15. Financial Risk Management Activities

In the normal course of our business, we are exposed to commodity risks related to changes in the prices of crude oil and natural gas as well as changes in interest rates and foreign currency values. Financial risk management activities include transactions designed to reduce risk in the selling prices of crude oil or natural gas we produced or by reducing our exposure to foreign currency or interest rate movements. Generally, futures, swaps or option strategies may be used to fix the forward selling price of a portion of our crude oil or natural gas production. Forward contracts may also be used to purchase certain currencies in which we conduct the business with the intent of reducing exposure to foreign currency fluctuations. At September 30, 2018, these forward contracts relate to the British Pound. Interest rate swaps may be used to convert interest payments on certain long-term debt from fixed to floating rates.

We present gross notional amounts of both long and short positions in the table below. These amounts include long and short positions that offset in closed positions and have not reached contractual maturity. Gross notional amounts do not quantify risk or represent assets or liabilities of the Corporation but are used in the calculation of cash settlements under the contracts.

The gross notional amounts of outstanding financial risk management derivative contracts related to West Texas Intermediate (WTI) instruments as of the dates shown below were as follows:

	September 30, 2018				December 31, 2017
Calendar year program	2018		2019		2018
Instrument type	Puts		Puts		Collars
Effective date	Oct. 1, 2018		Jan. 1, 2019		Jan. 1, 2018
End date	Dec. 31, 2018		Dec. 31, 2019		Dec. 31, 2018
Crude oil volumes (millions of barrels)		10.6		32.9		42.0
Ceiling price	N/A		N/A		$	65
Floor price	$	50	$	60	$	50

At December 31, 2017, we had WTI crude oil price collars with a monthly floor price of $50 per barrel and a monthly ceiling price of $65 per barrel with a notional amount of 115,000 barrels of oil per day (bopd) for the full year 2018. In the first quarter of 2018, we bought back the WTI $65 call options within the crude oil price collars for the period of May 1, 2018 through December 31, 2018. As a result, during this period we are able to realize monthly WTI selling prices above $65 per barrel on the crude oil price collars covering the notional amount of 115,000 bopd. The put options within our crude oil collar contracts remain outstanding with a WTI monthly floor price of $50 per barrel covering a notional amount of 115,000 bopd through December 31, 2018. During the nine months ended September 30, 2018, we purchased WTI put options with a notional amount of 90,000 bopd with a WTI monthly floor price of $60 per barrel for calendar year 2019.

The gross notional amounts of outstanding financial risk management derivative contracts, excluding commodity contracts, were as follows:

	September 30, 2018		December 31, 2017
	(In millions)
Foreign exchange	$	9	$	52
Interest rate swaps	$	100	$	450

The table below reflects the gross and net fair values of the risk management derivative instruments, all of which are based on Level 2 inputs:

	Assets		Liabilities
	(In millions)
September 30, 2018
Derivative Contracts Designated as Hedging Instruments
Commodity - Accounts receivable and Accounts payable	$	66	$	(8	)
Interest rate - Other liabilities and deferred credits (noncurrent)		—		(5	)
Total derivative contracts designated as hedging instruments		66		(13	)
Gross fair value of derivative contracts		66		(13	)
Net Fair Value of Derivative Contracts	$	66	$	(13	)

December 31, 2017
Derivative Contracts Designated as Hedging Instruments
Commodity - Accounts payable	$	—	$	(7	)
Interest rate - Other assets (noncurrent) and Accounts payable		—		(4	)
Total derivative contracts designated as hedging instruments		—		(11	)
Derivative Contracts Not Designated as Hedging Instruments
Commodity - Accounts payable		—		(2	)
Foreign exchange		1		—
Total derivative contracts not designated as hedging instruments		1		(2	)
Gross fair value of derivative contracts		1		(13	)
Net Fair Value of Derivative Contracts	$	1	$	(13	)

Derivative contracts designated as hedging instruments:

Crude oil derivatives: Crude oil price hedging contracts for the three and nine months ended September 30, 2018 decreased Sales and other operating revenues by $45 million and $119 million, respectively. In the third quarter and nine months ended September 30, 2017, the impact from realized and unrealized movements in crude oil price collars on Sales and other operating revenues was an increase of $6 million and a reduction of $5 million, respectively. At September 30, 2018, after-tax deferred losses in Accumulated other comprehensive income (loss) related to outstanding crude oil price hedging contracts were $92 million, of which $90 million will be reclassified into earnings during the next 12 months as the hedged crude oil sales are recognized in earnings.

Interest rate swaps designated as fair value hedges: At September 30, 2018 and December 31, 2017, we had interest rate swaps with gross notional amounts totaling $100 million and $450 million, respectively, which were designated as fair value hedges and relate to debt where we have converted interest payments on certain long-term debt from fixed to floating rates. Changes in the fair value of interest rate swaps and the hedged fixed-rate debt are recorded in Interest expense in the Statement of Consolidated Income. For the three and nine months ended September 30, 2018, the change in fair value of interest rate swaps was an increase in the liability of less than $1 million and $4 million, respectively, compared with an increase in liability of less than $1 million and $3 million in the third quarter and first nine months of 2017, respectively, with a corresponding adjustment in the carrying value of the hedged fixed‑rate debt. In the first quarter of 2018, we paid $3 million, to terminate interest rate swaps with a gross notional amount of $350 million. See Note 4, Debt.

Interest rate swaps designated as cash flow hedges: There were no floating to fixed interest rate swap contracts in 2018. During the nine months ended September 30, 2017, HIP had interest rate swaps with gross notional amounts totaling $459 million, which were designated as cash flow hedges and relates to debt in our Midstream operating segment where HIP converted interest payments on certain long-term debt from floating to fixed rates. For the three and nine months ended September 30, 2017, the change in fair value of interest rate swaps was an increase to assets of $1 million and $2 million, respectively.

Derivative contracts not designated as hedging instruments:

Crude oil collars: For the three and nine months ended September 30, 2018, noncash adjustments to crude oil price hedging contracts, which were de-designated as cash flow hedges in the fourth quarter of 2017, decreased Sales and other operating revenues by $4 million and $20 million, respectively. At September 30, 2018, after-tax deferred losses in Accumulated other comprehensive income (loss) in connection with the de-designation, were $3 million, of which all will be reclassified into earnings during the remainder of 2018 as the originally hedged crude oil sales are recognized in earnings.

Foreign exchange: Foreign exchange gains and losses which are reported in Other, net in Revenues and non-operating income in the Statement of Consolidated Income were losses of $4 million in the three months and nine months ended September 30, 2018, respectively, compared with gains of $17 million and $26 million in the three months and nine months ended September 30, 2017, respectively. A component of foreign exchange gain or loss is the result of foreign exchange derivative contracts that are not designated as hedges, which amounted to losses of less than $1 million and $1 million in the three months and nine months ended September 30, 2018, respectively, compared to gains of less than $1 million and $2 million in the third quarter and first nine months of 2017, respectively.

Fair Value Measurement: We have other short-term financial instruments, primarily cash equivalents, accounts receivable and accounts payable, for which the carrying value approximated fair value at September 30, 2018. Total long-term debt, excluding capital leases, with a carrying value of $6,421 million at September 30, 2018, had a fair value of $6,925 million based on Level 2 inputs.