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. We may utilize interest rate derivative instruments to hedge interest rate risk associated with future debt issuances (see Note 12 – Debt and Banking Arrangements).
The tables below provide information by maturity date about our interest rate risk-sensitive instruments as of December 31, 2023 and 2022. See Note 15 – Fair Value Measurements, Guarantees, and Concentration of Credit Risk for the methods used in determining the fair value of our long-term debt.
2024 2025 2026 2027 2028 Thereafter (1) Total Fair Value December 31, 2023
(Millions)
Long-term debt, including current portion:
Fixed rate $ 2,338 $ 2,263 $ 2,345 $ 1,993 $ 1,445 $ 15,329 $ 25,713 $ 25,553
Weighted-average interest rate 4.9 % 5.0 % 5.1 % 5.0 % 5.1 % 5.1 %
Commercial paper (2)
$ 725 $ — $ — $ — $ — $ — $ 725 $ 725
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
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(1) Includes unamortized discount / premium and debt issuance costs.
(2) The weighted-average interest rate for commercial paper as of December 31, 2023 and 2022 was 5.6 percent and 4.8 percent, respectively.
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 and to lock in NGL margin on a portion of our commodity-exposed gathering and processing volumes. These economic hedges are not designated for hedge accounting treatment.
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The maturities of our commodity derivative contracts at December 31, 2023 and 2022 were as follows:
Total
Fair
Value Maturity
Fair Value Measurements of Assets (Liabilities) Using (1)
2024
2025 - 2026
2027 - 2028+
(Millions)
Level 1 (2) $ 138 $ 110 $ 33 $ (5)
Level 2 (166) 14 (71) (109)
Level 3 53 2 16 35
Fair value of contracts outstanding at December 31, 2023
$ 25 $ 126 $ (22) $ (79)
Total
Fair
Value Maturity
Fair Value Measurements of Assets (Liabilities) Using (1)
2023 2024 - 2025 2026 - 2027+
(Millions)
Level 1 (3) $ (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)
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(1) See Note 15 – Fair Value Measurements, Guarantees, and Concentration of Credit Risk for discussion of valuation techniques by level within the fair value hierarchy. See Note 16 – Commodity Derivatives for the amount of change in fair value recognized in our Consolidated Statement of Income.
(2) Commodity derivative assets and liabilities exclude $2 million of net cash collateral in Level 1.
(3) Commodity derivative assets and liabilities exclude $202 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 first quarter of 2022, the VaR presented reflects the legacy Sequent operations only.
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The VaR associated with our integrated natural gas trading operations was $9 million at December 31, 2023 and $10 million at December 31, 2022. We had the following VaRs for the periods shown:
Twelve Months Ended
December 31, 2023
Nine Months Ended
December 31, 2022
Three Months Ended
March 31, 2022
Trading Trading
Sequent Only
(Millions)
Average $ 6 $ 10 $ 6
High $ 13 $ 39 $ 10
Low $ 4 $ 4 $ 4
Our non-trading portfolio primarily consists of commodity derivatives that hedge our upstream business and certain gathering and processing contracts. The VaR associated with these commodity derivatives was $3 million at December 31, 2023 and $8 million at December 31, 2022. We had the following VaRs for the periods shown:
Twelve Months Ended
December 31, 2023
Six Months Ended
December 31, 2022
(Millions)
Average $ 4 $ 16
High $ 8 $ 33
Low $ 2 $ 7
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