Derivatives

12 Months Ended

Dec. 31, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives

(12) Derivatives

Interest Rate Swaps

We periodically enter into interest rate swaps during the debt issuance process to hedge variability in future long-term debt interest payments that may result from changes in the benchmark interest rate (commonly the U.S. Treasury yield) prior to the

debt being issued or to hedge variability in cash flows on our variable-rate debt. We designate interest rate swaps as cash flow hedges in accordance with ASC 815.

In April 2019, we entered into an $850.0 million interest rate swap to manage the interest rate risk associated with our floating-rate, LIBOR-based borrowings. Under this arrangement, we pay a fixed interest rate of 2.27825% in exchange for LIBOR-based variable interest through December 2021. Assets or liabilities related to this interest rate swap contract are included in the fair value of derivative assets and liabilities on the consolidated balance sheets, and the change in fair value of this contract is recorded net as gain or loss on designated cash flow hedges on the consolidated statements of comprehensive income. Monthly, upon settlement, we reclassify the gain or loss associated with the interest rate swap into interest expense from accumulated other comprehensive income (loss). There is no ineffectiveness related to this hedge.

In May 2017, we entered into an interest rate swap in connection with the issuance of our 2047 Notes. Upon settlement of the interest rate swap in May 2017, we recorded the associated $2.2 million settlement loss in accumulated comprehensive loss on the consolidated balance sheets. We amortize the settlement loss into interest expense on the consolidated statements of operations over the term of the 2047 Notes. There was no ineffectiveness related to the hedge. In addition, the settlement loss was included as an operating cash outflow on the consolidated statement of cash flows for the year ended December 31, 2017.

For the year ended December 31, 2019, we recorded $9.0 million, net of tax benefit of $3.4 million, into accumulated other comprehensive loss related to changes in fair value of our interest rate swaps.

For the year ended December 31, 2019, we realized a loss of $0.4 million related to the monthly settlement of our interest rate swaps and an immaterial amount of amortization, which we recorded into interest expense, net of interest income from accumulated other comprehensive loss. For the years ended December 31, 2018 and 2017, we amortized an immaterial amount of the settlement loss into interest expense, net of interest income from accumulated other comprehensive loss. We expect to recognize an additional $5.7 million of interest expense out of accumulated other comprehensive loss over the next twelve months.

The fair value of our interest rate swaps included in our consolidated balance sheets were as follows (in millions):

	December 31, 2019
Fair value of derivative liabilities—current	$	(5.6	)
Fair value of derivative liabilities—long-term	(6.8		)
Net fair value of derivatives	$	(12.4	)

Commodity Swaps

We manage our exposure to changes in commodity prices by hedging the impact of market fluctuations. Commodity swaps are used both to manage and hedge price and location risk related to these market exposures and to manage margins on offsetting fixed-price purchase or sale commitments for physical quantities of crude, condensate, natural gas, and NGLs. We do not designate commodity swaps as cash flow or fair value hedges for hedge accounting treatment under ASC 815. Therefore, changes in the fair value of our derivatives are recorded in revenue in the period incurred. In addition, our commodity risk management policy does not allow us to take speculative positions with our derivative contracts.

We commonly enter into index (float-for-float) or fixed-for-float swaps in order to mitigate our cash flow exposure to fluctuations in the future prices of natural gas, NGLs, and crude oil. For natural gas, index swaps are used to protect against the price exposure of daily priced gas versus first-of-month priced gas. For condensate, crude oil, and natural gas, index swaps are also used to hedge the basis location price risk resulting from supply and markets being priced on different indices. For natural gas, NGLs, condensate, and crude oil, fixed-for-float swaps are used to protect cash flows against price fluctuations: (1) where we receive a percentage of liquids as a fee for processing third-party gas or where we receive a portion of the proceeds of the sales of natural gas and liquids as a fee, (2) in the natural gas processing and fractionation components of our business and (3) where we are mitigating the price risk for product held in inventory or storage.

Assets and liabilities related to our derivative contracts are included in the fair value of derivative assets and liabilities, and the change in fair value of these contracts is recorded net as a gain (loss) on derivative activity on the consolidated statements of operations. We estimate the fair value of all of our derivative contracts based upon actively-quoted prices of the underlying commodities.

The components of gain (loss) on derivative activity in the consolidated statements of operations related to commodity swaps are (in millions):

	Year Ended December 31,
	2019			2018			2017
Change in fair value of derivatives	$	(0.1	)	$	10.1		$	4.7
Realized gain (loss) on derivatives	14.5			(4.9		)	(8.9		)
Gain (loss) on derivative activity	$	14.4		$	5.2		$	(4.2	)

The fair value of derivative assets and liabilities related to commodity swaps are as follows (in millions):

	December 31, 2019			December 31, 2018
Fair value of derivative assets—current	$	12.9		$	28.6
Fair value of derivative assets—long-term	4.3			4.1
Fair value of derivative liabilities—current	(8.8		)	(21.8		)
Fair value of derivative liabilities—long-term	—			(2.4		)
Net fair value of derivatives	$	8.4		$	8.5

Set forth below are the summarized notional volumes and fair values of all instruments held for price risk management purposes and related physical offsets at December 31, 2019 (in millions). The remaining term of the contracts extend no later than December 2022.

		December 31, 2019
Commodity	Instruments	Unit	Volume		Net Fair Value
NGL (short contracts)	Swaps	Gallons	(64.0	)	$	1.7
NGL (long contracts)	Swaps	Gallons	11.7		(0.5		)
Natural gas (short contracts)	Swaps	MMBtu	(4.7	)	1.0
Natural gas (long contracts)	Swaps	MMBtu	3.7		(0.4		)
Crude and condensate (short contracts)	Swaps	MMbbls	(12.8	)	(1.0		)
Crude and condensate (long contracts)	Swaps	MMbbls	2.0		7.6
Total fair value of derivatives					$	8.4

On all transactions where we are exposed to counterparty risk, we analyze the counterparty’s financial condition prior to entering into an agreement, establish limits, and monitor the appropriateness of these limits on an ongoing basis. We primarily deal with financial institutions when entering into financial derivatives on commodities. We have entered into Master ISDAs that allow for netting of swap contract receivables and payables in the event of default by either party. If our counterparties failed to perform under existing swap contracts, the maximum loss on our gross receivable position of $17.2 million as of December 31, 2019 would be reduced to $8.4 million due to the offsetting of gross fair value payables against gross fair value receivables as allowed by the ISDAs.