23. 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. In the disclosures that follow, corporate financial risk management activities refer to the mitigation of these risks through hedging activities. We maintain a control environment for all of our financial risk management activities under the direction of our Chief Risk Officer. Our Treasury department is responsible for administering foreign exchange rate and interest rate hedging programs using similar controls and processes, where applicable. Hedging strategies are reviewed annually by the Audit Committee of the Board of Directors.

Corporate Financial Risk Management Activities: 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 December 31, 2017, 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 and, in the case of certain long-term debt relating to our Midstream operating segment, from floating to fixed rates.

Gross notional amounts of both long and short positions are presented in the volume tables beginning 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 financial risk management derivative contracts outstanding at December 31, were as follows:

	2017		2016
	(In millions)
Commodity - crude oil (millions of barrels)		42		—
Foreign exchange	$	52	$	785
Interest rate swaps	$	450	$	350

At December 31, 2017, we have outstanding West Texas Intermediate (WTI) crude oil collar contracts with a notional amount of 115,000 bopd for 2018 with an average monthly floor price of $50 per barrel and an average monthly ceiling price of $65 per barrel. Contracts with a notional amount of 90,000 bopd are designated as cash flow hedges, while 25,000 bopd were de-designated as cash flow hedges following the shutdown of a third-party operated offshore platform as a result of a fire in the fourth quarter of 2017.

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)
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	)

December 31, 2016
Derivative Contracts Designated as Hedging Instruments
Interest rate	$	—		$	—
Total derivative contracts designated as hedging instruments		—			—
Derivative Contracts Not Designated as Hedging Instruments
Foreign exchange - Accounts receivable and Accrued liabilities		9			(1	)
Total derivative contracts not designated as hedging instruments		9			(1	)
Gross fair value of derivative contracts		9			(1	)
Master netting arrangements		(1	)		1
Net Fair Value of Derivative Contracts	$	8		$	—

Income statement impact of derivative contracts designated as hedging instruments:

Crude oil collars: In 2017, crude oil price hedging contracts decreased Sales and other operating revenues by $34 million (2016: $-; 2015: increase of $126 million). This amount includes a loss of $71 million associated with changes in the time value of crude oil collars (2016: $-; 2015: losses of $48 million), and a charge of $1 million for hedge ineffectiveness (2016: $-; 2015: $-). At December 31, 2017, after-tax deferred losses in Accumulated other comprehensive income (loss) related to outstanding hedged crude oil collars were $127 million, of which all will be reclassified into earnings during the next 12 months as the hedged crude oil sales are recognized in earnings. There were no crude oil hedge contracts in 2016.

Interest rate swaps designated as fair value hedges: At December 31, 2017, we had interest rate swaps with gross notional amounts of $450 million (2016: $350 million), 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. During 2016, we settled existing interest rate swaps and received cash proceeds of $5 million (2015: $41 million). 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. In 2017, the change in fair value of interest rate swaps was an increase in the derivative liability of $4 million (2016: $6 million increase in asset; 2015: $4 million increase in asset) with a corresponding adjustment in the carrying value of the hedged fixed‑rate debt. In February 2018, we terminated interest rate swaps with a gross notional amount of $350 million. See Note 24, Subsequent Events.

Interest rate swaps designated as cash flow hedges: At December 31, 2017, there were no outstanding interest rate swaps designated as cash flow hedges. During 2017, HIP entered into interest rate swaps with gross notional amounts totaling $553 million to convert interest payments on certain long-term debt from floating to fixed rates before settling these instruments as part of the refinancing that occurred later in the year. See Note 10, Debt. In 2017, the change in fair value of interest rate swaps was an increase to assets of $3 million and the cash settlement was $3 million. At December 31, 2017, after-tax deferred income in Accumulated other comprehensive income (loss) in connection with the settled instruments, was $1 million, of which all will be reclassified into earnings during the next 12 months.

Income statement impact of derivative contracts not designated as hedging instruments:

Crude oil collars: In 2017, noncash adjustments to de-designated crude oil price hedging contracts decreased Sales and other operating revenues by $25 million. At December 31, 2017, after-tax deferred losses in Accumulated other comprehensive income (loss) in connection with the de-designation, were $12 million, of which all will be reclassified into earnings during the next 12 months as the originally hedged crude oil sales are recognized in earnings.

Foreign exchange: Total foreign exchange gains and losses were a gain of $15 million in 2017 (2016: gain of $26 million; 2015: loss of $21 million) and are reported in Other, net in Revenues and non-operating income in the Statement of Consolidated Income. A component of foreign exchange gains or losses is the result of foreign exchange derivative contracts that are not designated as hedges which amounted to a gain of $3 million in 2017 (2016: gain of $62 million; 2015: gain of $98 million).

In 2017, after‑tax foreign currency translation adjustments included in the Statement of Consolidated Comprehensive Income amounted to a gain of $144 million (2016: gain of $56 million; 2015: loss of $344 million) and $900 million of cumulative currency translation losses that were recognized in earnings as a result of the sale of our assets in Norway. See Note 2, Dispositions. Cumulative currency translation adjustments reduced stockholders’ equity by $1,044 million at December 31, 2016.

Credit Risk: We are exposed to credit risks that may at times be concentrated with certain counterparties, groups of counterparties or customers. Accounts receivable are generated from a diverse domestic and international customer base. As of December 31, 2017, our Accounts receivable—Trade were concentrated with the following counterparty industry segments: Integrated companies — 50%, Refining and marketing companies — 17%, Independent E&P companies — 14%, Storage and transportation companies — 7%, National oil companies — 2% and Others — 10%. We reduce risk related to certain counterparties, where applicable, by using master netting arrangements and requiring collateral, generally cash or letters of credit.

At December 31, 2017, we had outstanding letters of credit totaling $246 million (2016: $188 million).

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 December 31, 2017 and December 31, 2016. In addition, the disclosure for fair value of long-term debt in Note 10, Debt was based on Level 2 inputs.