately $2 million and $8 million for the six months ended June 30, 2012 and 2011, respectively. These amounts represent the ineffective portion of our commodity and interest rate derivatives that are designated as cash flow hedges.

(3)             Interest expense includes net gains of approximately $1 million for the three months ended June 30, 2012 and approximately $2 million and $1 million for the six months ended June 30, 2012 and 2011, respectively, associated with outstanding interest rate swaps, which are designated as a fair value hedge.

(4)             Includes realized and unrealized gains or losses for derivatives not designated for hedge accounting during the period.

Summary of derivative assets and liabilities on condensed consolidated balance sheet

The following table summarizes the derivative assets and liabilities on our condensed consolidated balance sheet on a gross basis as of June 30, 2012 (in millions):

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

Balance Sheet

 

 

 

Balance Sheet

 

 

 

 

 

Location

 

Fair Value

 

Location

 

Fair Value

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

Other current assets

 

$

97

 

Other current assets

 

$

(48

)

 

 

Other long-term assets

 

15

 

Other long-term assets

 

(6

)

 

 

 

 

 

 

Other current liabilities

 

(1

)

Interest rate derivatives

 

Other current assets

 

1

 

Other current liabilities

 

(87

)

 

 

 

 

 

 

Other long-term liabilities

 

(56

)

 

 

 

 

 

 

 

 

 

 

Total derivatives designated as hedging instruments

 

 

 

$

113

 

 

 

$

(198

)

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

Other current assets

 

$

264

 

Other current assets

 

$

(102

)

 

 

Other long-term assets

 

7

 

Other long-term assets

 

(5

)

 

 

 

 

 

 

Other current liabilities

 

(1

)

Total derivatives not designated as hedging instruments

 

 

 

$

271

 

 

 

$

(108

)

 

 

 

 

 

 

 

 

 

 

Total derivatives

 

 

 

$

384

 

 

 

$

(306

)

 

The following table summarizes the derivative assets and liabilities on our condensed consolidated balance sheet on a gross basis as of December 31, 2011 (in millions):

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

Balance Sheet

 

 

 

Balance Sheet

 

 

 

 

 

Location

 

Fair Value

 

Location

 

Fair Value

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

Other current assets

 

$

72

 

Other current assets

 

$

(47

)

 

 

Other long-term assets

 

20

 

Other long-term assets

 

(2

)

Interest rate derivatives

 

Other current assets

 

1

 

Other current liabilities

 

(24

)

 

 

 

 

 

 

Other long-term liabilities

 

(114

)

Foreign currency derivatives

 

Other current assets

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total derivatives designated as hedging instruments

 

 

 

$

94

 

 

 

$

(187

)

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

Other current assets

 

$

87

 

Other current assets

 

$

(39

)

 

 

Other long-term assets

 

6

 

Other long-term assets

 

(3

)

 

 

 

 

 

 

Other current liabilities

 

(1

)

Total derivatives not designated as hedging instruments

 

 

 

$

93

 

 

 

$

(43

)

 

 

 

 

 

 

 

 

 

 

Total derivatives

 

 

 

$

187

 

 

 

$

(230

)

 

Amounts of gain/(loss) recognized in AOCI on derivatives (effective portion)

The net deferred gain/(loss), including tax effects, recognized in AOCI for derivatives during the three and six months ended June 30, 2012 and 2011 are as follows (in millions):

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Commodity derivatives, net

 

$

(25

)

$

48

 

$

 

$

(97

)

Foreign currency derivatives, net

 

 

 

 

(1

)

Interest rate derivatives, net

 

(79

)

4

 

(28

)

6

 

Total

 

$

(104

)

$

52

 

$

(28

)

$

(92

)

 

Financial assets and liabilities within the fair value hierarchy accounted for at fair value on a recurring basis

 

 

 

 

Fair Value as of June 30, 2012
(in millions)

 

Fair Value as of December 31, 2011
(in millions)

 

Recurring Fair Value Measures (1)

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Commodity derivatives

 

$

98

 

$

86

 

$

36

 

$

220

 

$

80

 

$

1

 

$

12

 

$

93

 

Interest rate derivatives

 

 

(142

)

 

(142

)

 

(137

)

 

(137

)

Foreign currency derivatives

 

 

 

 

 

 

1

 

 

1

 

Total

 

$

98

 

$

(56

)

$

36

 

$

78

 

$

80

 

$

(135

)

$

12

 

$

(43

)

 

(1)                      Derivative assets and liabilities are presented above on a net basis but do not include related cash margin deposits.

 

Reconciliation of changes in fair value of derivatives classified as level 3

The following table provides a reconciliation of changes in fair value of the beginning and ending balances for our derivatives classified as level 3 (in millions):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Beginning Balance

 

$

2

 

$

(5

)

$

12

 

$

(14

)

Unrealized gains/(losses):

 

 

 

 

 

 

 

 

 

Included in earnings (1)

 

12

 

7

 

8

 

13

 

Included in other comprehensive income

 

 

1

 

3

 

(1

)

Settlements

 

(2

)

1

 

(14

)

33

 

Derivatives entered into during the period

 

19

 

6

 

22

 

(4

)

Transfers out of level 3

 

5

 

 

5

 

(17

)

Ending Balance

 

$

36

 

$

10

 

$

36

 

$

10

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized gains/(losses) included in earnings relating to level 3 derivatives still held at the end of the periods

 

$

31

 

$

13

 

$

33

 

$

11

 

 

(1)                      We reported unrealized gains and losses associated with level 3 commodity derivatives in our condensed consolidated statements of operations as Supply and Logistics segment revenues.