Derivative Financial Instruments

As of March 31, 2018, the Partnership had the following outstanding commodity contracts that were executed to manage the cash flow risk associated with future sales of NGLs and purchases of natural gas:



Derivative contracts not designated as hedging instruments	Financial Position	Notional Quantity (net)
Natural Gas (MMBtu)	Long	745,045
NGLs (Gal)	Short	7,696,503

Embedded Derivative - The Partnership has a natural gas purchase commitment embedded in a keep-whole processing agreement with a producer customer in the Southern Appalachian region expiring in December 2022. The customer has the unilateral option to extend the agreement for two consecutive five year terms through December 2032. For accounting purposes, these natural gas purchase commitment and term extending options have been aggregated into a single compound embedded derivative. The probability of the customer exercising its options is determined based on assumptions about the customer’s potential business strategy decision points that may exist at the time they would elect whether to renew the contract. The changes in fair value of this compound embedded derivative are based on the difference between the contractual and index pricing, the probability of the producer customer exercising its option to extend and the estimated favorability of these contracts compared to current market conditions. The changes in fair value are recorded in earnings through Purchased product costs in the Consolidated Statements of Income. As of March 31, 2018 and December 31, 2017, the estimated fair value of this contract was a liability of $59 million and $64 million, respectively.

Certain derivative positions are subject to master netting agreements; therefore, the Partnership has elected to offset derivative assets and liabilities that are legally permissible to be offset. As of March 31, 2018 and December 31, 2017, there were no derivative assets or liabilities that were offset in the Consolidated Balance Sheets. The impact of the Partnership’s derivative instruments on its Consolidated Balance Sheets is summarized below:



(In millions)	March 31, 2018					December 31, 2017
Derivative contracts not designated as hedging instruments and their balance sheet location	Asset		Liability			Asset		Liability
Commodity contracts⁽¹⁾
Other current assets / other current liabilities	$	—	$	(12	)	$	—	$	(14	)
Other noncurrent assets / deferred credits and other liabilities	—		(48		)	—		(52		)
Total	$	—	$	(60	)	$	—	$	(66	)


(1)	Includes embedded derivatives in commodity contracts as discussed above.

For further information regarding the fair value measurement of derivative instruments, including the effect of master netting arrangements or collateral, see Note 13. There were no material changes to the Partnership’s policy regarding the accounting for Level 2 and Level 3 instruments as previously disclosed in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2017. The Partnership does not designate any of its commodity derivative positions as hedges for accounting purposes.

The impact of the Partnership’s derivative contracts not designated as hedging instruments and the location of (loss) or gain recognized in the Consolidated Statements of Income is summarized below:



	Three Months Ended March 31,
(In millions)	2018			2017
Product sales
Realized loss	$	—		$	(1	)
Unrealized gain	1			7
Total derivative gain related to product sales	1			6
Purchased product costs
Realized loss	(3		)	(2		)
Unrealized gain	6			9
Total derivative gain related to purchased product costs	3			7
Cost of revenues
Realized (loss) gain	—			—
Unrealized (loss) gain	—			—
Total derivative (loss) gain related to cost of revenues	—			—
Total derivative gains	$	4		$	13