Risk Management and Hedging Activities | Risk Management and Hedging Activities Our operations expose us to a variety of risks including but not limited to changes in the prices of commodities that we buy or sell, changes in interest rates, and the creditworthiness of each of our counterparties. We manage certain of these exposures with either physical or financial transactions. We have established a comprehensive risk management policy and a risk management committee (the “Risk Management Committee”), to monitor and manage market risks associated with commodity prices and counterparty credit. The Risk Management Committee is composed of senior executives who receive regular briefings on positions and exposures, credit exposures and overall risk management in the context of market activities. The Risk Management Committee is responsible for the overall management of credit risk and commodity price risk, including monitoring exposure limits. Commodity Price Risk Our portfolio of commodity derivative activity is primarily accounted for using the mark-to-market method of accounting; however, depending upon our risk profile and objectives, in certain limited cases, we may execute transactions that qualify for the hedge method of accounting. The risks, strategies and instruments used to mitigate such risks, as well as the method of accounting are discussed and summarized below. Natural Gas Asset Based Trading and Marketing Our natural gas storage and pipeline assets are exposed to certain risks including changes in commodity prices. We manage commodity price risk related to our natural gas storage and pipeline assets through our commodity derivative program. The commercial activities related to our natural gas storage and pipeline assets primarily consist of the purchase and sale of gas and associated time spreads and basis spreads. A time spread transaction is executed by establishing a long gas position at one point in time and establishing an equal short gas position at a different point in time. Time spread transactions allow us to lock in a margin supported by the injection, withdrawal, and storage capacity of our natural gas storage assets. We may execute basis spread transactions to mitigate the risk of sale and purchase price differentials across our system. A basis spread transaction allows us to lock in a margin on our physical purchases and sales of gas, including injections and withdrawals from storage. We typically use swaps to execute these transactions, which are not designated as hedging instruments and are recorded at fair value with changes in fair value recorded in the current period consolidated statements of operations. While gas held in our storage locations is recorded at the lower of average cost or market, the derivative instruments that are used to manage our storage facilities are recorded at fair value and any changes in fair value are currently recorded in our consolidated statements of operations. Even though we may have economically hedged our exposure and locked in a future margin, the use of lower-of-cost or net realizable value for our physical inventory and the use of mark-to-market accounting for our derivative instruments may subject our earnings to market volatility. Commodity Cash Flow Hedges In order for our natural gas storage facility to remain operational, a minimum level of base gas must be maintained in each storage cavern, which is capitalized on our consolidated balance sheets as a component of property, plant and equipment, net. During construction or expansion of our storage caverns, we may execute a series of derivative financial instruments to mitigate a portion of the risk associated with the forecasted purchase of natural gas when we bring the storage caverns into operation. These derivative financial instruments may be designated as cash flow hedges. While the cash paid upon settlement of these hedges economically fixes the cash required to purchase base gas, the deferred losses or gains would remain in accumulated other comprehensive income (AOCI), until the cavern is emptied and the base gas is sold. The balance in AOCI of our previously settled base gas cash flow hedges was in a loss position of $6 million as of December 31, 2021. Commodity Cash Flow Protection Activities We are exposed to the impact of market fluctuations in the prices of natural gas, NGLs and condensate as a result of our gathering, processing, sales and storage activities. For gathering, processing and storage services, we may receive cash or commodities as payment for these services, depending on the contract type. We may enter into derivative financial instruments to mitigate a portion of the risk of weakening natural gas, NGL and condensate prices associated with our gathering, processing and sales activities, thereby stabilizing our cash flows. As of December 31, 2021 our derivative financial instruments used to mitigate a portion of the risk of weakening natural gas, NGL and condensate prices extend through the end of 2023. The commodity derivative instruments used for our hedging programs are a combination of direct NGL product, crude oil and natural gas hedges. Crude oil and NGL transactions are primarily accomplished through the use of forward contracts that effectively exchange floating price risk for a fixed price. The type of instrument used to mitigate a portion of the risk may vary depending on our risk management objectives. These transactions are not designated as hedging instruments for accounting purposes and the change in fair value is reflected in the current period within our consolidated statements of operations as trading and marketing gains and (losses), net. NGL Proprietary Trading Our NGL proprietary trading activity includes trading energy related products and services. We undertake these activities through the use of fixed forward sales and purchases, basis and spread trades, storage opportunities, put/call options, term contracts and spot market trading. These energy trading operations are exposed to market variables and commodity price risk with respect to these products and services, and these operations may enter into physical contracts and financial instruments with the objective of realizing a positive margin from the purchase and sale of commodity-based instruments. These physical and financial instruments are not designated as hedging instruments and are recorded at fair value with changes in fair value recorded in the current period consolidated statements of operations. We employ established risk limits, policies and procedures to manage risks associated with our natural gas asset based trading and marketing and NGL proprietary trading. Credit Risk Our principal customers range from large, natural gas marketers to industrial end-users for our natural gas products and services, as well as large multi-national petrochemical and refining companies, to small regional propane distributors for our NGL products and services. Substantially all of our natural gas and NGL sales are made at market-based prices. This concentration of credit risk may affect our overall credit risk, in that these customers may be similarly affected by changes in economic, regulatory or other factors. Where exposed to credit risk, we analyze the counterparties’ financial condition prior to entering into an agreement, establish credit limits and monitor the appropriateness of these limits on an ongoing basis. We may use various master agreements that include language giving us the right to request collateral to mitigate credit exposure. The collateral language provides for a counterparty to po st cash or letters of credit for exposure in excess of the established threshold. The threshold amount represents an open credit limit, determined in accordance with o ur credit policy. The collateral language also provides that the inability to post collateral is sufficient cause to terminate a contract and liquidate all positions. In addition, our master agreements and our standard gas and NGL sales contracts contain adequate assurance provisions, which allow us to suspend deliveries and cancel agreements, or continue deliveries to the buyer after the buyer provides acceptable security for payment. Contingent Credit Features Each of the above risks is managed through the execution of individual contracts with a variety of counterparties. Certain of our derivative contracts may contain credit-risk related contingent provisions that may require us to take certain actions in certain circumstances. We have International Swaps and Derivatives Association, or ISDA, contracts which are standardized master legal arrangements that establish key terms and conditions which govern certain derivative transactions. These ISDA contracts contain standard credit-risk related contingent provisions. Some of the provisions we are subject to are outlined below. • If we were to have an effective event of default under our Credit Agreement that occurs and is continuing, our ISDA counterparties may have the right to request early termination and net settlement of any outstanding derivative liability positions. • Our ISDA counterparties generally have collateral thresholds of zero, requiring us to fully collateralize any commodity contracts in a net liability position, when our credit rating is below investment grade. • Additionally, in some cases, our ISDA contracts contain cross-default provisions that could constitute a credit-risk related contingent feature. These provisions apply if we default in making timely payments under other credit arrangements and the amount of the default is above certain predefined thresholds, which are significantly high and are generally consistent with the terms of our Credit Agreement. As of December 31, 2021, we were not a party to any agreements that would trigger the cross-default provisions. Our commodity derivative contracts that are not governed by ISDA contracts do not have any credit-risk related contingent features. Depending upon the movement of commodity prices and interest rates, each of our individual contracts with counterparties to our commodity derivative instruments or interest rate swap instruments are in either a net asset or net liability position. As of December 31, 2021, we had $5 million of individual commodity derivative contracts that contain credit-risk related contingent features that were in a net liability position. If we were required to net settle our position with an individual counterparty, due to a credit-risk related event, our ISDA contracts may permit us to net all outstanding contracts with that counterparty, whether in a net asset or net liability position, as well as any cash collateral already posted. As of December 31, 2021, we have not been required to post additional collateral. Although our commodity derivative contracts that contain credit-risk related contingent features were in a net liability position as of December 31, 2021, the net liability position would be offset by contracts in a net asset position reducing our net liability to $2 million. Collateral As of December 31, 2021, we had cash deposits of $128 million, included in collateral cash deposits in our consolidated balance sheets. Additionally, as of December 31, 2021, we held letters of credit of $131 million from counterparties to secure their future performance under financial or physical contracts. Collateral amounts held or posted may be fixed or may vary, depending on the value of the underlying contracts, and could cover normal purchases and sales, services, trading and hedging contracts. In many cases, we and our counterparties have publicly disclosed credit ratings, which may impact the amounts of collateral requirements. Physical forward contracts and financial derivatives are cash settled at the expiration of the contract term. These transactions are generally subject to specific credit provisions within the contracts that would allow the seller, at its discretion, to suspend deliveries, cancel agreements or continue deliveries to the buyer after the buyer provides security for payment satisfactory to the seller. Offsetting Certain of our financial derivative instruments are subject to a master netting or similar arrangement, whereby we may elect to settle multiple positions with an individual counterparty through a single net payment. Each of our individual derivative instruments are presented on a gross basis on the consolidated balance sheets, regardless of our ability to net settle our positions. Instruments that are governed by agreements that include net settle provisions allow final settlement, when presented with a termination event, of outstanding amounts by extinguishing the mutual debts owed between the parties in exchange for a net amount due. We have trade receivables and payables associated with derivative instruments, subject to master netting or similar agreements, which are not included in the table below. The following summarizes the gross and net amounts of our derivative instruments: December 31, 2021 December 31, 2020 Gross Amounts Amounts Not Net Gross Amounts Amounts Not Net (millions) Assets: Commodity derivatives $ 96 $ — $ 96 $ 79 $ — $ 79 Liabilities: Commodity derivatives $ (175) $ — $ (175) $ (63) $ — $ (63) Summarized Derivative Information The fair value of our derivative instruments that are marked-to-market each period, as well as the location of each within our consolidated balance sheets, by major category, is summarized below. We have no derivative instruments that are designated as hedging instruments for accounting purposes as of December 31, 2021 and December 31, 2020. Balance Sheet Line Item December 31, December 31, Balance Sheet Line Item December 31, December 31, (millions) (millions) Derivative Assets Not Designated as Hedging Instruments: Derivative Liabilities Not Designated as Hedging Instruments: Commodity derivatives: Commodity derivatives: Unrealized gains on derivative instruments — current $ 86 $ 63 Unrealized losses on derivative instruments — current $ (145) $ (56) Unrealized gains on derivative instruments — long-term 10 16 Unrealized losses on derivative instruments — long-term (30) (7) Total $ 96 $ 79 Total $ (175) $ (63) The following summarizes the balance and activity within AOCI relative to our interest rate, commodity and foreign currency cash flow hedges as of and for the year ended December 31, 2021: Interest Commodity Foreign Total (millions) Net deferred (losses) gains in AOCI (beginning balance) $ (2) $ (6) $ 1 $ (7) Losses reclassified from AOCI to earnings — effective portion 1 — — 1 Net deferred (losses) gains in AOCI (ending balance) $ (1) $ (6) $ 1 $ (6) Deferred losses in AOCI expected to be reclassified into earnings over the next 12 months $ — $ — $ — $ — (a) Relates to Discovery, an unconsolidated affiliate. The following summarizes the balance and activity within AOCI relative to our interest rate, commodity and foreign currency cash flow hedges as of and for the year ended December 31, 2020: Interest Commodity Foreign Total (millions) Net deferred (losses) gains in AOCI (beginning balance) $ (2) $ (6) $ 1 $ (7) Net deferred (losses) gains in AOCI (ending balance) $ (2) $ (6) $ 1 $ (7) Deferred losses in AOCI expected to be reclassified into earnings over the next 12 months $ — $ — $ — $ — (a) Relates to Discovery, an unconsolidated affiliate. For the years ended December 31, 2021 and 2020, no derivative losses attributable to the ineffective portion or to amounts excluded from effectiveness testing were recognized in trading and marketing gains or losses, net or interest expense in our consolidated statements of operations. For the years ended December 31, 2021 and 2020, no derivative losses were reclassified from AOCI to trading and marketing gains or losses, net or interest expense as a result of the discontinuance of cash flow hedges related to certain forecasted transactions that are not probable of occurring. Changes in the value of derivative instruments, for which the hedge method of accounting has not been elected from one period to the next, are recorded in the consolidated statements of operations. The following summarizes these amounts and the location within the consolidated statements of operations that such amounts are reflected: Commodity Derivatives: Statements of Operations Line Item Year Ended December 31, 2021 2020 2019 (millions) Realized (losses) gains $ (493) $ 101 $ 65 Unrealized (losses) gains (125) 55 (78) Trading and marketing (losses) gains, net $ (618) $ 156 $ (13) We do not have any derivative financial instruments that are designated as a hedge of a net investment. The following tables represent, by commodity type, our net long or short positions that are expected to partially or entirely settle in each respective year. To the extent that we have long dated derivative positions that span multiple calendar years, the contract will appear in more than one line item in the tables below. December 31, 2021 Crude Oil Natural Gas Natural Gas Natural Gas Year of Expiration Net Short Net (Short) Long Position Net Short Net (Short) Long 2022 (1,133,000) (76,565,200) (5,080,635) (7,015,000) 2023 (446,000) 912,500 (1,344,000) (830,000) 2024 — — (1,455,000) (2,280,000) 2025 — — (1,440,000) 9,530,000 2026 — — (1,440,000) 535,000 December 31, 2020 Crude Oil Natural Gas Natural Gas Natural Gas Year of Expiration Net Short Net Short Position Net Short Net Long (Short) 2021 (1,969,000) (69,887,800) (9,857,339) (7,130,000) 2022 (214,000) (36,500,000) (1,422,842) 10,950,000 2023 — — (1,440,000) 3,650,000 2024 — — (1,440,000) 2,140,000 2025 — — (1,320,000) 1,825,000 |