Common use of Valuation Process Clause in Contracts

Valuation Process. The Partnership’s Risk Management Department (the “Risk Department”) is responsible for the valuation of the Partnership’s commodity derivative contracts and embedded derivatives in commodity contracts, except for the Natural Gas Embedded Derivative. The Risk Department reports to the Chief Financial Officer and is responsible for the oversight of the Partnership’s commodity risk management program. The members of the Risk Department have the requisite experience, knowledge and day-to-day involvement in the energy commodity markets to ensure appropriate valuations and understand the changes in the valuations from period to period. The valuations of the Level 3 commodity derivative contracts are performed by a third-party pricing service and reviewed and validated on a quarterly basis by the Risk Department by comparing the pricing and option volatilities to actual market data and/or data provided by at least one other independent third-party pricing service. Management is responsible for the valuation of the Natural Gas Embedded Derivative discussed in Note 15. Included in the valuation of the Natural Gas Embedded Derivative are assumptions about the forward price curves for NGLs and natural gas for periods in which price curves and not available from third-party pricing services due to insufficient market data. The Risk Department must develop forward price curves for NGLs and natural gas through the initial contract term (January 2016 through December 2022) for management’s use in determining the fair value of the Natural Gas Embedded Derivative. In developing the pricing curves for these periods, the Risk Department maximizes its use of the latest known market data and trends as well as its understanding of the historical relationships between forward NGL and natural gas prices and the forward market data that is available for the required period, such as crude oil pricing and natural gas pricing from other markets. However, there is very limited actual market data available to validate the Risk Department’s estimated price curves. Management also assesses the probability of the producer customer’s renewal of the contracts, which includes consideration of: • The estimated favorability of the contracts to the producer customer as compared to other options that would be available to them at the time and in the relative geographic area of their producing assets • Extrapolated pricing curves, using a weighted average probability method that is based on historical frac spreads, which impact the calculation of favorability • The producer customer’s potential business strategy decision points that may exist at the time the counterparty would elect whether to renew the contracts The tables below include a roll forward of the balance sheet amounts for the years ended December 31, 2015 (including the change in fair value) for assets and liabilities classified by the Partnership within Level 3 of the valuation hierarchy. (In millions) Commodity Derivative Contracts (net) Embedded Derivatives in Commodity Contracts (net) Fair value at beginning of period $ — $ — Net positions assumed in conjunction with the MarkWest Merger 7 (38 ) Total gain (realized and unrealized) included in earnings(1) 3 5 Settlements (3 ) 1 Fair value at end of period $ 7 $ (32 ) The amount of total gains for the period included in earnings attributable to the change in unrealized gains relating to assets still held at end of period $ 2 $ 5 (1) Gains and losses on Commodity Derivative Contracts classified as Level 3 are recorded in Product sales in the accompanying Consolidated Statements of Income. Gains and losses on Embedded Derivatives in Commodity Contracts are recorded in Costs of revenue and Purchased product costs.