Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Our current interest rate risk exposure is related primarily to our debt portfolio. Our debt portfolio is primarily comprised of fixed rate debt, which mitigates the impact of fluctuations in interest rates. Any borrowings under our credit facility and any issuances under our commercial paper program could be at a variable interest rate and could expose us to the risk of increasing interest rates. The maturity of our long-term debt portfolio is partially influenced by the expected lives of our operating assets. (See Note 12 – Debt and Banking Arrangements of Notes to Consolidated Financial Statements.)
The tables below provide information by maturity date about our interest rate risk-sensitive instruments as of December 31, 2022 and 2021. See Note 15 – Fair Value Measurements, Guarantees, and Concentration of Credit Risk of Notes to Consolidated Financial Statements for the methods used in determining the fair value of our long-term debt.
2023 2024 2025 2026 2027 Thereafter (1) Total Fair Value December 31, 2022
(Millions)
Long-term debt, including current portion:
Fixed rate $ 629 $ 2,281 $ 1,619 $ 1,245 $ 1,993 $ 14,787 $ 22,554 $ 21,569
Weighted-average interest rate 5.0 % 5.0 % 5.1 % 5.0 % 5.0 % 5.1 %
Commercial paper (2) $ 350 $ — $ — $ — $ — $ — $ 350 $ 350
2022 2023 2024 2025 2026 Thereafter (1) Total Fair Value December 31, 2021
(Millions)
Long-term debt, including current portion:
Fixed rate
$ 2,026 $ 1,478 $ 2,281 $ 1,619 $ 1,244 $ 15,027 $ 23,675 $ 27,768
Weighted-average interest rate 4.9 % 5.0 % 5.1 % 5.1 % 5.1 % 5.1 %
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(1) Includes unamortized discount / premium and debt issuance costs.
(2) The weighted-average interest rate for commercial paper was 4.8 percent as of December 31, 2022.
Commodity Price Risk
We are exposed to commodity price risk through our natural gas and NGL marketing activities, including contracts to purchase, sell, transport, and store product. We routinely manage this risk with a variety of exchange-traded and OTC energy contracts such as forward contracts, futures contracts, and basis swaps, as well as physical transactions. Although many of the contracts used to manage commodity exposure are derivative instruments, these economic hedges are not designated or do not qualify for hedge accounting treatment.
We are also exposed to commodity prices through our upstream business and certain gathering and processing contracts. We use derivative instruments to lock in forward sales prices on a portion of our expected future production. These economic hedges are not designated for hedge accounting treatment.
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The maturities of our derivative contracts at December 31, 2022, as well as the maturities of the derivative contracts related to the operations acquired in the Sequent Acquisition at December 31, 2021, were as follows:
Total
Fair
Value Maturity
Fair Value Measurements Using (1) 2023 2024 - 2025 2026 - 2027+
(Millions)
Level 1 (2) $ (2) $ 11 $ (9) $ (4)
Level 2 (586) (171) (224) (191)
Level 3 (56) (19) 2 (39)
Fair value of contracts outstanding at December 31, 2022 $ (644) $ (179) $ (231) $ (234)
Total
Fair
Value Maturity
Fair Value Measurements Using (1) 2022 2023 - 2024 2025 - 2026+
(Millions)
Level 1 (3) $ (69) $ (49) $ (30) $ 10
Level 2 (317) (77) (108) (132)
Level 3 (16) (13) (11) 8
Fair value of contracts outstanding at December 31, 2021 $ (402) $ (139) $ (149) $ (114)
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(1) See Note 15 – Fair Value Measurements, Guarantees, and Concentration of Credit Risk of Notes to Consolidated Financial Statements for discussion of valuation techniques by level within the fair value hierarchy. See Note 16 – Derivatives of Notes to Consolidated Financial Statements for the amount of change in fair value recognized in our Consolidated Statement of Income.
(2) Net commodity derivative assets and liabilities exclude $202 million of net cash collateral in Level 1.
(3) Net commodity derivative assets and liabilities related to the operations acquired in the Sequent Acquisition exclude $267 million of net cash collateral in Level 1.
Value at Risk (VaR)
VaR is the maximum predicted loss in portfolio value over a specified time period that is not expected to be exceeded within a given degree of probability. Our VaR may not be comparable to that of other companies due to differences in the factors used to calculate VaR. Our VaR is determined using parametric models with 95 percent confidence intervals and one-day holding periods, which means that 95 percent of the time, the risk of loss in a day from a portfolio of positions is expected to be less than or equal to the amount of VaR calculated. Our open exposure is managed in accordance with established policies that limit market risk and require daily reporting of predicted financial loss to management. Because we generally manage physical gas assets and economically protect our positions by hedging in the futures markets, our open exposure is generally mitigated. We employ daily risk testing, using both VaR and stress testing, to evaluate the risk of our positions.
We actively monitor open commodity marketing positions and the resulting VaR and maintain a relatively small risk exposure as total buy volume is close to sell volume, with minimal open natural gas price risk. Starting in the second quarter of 2022, following the further integration of our legacy trading activities with the operations acquired in the Sequent Acquisition, we now present VaR for our integrated natural gas trading operations. For the second half of 2021 and the first quarter of 2022, the VaR presented reflects the legacy Sequent operations only.
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At December 31, 2022, the VaR associated with this activity was $10 million. We had the following VaRs for the periods shown:
Nine Months Ended
December 31, 2022 Three Months Ended
March 31, 2022 Six Months Ended December 31, 2021
Trading Sequent Only Sequent Only
(Millions)
Average $ 10 $ 6 $ 4
High $ 39 $ 10 $ 7
Low $ 4 $ 4 $ 2
Our non-trading portfolio primarily consists of derivatives that hedge our upstream business and certain gathering and processing contracts. At December 31, 2022, the VaR associated with these derivatives was $8 million.
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