Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to various market risks, including (i) commodity price risk, (ii) interest rate risk and (iii) currency exchange rate risk. We use various derivative instruments to manage such risks and, in certain circumstances, to realize incremental margin during volatile market conditions. Our risk management policies and procedures are designed to help ensure that our hedging activities address our risks by monitoring our exchange-cleared and over-the-counter positions, as well as physical volumes, grades, locations, delivery schedules and storage capacity. We have a risk management function that has direct responsibility and authority for our risk policies, related controls around commercial activities and certain aspects of corporate risk management. Our risk management function also approves all new risk management strategies through a formal process. The following discussion addresses each category of risk.
Commodity Price Risk
We use derivative instruments to hedge price risk associated with the following commodities:
• Crude oil
We utilize crude oil derivatives to hedge commodity price risk inherent in our pipeline and merchant activities. Our objectives for these derivatives include hedging anticipated purchases and sales, stored inventory and basis differentials. We manage these exposures with various instruments including futures, forwards, swaps and options.
• Natural gas
We utilize natural gas derivatives to hedge commodity price risk inherent in our merchant activities. Our objectives for these derivatives include hedging anticipated purchases of natural gas. We manage these exposures with various instruments including futures, swaps and options.
• NGL and other
We utilize NGL derivatives, primarily propane and butane derivatives, to hedge commodity price risk inherent in our merchant activities. Our objectives for these derivatives include hedging anticipated purchases and sales and stored inventory. We manage these exposures with various instruments including futures, forwards, swaps and options.
See Note 13 to our Consolidated Financial Statements for further discussion regarding our hedging strategies and objectives.
The fair value of our commodity derivatives and the change in fair value as of December 31, 2021 that would be expected from a 10% price increase or decrease is shown in the table below (in millions):
Fair Value Effect of 10%
Price Increase
Effect of 10%
Price Decrease
Crude oil
$ (15) $ (41) $ 41
Natural gas
18 $ 19 $ (19)
NGL and other
(146) $ (78) $ 78
Total fair value
$ (143)
The fair values presented in the table above reflect the sensitivity of the derivative instruments only and do not include the effect of the underlying hedged commodity. Price-risk sensitivities were calculated by assuming an across-the-board 10% increase or decrease in price regardless of term or historical relationships between the contractual price of the instruments and the underlying commodity price. In the event of an actual 10% change in near-term commodity prices, the fair value of our derivative portfolio would typically change less than that shown in the table as changes in near-term prices are not typically mirrored in delivery months further out.
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Index to Financial Statements
Interest Rate Risk
Our use of variable rate debt and any forecasted issuances of fixed rate debt expose us to interest rate risk. Therefore, from time to time, we use interest rate derivatives to hedge interest rate risk associated with anticipated interest payments and, in certain cases, outstanding debt instruments. All of PAA’s senior notes are fixed rate notes and thus are not subject to interest rate risk. We did not have any variable rate debt outstanding at December 31, 2021. The average interest rate on variable rate debt that was outstanding during the year ended December 31, 2021 was 0.8%, based upon rates in effect during the year. The fair value of our interest rate derivatives was an asset of $65 million as of December 31, 2021. A 10% increase in the forward LIBOR curve as of December 31, 2021 would have resulted in an increase of $16 million to the fair value of our interest rate derivatives. A 10% decrease in the forward LIBOR curve as of December 31, 2021 would have resulted in a decrease of $16 million to the fair value of our interest rate derivatives. See Note 13 to our Consolidated Financial Statements for a discussion of our interest rate risk hedging activities.
Preferred Distribution Rate Reset Option
The Preferred Distribution Rate Reset Option of PAA’s Series A preferred units is an embedded derivative that must be bifurcated from the related host contract, PAA’s partnership agreement, and recorded at fair value in our Consolidated Balance Sheets. The valuation model utilized for this embedded derivative contains inputs including PAA’s common unit price, ten-year United States treasury rates, default probabilities and timing estimates to ultimately calculate the fair value of PAA’s Series A preferred units with and without the Preferred Distribution Rate Reset Option. The fair value of this embedded derivative was less than $1 million as of December 31, 2021. A 10% increase or decrease in the fair value would have an impact of less than $1 million. See Note 13 to our Consolidated Financial Statements for a discussion of embedded derivatives.
Item 8. Financial Statements and Supplementary Data
See “Index to the Consolidated Financial Statements” on page F-1.
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None.