(13) Derivatives

Interest Rate Swaps

The Partnership entered into interest rate swaps in 2016 in connection with the issuance of the 2026 Notes, in 2015 in connection with the issuance of the 2025 Notes, and in 2014 in connection with the issuance of the 2024 Notes and 2045 Notes. The Partnership had no open interest rate swap positions as of December 31, 2016.

The impact of the interest rate swaps on net income is included in other income (expense) in the consolidated statements of operations as part of interest expense, net, as follows (in millions):


	Year Ended December 31,
	2016		2015		2014
Settlement gains on derivatives	$	0.4	$	3.6	$	3.6

Commodity Swaps

The Partnership manages its exposure to fluctuation in commodity prices by hedging the impact of market fluctuations. Swaps are used to manage and hedge price and location risk related to these market exposures. Swaps are also used to manage margins on offsetting fixed-price purchase or sale commitments for physical quantities of natural gas and NGLs. The Partnership does not designate transactions as cash flow or fair value hedges for hedge accounting treatment under ASC 815. Therefore, changes in the fair value of the Partnership’s derivatives are recorded in revenue in the period incurred. In addition, the Partnership’s risk management policy does not allow the Partnership to take speculative positions with its derivative contracts.

The Partnership commonly enters into index (float-for-float) or fixed-for-float swaps in order to mitigate its cash flow exposure to fluctuations in the future prices of natural gas, NGLs and crude oil. For natural gas, index swaps are used to protect against the price exposure of daily priced gas versus first-of-month priced gas. They are also used to hedge the basis location price risk resulting from supply and markets being priced on different indices. For natural gas, NGLs, condensate and crude, fixed-for-float swaps are used to protect cash flows against price fluctuations: (1) where the Partnership receives a percentage of liquids as a fee for processing third-party gas or where the Partnership receives a portion of the proceeds of the sales of natural gas and liquids as a fee, (2) in the natural gas processing and fractionation components of its business and (3) where the Partnership is mitigating the price risk for product held in inventory or storage.

The components of gain (loss) on derivative activity in the consolidated statements of operations related to commodity swaps are (in millions):


	Year Ended December 31,
	2016		2015		2014 (1)
Change in fair value of derivatives	$	(20.1)	$	(7.7)	$	22.4
Realized gain (loss) on derivatives		9.0		17.1		(0.3)
Gain (loss) on derivative activity	$	(11.1)	$	9.4	$	22.1

(1)

Represents activity from the period between March 7, 2014 to December 31, 2014.

The fair value of derivative assets and liabilities related to commodity swaps are as follows (in millions):


	Year Ended December 31,
	2016		2015
Fair value of derivative assets - current	$	1.3	$	16.8
Fair value of derivative liabilities - current		(7.6)		(2.9)
Fair value of derivative liabilities - long-term		—		(0.1)
Net fair value of derivatives	$	(6.3)	$	13.8

Assets and liabilities related to the Partnership’s derivative contracts are included in the fair value of derivative assets and liabilities and the change in fair value of these contracts are recorded at net as a gain (loss) on derivative activity in the consolidated statements of operations. The Partnership estimates the fair value of all of our derivative contracts using actively quoted prices. The total estimated fair value liability of derivative contracts of $6.3 million as of December 31, 2016 has a maturity date of less than one year.

Set forth below is the summarized notional volumes and fair value of all instruments held for price risk management purposes and related physical offsets at December 31, 2016 (in millions). The remaining term of the contracts extend no later than December 2017.


		December 31, 2016
Commodity	Instruments	Unit	Volume	Fair Value
NGL (short contracts)	Swaps	Gallons	(27.7)	$	(3.8)
NGL (long contracts)	Swaps	Gallons	8.3		0.2
Natural Gas (short contracts)	Swaps	MMBtu	(6.8)		(3.7)
Natural Gas (long contracts)	Swaps	MMBtu	3.5		1.0
Total fair value of derivatives				$	(6.3)

On all transactions where the Partnership is exposed to counterparty risk, the Partnership analyzes the counterparty’s financial condition prior to entering into an agreement, establishes limits and monitors the appropriateness of these limits on an ongoing basis. The Partnership primarily deals with two types of counterparties, financial institutions and other energy companies, when entering into financial derivatives on commodities. The Partnership has entered into Master International Swaps and Derivatives Association Agreements (“ISDAs”) that allow for netting of swap contract receivables and payables in the event of default by either party. If the Partnership’s counterparties failed to perform under existing swap contracts, the Partnership’s maximum loss of $1.3 million as of December 31, 2016 would be reduced to $0.1 million due to the offsetting of gross fair value payables against gross fair value receivables as allowed by the ISDAs.