Derivatives and Risk Management Activities

We identify the risks that underlie our core business activities and use risk management strategies to mitigate those risks when we determine that there is value in doing so. Our policy is to use derivative instruments for risk management purposes and not for the purpose of speculating on hydrocarbon commodity (referred to herein as “commodity”) price changes. We use various derivative instruments to manage our exposure to (i) commodity price risk, as well as to optimize our profits, (ii) interest rate risk and (iii) currency exchange rate risk. Our commodity price risk management policies and procedures are designed to help ensure that our hedging activities address our risks by monitoring our derivative positions, as well as physical volumes, grades, locations, delivery schedules and storage capacity. Our interest rate and currency exchange rate risk management policies and procedures are designed to monitor our derivative positions and ensure that those positions are consistent with our objectives and approved strategies. When we apply hedge accounting, our policy is to formally document all relationships between hedging instruments and hedged items, as well as our risk management objectives for undertaking the hedge. This process includes specific identification of the hedging instrument and the hedged transaction, the nature of the risk being hedged and how the hedging instrument’s effectiveness will be assessed. Both at the inception of the hedge and throughout the hedging relationship, we assess whether the derivatives employed are highly effective in offsetting changes in cash flows of anticipated hedged transactions.

Commodity Price Risk Hedging

Our core business activities involve certain commodity price-related risks that we manage in various ways, including through the use of derivative instruments. Our policy is to (i) only purchase inventory for which we have a sales market, (ii) structure our sales contracts so that price fluctuations do not materially affect our operating income and (iii) not acquire and hold physical inventory or derivatives for the purpose of speculating on commodity price changes. The material commodity-related risks inherent in our business activities can be divided into the following general categories:

Commodity Purchases and Sales — In the normal course of our operations, we purchase and sell commodities. We use derivatives to manage the associated risks and to optimize profits. As of December 31, 2018, net derivative positions related to these activities included:


•	A net long position of 3.4 million barrels associated with our crude oil purchases, which was unwound ratably during January 2019 to match monthly average pricing.


•	A net short time spread position of 10.1 million barrels, which hedges a portion of our anticipated crude oil lease gathering purchases through March 2020.


•	A crude oil grade basis position of 54.6 million barrels through December 2020. These derivatives allow us to lock in grade basis differentials.


•	A net short position of 6.1 million barrels through March 2021 related to anticipated net sales of our crude oil and NGL inventory.

Pipeline Loss Allowance Oil — As is common in the pipeline transportation industry, our tariffs incorporate a loss allowance factor. We utilize derivative instruments to hedge a portion of the anticipated sales of the loss allowance oil that is to be collected under our tariffs. As of December 31, 2018, our PLA hedges included a short position consisting of crude oil futures of 1.2 million barrels through December 2019 and a long call option position of 2.4 million barrels through December 2020.

Natural Gas Processing/NGL Fractionation — We purchase natural gas for processing and operational needs. Additionally, we purchase NGL mix for fractionation and sell the resulting individual specification products (including ethane, propane, butane and condensate). In conjunction with these activities, we hedge the price risk associated with the purchase of the natural gas and the subsequent sale of the individual specification products. As of December 31, 2018, we had a long natural gas position of 44.1 Bcf which hedges a portion of our natural gas processing and operational needs through December 2020. We also had a short propane position of 6.4 million barrels through December 2020, a short butane position of 2.0 million barrels through December 2020 and a short WTI position of 0.7 million barrels through December 2020. In addition, we had a long power position of 0.3 million megawatt hours, which hedges a portion of our power supply requirements at our Canadian natural gas processing and fractionation plants through December 2020.

Physical commodity contracts that meet the definition of a derivative but are ineligible, or not designated, for the normal purchases and normal sales scope exception are recorded on the balance sheet at fair value, with changes in fair value recognized in earnings. We have determined that substantially all of our physical commodity contracts qualify for the normal purchases and normal sales scope exception.

Interest Rate Risk Hedging

We use interest rate derivatives to hedge the benchmark interest rate associated with interest payments occurring as a result of debt issuances. The derivative instruments we use to manage this risk consist of forward starting interest rate swaps and treasury locks. These derivatives are designated as cash flow hedges. As such, changes in fair value are deferred in AOCI and are reclassified to interest expense as we incur the interest expense associated with the underlying debt.

The following table summarizes the terms of our outstanding interest rate derivatives as of December 31, 2018 (notional amounts in millions):

Hedged Transaction

Number and Types of

Derivatives Employed

Notional

Amount

Expected

Termination Date

Average Rate Locked

Accounting

Treatment

Anticipated interest payments

8 forward starting swaps (30-year)

200

6/14/2019

2.83

Cash flow hedge

Anticipated interest payments

8 forward starting swaps

(30-year)

200

6/15/2020

3.06

Cash flow hedge

Currency Exchange Rate Risk Hedging

Because a significant portion of our Canadian business is conducted in CAD we use foreign currency derivatives to minimize the risk of unfavorable changes in exchange rates. These instruments include foreign currency exchange contracts, forwards and options.

Our use of foreign currency derivatives include (i) derivatives we use to hedge currency exchange risk created by the use of USD-denominated commodity derivatives to hedge commodity price risk associated with CAD-denominated commodity purchases and sales and (ii) foreign currency exchange contracts we use to manage our Canadian business cash requirements.

The following table summarizes our open forward exchange contracts as of December 31, 2018 (in millions):



		USD		CAD		Average Exchange Rate USD to CAD
Forward exchange contracts that exchange CAD for USD:
	2019	$	3	$	4	$1.00 - $1.34

Forward exchange contracts that exchange USD for CAD:
	2019	$	218	$	284	$1.00 - $1.31

Preferred Distribution Rate Reset Option

A derivative feature embedded in a contract that does not meet the definition of a derivative in its entirety must be bifurcated and accounted for separately if the economic characteristics and risks of the embedded derivative are not clearly and closely related to those of the host contract. The Preferred Distribution Rate Reset Option of our Series A preferred units is an embedded derivative that must be bifurcated from the related host contract, our partnership agreement, and recorded at fair value on our Consolidated Balance Sheet. Corresponding changes in fair value are recognized in “Other income/(expense), net” in our Consolidated Statement of Operations. See Note 12 for additional information regarding our Series A preferred units and Preferred Distribution Rate Reset Option.

Summary of Financial Impact

We record all open derivatives on the balance sheet as either assets or liabilities measured at fair value. Changes in the fair value of derivatives are recognized currently in earnings unless specific hedge accounting criteria are met. For derivatives designated as cash flow hedges, changes in fair value of the effective portion of the hedges are deferred in AOCI and recognized in earnings in the periods during which the underlying physical transactions are recognized in earnings. Derivatives that are not designated as a hedging instrument, derivatives that do not qualify for hedge accounting and the portion of cash flow hedges that are not highly effective in offsetting changes in cash flows of the hedged items are recognized in earnings each period. Cash settlements associated with our derivative activities are classified within the same category as the related hedged item in our Consolidated Statements of Cash Flows.

A summary of the impact of our derivatives recognized in earnings is as follows (in millions):



	Year Ended December 31, 2018
Location of Gain/(Loss)	Commodity Derivatives			Foreign Currency Derivatives			Preferred Distribution Rate Reset Option			Interest Rate Derivatives			Total
Supply and Logistics segment revenues ⁽¹⁾	$	150		$	(23	)	$	—		$	—		$	127
Field operating costs ⁽¹⁾	(2		)	—			—			—			(2		)
Interest expense, net ⁽²⁾	—			—			—			(5		)	(5		)
Other income/(expense), net ⁽¹⁾	—			—			(14		)	—			(14		)
Total Gain/(Loss) on Derivatives Recognized in Net Income	$	148		$	(23	)	$	(14	)	$	(5	)	$	106



	Year Ended December 31, 2017
Location of Gain/(Loss)	Commodity Derivatives			Foreign Currency Derivatives		Preferred Distribution Rate Reset Option		Interest Rate Derivatives			Total
Supply and Logistics segment revenues ⁽¹⁾	$	(188	)	$	8	$	—	$	—		$	(180	)
Field operating costs ⁽¹⁾	(10		)	—		—		—			(10		)
Depreciation and amortization ⁽²⁾	(3		)	—		—		—			(3		)
Interest expense, net ⁽²⁾	—			—		—		(18		)	(18		)
Other income/(expense), net ⁽¹⁾	—			—		13		—			13
Total Gain/(Loss) on Derivatives Recognized in Net Income	$	(201	)	$	8	$	13	$	(18	)	$	(198	)



	Year Ended December 31, 2016
Location of Gain/(Loss)	Commodity Derivatives			Foreign Currency Derivatives			Preferred Distribution Rate Reset Option		Interest Rate Derivatives			Total
Supply and Logistics segment revenues ⁽¹⁾	$	(342	)	$	(3	)	$	—	$	—		$	(345	)
Transportation segment revenues ⁽¹⁾	5			—			—		—			5
Interest expense, net ⁽²⁾	—			—			—		(14		)	(14		)
Other income/(expense), net ⁽¹⁾	—			—			30		—			30
Total Gain/(Loss) on Derivatives Recognized in Net Income	$	(337	)	$	(3	)	$	30	$	(14	)	$	(324	)


⁽¹⁾	Derivatives not designated as a hedge. For the year ended December 31, 2016, Supply and Logistics segment revenues includes a gain of $2 million related to derivatives in hedging relationships.


⁽²⁾	Derivatives in hedging relationships.

The following table summarizes the derivative assets and liabilities on our Consolidated Balance Sheet on a gross basis as of December 31, 2018 (in millions):



	Derivatives Not Designated As Hedging Instruments
Balance Sheet Location	Commodity Derivatives			Foreign Currency Derivatives			Preferred Distribution Rate Reset Option			Total			Interest Rate Derivatives ⁽¹⁾			Total Derivatives
Derivative Assets
Other current assets	$	441		$	—		$	—		$	441		$	2		$	443
Other long-term assets, net	34			—			—			34			—			34
Other long-term liabilities and deferred credits	3			—			—			3			—			3
Total Derivative Assets	$	478		$	—		$	—		$	478		$	2		$	480

Derivative Liabilities
Other current assets	$	(182	)	$	—		$	—		$	(182	)	$	—		$	(182	)
Other long-term assets, net	(7		)	—			—			(7		)	—			(7		)
Other current liabilities	(10		)	(9		)	—			(19		)	(1		)	(20		)
Other long-term liabilities and deferred credits	(9		)	—			(36		)	(45		)	(8		)	(53		)
Total Derivative Liabilities	$	(208	)	$	(9	)	$	(36	)	$	(253	)	$	(9	)	$	(262	)

The following table summarizes the derivative assets and liabilities on our Consolidated Balance Sheet on a gross basis as of December 31, 2017 (in millions):



	Derivatives Not Designated As Hedging Instruments
Balance Sheet Location	Commodity Derivatives			Foreign Currency Derivatives			Preferred Distribution Rate Reset Option			Total			Interest Rate Derivatives ⁽¹⁾			Total Derivatives
Derivative Assets
Other current assets	$	73		$	6		$	—		$	79		$	—		$	79
Other long-term assets, net	1			—			—			1			—			1
Other current liabilities	5			—			—			5			2			7
Other long-term liabilities and deferred credits	3			—			—			3			—			3
Total Derivative Assets	$	82		$	6		$	—		$	88		$	2		$	90

Derivative Liabilities
Other current assets	$	(227	)	$	(2	)	$	—		$	(229	)	$	—		$	(229	)
Other long-term assets, net	—			—			—			—			—			—
Other current liabilities	(131		)	—			—			(131		)	(27		)	(158		)
Other long-term liabilities and deferred credits	(5		)	—			(22		)	(27		)	(11		)	(38		)
Total Derivative Liabilities	$	(363	)	$	(2	)	$	(22	)	$	(387	)	$	(38	)	$	(425	)


⁽¹⁾	Derivatives in hedging relationships.

Our financial derivatives, used for hedging risk, are governed through ISDA master agreements and clearing brokerage agreements. These agreements include stipulations regarding the right of set off in the event that we or our counterparty default on performance obligations. If a default were to occur, both parties have the right to net amounts payable and receivable into a single net settlement between parties.

Our accounting policy is to offset derivative assets and liabilities executed with the same counterparty when a master netting arrangement exists. Accordingly, we also offset derivative assets and liabilities with amounts associated with cash margin. Our exchange-traded derivatives are transacted through clearing brokerage accounts and are subject to margin requirements as established by the respective exchange. On a daily basis, our account equity (consisting of the sum of our cash balance and the fair value of our open derivatives) is compared to our initial margin requirement resulting in the payment or return of variation margin. The following table provides the components of our net broker receivable/(payable):



	December 31, 2018			December 31, 2017
Initial margin	$	95		$	48
Variation margin posted/(returned)	(91		)	164
Letters of credit	(84		)	—
Net broker receivable/(payable)	$	(80	)	$	212

The following table presents information about derivative financial assets and liabilities that are subject to offsetting, including enforceable master netting arrangements (in millions):



	December 31, 2018						December 31, 2017
	Derivative Asset Positions			Derivative Liability Positions			Derivative Asset Positions			Derivative Liability Positions
Netting Adjustments:
Gross position - asset/(liability)	$	480		$	(262	)	$	90		$	(425	)
Netting adjustment	(192		)	192			(239		)	239
Cash collateral paid/(received)	(80		)	—			212			—
Net position - asset/(liability)	$	208		$	(70	)	$	63		$	(186	)

Balance Sheet Location After Netting Adjustments:
Other current assets	$	181		$	—		$	62		$	—
Other long-term assets, net	27			—			1			—
Other current liabilities	—			(20		)	—			(151		)
Other long-term liabilities and deferred credits	—			(50		)	—			(35		)
	$	208		$	(70	)	$	63		$	(186	)

As of December 31, 2018, there was a net loss of $177 million deferred in AOCI. The deferred net loss recorded in AOCI is expected to be reclassified to future earnings contemporaneously with (i) the earnings recognition of the underlying hedged commodity transactions or (ii) interest expense accruals associated with underlying debt instruments. Of the total net loss deferred in AOCI at December 31, 2018, we expect to reclassify a net loss of $7 million to earnings in the next twelve months. We estimate that substantially all of the remaining deferred loss will be reclassified to earnings through 2050 as the underlying hedged transactions impact earnings. A portion of these amounts is based on market prices as of December 31, 2018; thus, actual amounts to be reclassified will differ and could vary materially as a result of changes in market conditions.

The following table summarizes the net unrealized gain/(loss) recognized in AOCI for derivatives (in millions):



	Year Ended December 31,
	2018		2017			2016
Interest rate derivatives, net	$	38	$	(16	)	$	(33	)

At December 31, 2018 and 2017, none of our outstanding derivatives contained credit-risk related contingent features that would result in a material adverse impact to us upon any change in our credit ratings. Although we may be required to post margin on our cleared derivatives as described above, we do not require our non-cleared derivative counterparties to post collateral with us.

Recurring Fair Value Measurements

Derivative Financial Assets and Liabilities

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 (in millions):



	Fair Value as of December 31, 2018											Fair Value as of December 31, 2017
Recurring Fair Value Measures ⁽¹⁾	Level 1		Level 2			Level 3			Total			Level 1		Level 2			Level 3			Total
Commodity derivatives	$	171	$	87		$	12		$	270		$	5	$	(278	)	$	(8	)	$	(281	)
Interest rate derivatives	—		(7		)	—			(7		)	—		(36		)	—			(36		)
Foreign currency derivatives	—		(9		)	—			(9		)	—		4			—			4
Preferred Distribution Rate Reset Option	—		—			(36		)	(36		)	—		—			(22		)	(22		)
Total net derivative asset/(liability)	$	171	$	71		$	(24	)	$	218		$	5	$	(310	)	$	(30	)	$	(335	)


⁽¹⁾	Derivative assets and liabilities are presented above on a net basis but do not include related cash margin deposits.

Level 1

Level 1 of the fair value hierarchy includes exchange-traded commodity derivatives and over-the-counter commodity contracts such as futures, swaps and options. The fair value of exchange-traded commodity derivatives and over-the-counter commodity contracts is based on unadjusted quoted prices in active markets.

Level 2

Level 2 of the fair value hierarchy includes exchange-cleared commodity derivatives and over-the-counter commodity, interest rate and foreign currency derivatives that are traded in observable markets with less volume and transaction frequency than active markets. In addition, it includes certain physical commodity contracts. The fair values of these derivatives are corroborated with market observable inputs.

Level 3

Level 3 of the fair value hierarchy includes certain physical commodity contracts, over-the counter financial commodity contracts, and the Preferred Distribution Rate Reset Option contained in our partnership agreement which is classified as an embedded derivative.

The fair values of our Level 3 physical commodity contracts and over-the-counter financial commodity contracts are based on valuation models utilizing significant unobservable pricing inputs and timing estimates, which involve management judgment. Significant deviations from these inputs and estimates could result in a material change in fair value to our physical commodity contracts and over-the-counter financial commodity contracts. We report unrealized gains and losses associated with these physical commodity contracts in our Consolidated Statements of Operations as Supply and Logistics segment revenues. Unrealized gains and losses associated with the over-the-counter financial commodity contracts are reported in our Consolidated Statements of Operations as Field operating costs.

The fair value of the embedded derivative feature contained in our partnership agreement is based on a valuation model that estimates the fair value of the Series A preferred units with and without the Preferred Distribution Rate Reset Option. This model contains inputs, including our common unit price, ten-year U.S. treasury rates, default probabilities and timing estimates, some of which involve management judgment. A significant change in these inputs could result in a material change in fair value to this embedded derivative feature. We report unrealized gains and losses associated with this embedded derivative in our Consolidated Statements of Operations in “Other income/(expense), net.”

To the extent any transfers between levels of the fair value hierarchy occur, our policy is to reflect these transfers as of the beginning of the reporting period in which they occur.

Rollforward of Level 3 Net Asset/(Liability)

The following table provides a reconciliation of changes in fair value of the beginning and ending balances for our derivatives classified as Level 3 (in millions):



	Year Ended December 31,
	2018			2017
Beginning Balance	$	(30	)	$	(36	)
Net gains/(losses) for the period included in earnings	(13		)	12
Settlements	7			4
Derivatives entered into during the period	12			(10		)
Ending Balance	$	(24	)	$	(30	)

Change in unrealized gains/(losses) included in earnings relating to Level 3 derivatives still held at the end of the period	$	(1	)	$	5