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DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
 9 Months Ended
Sep. 30, 2017
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
12. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
As a result of the Midcoast sale, our net income and cash flows are no longer subject to volatility stemming from fluctuation in the prices of natural gas, NGLs, condensates and fractionation margins.
Our net income and cash flows are subject to volatility stemming from changes in interest rates on our variable rate debt obligations and fluctuations in commodity prices of crude oil. Our interest rate risk exposure results from changes in interest rates on our variable rate debt. Our exposure to commodity price risk exists within our Liquids segment. We use derivative financial instruments, such as futures, forwards, swaps, options and other financial instruments with similar characteristics, to manage the risks associated with market fluctuations in interest rates and commodity prices, as well as to reduce volatility in our cash flows. Based on our risk management policies, all of our derivative financial instruments, including those that are not designated for hedge accounting treatment, are employed in connection with an underlying asset, liability or forecasted transaction and are not entered into with the objective of speculating on interest rates or commodity prices. We have hedged a portion of our exposure to the variability in future cash flows associated with the risks discussed above in future periods in accordance with our risk management policies. Our derivative instruments that are designated for hedge accounting under authoritative guidance are classified as cash flow hedges.




Derivative Positions
Our derivative financial instruments are included at their fair values in the consolidated statements of financial position as follows:
 
September 30,
2017
 
December 31,
2016
 
 
 
 
  
(in millions)
Other current assets
$
0.1

 
$
—

Accounts payable and other
(162.8
)
 
(145.4
)
Other long-term liabilities
(22.9
)
 
(21.3
)
  
$
(185.6
)
 
$
(166.7
)

The changes in the 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 interest rate contracts and crude oil sales contracts.
The table below summarizes our derivative balances by counterparty credit quality (any negative amounts represent our net obligations to pay the counterparty).
 
September 30,
2017
 
December 31,
2016
 
 
 
 
  
(in millions)
Counterparty Credit Quality(1)
  

 
  

AA
$
(83.8
)
 
$
(79.2
)
A
(65.1
)
 
(58.4
)
Lower than A
(36.7
)
 
(29.1
)
  
$
(185.6
)
 
$
(166.7
)
_____________________
(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 and interest rates, our outstanding financial exposure to third parties has decreased. When credit thresholds are met pursuant to the terms of our International Swaps and Derivatives Association, Inc. (ISDA®), financial contracts, we have the right to require collateral from our counterparties. We include any cash collateral received or posted in the balances listed above. At September 30, 2017 and December 31, 2016, we did not have any cash collateral on our asset exposures. Cash collateral is classified as “Restricted cash” in our consolidated statements of financial position.
We provided letters of credit totaling $152.6 million and $119.5 million relating to our liability exposures pursuant to the margin thresholds in effect at September 30, 2017 and December 31, 2016, respectively, under our ISDA® agreements. 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 interest rate and commodity swaps require that collateral be posted per tiered contractual thresholds based on the credit rating of each counterparty. We generally provide 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.
In the event that our credit ratings were to decline below the lowest level of investment grade, as determined by Standard & Poor’s and Moody’s, we would be required to provide additional amounts under our existing letters of credit to meet the requirements of our ISDA® agreements. For example, if our credit ratings had been below the lowest level of investment grade at September 30, 2017, we would have been required to provide additional letters of credit in the amount of $34.1 million related to our positions.
At September 30, 2017 and December 31, 2016, we had credit concentrations in the following industry sectors, as presented below:
 
September 30,
2017
 
December 31,
2016
 
 
 
 
  
(in millions)
United States financial institutions and investment banking entities
$
(132.4
)
 
$
(121.7
)
Non-United States financial institutions
(53.2
)
 
(45.0
)
  
$
(185.6
)
 
$
(166.7
)

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, or OTC, derivatives is directly with our counterparty and continues until the maturity or termination of the contracts.

Effect of Derivative Instruments on the Consolidated Statements of Financial Position
 
 
 
Asset Derivatives
 
Liability Derivatives
  
 
 
Fair Value at
 
Fair Value at
  
Financial Position
Location
 
September 30,
2017
 
December 31,
2016
 
September 30,
2017
 
December 31,
2016
 
 
 
 
 
 
 
 
 
 
  
  
 
(in millions)
Derivatives designated as hedging instruments:(1)
  
 
  

 
  

 
  

 
  

Interest rate contracts
Accounts payable and other
 
$
—

 
$
—

 
$
(162.2
)
 
$
(144.0
)
Interest rate contracts
Other long-term liabilities
 
—

 
—

 
(22.8
)
 
(21.1
)
  
 
 
—

 
—

 
(185.0
)
 
(165.1
)
Derivatives not designated as hedging instruments:
  
 
  

 
  

 
  

 
  

Commodity contracts
Other current assets
 
0.1

 
—

 
—

 
—

Commodity contracts
Accounts payable and other
 
—

 
—

 
(0.6
)
 
(1.4
)
Commodity contracts
Other long-term liabilities
 
—

 
—

 
(0.1
)
 
(0.2
)
  
 
 
0.1

 
—

 
(0.7
)
 
(1.6
)
Total derivative instruments
 
$
0.1

 
$
—

 
$
(185.7
)
 
$
(166.7
)
_____________________
(1)
Includes items currently designated as hedging instruments. Excludes the portion of de-designated hedges which may have a component remaining in accumulated other comprehensive income (AOCI).
Accumulated Other Comprehensive Income
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. As of September 30, 2017 and December 31, 2016, we included in AOCI unrecognized losses of approximately $200.2 million and $223.3 million, respectively, associated with derivative financial instruments that qualified for and were classified as cash flow hedges of forecasted transactions that were subsequently de-designated, settled, or terminated. These losses are reclassified to earnings over the periods during which the originally hedged forecasted transactions affect earnings.
No commodity hedges were de-designated during the nine months ended September 30, 2017 and 2016. We estimate that approximately $48.7 million, representing net losses from our cash flow hedging activities based on pricing and positions at September 30, 2017, will be reclassified from AOCI to earnings during the next 12 months.
Effect of Derivative Instruments on the Consolidated Statements of Income and Accumulated Other Comprehensive Income
Derivatives in Cash Flow Hedging Relationships
 
Amount of Gain
(Loss) Recognized
in AOCI on
Derivative
(Effective Portion)
 
Location of Gain
(Loss) Reclassified from
AOCI to Earnings
(Effective Portion)
 
Amount of Gain
(Loss) Reclassified
from AOCI
to Earnings
(Effective Portion)
 
Location of Gain (Loss)
Recognized in Earnings on
Derivative (Ineffective
Portion and Amount
Excluded from
Effectiveness Testing)(1)
 
Amount of Gain
(Loss) Recognized in
Earnings on
Derivative (Ineffective
Portion and Amount
Excluded from
Effectiveness
Testing)(1)
 
 
 
 
 
 
 
 
 
 
 
  
 
  
 
(in millions)
 
  
 
  
Three months ended September 30, 2017
 
 
 
 
 
  

 
  
 
  

Interest rate contracts
 
$
(1.9
)
 
Interest expense
 
$
(9.8
)
 
Interest expense
 
$
(0.3
)
Total
 
$
(1.9
)
 
 
 
$
(9.8
)
 
 
 
$
(0.3
)
Three months ended September 30, 2016
 
 
 
 
 
  

 
  
 
  

Interest rate contracts
 
$
6.9

 
Interest expense
 
$
(10.0
)
 
Interest expense
 
$
—

Commodity contracts
 
—

 
Commodity costs
 
0.1

 
Commodity costs
 
—

Total
 
$
6.9

 
 
 
$
(9.9
)
 
 
 
$
—

Nine months ended September 30, 2017
 
 
 
 
 
  

 
  
 
  

Interest rate contracts
 
$
(17.7
)
 
Interest expense
 
$
(30.5
)
 
Interest expense
 
$
(2.2
)
Total
 
$
(17.7
)
 
 
 
$
(30.5
)
 
 
 
$
(2.2
)
Nine months ended September 30, 2016
 
 
 
 
 
  

 
  
 
  

Interest rate contracts
 
$
(128.3
)
 
Interest expense
 
$
(29.9
)
 
Interest expense
 
$
(3.4
)
Commodity contracts
 
—

 
Commodity costs
 
0.2

 
Commodity costs
 
—

Total
 
$
(128.3
)
 
 
 
$
(29.7
)
 
 
 
$
(3.4
)
_____________________
(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
  
2017
 
2016
 
 
 
 
  
(in millions)
Balance at January 1
$
(339.3
)
 
$
(370.0
)
Other comprehensive loss before reclassifications
(24.5
)
 
(134.3
)
Amounts reclassified from AOCI(1)
30.5

 
29.7

Net other comprehensive income (loss)
6.0

 
(104.6
)
Balance at September 30
$
(333.3
)
 
$
(474.6
)
_____________________
(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
 
Three months ended September 30,
 
Nine months ended September 30,
  
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
  
  
 
(in millions)
 
  
Losses on cash flow hedges:
  

 
  

 
  

 
  

Interest Rate Contracts(1)
$
9.8

 
$
10.0

 
$
30.5

 
$
29.9

Commodity Contracts
—

 
(0.1
)
 
—

 
(0.2
)
Total Reclassifications from AOCI
$
9.8

 
$
9.9

 
$
30.5

 
$
29.7

_____________________
(1)
Loss reported within “Interest expense, net” in the consolidated statements of income.

Effect of Derivative Instruments on Consolidated Statements of Income
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
  
 
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
Derivatives Not Designated
as Hedging Instruments
 
Location of Gain or (Loss)
Recognized in Earnings
 
Amount of Gain or (Loss)
Recognized in Earnings(1)(2)
 
Amount of Gain or (Loss)
Recognized in Earnings(1)(2)
 
 
 
 
 
 
 
 
 
  
 
  
 
  
 
(in millions)
 
  
Commodity contracts
 
Transportation and other services
(3) 
 
$
(1.3
)
 
$
1.0

 
$
1.8

 
$
(2.1
)
Total
$
(1.3
)
 
$
1.0

 
$
1.8

 
$
(2.1
)
_____________
(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 receive hedge accounting treatment and does not include the ineffective portion of derivatives that are designated as hedging instruments.
(3)
Includes settlement gains of $0.4 million and $1.2 million for the three months ended September 30, 2017 and 2016, respectively, and settlement gains of $0.8 million and $4.9 million for the nine months ended September 30, 2017 and 2016, respectively.
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 gross basis. However, the terms of the ISDA®, which govern 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. The effect of the rights of set-off are outlined below.
Offsetting of Financial Assets and Derivative Assets
 
September 30, 2017
  
Gross
Amount of
Recognized
Assets
 
Gross
Amount
Offset in the
Statement of
Financial Position
 
Net Amount
of Assets
Presented in
the Statement of
Financial Position
 
Gross Amount
Not Offset in the
Statement of
Financial Position
 
Net Amount
  
  
 
  
 
(in millions)
 
  
 
  
Description:
  

 
  

 
  

 
  

 
  

Derivatives
$
0.1

 
$
—

 
$
0.1

 
$
(0.1
)
 
$
—


 
December 31, 2016
  
Gross
Amount of
Recognized
Assets
 
Gross
Amount
Offset in the
Statement of
Financial Position
 
Net Amount
of Assets
Presented in
the Statement of
Financial Position
 
Gross Amount
Not Offset in the
Statement of
Financial Position
 
Net Amount
  
  
 
  
 
(in millions)
 
  
 
  
Description:
  

 
  

 
  

 
  

 
  

Derivatives
$
—

 
$
—

 
$
—

 
$
—

 
$
—



Offsetting of Financial Liabilities and Derivative Liabilities

 
September 30, 2017
  
Gross
Amount of
Recognized
Liabilities
 
Gross Amount
Offset in the
Statement of
Financial Position
 
Net Amount of Liabilities
Presented in
the Statement of
Financial Position
 
Gross Amount
Not Offset in the
Statement of
Financial Position
 
Net Amount
  
  
 
  
 
(in millions)
 
  
 
  
Description:
  

 
  

 
  

 
  

 
  

Derivatives
$
(185.7
)
 
$
—

 
$
(185.7
)
 
$
0.1

 
$
(185.6
)

 
December 31, 2016
  
Gross
Amount of
Recognized
Liabilities
 
Gross Amount
Offset in the
Statement of
Financial Position
 
Net Amount of
Liabilities
Presented in
the Statement of
Financial Position
 
Gross Amount
Not Offset in the
Statement of
Financial Position
 
Net Amount
  
  
 
  
 
(in millions)
 
  
 
  
Description:
  

 
  

 
  

 
  

 
  

Derivatives
$
(166.7
)
 
$
—

 
$
(166.7
)
 
$
—

 
$
(166.7
)

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, 2017 and December 31, 2016. 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. For the periods ended September 30, 2017 and December 31, 2016, we did not have any Level 3 derivative instruments.
 
 
September 30, 2017
 
December 31, 2016
  
 
Level 2
 
Level 2
 
 
 
 
 
  
 
  
 
  
Interest rate contracts
 
$
(185.0
)
 
$
(165.1
)
Commodity contracts:
 
  

 
  

Financial
 
(0.6
)
 
(1.6
)
Total
 
$
(185.6
)
 
$
(166.7
)

Qualitative Information about Level 2 Fair Value Measurements
We categorize, as Level 2, the fair value of assets and liabilities that we measure with either directly or indirectly observable inputs as of the measurement date, where pricing inputs are other than quoted prices in active markets for the identical instrument. This category includes both OTC transactions valued using exchange traded pricing information in addition to assets and liabilities that we value using either models or other valuation methodologies derived from observable market data. These models are primarily industry-standard models that consider various inputs including: (i) quoted prices for assets and liabilities; (ii) time value; and (iii) current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these inputs are observable in the marketplace throughout the full term of the assets and liabilities, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace.
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 at September 30, 2017 and December 31, 2016.

 
September 30, 2017
 
December 31, 2016
  
Commodity
 
Notional(1)
 
Wtd. Average Price(2)
 
Fair Value(3)
 
Fair Value(3)
  
Receive
 
Pay
 
Asset
 
Liability
 
Asset
 
Liability
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
  
 
  
 
  
 
  
 
(in millions)
Portion of contracts maturing in 2017
 
  

 
  

 
  

 
  

 
  

 
  

 
  

Swaps
  
 
  

 
  

 
  

 
  

 
  

 
  

 
  

Receive fixed/pay variable
Crude Oil
 
123,832

 
$
51.91

 
$
51.98

 
$
0.1

 
$
(0.1
)
 
$
—

 
$
(1.6
)
Portion of contracts maturing in 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Swaps
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Receive fixed/pay variable
Crude Oil
 
498,955

 
$
50.71

 
$
51.85

 
$
—

 
$
(0.6
)
 
$
—

 
$
—

_____________
(1)
Volumes of crude oil are measured in Bbl.
(2)
Weighted-average prices received and paid are in $/Bbl for crude oil.
(3)
The fair value is determined based on quoted market prices at September 30, 2017 and December 31, 2016, respectively, discounted using the swap rate for the respective periods to consider the time value of money. Fair values exclude credit valuation adjustment gains of nil at September 30, 2017 and December 31, 2016, as well as cash collateral received.
Fair Value Measurements of Interest Rate Derivatives
We enter into interest rate swaps, caps and derivative financial instruments with similar characteristics to manage the cash flow associated with future interest rate movements on our indebtedness. The following table provides information about our current interest rate derivatives for the specified periods.
 
 
 
 
 
 
Average
Fixed
Rate(1)
 
Fair Value(2) at
Date of Maturity & Contract Type
 
Accounting Treatment
 
Notional
 
September 30,
2017
 
December 31,
2016
 
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
 
(dollars in millions)
 
  
Contracts maturing in 2017
 
 
 
 
 
 
 
 
 
 
Interest Rate Swaps – Pay Fixed
 
Cash Flow Hedge
 
$500
 
2.21%
 
$
—

 
$
(0.3
)
Contracts maturing in 2018
 
  
 
  
 
  
 
  

 
  

Interest Rate Swaps – Pay Fixed
 
Cash Flow Hedge
 
$810
 
2.24%
 
$
(2.1
)
 
$
(9.4
)
Contracts maturing in 2019
 
  
 
  
 
  
 
  

 
  

Interest Rate Swaps – Pay Fixed
 
Cash Flow Hedge
 
$620
 
2.96%
 
$
(7.8
)
 
$
(7.3
)
Contracts settling prior to maturity
 
  
 
  
 
  
 
  

 
  

2017 – Pre-issuance Hedges
 
Cash Flow Hedge
 
$1,000
 
4.07%
 
$
(156.0
)
 
$
(136.2
)
2018 – Pre-issuance Hedges
 
Cash Flow Hedge
 
$350
 
3.08%
 
$
(19.4
)
 
$
(13.1
)
_____________
(1)
Interest rate derivative contracts are based on the one-month or three-month London Interbank Offered Rate (LIBOR).
(2)
The fair value is determined from quoted market prices at September 30, 2017 and December 31, 2016, 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 adjustment gains of approximately $0.3 million and $1.2 million at September 30, 2017 and December 31, 2016, respectively.