Our fair value measurements are grouped into a three-level valuation hierarchy and are categorized in their entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows.

A financial instrument’s categorization within the hierarchy is based upon the level of judgment involved in the most significant input in the determination of the instrument’s fair value. Following is a description of the valuation methodologies used as well as the general classification of such instruments pursuant to the hierarchy.

We enter into a variety of derivative financial instruments, which may include exchange traded instruments (such as New York Mercantile Exchange, or NYMEX, crude oil or natural gas futures) or over-the-counter, or OTC, instruments (such as natural gas contracts, crude oil or NGL swaps). The exchange traded instruments are generally executed with a highly rated broker dealer serving as the clearinghouse for individual transactions.

Our activities expose us to varying degrees of commodity price risk. To mitigate a portion of this risk and to manage commodity price risk related primarily to owned natural gas storage and pipeline assets, we engage in natural gas asset based trading and marketing, and we may enter into natural gas and crude oil derivatives to lock in a specific margin when market conditions are favorable. A portion of this may be accomplished through the use of exchange traded derivative contracts. Such instruments are generally classified as Level 1 since the value is equal to the quoted market price of the exchange traded instrument as of our balance sheet date, and no adjustments are required. Depending upon market conditions and our strategy we may enter into exchange traded derivative positions with a significant time horizon to maturity. Although such instruments are exchange traded, market prices may only be readily observable for a portion of the duration of the instrument. In order to calculate the fair value of these instruments, readily observable market information is utilized to the extent it is available; however, in the event that readily observable market data is not available, we may interpolate or extrapolate based upon observable data. In instances where we utilize an interpolated or extrapolated value, and it is considered significant to the valuation of the contract as a whole, we would classify the instrument within Level 3.

We also engage in the business of trading energy related products and services, which exposes us to market variables and commodity price risk. We may enter into physical contracts or financial instruments with the objective of realizing a positive margin from the purchase and sale of these commodity-based instruments. We may enter into derivative instruments for NGLs or other energy related products, primarily using the OTC derivative instrument markets, which are not as active and liquid as exchange traded instruments. Market quotes for such contracts may only be available for short dated positions (up to six months), and an active market itself may not exist beyond such time horizon. Contracts entered into with a relatively short time horizon for which prices are readily observable in the OTC market are generally classified within Level 2. Contracts with a longer time horizon, for which we internally generate a forward curve to value such instruments, are generally classified within Level 3. The internally generated curve may utilize a variety of assumptions including, but not limited to, data obtained from third-party pricing services, historical and future expected relationship of NGL prices to crude oil prices, the knowledge of expected supply sources coming online, expected weather trends within certain regions of the United States, and the future expected demand for NGLs.

Each instrument is assigned to a level within the hierarchy at the end of each financial quarter depending upon the extent to which the valuation inputs are observable. Generally, an instrument will move toward a level within the hierarchy that requires a lower degree of judgment as the time to maturity approaches, and as the markets in which the asset trades will likely become more liquid and prices more readily available in the market, thus reducing the need to rely upon our internally developed assumptions. However, the level of a given instrument may change, in either direction, depending upon market conditions and the availability of market observable data.

We utilize fair value to perform impairment tests as required on our property, plant and equipment, goodwill, equity investments in unconsolidated affiliates, and intangible assets. The inputs used to determine such fair value are primarily based upon internally developed cash flow models and would generally be classified within Level 3 in the event that we were required to measure and record such assets at fair value within our condensed consolidated financial statements. Additionally, we use fair value to determine the inception value of our asset retirement obligations. The inputs used to determine such fair value are primarily based upon costs incurred historically for similar work, as well as estimates from independent third parties for costs

During the three months ended March 31, 2020, we determined that triggering events had occurred with respect to specific asset groups as a result of the impact of commodity prices on the respective recently prepared budget forecasts, coupled with a negative outlook for long-term production volume forecasts for these asset groups. We used the income approach to calculate the fair value of the asset group and compared it to the carrying value. The primary inputs to our calculation were forecasted future commodity pricing and the discount rate. The impairment amount recorded represented the difference between the fair and carrying values. As a result, we recognized a $587 million impairment loss associated with certain asset groups in the Permian and South regions of our Gathering and Processing segment and an impairment of $61 million of our equity investment in Discovery Producer Services LLC (“Discovery”).

We may identify additional triggering events requiring future evaluations of the recoverability of the carrying value of our long-lived assets and investments that could result in future impairments. Such impairments could have a significant effect on our results of operations, which would be recognized in the period in which the carrying value is determined to be not fully recoverable.

March 31, 2020

Asset Groups

Valuation Techniques

Unobservable Inputs

Range (low-high) (a)

Average (b)

Long-lived assets, investment in unconsolidated affiliate, goodwill

Discounted cash flow

Oil prices

$34.52 - $67.61

55.98

Per barrel

Natural gas prices

$2.28 - $4.12

3.35

Per MMBtu

NGL prices

$0.30 - $0.62

0.52

Per gallon

Discount rate

14%

Terminal value multiple

Goodwill

Market comparable companies

EBITDA multiple

5.2x - 16.5x


	September 30, 2020								December 31, 2019
	Level 1		Level 2		Level 3		Total Carrying Value		Level 1		Level 2		Level 3		Total Carrying Value
	(millions)
Current assets:
Commodity derivatives	$	59	$	32	$	—	$	91	$	13	$	15	$	4	$	32

Long-term assets:
Commodity derivatives	$	16	$	20	$	4	$	40	$	1	$	1	$	—	$	2
Long-term investments	$	14	$	1	$	—	$	15	$	—	$	—	$	—	$	—
Current liabilities:
Commodity derivatives	$	(37)	$	(45)	$	(1)	$	(83)	$	(15)	$	(42)	$	(1)	$	(58)

Long-term liabilities:
Commodity derivatives	$	(13)	$	(15)	$	(1)	$	(29)	$	(2)	$	(15)	$	(3)	$	(20)

The determination to classify a financial instrument within Level 1 or Level 2 is based upon the availability of quoted prices for identical or similar assets and liabilities in active markets. Depending upon the information readily observable in the market, and/or the use of identical or similar quoted prices, which are significant to the overall valuation, the classification of any individual financial instrument may differ from one measurement date to the next.

The tables below illustrate a rollforward of the amounts included in our condensed consolidated balance sheets for derivative financial instruments that we have classified within Level 3. Since financial instruments classified as Level 3 typically include a combination of observable components (that is, components that are actively quoted and can be validated to external sources) and unobservable components, the gains and losses in the table below may include changes in fair value due in part to observable market factors, or changes to our assumptions on the unobservable components. Depending upon the information readily observable in the market, and/or the use of unobservable inputs, which are significant to the overall valuation, the classification of any individual financial instrument may differ from one measurement date to the next. The significant unobservable inputs used in determining fair value include adjustments by other market-based or independently sourced market data such as historical commodity volatilities, crude oil future yield curves, and/or counterparty specific considerations. In the event that there is a movement to/from the classification of an instrument as Level 3, we would reflect such items in the table below within the “Transfers into/out of Level 3” captions.

We manage our overall risk at the portfolio level and in the execution of our strategy, we may use a combination of financial instruments, which may be classified within any level. Since Level 1 and Level 2 risk management instruments are not included in the rollforward below, the gains or losses in the table do not reflect the effect of our total risk management activities.


	Commodity Derivative Instruments
	Current Assets		Long-Term Assets		Current Liabilities		Long-Term Liabilities
	(millions)
Three months ended September 30, 2020 (a):
Beginning balance	$	1	$	—	$	(3)	$	(4)
Net unrealized (losses) gains included in earnings	(1)		4		(1)		3

Transfers out of Level 3	—		—		2		—
Settlements	—		—		1		—


Ending balance	$	—	$	4	$	(1)	$	(1)
Net unrealized gains on derivatives still held included in earnings	$	—	$	4	$	1	$	3
Three months ended September 30, 2019 (a):
Beginning balance	$	8	$	2	$	(1)	$	—
Net unrealized gains (losses) included in earnings	7		(1)		1		(5)

Transfers out of Level 3	(8)		—		—		—
Settlements	(2)		—		(1)		—


Ending balance	$	5	$	1	$	(1)	$	(5)
Net unrealized gains (losses) on derivatives still held included in earnings	$	3	$	(1)	$	—	$	(5)


	Commodity Derivative Instruments
	Current Assets		Long-Term Assets		Current Liabilities		Long-Term Liabilities
	(millions)
Nine months ended September 30, 2020 (a):
Beginning balance	$	4	$	—	$	(1)	$	(3)
Net unrealized (losses) gains included in earnings	(1)		8		8		2

Transfers out of Level 3	—		(4)		—		—
Settlements	(3)		—		(8)		—


Ending balance	$	—	$	4	$	(1)	$	(1)
Net unrealized (losses) gains on derivatives still held included in earnings	$	(2)	$	4	$	(1)	$	1
Nine months ended September 30, 2019 (a):
Beginning balance	$	14	$	2	$	—	$	(2)
Net unrealized gains (losses) included in earnings	7		(1)		—		(6)

Transfers out of Level 3	(7)		—		—		3
Settlements	(9)		—		(1)		—


Ending balance	$	5	$	1	$	(1)	$	(5)
Net unrealized gains (losses) on derivatives still held included in earnings	$	5	$	1	$	(1)	$	(5)

We utilize the market approach to measure the fair value of our commodity contracts. The significant unobservable inputs used in this approach to fair value are longer dated price quotes. Our sensitivity to these longer dated forward curve prices are presented in the table below. Significant changes in any of those inputs in isolation would result in significantly different fair value measurements, depending on our short or long position in contracts.

September 30, 2020

Product Group

Fair Value

Valuation Techniques

Unobservable Input

Forward
Curve Range

Weighted Average (a)

(millions)

Assets

Natural gas

Market approach

Longer dated forward curve prices

$1.90-$2.68

$1.86

Per MMBtu

Liabilities

NGLs

(2)

Market approach

Longer dated forward curve prices

$0.14-$0.89

$0.43

Per gallon

Valuation of a contract’s fair value is validated by an internal group independent of the marketing group. While common industry practices are used to develop valuation techniques, changes in pricing methodologies or the underlying assumptions could result in significantly different fair values and income recognition. When available, quoted market prices or prices obtained through external sources are used to determine a contract’s fair value. For contracts with a delivery location or duration for which quoted market prices are not available, fair value is determined based on pricing models developed primarily from historical and expected relationships with quoted market prices.

We determine the fair value of our fixed-rate senior notes and junior subordinated notes based on quotes obtained from bond dealers. The carrying value of borrowings under the Credit Agreement and the Securitization Facility approximate fair value as their interest rates are based on prevailing market interest rates. We classify the fair values of our outstanding debt balances within Level 2 of the valuation hierarchy. As of September 30, 2020 and December 31, 2019, the carrying value and fair value of our total debt, including current maturities, were as follows: