Derivative Financial Instruments

Interest Rate Derivatives

We periodically enter into interest rate derivatives to economically hedge debt, interest or expected debt issuances, and we have historically designated these derivatives as cash flow or fair value hedges for accounting purposes. Adjustments resulting from discontinued hedges continue to be recognized in accordance with their historic hedging relationships.

Interest Rate Derivatives Activity During 2013. In September 2013, we entered into $150.0 million of Treasury lock contracts to hedge against the risk of variability of future interest payments on a portion of the debt we issued in early October 2013. We accounted for these contracts as cash flow hedges. These contracts were settled on October 3, 2013 for a loss of $0.2 million. The loss was recorded to other comprehensive income and will be recognized into earnings as an adjustment to our periodic interest accruals over the next 30 years to coincide with interest payments on the underlying debt.

Interest Rate Derivatives Activity During 2012. During 2012, we entered into a total of $250.0 million of forward-starting interest rate swap agreements to hedge against the variability of future interest payments on debt that we anticipated issuing to refinance our $250.0 million of 6.45% notes due June 1, 2014. These forward-starting interest rate swap agreements were accounted for as cash flow hedges. In November 2012, we terminated and settled these agreements and realized a gain of $11.0 million. The gain was recorded to other comprehensive income and will be recognized into earnings as an adjustment to our periodic interest accruals for the 30 years of hedged interest payments following the expected debt issuance. If management were to determine that it was probable this forecasted transaction would not occur in 2014, the $11.0 million gain we have recorded to other comprehensive income would be reclassified into earnings.

Interest Rate Derivatives Activity During 2011. During 2011, we entered into $100.0 million of interest rate swap agreements, which were accounted for as fair value hedges, to hedge against changes in the fair value of a portion of our $250.0 million of 6.40% notes due 2018. In third quarter 2011, we terminated and settled these interest rate swap agreements and received $5.9 million, which was recorded as an adjustment to long-term debt that is being amortized over the remaining life of the notes into interest expense.

Commodity Derivatives

Hedging Strategies

Our butane blending activities produce gasoline products, and we can reasonably estimate the timing and quantities of sales of these products. We use a combination of forward purchase and sale contracts, NYMEX contracts and butane futures agreements to help manage price changes, which has the effect of locking in most of the product margin realized from our butane blending activities that we choose to hedge.

We account for the forward physical purchase and sale contracts we use in our butane blending and fractionation activities as normal purchases and sales. Forward contracts that qualify for and are elected as normal purchases and sales are accounted for using traditional accrual accounting. As of December 31, 2013, we had commitments under these forward purchase and sale contracts as follows (in millions):

We use NYMEX contracts to hedge against changes in the price of refined products we expect to sell in future periods. Our NYMEX contracts fall into one of three hedge types:



Hedge Type	Hedge Purpose	Accounting Treatment
Qualifies for Hedge Accounting Treatment
Cash Flow Hedge	To hedge the variability in cash flows related to a forecasted transaction.	The effective portion of changes in the value of the hedge are recorded to accumulated other comprehensive income/loss and reclassified to earnings when the forecasted transaction occurs. Ineffectiveness is recognized currently in earnings.
Fair Value Hedge	To hedge against changes in the fair value of a recognized asset or liability.	The effective portion of changes in the value of the hedge are recorded as adjustments to the asset or liability being hedged. Any ineffectiveness is recognized currently in earnings.
Does not Qualify For Hedge Accounting Treatment
Economic Hedge	To effectively serve as either a fair value or a cash flow hedge; however, the derivative agreement does not qualify for hedge accounting treatment or is not designated as a hedge in accordance with ASC 815, Derivatives and Hedging.	Changes in the value of these agreements are recognized currently in earnings.

Period changes in the fair value of NYMEX agreements that are considered economic hedges, the effective portion of changes in the fair value of cash flow hedges that are reclassified from accumulated other comprehensive income/loss and any ineffectiveness associated with hedges related to our butane blending and fractionation activities are recognized currently in earnings as adjustments to product sales.

We also use exchange-traded butane futures agreements, which are not designated as hedges for accounting purposes, to hedge against changes in the price of butane we expect to purchase in the future. Period changes in the fair value of these agreements are recognized currently in earnings as adjustments to cost of product sales.

Additionally, we currently hold petroleum product inventories that we obtained from overages on our pipeline systems. We use NYMEX contracts that are not designated as hedges for accounting purposes to help manage price changes related to these overage inventory barrels. Period changes in the fair value of these agreements are recognized currently in earnings as adjustments to operating expense.

As outlined in the table below, our open NYMEX contracts and butane futures agreements at December 31, 2013 were as follows:



Type of Contract/Accounting Methodology	Product Represented by the Contract and Associated Barrels	Maturity Dates
NYMEX - Fair Value Hedges	0.7 million barrels of crude oil	Between January 2014 and November 2016
NYMEX - Economic Hedges	2.2 million barrels of refined products and crude oil	Between January and April 2014
Butane Futures Agreements - Economic Hedges	0.1 million barrels of butane	Between January and April 2014

Energy Commodity Derivatives Contracts and Deposits Offsets

At December 31, 2013, we had made margin deposits of $14.8 million for our NYMEX contracts. We have the right to offset the combined fair values of our open NYMEX contracts and our open butane futures agreements against our margin deposits under a master netting arrangement; however, we have elected to disclose the combined fair values of our open NYMEX and butane futures agreements separately from the related margin deposits on our consolidated balance sheets. Additionally, we have the right to offset the fair values of our NYMEX agreements and butane futures agreements together for each counterparty, which we have elected to do, and we report the combined net balances on our consolidated balance sheets. A schedule of the derivative amounts we have offset and the deposit amounts we could offset under a master netting arrangement are provided below as of December 31, 2012 and 2013 (in thousands):



	December 31, 2012
Description	Gross Amounts of Liabilities			Gross Amounts of Assets		Net Amounts of Liabilities Presented in the Consolidated Balance Sheet			Margin Deposit Amounts Not Offset in the Consolidated Balance Sheet		Net Amount
Energy commodity derivatives	$	(9,388	)	$	2,050	$	(7,338	)	$	18,304	$	10,966



	December 31, 2013
Description	Gross Amounts of Liabilities			Gross Amounts of Assets		Net Amounts of Liabilities Presented in the Consolidated Balance Sheet⁽¹⁾			Margin Deposit Amounts Not Offset in the Consolidated Balance Sheet		Net Amount
Energy commodity derivatives	$	(7,167	)	$	2,665	$	(4,502	)	$	14,782	$	10,280

(1) Net amount includes energy commodity derivative contracts classified as current liabilities, net, of $6,737 and noncurrent assets of $2,235.

Impact of Derivatives on Income Statement, Balance Sheet and AOCL

At December 31, 2012 and 2013, we had open NYMEX contracts on 0.7 million barrels of crude oil that were designated as fair value hedges. During 2012, because there was no ineffectiveness recognized on these hedges, the cumulative losses of $5.7 million from the agreements were fully offset by a cumulative increase of $5.5 million to tank bottom inventory and an increase of $0.2 million to other current assets; therefore, there was no net impact from these agreements on income/expense. During 2013, because there was no ineffectiveness recognized on these hedges, the cumulative losses of $8.7 million from the agreements were fully offset by a cumulative increase of $8.9 million to tank bottom inventory and a decrease of $0.2 million to other current assets; therefore, there was no net impact from these agreements on income or expense.

The following is a summary of the effect on our consolidated statements of income and statements of comprehensive income for the years ended December 31, 2012 and 2013 of the effective portion of derivatives accounted for under ASC 815-30, Derivatives and Hedging—Cash Flow Hedges, that were designated as hedging instruments (in thousands). See Note 7 - Product Sales Revenue for further details regarding the impact of our NYMEX agreements on product sales.



	Year Ended December 31, 2012
Derivative Instrument	Amount of Gain Recognized in AOCL on Derivative			Location of Gain Reclassified from AOCL into Income	Amount of Gain Reclassified from AOCL into Income
Interest rate contracts		$	10,977	Interest expense		$	164
NYMEX commodity contracts		2,912		Product sales revenue		2,760
Total cash flow hedges		$	13,889	Total		$	2,924



	Year Ended December 31, 2013
Derivative Instrument	Amount of Loss Recognized in AOCL on Derivative				Location of Gain (Loss) Reclassified from AOCL into Income	Amount of Gain (Loss) Reclassified from AOCL into Income
Interest rate contracts		$	(184	)	Interest expense		$	163
NYMEX commodity contracts		(4,560		)	Product sales revenue		(4,408		)
Total cash flow hedges		$	(4,744	)	Total		$	(4,245	)

There was no ineffectiveness recognized on the financial instruments disclosed in the above tables during the years ended December 31, 2012 and 2013. See Comprehensive Income in Note 2—Summary of Significant Accounting Policies for a roll-forward of the derivative gains included in AOCL for the years ended December 31, 2011, 2012 and 2013. As of December 31, 2013, the net loss estimated to be classified to interest expense over the next twelve months from AOCL is approximately $0.1 million.

The following table provides a summary of the effect on our consolidated statements of income for the years ended December 31, 2012 and 2013 of derivatives accounted for under ASC 815-10-35; Derivatives and Hedging—Overall—Subsequent Measurement, that were not designated as hedging instruments (in thousands):



		Amount of Gain (Loss) Recognized on Derivative
		Year Ended December 31,
Derivative Instrument	Location of Gain (Loss) Recognized on Derivative	2012			2013
NYMEX commodity contracts	Product sales revenue	$	(36,959	)	$	(6,189	)
NYMEX commodity contracts	Operating expenses	(2,055		)	(3,770		)
Butane futures agreements	Cost of product sales	1,203			2,682
	Total	$	(37,811	)	$	(7,277	)

The following tables provide a summary of the amounts included on our consolidated balance sheets of the fair value of derivatives accounted for under ASC 815, Derivatives and Hedging, that were designated as hedging instruments as of December 31, 2012 and 2013 (in thousands):

December 31, 2012

Asset Derivatives

Liability Derivatives

Derivative Instrument

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

NYMEX commodity contracts

Energy commodity derivatives contracts, net

473

Energy commodity derivatives contracts, net

207

December 31, 2013

Asset Derivatives

Liability Derivatives

Derivative Instrument

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

NYMEX commodity contracts

Energy commodity derivatives contracts, net

—

Energy commodity derivatives contracts, net

146

NYMEX commodity contracts

Other noncurrent assets

2,235

Other noncurrent liabilities

—

Total

2,235

Total

146

The following tables provide a summary of the amounts included on our consolidated balance sheets of the fair value of derivatives accounted for under ASC 815, Derivatives and Hedging, that were not designated as hedging instruments as of December 31, 2012 and 2013 (in thousands):

December 31, 2012

Asset Derivatives

Liability Derivatives

Derivative Instrument

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

NYMEX commodity contracts

Energy commodity derivatives contracts, net

227

Energy commodity derivatives contracts, net

8,954

Butane futures agreements

Energy commodity derivatives contracts, net

1,350

Energy commodity derivatives contracts, net

227

Total

1,577

Total

9,181

December 31, 2013

Asset Derivatives

Liability Derivatives

Derivative Instrument

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

NYMEX commodity contracts

Energy commodity derivatives contracts, net

7,021

Butane futures agreements

Energy commodity derivatives contracts, net

382

Energy commodity derivatives contracts, net

—

Total

430

Total

7,021

Notional Value

Forward purchase contracts

Forward sale contracts