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Derivative Financial Instruments | 9 Months Ended
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Sep. 30, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Financial Instruments | Derivative Financial Instruments Interest Rate Derivatives We periodically enter into interest rate derivatives to hedge the fair value of debt or hedge against variability in interest rates. For interest rate cash flow hedges, we record the unrealized gains or losses as an adjustment to other comprehensive income. The realized gains and losses from our cash flow hedges are recognized into earnings as an adjustment to our periodic interest expense over the life of the related debt issuance. For fair value hedges on long-term debt, we record the unrealized gains or losses as an adjustment to long-term debt, and realized amounts as an adjustment to our periodic interest expense. Adjustments resulting from discontinued hedges continue to be recognized in accordance with their historic hedging relationships. In third quarter 2019, upon issuance of our $500.0 million of 3.95% notes due 2050, we terminated and settled treasury lock agreements we had previously entered into to protect against the variability of interest payments on this anticipated debt issuance for a loss of $25.3 million, which was included in our statements of cash flows as a net payment on financial derivatives. These agreements were accounted for as cash flow hedges. The loss was recorded to other comprehensive income (loss) and will be recognized into earnings as an adjustment to our periodic interest expense over the life of the associated notes. In first quarter 2019, upon issuance of $500.0 million of 4.85% notes due 2049, we terminated and settled treasury lock agreements that we had previously entered into to protect against the variability of interest payments on this anticipated debt issuance for a loss of $8.0 million, which was included in our statements of cash flows as a net payment on financial derivatives. These agreements were accounted for as cash flow hedges. The loss was recorded to other comprehensive income (loss) and will be recognized into earnings as an adjustment to our periodic interest expense over the life of the associated notes. Commodity Derivatives Our butane blending activities produce gasoline, and we can reasonably estimate the timing and quantities of sales of these products. We use a combination of exchange-traded commodities futures contracts and forward purchase and sale contracts to help manage commodity price changes and mitigate the risk of decline in the product margin realized from our butane blending activities. Further, certain of our other commercial operations generate petroleum products, and we also use futures contracts to hedge against price changes for some of these commodities. Forward physical purchase and sale contracts that qualify for and are elected as normal purchases and sales are accounted for using traditional accrual accounting, whereby changes in the mark-to-market values of such contracts are not recognized in income; rather the revenues and expenses associated with such transactions are recognized during the period when commodities are physically delivered or received. Forward physical commodity contracts subject to this exception are evaluated for the probability of future delivery and are periodically tested once the forecasted period has passed to determine whether similar forward contracts are probable of physical delivery in the future. We record the effective portion of the gains or losses for commodity-based contracts designated as fair value hedges as adjustments to the assets being hedged and the ineffective portions as well as amounts excluded from the assessment of hedge effectiveness as adjustments to other income or expense. We recognize the change in fair value of economic hedges that hedge against changes in the price of petroleum products that we expect to sell or purchase in the future currently in earnings as adjustments to product sales revenue, cost of product sales or operating expenses, as applicable. Our open futures contracts at September 30, 2019 were as follows:
Type of Contract/Accounting Methodology |  | Product Represented by the Contract and Associated Barrels |  | Maturity Dates
Futures - Economic Hedges |  | 4.5 million barrels of refined products and crude oil |  | Between October 2019 and April 2020
Futures - Economic Hedges |  | 1.5 million barrels of butane and natural gasoline |  | Between October 2019 and April 2020
Energy Commodity Derivatives Contracts and Deposits Offsets At September 30, 2019, we had made margin deposits of $21.8 million for our future contracts with our counterparties, which were recorded as current assets under energy commodity derivatives deposits on our consolidated balance sheets. At December 31, 2018, we held margin deposits of $37.3 million for our future contracts with our counterparties, which were recorded as current liabilities under energy commodity derivatives deposits on our consolidated balance sheets. We have the right to offset the combined fair values of our open futures contracts against our margin deposits under a master netting arrangement for each counterparty; however, we have elected to present the combined fair values of our open futures contracts separately from the related margin deposits on our consolidated balance sheets. Additionally, we have the right to offset the fair values of our futures contracts 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, 2018 and September 30, 2019 (in thousands):
Description |  | Gross Amounts of Recognized Assets (Liabilities) |  | Gross Amounts of Assets (Liabilities) Offset in the Consolidated Balance Sheets |  | Net Amounts of Assets (Liabilities) Presented in the Consolidated Balance Sheets |  | Margin Deposit Amounts Not Offset in the Consolidated Balance Sheets |  | Net Asset Amount(1)
As of 12/31/2018 |  | $ | 62,166 |  |  | $ | (7,155 | ) |  | $ | 55,011 |  |  | $ | (37,328 | ) |  | $ | 17,683 |
As of 9/30/2019 |  | $ | 16,978 |  |  | $ | (12,139 | ) |  | $ | 4,839 |  |  | $ | 21,811 |  |  | $ | 26,650 |
(1) | Amount represents the maximum loss we would incur if all of our counterparties failed to perform on their derivative contracts.
Basis Derivative Agreement During 2019, we entered into a basis derivative agreement with a joint venture co-owner’s affiliate, and, contemporaneously, that affiliate entered into an intrastate transportation services agreement with the joint venture. Settlements under the basis derivative agreement are determined based on the basis differential of crude oil prices at different market locations and a notional volume of 30,000 barrels per day. As a result, we account for this agreement as a derivative. The agreement will expire in early 2022. We recognize the changes in fair value of this agreement based on forward price curves for crude oil in West Texas and the Houston Gulf Coast in other operating income (expense) in our consolidated statements of income. The liability for this agreement at September 30, 2019 was $17.8 million. Impact of Derivatives on Our Financial Statements Comprehensive Income The changes in derivative activity included in AOCL for the three and nine months ended September 30, 2018 and 2019 were as follows (in thousands):
| Three Months Ended |  | Nine Months Ended
| September 30, |  | September 30,
Derivative Losses Included in AOCL | 2018 |  | 2019 |  | 2018 |  | 2019
Beginning balance | $ | (25,165 | ) |  | $ | (36,287 | ) |  | $ | (33,755 | ) |  | $ | (26,480 | )
Net gain (loss) on cash flow hedges | 6,852 |  |  | (14,181 | ) |  | 13,963 |  |  | (25,216 | )
Reclassification of net loss on cash flow hedges to income | 740 |  |  | 699 |  |  | 2,219 |  |  | 1,927 |
Ending balance | $ | (17,573 | ) |  | $ | (49,769 | ) |  | $ | (17,573 | ) |  | $ | (49,769 | )
The following is a summary of the effect on our consolidated statements of income for the three and nine months ended September 30, 2018 and 2019 of derivatives that were designated as cash flow hedges (in thousands):
|  | Interest Rate Contracts
|  | Amount of Gain (Loss) Recognized in AOCL on Derivatives |  | Location of Loss Reclassified from AOCL into Income |  | Amount of Loss Reclassified from AOCL into Income
Three Months Ended September 30, 2018 |  | $ | 6,852 |  |  | Interest expense |  | $ | (740 | )
Three Months Ended September 30, 2019 |  | $ | (14,181 | ) |  | Interest expense |  | $ | (699 | )
Nine Months Ended September 30, 2018 |  | $ | 13,963 |  |  | Interest expense |  | $ | (2,219 | )
Nine Months Ended September 30, 2019 |  | $ | (25,216 | ) |  | Interest expense |  | $ | (1,927 | )
As of September 30, 2019, the net loss estimated to be classified to interest expense over the next twelve months from AOCL is approximately $3.2 million. This amount relates to the amortization of losses on interest rate contracts over the life of the related debt instruments. The following table provides a summary of the effect on our consolidated statements of income for the three and nine months ended September 30, 2018 and 2019 of derivatives that were not designated as hedging instruments (in thousands):
|  |  |  | Amount of Gain (Loss) Recognized on Derivatives
|  |  |  | Three Months Ended |  | Nine Months Ended
|  | Location of Gain (Loss) Recognized on Derivatives |  | September 30, |  | September 30,
Derivative Instrument |  |  | 2018 |  | 2019 |  | 2018 |  | 2019
Futures contracts |  | Product sales revenue |  | $ | (24,354 | ) |  | $ | 17,626 |  |  | $ | (70,140 | ) |  | $ | (41,504 | )
Futures contracts |  | Cost of product sales |  | 11,665 |  |  | (5,581 | ) |  | 16,058 |  |  | (9,456 | )
Basis derivative agreement |  | Other operating income (expense) |  | — |  |  | (3,910 | ) |  | — |  |  | (8,869 | )
|  | Total |  | $ | (12,689 | ) |  | $ | 8,135 |  |  | $ | (54,082 | ) |  | $ | (59,829 | )
The impact of the derivatives in the above table was reflected as cash from operations on our consolidated statements of cash flows. Balance Sheets The following table provides a summary of the fair value of derivatives, which are presented on a net basis in our consolidated balance sheets, that were designated as hedging instruments as of December 31, 2018 (in thousands). There were no balances outstanding at September 30, 2019.
|  | December 31, 2018
|  | Asset Derivatives |  | Liability Derivatives
Derivative Instrument |  | Balance Sheet Location |  | Fair Value |  | Balance Sheet Location |  | Fair Value
Futures contracts |  | Energy commodity derivatives contracts, net |  | $ | 462 |  |  | Energy commodity derivatives contracts, net |  | $ | — |
Interest rate contracts |  | Other current assets |  | 312 |  |  | Other current liabilities |  | 8,438 |
|  | Total |  | $ | 774 |  |  | Total |  | $ | 8,438 |
The following tables provide a summary of the fair value of derivatives, which are presented on a net basis in our consolidated balance sheets, that were not designated as hedging instruments as of December 31, 2018 and September 30, 2019 (in thousands):
|  | December 31, 2018
|  | Asset Derivatives |  | Liability Derivatives
Derivative Instrument |  | Balance Sheet Location |  | Fair Value |  | Balance Sheet Location |  | Fair Value
Futures contracts |  | Energy commodity derivatives contracts, net |  | $ | 61,704 |  |  | Energy commodity derivatives contracts, net |  | $ | 7,155 |
|  | September 30, 2019
|  | Asset Derivatives |  | Liability Derivatives
Derivative Instrument |  | Balance Sheet Location |  | Fair Value |  | Balance Sheet Location |  | Fair Value
Futures contracts |  | Energy commodity derivatives contracts, net |  | $ | 16,978 |  |  | Energy commodity derivatives contracts, net |  | $ | 12,139 |
Basis derivative agreement |  | Other current assets |  | — |  |  | Other current liabilities |  | 8,957 |
Basis derivative agreement |  | Other noncurrent assets |  | — |  |  | Other noncurrent liabilities |  | 8,798 |
|  | Total |  | $ | 16,978 |  |  | Total |  | $ | 29,894 |

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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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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