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Derivative Financial Instruments | 9 Months Ended
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Sep. 30, 2014
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Financial Instruments | 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. In third quarter 2014, we entered into $200.0 million of forward-starting interest rate swap agreements to hedge against the risk of variability of future interest payments on a portion of debt we anticipate issuing in the next year. The fair value of these contracts at September 30, 2014 was a net liability of $1.8 million. We account for these agreements as cash flow hedges. In first quarter 2014, we entered into $200.0 million of interest rate swap agreements to hedge against the variability of future interest payments on an anticipated debt issuance. We accounted for these agreements as cash flow hedges. When we issued $250.0 million of 5.15% notes due 2043 later in the first quarter of 2014, we settled the associated interest rate swap agreements for a loss of $3.6 million. The loss was recorded to other comprehensive income and is being recognized into earnings as an adjustment to our periodic interest expense accruals over the life of the associated notes. This loss was also reported as net payment on financial derivatives in the financing activities of our consolidated statements of cash flows. During 2012, we terminated and settled certain interest rate swap agreements and realized a gain of $11.0 million, which was recorded to other comprehensive income as a deferred cash flow hedging gain. The purpose of these swaps was to hedge against the variability of future interest payments on the refinancing of our debt that matured in June 2014. We recognized ineffectiveness in earnings on this deferred hedging gain of $0.2 million for the nine months ended September 30, 2014 due to timing of our debt refinancing. 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 Chicago Mercantile Exchange ("CME") butane futures agreements to help manage commodity 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 September 30, 2014, we had commitments under these forward purchase and sale contracts as follows (in millions):
| Notional Value |  | Barrels
Forward purchase contracts | $ | 248.1 |  |  | 4.2
Forward sale contracts | $ | 80.6 |  |  | 0.9
We use NYMEX contracts to hedge against changes in the price of petroleum products we expect to sell in future periods. Our NYMEX contracts fall into one of three hedge categories:
Hedge Category |  | 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 is recorded to accumulated other comprehensive income/loss and reclassified to earnings when the forecasted transaction occurs. Any 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 is 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 under ASC 815, Derivatives and Hedging. |  | Changes in the fair value of these agreements are recognized currently in earnings.
Period changes in the fair value of NYMEX agreements that are accounted for as economic hedges, other than those economic hedges of our pipeline product overages (see discussion of these below), 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 commodity activities are recognized currently in earnings as adjustments to product sales. We also use CME-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 CME butane futures agreements at September 30, 2014 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 October 2014 and November 2016
NYMEX - Economic Hedges(1) |  | 4.0 million barrels of refined products and crude oil |  | Between October 2014 and October 2015
CME Butane Futures Agreements - Economic Hedges |  | 0.9 million barrels of butane |  | Between October 2014 and April 2015
(1) | Of the 4.0 million barrels of products we have economically hedged at September 30, 2014, we had open agreements which swap the pricing on 0.8 million of those barrels from New York harbor to Platts Group 3 or Platts Gulf Coast, which are the geographic locations where these barrels will be sold.
Energy Commodity Derivatives Contracts and Deposits Offsets At September 30, 2014, we had made margin deposits of $0.1 million related to our NYMEX and CME contracts, which were recorded as a current asset under energy commodity derivatives deposits on our consolidated balance sheet. We have the right to offset the combined fair values of our open NYMEX contracts and our open CME 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 CME 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 CME 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, 2013 and September 30, 2014 (in thousands):
|  | December 31, 2013
Description |  | Gross Amounts of Recognized Liabilities |  | Gross Amounts of Assets Offset in the Consolidated Balance Sheet |  | Net Amounts of Liabilities Presented in the Consolidated Balance Sheet(1) |  | Margin Deposit Amounts Not Offset in the Consolidated Balance Sheet |  | Net Asset Amount
Energy commodity derivatives |  | $ | (7,167 | ) |  | $ | 2,665 |  |  | $ | (4,502 | ) |  | $ | 14,782 |  |  | $ | 10,280 |
|  | September 30, 2014
Description |  | Gross Amounts of Recognized Assets |  | Gross Amounts of Liabilities Offset in the Consolidated Balance Sheet |  | Net Amounts of Assets Presented in the Consolidated Balance Sheet(2) |  | Margin Deposit Amounts Not Offset in the Consolidated Balance Sheet |  | Net Asset Amount
Energy commodity derivatives |  | $ | 31,909 |  |  | $ | (4,222 | ) |  | $ | 27,687 |  |  | $ | 133 |  |  | $ | 27,820 |
(1) Net amount includes energy commodity derivative contracts classified as current liabilities, net, of $6,737 and noncurrent assets of $2,235. (2) Net amount includes energy commodity derivative contracts classified as current assets, net, of $27,757 and noncurrent liabilities of $70. Impact of Derivatives on Income Statement, Balance Sheet, Cash Flows and AOCL The changes in derivative activity included in AOCL for the three and nine months ended September 30, 2013 and 2014 were as follows (in thousands):
| Three Months Ended September 30, |  | Nine Months Ended September 30,
Derivative Gains (Losses) Included in AOCL | 2013 |  | 2014 |  | 2013 |  | 2014
Beginning balance | $ | 13,892 |  |  | $ | 9,835 |  |  | $ | 14,126 |  |  | $ | 13,627 |
Net loss on cash flow hedges | (36 | ) |  | (1,830 | ) |  | (4,596 | ) |  | (5,443 | )
Reclassification of net loss (gain) on cash flow hedges to income | (41 | ) |  | 119 |  |  | 4,285 |  |  | (60 | )
Ending balance | $ | 13,815 |  |  | $ | 8,124 |  |  | $ | 13,815 |  |  | $ | 8,124 |
During 2014, we had open NYMEX contracts on 0.7 million barrels of crude oil that were designated as fair value hedges. These agreements hedge against the change in value of our crude oil linefill and tank bottom inventories. Because there was no ineffectiveness recognized on these hedges, the cumulative losses of $11.0 million from the agreements as of September 30, 2014 were fully offset by a cumulative increase of $11.2 million to tank bottom inventory and a cumulative decrease of $0.2 million to our crude oil linefill, which is reported in other current assets; therefore, there was no net impact from these agreements on our results of operations. The following tables provide a summary of the effect on our consolidated statements of income for the three and nine months ended September 30, 2013 and 2014 of derivatives accounted for under ASC 815-30, Derivatives and Hedging—Cash Flow Hedges, that were designated as hedging instruments (in thousands):
|  | Three Months Ended September 30, 2013
|  | Amount of Loss Recognized in AOCL on Derivative |  | Location of Gain Reclassified from AOCL into Income |  | Amount of Gain Reclassified from AOCL into Income
Derivative Instrument |  |  |  | Effective Portion |  | Ineffective Portion
Interest rate contracts |  |  | $ | (36 | ) |  |  | Interest expense |  |  | $ | 41 |  |  |  |  | $ | — |  |
|  | Three Months Ended September 30, 2014
|  | Amount of Loss Recognized in AOCL on Derivative |  | Location of Loss Reclassified from AOCL into Income |  | Amount of Loss Reclassified from AOCL into Income
Derivative Instrument |  |  |  | Effective Portion |  | Ineffective Portion
Interest rate contracts |  |  | $ | (1,830 | ) |  |  | Interest expense |  |  | $ | (119 | ) |  |  |  | $ | — |  |
|  | Nine Months Ended September 30, 2013
|  | 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
Derivative Instrument |  |  |  | Effective Portion |  | Ineffective Portion
Interest rate contracts |  |  | $ | (36 | ) |  |  | Interest expense |  |  | $ | 123 |  |  |  |  | $ | — |  |
NYMEX commodity contracts |  |  | (4,560 | ) |  |  | Product sales revenue |  |  | (4,408 | ) |  |  |  | — |  |
Total cash flow hedges |  |  | $ | (4,596 | ) |  |  | Total |  |  | $ | (4,285 | ) |  |  |  | $ | — |  |
|  | Nine Months Ended September 30, 2014
|  | 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
Derivative Instrument |  |  |  | Effective Portion |  | Ineffective Portion
Interest rate contracts |  |  | $ | (5,443 | ) |  |  | Interest expense |  |  | $ | (123 | ) |  |  |  | $ | 183 |  |
As of September 30, 2014, the net loss estimated to be classified to interest expense over the next twelve months from AOCL is approximately $0.2 million. The following table provides a summary of the effect on our consolidated statements of income for the three and nine months ended September 30, 2013 and 2014 of derivatives accounted for under ASC 815; Derivatives and Hedging—Overall, that were not designated as hedging instruments (in thousands):
|  |  |  | Amount of Gain (Loss) Recognized on Derivative
|  |  |  | Three Months Ended |  | Nine Months Ended
|  | Location of Gain (Loss) Recognized on Derivative |  | September 30, |  | September 30,
Derivative Instrument |  |  | 2013 |  | 2014 |  | 2013 |  | 2014
NYMEX commodity contracts |  | Product sales revenue |  | $ | (2,035 | ) |  | $ | 47,545 |  |  | $ | 8,546 |  |  | $ | 33,715 |
NYMEX commodity contracts |  | Operating expenses |  | (3,107 | ) |  | 4,350 |  |  | (1,645 | ) |  | 447 |
CME butane futures agreements |  | Cost of product sales |  | 2,878 |  |  | (3,913 | ) |  | 2,117 |  |  | (3,137 | )
|  | Total |  | $ | (2,264 | ) |  | $ | 47,982 |  |  | $ | 9,018 |  |  | $ | 31,025 |
The impact of the derivatives in the above table was reflected as cash from operations on our consolidated statements of cash flows. The following tables provide a summary of the fair value of derivatives accounted for under ASC 815, Derivatives and Hedging, which are presented on a net basis in our consolidated balance sheets, that were designated as hedging instruments as of December 31, 2013 and September 30, 2014 (in thousands):
|  | 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 |
|  | September 30, 2014
|  | Asset Derivatives |  | Liability Derivatives
Derivative Instrument |  | Balance Sheet Location |  | Fair Value |  | Balance Sheet Location |  | Fair Value
NYMEX commodity contracts |  | Energy commodity derivatives contracts, net |  | $ | 30 |  |  | Energy commodity derivatives contracts, net |  | $ | — |
NYMEX commodity contracts |  | Other noncurrent assets |  | — |  |  | Other noncurrent liabilities |  | 70 |
Interest rate contracts |  | Other current assets |  | 713 |  |  | Other current liabilities |  | 2,543 |
|  | Total |  | $ | 743 |  |  | Total |  | $ | 2,613 |
The following tables provide a summary of the fair value of derivatives accounted for under ASC 815, Derivatives and Hedging, which are presented on a net basis in our consolidated balance sheets, that were not designated as hedging instruments as of December 31, 2013 and September 30, 2014 (in thousands):
|  | 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 |  | $ | 48 |  |  | Energy commodity derivatives contracts, net |  | $ | 7,021 |
CME butane futures agreements |  | Energy commodity derivatives contracts, net |  | 382 |  |  | Energy commodity derivatives contracts, net |  | — |
|  | Total |  | $ | 430 |  |  | Total |  | $ | 7,021 |
|  | September 30, 2014
|  | Asset Derivatives |  | Liability Derivatives
Derivative Instrument |  | Balance Sheet Location |  | Fair Value |  | Balance Sheet Location |  | Fair Value
NYMEX commodity contracts |  | Energy commodity derivatives contracts, net |  | $ | 31,879 |  |  | Energy commodity derivatives contracts, net |  | $ | 897 |
CME butane futures agreements |  | Energy commodity derivatives contracts, net |  | — |  |  | Energy commodity derivatives contracts, net |  | 3,255 |
|  | Total |  | $ | 31,879 |  |  | Total |  | $ | 4,152 |

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=35736893&loc=d3e80748-113994 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4A -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5618551-113959 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4K -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5708775-113959 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 25 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6886632&loc=d3e76258-113986 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4E -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5624181-113959 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 45 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6441202&loc=d3e80720-113993 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4H -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5624258-113959 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4B -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5624163-113959 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(n)) -URI http://asc.fasb.org/extlink&oid=26873400&loc=d3e23780-122690 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4J -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5708773-113959 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=35736893&loc=d3e80784-113994 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4D -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5624177-113959 Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=35706170&loc=d3e41620-113959 Reference 14: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1A -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5579245-113959 Reference 15: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1B -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5580258-113959 Reference 16: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5579240-113959 Reference 17: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=35706170&loc=d3e41641-113959 Reference 18: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=35706170&loc=d3e41638-113959 Reference 19: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4C -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5624171-113959 + Details
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