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DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
 3 Months Ended
Mar. 31, 2016
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

12. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

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 natural gas, NGLs, condensate, crude oil and fractionation margins. Fractionation margins represent the relative difference between the price we receive from NGL and condensate sales and the corresponding commodity costs of natural gas and natural gas liquids we purchase for processing. Our interest rate risk exposure results from changes in interest rates on our variable rate debt and exists at the corporate level where our variable rate debt obligations are issued. Our exposure to commodity price risk exists within each of our segments. 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:
 
 
 
March 31,
2016
 
December 31,
2015
  
 
(in millions)
Other current assets
 
$
101.9
 
 
$
123.9
 
Other assets, net
 
 
26.2
 
 
 
39.7
 
Accounts payable and other(1)
 
 
(148.7
) 
 
 
(130.9
) 
Other long-term liabilities
 
 
(141.0
) 
 
 
(90.6
) 
  
 
$
(161.6
) 
 
$
(57.9
) 
 
(1)
Includes $12.6 million held of cash collateral at December 31, 2015.
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 natural gas, NGL and crude oil sales and purchase contracts and interest rate contracts.
The table below summarizes our derivative balances by counterparty credit quality (any negative amounts represent our net obligations to pay the counterparty).
 
 
 
March 31,
2016
 
December 31,
2015
  
 
(in millions)
Counterparty Credit Quality(1)
 
 
  
 
 
 
  
 
AAA
 
$
0.1
 
 
$
—
 
AA(2)
 
 
(47.3
) 
 
 
(12.4
) 
A
 
 
(44.1
) 
 
 
(10.5
) 
Lower than A
 
 
(70.3
) 
 
 
(35.0
) 
  
 
$
(161.6
) 
 
$
(57.9
) 
 
(1)
As determined by nationally-recognized statistical ratings organizations.
(2)
Includes $12.6 million held of cash collateral at December 31, 2015.
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 also decreased. When credit thresholds are met pursuant to the terms of our International Swaps and Derivatives Association, Inc., or 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 March 31, 2016, we did not have any cash collateral on our asset exposures. At December 31, 2015, we held $12.6 million of 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 $198.2 million and $120.1 million relating to our liability exposures pursuant to the margin thresholds in effect at March 31, 2016 and December 31, 2015, 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 March 31, 2016, we would have been required to provide letters of credit in the amount of $62.9 million related to our positions.
At March 31, 2016 and December 31, 2015, we had credit concentrations in the following industry sectors, as presented below:
 
 
 
March 31,
2016
 
December 31,
2015
  
 
(in millions)
United States financial institutions and investment banking entities(1)
 
$
(95.3
) 
 
$
(30.9
) 
Non-United States financial institutions
 
 
(88.7
) 
 
 
(51.0
) 
Other
 
 
22.4
 
 
 
24.0
 
  
 
$
(161.6
) 
 
$
(57.9
) 
 
(1)
Includes $12.6 million held of cash collateral at December 31, 2015.
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
 
March 31,
2016
 
December 31,
2015
 
March 31,
2016
 
December 31,
2015
  
 
  
 
(in millions)
Derivatives designated as hedging instruments:(1)
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
Interest rate contracts
 
 
Accounts payable and other
 
 
$
—
 
 
$
—
 
 
$
(118.3
) 
 
$
(85.2
) 
Interest rate contracts
 
 
Other long-term liabilities
 
 
 
—
 
 
 
—
 
 
 
(126.7
) 
 
 
(72.3
) 
  
 
 
 
 
 
—
 
 
 
—
 
 
 
(245.0
) 
 
 
(157.5
) 
Derivatives not designated as hedging instruments:
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
Commodity contracts
 
 
Other current assets
 
 
 
101.9
 
 
 
123.9
 
 
 
—
 
 
 
—
 
Commodity contracts
 
 
Other assets
 
 
 
26.2
 
 
 
39.7
 
 
 
—
 
 
 
—
 
Commodity contracts
 
 
Accounts payable and other(2)
 
 
 
—
 
 
 
—
 
 
 
(30.4
) 
 
 
(33.1
) 
Commodity contracts
 
 
Other long-term liabilities
 
 
 
—
 
 
 
—
 
 
 
(14.3
) 
 
 
(18.3
) 
  
 
 
 
 
 
128.1
 
 
 
163.6
 
 
 
(44.7
) 
 
 
(51.4
) 
Total derivative instruments
 
 
 
 
$
128.1
 
 
$
163.6
 
 
$
(289.7
) 
 
$
(208.9
) 
 
(1)
Includes items currently designated as hedging instruments. Excludes the portion of de-designated hedges which may have a component remaining in AOCI.
(2)
Liability derivatives exclude $12.6 million held of cash collateral at December 31, 2015.

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 March 31, 2016 and December 31, 2015, we also included in AOCI unrecognized losses of approximately $247.6 million and $255.5 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.
During the three months ended March 31, 2015, unrealized commodity hedge gains of $0.6 million were de-designated as a result of the hedges no longer meeting hedge accounting criteria. We estimate that approximately $50.0 million, representing unrealized net losses from our cash flow hedging activities based on pricing and positions at March 31, 2016, 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)
 
  
 
  
For the three months ended March 31, 2016
 
 
  
 
 
 
  
 
 
 
  
 
Interest rate contracts
 
$
(85.6
) 
 
 
Interest expense
 
 
$
(10.1
) 
 
 
Interest expense
 
 
$
(1.9
) 
Commodity contracts
 
 
—
 
 
 
Commodity Costs
 
 
 
0.1
 
 
 
Commodity Costs
 
 
 
—
 
Total
 
$
(85.6
) 
 
 
 
 
$
(10.0
) 
 
 
 
 
$
(1.9
) 
For the three months ended March 31, 2015
 
 
  
 
 
 
  
 
 
 
  
 
Interest rate contracts
 
$
(145.2
) 
 
 
Interest expense
 
 
$
(5.4
) 
 
 
Interest expense
 
 
$
28.7
 
Commodity contracts
 
 
(3.6
) 
 
 
Commodity Costs
 
 
 
8.4
 
 
 
Commodity Costs
 
 
 
(4.0
) 
Total
 
$
(148.8
) 
 
 
 
 
$
3.0
 
 
 
 
 
$
24.7
 
 
(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
  
 
2016
 
2015
  
 
(in millions)
Balance at January 1
 
$
(370.0
) 
 
$
(211.4
) 
Other comprehensive loss before reclassifications(1)
 
 
(87.6
) 
 
 
(145.1
) 
Amounts reclassified from AOCI(2)(3)
 
 
10.0
 
 
 
(1.0
) 
Net other comprehensive loss
 
$
(77.6
) 
 
$
(146.1
) 
Balance at March 31
 
$
(447.6
) 
 
$
(357.5
) 
 
(1)
Excludes NCI gain of $1.3 million reclassified from AOCI at March 31, 2015.
(2)
Excludes NCI loss of $2.0 million reclassified from AOCI at March 31, 2015.
(3)
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

 
 
For the three months
ended March 31,
  
 
2016
 
2015
  
 
(in millions)
Losses (gains) on cash flow hedges:
 
 
  
 
 
 
  
 
Interest Rate Contracts(1)
 
$
10.0
 
 
$
5.4
 
Commodity Contracts(2)(3)
 
 
—
 
 
 
(6.4
) 
Total Reclassifications from AOCI
 
$
10.0
 
 
$
(1.0
) 
 
(1)
Loss reported within “Interest expense, net” in the consolidated statements of income.
(2)
Loss (gain) reported within “Commodity costs” in the consolidated statements of income.
(3)
Excludes NCI loss of $2.0 million reclassified from AOCI for the three months ended March 31, 2015.

Effect of Derivative Instruments on Consolidated Statements of Income

 
 
 
For the three months
ended March 31,
  
 
 
2016
 
2015
      Derivatives Not Designated
        as Hedging Instruments
 
Location of Gain or (Loss)
Recognized in Earnings
 
Amount of Gain or (Loss)
Recognized in Earnings(1)(2)
  
 
  
 
(in millions)
Commodity contracts
 
 
Transportation and other services(3)
 
 
$
0.8
 
 
$
2.7
 
Commodity contracts
 
 
Commodity sales
 
 
 
(2.4
) 
 
 
(17.3
) 
Commodity contracts
 
 
Commodity sales – affiliate
 
 
 
—
 
 
 
(0.2
) 
Commodity contracts
 
 
Commodity costs(4)
 
 
 
1.8
 
 
 
7.1
 
Other contracts
 
 
Other income/(expense)
 
 
 
—
 
 
 
5.0
 
Total
 
 
 
 
$
0.2
 
 
$
(2.7
) 
 
(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 $2.5 million and $6.6 million for the three months ended March 31, 2016 and 2015, respectively.
(4)
Includes settlement gains of $26.5 million and $25.7 million for the three months ended March 31, 2016 and 2015, 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

 
 
As of March 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
 
$
128.1
 
 
$
—
 
 
$
128.1
 
 
$
(23.2
) 
 
$
104.9
 
 
 
 
 
As of December 31, 2015
  
 
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(1)
 
Net
Amount
  
 
(in millions)
Description:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives
 
$
163.6
 
 
$
—
 
 
$
163.6
 
 
$
(41.5
) 
 
$
122.1
 
 
(1)
Includes $12.6 million of cash collateral held at December 31, 2015.

Offsetting of Financial Liabilities and Derivative Liabilities

 
 
As of March 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
 
$
(289.7
) 
 
$
—
 
 
$
(289.7
) 
 
$
23.2
 
 
$
(266.5
) 
 
 
 
 
As of December 31, 2015
  
 
Gross
Amount of
Recognized
Liabilities(1)
 
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(1)
 
Net
Amount
  
 
(in millions)
Description:
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
Derivatives
 
$
(221.5
) 
 
$
—
 
 
$
(221.5
) 
 
$
41.5
 
 
$
(180.0
) 
 
(1)
Includes $12.6 million of cash collateral at December 31, 2015.

Inputs to Fair Value Derivative Instruments

The following table sets forth by level within the fair value hierarchy our net financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2016 and December 31, 2015. 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.
 
 
 
March 31, 2016
 
December 31, 2015
  
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
  
 
(in millions)
Interest rate contracts
 
$
—
 
 
$
(245.0
) 
 
$
—
 
 
$
(245.0
) 
 
$
—
 
 
$
(157.5
) 
 
$
—
 
 
$
(157.5
) 
Commodity contracts:
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
Financial
 
 
—
 
 
 
6.0
 
 
 
5.5
 
 
 
11.5
 
 
 
—
 
 
 
8.4
 
 
 
8.9
 
 
 
17.3
 
Physical
 
 
—
 
 
 
—
 
 
 
0.9
 
 
 
0.9
 
 
 
—
 
 
 
—
 
 
 
0.6
 
 
 
0.6
 
Commodity options
 
 
—
 
 
 
—
 
 
 
71.0
 
 
 
71.0
 
 
 
—
 
 
 
—
 
 
 
94.3
 
 
 
94.3
 
  
 
 
—
 
 
 
(239.0
) 
 
 
77.4
 
 
 
(161.6
) 
 
 
—
 
 
 
(149.1
) 
 
 
103.8
 
 
 
(45.3
) 
Cash collateral
 
 
 
 
 
 
 
 
 
 
 
—
 
 
 
 
 
 
 
 
 
 
 
 
(12.6
) 
Total
 
 
 
 
 
 
 
 
 
 
$
(161.6
) 
 
 
 
 
 
 
 
 
 
 
$
(57.9
) 

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: (1) quoted prices for assets and liabilities; (2) time value; and (3) 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.

Qualitative Information about Level 3 Fair Value Measurements

Data from pricing services and published indices are used to measure the fair value of our Level 3 derivative instruments on a recurring basis. We may also use these inputs with internally developed methodologies that result in our best estimate of fair value. The inputs listed in the table below would have a direct impact on the fair values of the listed instruments. The significant unobservable inputs used in the fair value measurement of the commodity derivatives (natural gas, NGLs, crude and power) are forward commodity prices. The significant unobservable inputs used in determining the fair value measurement of options are price and volatility. Forward commodity price in isolation has a direct relationship to the fair value of a commodity contract in a long position and an inverse relationship to a commodity contract in a short position. Volatility has a direct relationship to the fair value of an option contract. Generally, a change in the estimate of forward commodity prices is unrelated to a change in the estimate of volatility of prices. A change to the credit valuation has an inverse relationship to the fair value of our derivative contracts.

Quantitative Information About Level 3 Fair Value Measurements

 
 
Fair Value at
March 31,
2016(2)
 
Valuation
Technique
 
Unobservable
Input
 
Range(1)
          Contract Type
 
Lowest
 
Highest
 
Weighted
Average
 
Units
  
 
(in millions)
 
  
 
  
 
  
 
  
 
  
 
  
Commodity Contracts – Financial
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
Natural Gas
 
$
0.6
 
 
 
Market Approach
 
 
 
Forward Gas Price
 
 
 
1.80
 
 
 
3.27
 
 
 
2.69
 
 
 
MMBtu
 
NGLs
 
$
4.9
 
 
 
Market Approach
 
 
 
Forward NGL Price
 
 
 
0.17
 
 
 
0.92
 
 
 
0.42
 
 
 
Gal
 
Commodity Contracts – Physical
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
Natural Gas
 
$
(1.8
) 
 
 
Market Approach
 
 
 
Forward Gas Price
 
 
 
1.53
 
 
 
3.27
 
 
 
2.01
 
 
 
MMBtu
 
Crude Oil
 
$
0.3
 
 
 
Market Approach
 
 
 
Forward Crude Price
 
 
 
28.29
 
 
 
40.90
 
 
 
38.91
 
 
 
Bbl
 
NGLs
 
$
2.4
 
 
 
Market Approach
 
 
 
Forward NGL Price
 
 
 
0.17
 
 
 
0.92
 
 
 
0.41
 
 
 
Gal
 
Commodity Options
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
Natural Gas, Crude and NGLs
 
$
71.0
 
 
 
Option Model
 
 
 
Option Volatility
 
 
 
8
% 
 
 
100
% 
 
 
37
% 
 
 
 
Total Fair Value
 
$
77.4
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Prices are in dollars per Millions of British Thermal Units, or MMBtu, for natural gas; dollars per Gallon, or Gal, for NGLs; and dollars per barrel, or Bbl, for crude oil.
(2)
Fair values include credit valuation adjustment losses of approximately $0.2 million.

Quantitative Information About Level 3 Fair Value Measurements

 
 
Fair Value at
December 31,
2015(2)
 
Valuation
Technique
 
Unobservable
Input
 
Range(1)
          Contract Type
 
Lowest
 
Highest
 
Weighted
Average
 
Units
  
 
(in millions)
Commodity Contracts – Financial
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
Natural Gas
 
$
0.3
 
 
 
Market Approach
 
 
 
Forward Gas Price
 
 
 
2.27
 
 
 
3.07
 
 
 
2.64
 
 
 
MMBtu
 
NGLs
 
 
8.6
 
 
 
Market Approach
 
 
 
Forward NGL Price
 
 
 
0.16
 
 
 
0.93
 
 
 
0.41
 
 
 
Gal
 
Commodity Contracts – Physical
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
Natural Gas
 
 
(2.5
) 
 
 
Market Approach
 
 
 
Forward Gas Price
 
 
 
2.08
 
 
 
3.44
 
 
 
2.33
 
 
 
MMBtu
 
Crude Oil
 
 
—
 
 
 
Market Approach
 
 
 
Forward Crude Price
 
 
 
26.50
 
 
 
38.41
 
 
 
37.29
 
 
 
Bbl
 
NGLs
 
 
3.1
 
 
 
Market Approach
 
 
 
Forward NGL Price
 
 
 
0.16
 
 
 
1.20
 
 
 
0.40
 
 
 
Gal
 
Commodity Options
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
Natural Gas, Crude and NGLs
 
 
94.3
 
 
 
Option Model
 
 
 
Option Volatility
 
 
 
13
% 
 
 
74
% 
 
 
36
% 
 
 
 
Total Fair Value
 
$
103.8
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Prices are in dollars per Millions of British Thermal Units, or MMBtu, for natural gas; dollars per Gallon, or Gal, for NGLs; and dollars per barrel, or Bbl, for crude oil.
(2)
Fair values include credit valuation adjustment losses of approximately $0.3 million.

Level 3 Fair Value Reconciliation

The table below provides a reconciliation of changes in the fair value of our Level 3 financial assets and liabilities measured on a recurring basis from January 1, 2016 to March 31, 2016. No transfers of assets between any of the Levels occurred during the period.
 
 
 
Commodity
Financial
Contracts
 
Commodity
Physical
Contracts
 
Commodity
Options
 
Total
  
 
(in millions)
Beginning balance as of January 1, 2016
 
$
8.9
 
 
$
0.6
 
 
$
94.3
 
 
$
103.8
 
Transfer in (out) of Level 3(1)
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
Gains or losses included in earnings:
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
Reported in Commodity sales
 
 
—
 
 
 
(6.7
) 
 
 
—
 
 
 
(6.7
) 
Reported in Commodity costs
 
 
0.4
 
 
 
8.5
 
 
 
(1.5
) 
 
 
7.4
 
Gains or losses included in other comprehensive income:
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
Purchases, issuances, sales and settlements:
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
Purchases
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
Sales
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
Settlements(2)
 
 
(3.8
) 
 
 
(1.5
) 
 
 
(21.8
) 
 
 
(27.1
) 
Ending balance as March 31, 2016
 
$
5.5
 
 
$
0.9
 
 
$
71.0
 
 
$
77.4
 
Amounts reported in Commodity sales
 
$
—
 
 
$
(2.4
) 
 
$
—
 
 
$
(2.4
) 
Amount of changes in net assets attributable to the change in derivative gains or losses related to assets and liabilities still held at the reporting date:
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
Reported in Commodity sales
 
$
—
 
 
$
(2.7
) 
 
$
—
 
 
$
(2.7
) 
Reported in Commodity costs
 
$
0.4
 
 
$
4.8
 
 
$
(2.5
) 
 
 
2.7
 
 
(1)
Our policy is to recognize transfers as of the last day of the reporting period.
(2)
Settlements represent the realized portion of forward contracts.

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 and physical contracts at March 31, 2016 and December 31, 2015.
 
 
 
At March 31, 2016
 
At December 31, 2015
 
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 2016
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
Swaps
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
Receive variable/pay fixed
 
 
Natural Gas
 
 
 
16,287
 
 
$
2.43
 
 
$
3.48
 
 
$
—
 
 
$
—
 
 
$
—
 
 
$
—
 
  
 
 
NGL
 
 
 
1,570,750
 
 
$
23.30
 
 
$
25.39
 
 
$
1.8
 
 
$
(5.1
) 
 
$
0.2
 
 
$
(8.4
) 
  
 
 
Crude Oil
 
 
 
464,000
 
 
$
40.65
 
 
$
65.19
 
 
$
0.1
 
 
$
(11.5
) 
 
$
—
 
 
$
(17.5
) 
Receive fixed/pay variable
 
 
NGL
 
 
 
1,894,000
 
 
$
27.74
 
 
$
22.68
 
 
$
11.0
 
 
$
(1.4
) 
 
$
18.3
 
 
$
(0.2
) 
  
 
 
Crude Oil
 
 
 
970,575
 
 
$
58.65
 
 
$
41.08
 
 
$
17.6
 
 
$
(0.6
) 
 
$
25.4
 
 
$
—
 
Receive variable/pay variable
 
 
Natural Gas
 
 
 
7,355,000
 
 
$
2.47
 
 
$
2.47
 
 
$
0.2
 
 
$
(0.2
) 
 
$
0.1
 
 
$
(0.1
) 
Physical Contracts
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
Receive variable/pay fixed
 
 
NGL
 
 
 
890,000
 
 
$
17.94
 
 
$
16.02
 
 
$
1.8
 
 
$
(0.1
) 
 
$
—
 
 
$
(0.2
) 
  
 
 
Crude Oil
 
 
 
—
 
 
$
—
 
 
$
—
 
 
$
—
 
 
$
—
 
 
$
—
 
 
$
(0.2
) 
Receive fixed/pay variable
 
 
NGL
 
 
 
869,166
 
 
$
22.46
 
 
$
24.95
 
 
$
0.1
 
 
$
(2.3
) 
 
$
1.9
 
 
$
(0.2
) 
Receive variable/pay variable
 
 
Natural Gas
 
 
 
118,233,634
 
 
$
1.94
 
 
$
1.96
 
 
$
—
 
 
$
(2.1
) 
 
$
—
 
 
$
(2.8
) 
  
 
 
NGL
 
 
 
8,400,616
 
 
$
16.85
 
 
$
16.51
 
 
$
3.7
 
 
$
(0.8
) 
 
$
4.0
 
 
$
(2.4
) 
  
 
 
Crude Oil
 
 
 
681,040
 
 
$
38.84
 
 
$
38.38
 
 
$
0.7
 
 
$
(0.4
) 
 
$
0.7
 
 
$
(0.5
) 
Portion of contracts maturing in 2017
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
Swaps
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
Receive variable/pay fixed
 
 
Natural Gas
 
 
 
76,530
 
 
$
2.49
 
 
$
2.97
 
 
$
—
 
 
$
—
 
 
$
—
 
 
$
—
 
  
 
 
NGL
 
 
 
757,500
 
 
$
16.63
 
 
$
21.05
 
 
$
0.1
 
 
$
(3.5
) 
 
$
—
 
 
$
(4.5
) 
  
 
 
Crude Oil
 
 
 
547,500
 
 
$
44.92
 
 
$
66.72
 
 
$
—
 
 
$
(11.8
) 
 
$
—
 
 
$
(10.9
) 
Receive fixed/pay variable
 
 
NGL
 
 
 
757,500
 
 
$
19.19
 
 
$
16.63
 
 
$
2.2
 
 
$
(0.3
) 
 
$
3.3
 
 
$
(0.1
) 
  
 
 
Crude Oil
 
 
 
638,750
 
 
$
63.63
 
 
$
44.92
 
 
$
11.9
 
 
$
—
 
 
$
10.9
 
 
$
—
 
Receive variable/pay variable
 
 
Natural Gas
 
 
 
12,550,000
 
 
$
2.75
 
 
$
2.70
 
 
$
0.8
 
 
$
(0.2
) 
 
$
0.5
 
 
$
(0.2
) 
Physical Contracts
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
Receive fixed/pay variable
 
 
NGL
 
 
 
595
 
 
$
22.37
 
 
$
21.17
 
 
$
—
 
 
$
—
 
 
$
—
 
 
$
—
 
Receive variable/pay variable
 
 
Natural Gas
 
 
 
3,987,810
 
 
$
2.78
 
 
$
2.75
 
 
$
0.1
 
 
$
—
 
 
$
0.1
 
 
$
—
 
  
 
 
NGL
 
 
 
186,500
 
 
$
23.33
 
 
$
23.40
 
 
$
—
 
 
$
—
 
 
$
—
 
 
$
—
 
Portion of contracts maturing in 2018
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
Physical Contracts
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
Receive variable/pay variable
 
 
Natural Gas
 
 
 
2,187,810
 
 
$
2.92
 
 
$
2.89
 
 
$
0.1
 
 
$
—
 
 
$
0.1
 
 
$
—
 
Portion of contracts maturing in 2019
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
Physical Contracts
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
Receive variable/pay variable
 
 
Natural Gas
 
 
 
2,187,810
 
 
$
3.00
 
 
$
2.97
 
 
$
0.1
 
 
$
—
 
 
$
0.1
 
 
$
—
 
Portion of contracts maturing in 2020
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
Physical Contracts
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
Receive variable/pay variable
 
 
Natural Gas
 
 
 
359,640
 
 
$
3.29
 
 
$
3.26
 
 
$
—
 
 
$
—
 
 
$
—
 
 
$
—
 
 
(1)
Volumes of natural gas are measured in MMBtu, whereas volumes of NGL and crude oil are measured in Bbl.
(2)
Weighted-average prices received and paid are in $/MMBtu for natural gas and $/Bbl for NGL and crude oil.
(3)
The fair value is determined based on quoted market prices at March 31, 2016 and December 31, 2015, 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 approximately $0.4 million and $0.5 million at March 31, 2016 and December 31, 2015, respectively, as well as cash collateral received.
The following table provides summarized information about the fair values of expected cash flows of our outstanding commodity options at March 31, 2016 and December 31, 2015.
 
 
 
At March 31, 2016
 
At December 31, 2015
 
Commodity
 
Notional(1)
 
Strike
Price(2)
 
Market
Price(2)
 
Fair Value(3)
 
Fair Value(3)
 
Asset
 
Liability
 
Asset
 
Liability
  
 
  
 
  
 
  
 
  
 
  
 
(in millions)
 
  
Portion of option contracts maturing in 2016
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
Puts (purchased)
 
 
Natural Gas
 
 
 
1,237,500
 
 
$
3.75
 
 
$
2.22
 
 
$
1.9
 
 
$
—
 
 
$
2.1
 
 
$
—
 
  
 
 
NGL
 
 
 
2,227,500
 
 
$
39.29
 
 
$
22.66
 
 
$
37.6
 
 
$
—
 
 
$
54.4
 
 
$
—
 
  
 
 
Crude Oil
 
 
 
605,000
 
 
$
75.91
 
 
$
41.68
 
 
$
20.7
 
 
$
—
 
 
$
27.7
 
 
$
—
 
Calls (written)
 
 
Natural Gas
 
 
 
1,237,500
 
 
$
4.98
 
 
$
2.22
 
 
$
—
 
 
$
—
 
 
$
—
 
 
$
—
 
  
 
 
NGL
 
 
 
2,227,500
 
 
$
45.09
 
 
$
22.66
 
 
$
—
 
 
$
(0.4
) 
 
$
—
 
 
$
(0.3
) 
  
 
 
Crude Oil
 
 
 
605,000
 
 
$
86.68
 
 
$
41.68
 
 
$
—
 
 
$
—
 
 
$
—
 
 
$
—
 
Puts (written)
 
 
Natural Gas
 
 
 
1,237,500
 
 
$
3.75
 
 
$
2.22
 
 
$
—
 
 
$
(1.9
) 
 
$
—
 
 
$
(2.1
) 
  
 
 
NGL
 
 
 
68,750
 
 
$
39.06
 
 
$
23.25
 
 
$
—
 
 
$
(1.1
) 
 
$
—
 
 
$
(1.5
) 
Calls (purchased)
 
 
Natural Gas
 
 
 
1,237,500
 
 
$
4.98
 
 
$
2.22
 
 
$
—
 
 
$
—
 
 
$
—
 
 
$
—
 
  
 
 
NGL
 
 
 
68,750
 
 
$
46.41
 
 
$
23.25
 
 
$
—
 
 
$
—
 
 
$
—
 
 
$
—
 
Portion of option contracts maturing in 2017
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
Puts (purchased)
 
 
NGL
 
 
 
1,277,500
 
 
$
25.26
 
 
$
23.44
 
 
$
5.1
 
 
$
—
 
 
$
5.8
 
 
$
—
 
  
 
 
Crude Oil
 
 
 
638,750
 
 
$
59.86
 
 
$
44.92
 
 
$
11.1
 
 
$
—
 
 
$
10.0
 
 
$
—
 
Calls (written)
 
 
NGL
 
 
 
1,277,500
 
 
$
29.46
 
 
$
23.44
 
 
$
—
 
 
$
(0.8
) 
 
$
—
 
 
$
(0.8
) 
  
 
 
Crude Oil
 
 
 
638,750
 
 
$
68.19
 
 
$
44.92
 
 
$
—
 
 
$
(0.9
) 
 
$
—
 
 
$
(0.6
) 
Portion of option contracts maturing in 2018
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
Puts (purchased)
 
 
Crude Oil
 
 
 
91,250
 
 
$
42.00
 
 
$
47.03
 
 
$
0.5
 
 
$
—
 
 
$
—
 
 
$
—
 
Calls (written)
 
 
Crude Oil
 
 
 
91,250
 
 
$
51.75
 
 
$
47.03
 
 
$
—
 
 
$
(0.5
) 
 
$
—
 
 
$
—
 
 
(1)
Volumes of natural gas are measured in MMBtu, whereas volumes of NGL and crude oil are measured in Bbl.
(2)
Strike and market prices are in $/MMBtu for natural gas and in $/Bbl for NGL and crude oil.
(3)
The fair value is determined based on quoted market prices at March 31, 2016 and December 31, 2015, respectively, discounted using the swap rate for the respective periods to consider the time value of money. Fair values exclude credit valuation adjustment losses of approximately $0.3 million and $0.4 million at March 31, 2016 and December 31, 2015, respectively, 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.
 
 
 
Accounting Treatment
 
Notional
 
Average
Fixed
Rate(1)
 
Fair Value(2) at
           Date of Maturity & Contract Type
 
March 31,
2016
 
December 31,
2015
  
 
 
(dollars in millions)
Contracts maturing in 2017
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
Interest Rate Swaps – Pay Fixed
 
 
Cash Flow Hedge
 
 
$
500
 
 
 
2.21
% 
 
$
(5.9
) 
 
$
(7.0
) 
Contracts maturing in 2018
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
Interest Rate Swaps – Pay Fixed
 
 
Cash Flow Hedge
 
 
$
810
 
 
 
2.24
% 
 
$
(11.1
) 
 
$
(6.6
) 
Contracts maturing in 2019
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
Interest Rate Swaps – Pay Fixed
 
 
Cash Flow Hedge
 
 
$
620
 
 
 
2.96
% 
 
$
(10.9
) 
 
$
(6.0
) 
Contracts settling prior to maturity
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
2016 – Pre-issuance Hedges
 
 
Cash Flow Hedge
 
 
$
500
 
 
 
4.21
% 
 
$
(112.3
) 
 
$
(80.4
) 
2017 – Pre-issuance Hedges
 
 
Cash Flow Hedge
 
 
$
500
 
 
 
3.69
% 
 
$
(79.7
) 
 
$
(49.2
) 
2018 – Pre-issuance Hedges
 
 
Cash Flow Hedge
 
 
$
350
 
 
 
3.08
% 
 
$
(31.2
) 
 
$
(12.2
) 
 
(1)
Interest rate derivative contracts are based on the one-month or three-month London Interbank Offered Rate, or LIBOR.
(2)
The fair value is determined from quoted market prices at March 31, 2016 and December 31, 2015, 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 approximately $6.1 million and $3.9 million at March 31, 2016 and December 31, 2015, respectively.