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Risk Management (Notes)
 12 Months Ended
Dec. 31, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Risk Management
14.  Risk Management

Certain of our business activities expose us to risks associated with unfavorable changes in the market price of natural gas, NGL and crude oil.  We also have exposure to interest rate and foreign currency 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 some of these risks.

During the year ended December 31, 2018, due to volatility in certain basis differentials, we discontinued hedge accounting on certain of our crude oil derivative contracts as we did not expect them to be highly effective, for accounting purposes, in offsetting the variability in cash flows. As of December 31, 2018, these hedging relationships had been re-designated as the effectiveness improved to required levels. As the forecasted transactions were still probable, accumulated gains and losses prior to the discontinuance remained in “Accumulated other comprehensive loss” unless earnings were impacted by the forecasted transactions; however, changes in the derivative contracts’ fair value subsequent to the discontinuance of hedge accounting and prior to the re-designation were reported in earnings. Upon re-designation, we resumed reporting changes in the derivative contracts’ fair value in “Accumulated other comprehensive income.”

On January 1, 2019, we adopted ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” The ASU better aligns an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. We applied ASU No. 2017-12 using a modified retrospective approach for cash flow and fair value hedges existing at the date of adoption and prospectively for the presentation and disclosure guidance. Our adoption of ASU No. 2017-12 did not have a material impact on our consolidated financial statements.

Energy Commodity Price Risk Management

As of December 31, 2019, we had the following outstanding commodity forward contracts to hedge our forecasted energy commodity purchases and sales: 
 
Net open position long/(short)
Derivatives designated as hedging contracts
 
 
Crude oil fixed price
(19.6
)
MMBbl
Crude oil basis
(7.2
)
MMBbl
Natural gas fixed price
(30.8
)
Bcf
Natural gas basis
(22.3
)
Bcf
NGL fixed price
(1.3
)
MMBbl
Derivatives not designated as hedging contracts
 

 
Crude oil fixed price
(0.8
)
MMBbl
Crude oil basis
(4.1
)
MMBbl
Natural gas fixed price
(5.2
)
Bcf
Natural gas basis
(8.8
)
Bcf
NGL fixed price
(1.9
)
MMBbl


As of December 31, 2019, the maximum length of time over which we have hedged, for accounting purposes, our exposure to the variability in future cash flows associated with energy commodity price risk is through December 2023.

Interest Rate Risk Management

We utilize interest rate derivatives to hedge our exposure to both changes in the fair value of our fixed rate debt instruments and variability in expected future cash flows attributable to variable interest rate payments. The following table summarizes our outstanding interest rate contracts as of December 31, 2019 (in millions):
 
 
Notional amount
 
Accounting treatment
 
Maximum term
 
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
Fixed-to-variable interest rate contracts(a)
 
$8,725
 
Fair value hedge
 
March 2035
 
Variable-to-fixed interest rate contracts
 
$250
 
Cash flow hedge
 
January 2023
 
_______
(a)
The principal amount of hedged senior notes consisted of $1,100 million included in “Current portion of debt” and $7,625 million included in “Long-term debt” on our accompanying consolidated balance sheet.

Foreign Currency Risk Management

We utilize foreign currency derivatives to hedge our exposure to variability in foreign exchange rates. The following table summarizes our outstanding foreign currency contracts as of December 31, 2019 (in millions):
 
 
Notional amount
 
Accounting treatment
 
Maximum term
 
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
EUR-to-USD cross currency swap contracts(a)
 
$1,358
 
Cash flow hedge
 
March 2027
 

_______
(a) These swaps eliminate the foreign currency risk associated with all of our Euro-denominated debt.

During the year ended December 31, 2018, we entered into foreign currency swap agreements with a combined notional principal amount of C$2,450 million (U.S.$1,888 million). These swaps resulted in our selling fixed C$ and receiving fixed
U.S.$, effectively hedging the foreign currency risk associated with a substantial portion of our share of the TMPL Sale proceeds which KML distributed on January 3, 2019, at which time the foreign currency swaps expired. These foreign currency swaps were accounted for as net investment hedges as the foreign currency risk was related to our investment in Canadian dollar denominated foreign operations, and the critical risks of the forward contracts coincided with those of the net investment. As a result, the change in fair value of the foreign currency swaps were reflected in the “Foreign currency translation adjustments” section of “Other comprehensive income (loss), net of tax” on our consolidated statements of
comprehensive income. In December 2019, these currency translation adjustments were recognized as a part of the after-tax net gain on the KML and U.S. Cochin Sale. See Note 3.

Impact of Derivative Contracts on Our Consolidated Financial Statements

The following table summarizes the fair values of our derivative contracts included in our accompanying consolidated balance sheets (in millions):
Fair Value of Derivative Contracts
 
 
 
Derivatives
Asset 
 
Derivatives
Liability 
 
 
 
December 31,
 
December 31,
 
 
 
2019
 
2018
 
2019
 
2018
 
Location
 
Fair value
 
Fair value
Derivatives designated as
hedging instruments
 
 
 
 
 
 
 
 
 
Energy commodity derivative contracts
Fair value of derivative contracts/(Other current liabilities)
 
$
31

 
$
135

 
$
(43
)
 
$
(45
)
 
Deferred charges and other assets/(Other long-term liabilities and deferred credits)
 
17

 
64

 
(8
)
 
—

Subtotal
 
 
48

 
199

 
(51
)
 
(45
)
Interest rate contracts
Fair value of derivative contracts/(Other current liabilities)
 
45

 
12

 
—

 
(37
)
 
Deferred charges and other assets/(Other long-term liabilities and deferred credits)
 
313

 
121

 
(1
)
 
(78
)
Subtotal
 
 
358

 
133

 
(1
)
 
(115
)
Foreign currency contracts
Fair value of derivative contracts/(Other current liabilities)
 
—

 
91

 
(6
)
 
(6
)
 
Deferred charges and other assets/(Other long-term liabilities and deferred credits)
 
46

 
106

 
—

 
—

Subtotal
 
 
46

 
197

 
(6
)
 
(6
)
Total
 
 
452

 
529

 
(58
)
 
(166
)
Derivatives not designated as
 hedging instruments
 
 
 

 
 

 
 

 
 

Energy commodity derivative contracts
Fair value of derivative contracts/(Other current liabilities)
 
8

 
22

 
(7
)
 
(5
)
Total
 
 
8

 
22

 
(7
)
 
(5
)
Total derivatives
 
 
$
460

 
$
551

 
$
(65
)
 
$
(171
)


The following two tables summarize the fair value measurements of our derivative contracts based on the three levels established by the Codification (in millions). The tables also identify the impact of derivative contracts which we have elected to present on our accompanying consolidated balance sheets on a gross basis that are eligible for netting under master netting agreements.
 
Balance sheet asset fair value measurements by level
 
 
 
 
 

Level 1
 

Level 2
 

Level 3
 
Gross amount
 
Contracts available for netting
 
Cash collateral held(b)
 
Net amount
As of December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy commodity derivative contracts(a)
$
19

 
$
37

 
$
—

 
$
56

 
$
(19
)
 
$
(21
)
 
$
16

Interest rate contracts
$
—

 
$
358

 
$
—

 
$
358

 
$
—

 
$
—

 
$
358

Foreign currency contracts
$
—

 
$
46

 
$
—

 
$
46

 
$
(6
)
 
$
—

 
$
40

As of December 31, 2018
 

 
 

 
 

 
 
 
 
 
 
 
 
Energy commodity derivative contracts(a)
$
28

 
$
193

 
$
—

 
$
221

 
$
(39
)
 
$
(25
)
 
$
157

Interest rate contracts
$
—

 
$
133

 
$
—

 
$
133

 
$
(7
)
 
$
—

 
$
126

Foreign currency contracts
$
—

 
$
197

 
$
—

 
$
197

 
$
(6
)
 
$
—

 
$
191


 
Balance sheet liability
fair value measurements by level
 
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
Gross amount
 
Contracts available for netting
 
Cash collateral posted(b)
 
Net amount
As of December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy commodity derivative contracts(a)
$
(3
)
 
$
(55
)
 
$
—

 
$
(58
)
 
$
19

 
$
—

 
$
(39
)
Interest rate contracts
$
—

 
$
(1
)
 
$
—

 
$
(1
)
 
$
—

 
$
—

 
$
(1
)
Foreign currency contracts
$
—

 
$
(6
)
 
$
—

 
$
(6
)
 
$
6

 
$
—

 
$
—

As of December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy commodity derivative contracts(a)
$
(11
)
 
$
(39
)
 
$
—

 
$
(50
)
 
$
39

 
$
—

 
$
(11
)
Interest rate contracts
$
—

 
$
(115
)
 
$
—

 
$
(115
)
 
$
7

 
$
—

 
$
(108
)
Foreign currency contracts
$
—

 
$
(6
)
 
$
—

 
$
(6
)
 
$
6

 
$
—

 
$
—

_______
(a)
Level 1 consists primarily of NYMEX natural gas futures.  Level 2 consists primarily of OTC WTI swaps, NGL swaps and crude oil basis swaps.
(b)
Any cash collateral paid or received is reflected in this table, but only to the extent that it represents variation margins. Any amount associated with derivative prepayments or initial margins that are not influenced by the derivative asset or liability amounts or those that are determined solely on their volumetric notional amounts are excluded from this table.

The following tables summarize the pre-tax impact of our derivative contracts in our accompanying consolidated statements of income and comprehensive income (in millions):
Derivatives in fair value hedging relationships
 
Location
 
Gain/(loss) recognized in income on derivatives and related hedged item
 
 
 
 
Year Ended December 31,
 
 
 
 
2019
 
2018
 
2017
Interest rate contracts
 
Interest, net
 
$
340

 
$
(122
)
 
$
(103
)
 
 
 
 
 
 
 
 
 
Hedged fixed rate debt(a)
 
Interest, net
 
$
(353
)
 
$
113

 
$
105

_______
(a)
As of December 31, 2019, the cumulative amount of fair value hedging adjustments to our hedged fixed rate debt was an increase of $359 million included in “Debt fair value adjustments” on our accompanying consolidated balance sheets.

Derivatives in cash flow hedging relationships
 
Gain/(loss) recognized in OCI on derivative(a)
 
Location
 
Gain/(loss) reclassified from Accumulated OCI into income(b)
 
 
Year Ended
 
 
 
Year Ended
 
 
December 31,
 
 
 
December 31,
 
 
2019
 
2018
 
2017
 
 
 
2019
 
2018
 
2017
Energy commodity derivative contracts
 
$
(168
)
 
$
201

 
$
37

 
Revenues—Commodity sales
 
$
16

 
$
(59
)
 
$
73

 
 
 

 
 

 
 
 
Costs of sales
 
5

 
21

 
14

Interest rate contracts(c)
 
(1
)
 
3

 
—

 
Earnings from equity investments(c)
 
2

 
(4
)
 
(5
)
Foreign currency contracts
 
(60
)
 
(59
)
 
190

 
Other, net
 
(31
)
 
(67
)
 
186

Total
 
$
(229
)
 
$
145

 
$
227

 
Total
 
$
(8
)
 
$
(109
)
 
$
268

_______
(a)
We expect to reclassify an approximate $22 million gain associated with cash flow hedge price risk management activities included in our accumulated other comprehensive loss balance as of December 31, 2019 into earnings during the next twelve months (when the associated forecasted transactions are also expected to impact earnings); however, actual amounts reclassified into earnings could vary materially as a result of changes in market prices.
(b)
During the year ended December 31, 2019, we recognized a $12 million gain associated with a write-down of hedged inventory. During the year ended December 31, 2018, we recognized a $3 million loss as a result of our equity investment’s forecasted transactions being probable of not occurring and a $21 million gain associated with a write-down of hedged inventory. All other amounts reclassified were the result of the hedged forecasted transactions actually affecting earnings (i.e., when the forecasted sales and purchases actually occurred).
(c)
Amounts represent our share of an equity investee’s accumulated other comprehensive income (loss).

Derivatives in net investment hedging relationships
 
Gain/(loss) recognized in OCI on derivative
 
Location
 
Gain/(loss) reclassified from Accumulated OCI into income(a)
 
 
Year Ended
 
 
 
Year Ended
 
 
December 31,
 
 
 
December 31,
 
 
2019
 
2018
 
2017
 
 
 
2019
 
2018
 
2017
Foreign currency contracts
 
$
(8
)
 
$
91

 
$
—

 
(Gain) loss on divestitures and impairments, net
 
$
83

 
$
26

 
$
—

Total
 
$
(8
)
 
$
91

 
$
—

 
Total
 
$
83

 
$
26

 
$
—

_______
(a)
During the year ended December 31, 2019, we recognized a $83 million gain related to the KML and U.S. Cochin Sale. During the year ended December 31, 2018, we recognized a $26 million gain related to the TMPL Sale. See Note 3.

Derivatives not designated as accounting hedges
 
Location
 
Gain/(loss) recognized in income on derivatives
 
 
 
 
Year Ended December 31,
 
 
 
 
2019
 
2018
 
2017
Energy commodity derivative contracts
 
Revenues—Commodity sales
 
$
33

 
$
(9
)
 
$
4

 
 
Costs of sales
 
(7
)
 
2

 
—

 
 
Earnings from equity investments(b)
 
3

 
—

 
—

Total(a)
 
 
 
$
29

 
$
(7
)
 
$
4

________
(a) The years ended December 31, 2019, 2018 and 2017 include approximate losses of $8 million and $4 million, and gains of $57 million, respectively, associated with natural gas, crude and NGL derivative contract settlements.
(b) Amounts represent our share of an equity investee’s income (loss).

Credit Risks

In conjunction with certain derivative contracts, we are required to provide collateral to our counterparties, which may include posting letters of credit or placing cash in margin accounts.  As of December 31, 2019 and 2018, we had no outstanding
letters of credit supporting our commodity price risk management program. As of December 31, 2019 and 2018, we had cash margins of $15 million and $16 million, respectively, posted by our counterparties with us as collateral and reported within “Other current liabilities” on our accompanying consolidated balance sheets. The balance at December 31, 2019 represents the net of our initial margin requirements of $6 million, offset by counterparty variation margin requirements of $21 million. We also use industry standard commercial agreements that allow for the netting of exposures associated with transactions executed under a single commercial agreement. Additionally, we generally utilize master netting agreements to offset credit exposure across multiple commercial agreements with a single counterparty.

We also have agreements with certain counterparties to our derivative contracts that contain provisions requiring the posting of additional collateral upon a decrease in our credit rating.  As of December 31, 2019, based on our current mark-to- market positions and posted collateral, we estimate that if our credit rating were downgraded one notch we would not be required to post additional collateral. If we were downgraded two notches, we estimate that we would be required to post $11 million of additional collateral.