(12) Derivatives

Interest Rate Swaps

We periodically enter into interest rate swaps in connection with new debt issuances. During the debt issuance process, we are exposed to variability in future long-term debt interest payments that may result from changes in the benchmark interest rate (commonly the U.S. Treasury yield) prior to the debt being issued. In order to hedge this variability, we enter into interest rate swaps to effectively lock in the benchmark interest rate at the inception of the swap. Prior to 2017, we did not designate interest rate swaps as hedges and, therefore, included the associated settlement gains and losses as interest expense, net of interest income, on the consolidated statements of operations.

In May 2017, we entered into an interest rate swap in connection with the issuance of ENLK’s 2047 Notes. In accordance with ASC 815, we designated this swap as a cash flow hedge. Upon settlement of the interest rate swap in May 2017, we recorded the associated $2.2 million settlement loss in accumulated comprehensive loss on the consolidated balance sheets. We will amortize the settlement loss into interest expense on the consolidated statements of operations over the term of the 2047 Notes. There was no ineffectiveness related to the hedge. For the three months ended March 31, 2019, we amortized an immaterial amount of the settlement loss into interest expense from accumulated other comprehensive income (loss). We expect to recognize $0.1 million of interest expense out of accumulated other comprehensive income (loss) over the next twelve months. We have no open interest rate swap positions as of March 31, 2019.

Commodity Swaps

We manage our exposure to changes in commodity prices by hedging the impact of market fluctuations. Commodity swaps are used both to manage and hedge price and location risk related to these market exposures and to manage margins on offsetting fixed-price purchase or sale commitments for physical quantities of crude, condensate, natural gas, and NGLs. We do not designate commodity swaps as cash flow or fair value hedges for hedge accounting treatment under ASC 815. Therefore, changes in the fair value of our derivatives are recorded in revenue in the period incurred. In addition, our commodity risk management policy does not allow us to take speculative positions with our derivative contracts.

We commonly enter into index (float-for-float) or fixed-for-float swaps in order to mitigate our 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. For condensate, crude oil, and natural gas, index swaps 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 oil, fixed-for-float swaps are used to protect cash flows against price fluctuations: (1) where we receive a percentage of liquids as a fee for processing third-party gas or where we receive 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 our business and (3) where we are mitigating the price risk for product held in inventory or storage.

Assets and liabilities related to our derivative contracts are included in the fair value of derivative assets and liabilities, and the change in fair value of these contracts is recorded net as a gain (loss) on derivative activity in “Gain on derivative activity” in the consolidated statements of operations. We estimate the fair value of all of our derivative contracts based upon actively-quoted prices of the underlying commodities.

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



	Three Months Ended March 31,
	2019			2018
Change in fair value of derivatives	$	(2.0	)	$	(3.5	)
Realized gain on derivatives	3.8			4.0
Gain on derivative activity	$	1.8		$	0.5

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



	March 31, 2019			December 31, 2018
Fair value of derivative assets—current	$	8.7		$	28.6
Fair value of derivative assets—long-term	4.6			4.1
Fair value of derivative liabilities—current	(6.6		)	(21.8		)
Fair value of derivative liabilities—long-term	(0.2		)	(2.4		)
Net fair value of derivatives	$	6.5		$	8.5

Set forth below are the summarized notional volumes and fair values of all instruments held for price risk management purposes and related physical offsets at March 31, 2019 (in millions). The remaining term of the contracts extend no later than December 2022.



		March 31, 2019
Commodity	Instruments	Unit	Volume		Fair Value
NGL (short contracts)	Swaps	Gallons	(13.8	)	$	1.2
NGL (long contracts)	Swaps	Gallons	2.6		(0.1		)
Natural Gas (short contracts)	Swaps	MMBtu	(3.0	)	—
Natural Gas (long contracts)	Swaps	MMBtu	4.6		(1.1		)
Crude and condensate (short contracts)	Swaps	MMbbls	(12.7	)	9.7
Crude and condensate (long contracts)	Swaps	MMbbls	1.5		(3.2		)
Total fair value of derivatives					$	6.5

On all transactions where we are exposed to counterparty risk, we analyze the counterparty’s financial condition prior to entering into an agreement, establish limits, and monitor the appropriateness of these limits on an ongoing basis. We primarily deal with financial institutions when entering into financial derivatives on commodities. We have entered into Master ISDAs that allow for netting of swap contract receivables and payables in the event of default by either party. If our counterparties failed to perform under existing swap contracts, the maximum loss on our gross receivable position of $13.3 million as of March 31, 2019 would be reduced to $7.5 million due to the offsetting of gross fair value payables against gross fair value receivables as allowed by the ISDAs.