v3.20.1
Derivative Financial Instruments
 3 Months Ended
Mar. 31, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments
Derivative Financial Instruments

Interest Rate Derivatives

In first quarter 2020, we entered into $100.0 million of treasury lock agreements to protect against the risk of variability on a portion of a debt issuance we anticipate to occur by early 2021. The fair value of these interest rate derivative agreements at March 31, 2020 was recorded as a current liability of $11.9 million, with the offset recorded to other comprehensive income. We account for these agreements as cash flow hedges.

Commodity Derivatives

Our open futures contracts at March 31, 2020 were as follows:
Type of Contract/Accounting Methodology
 
Product Represented by the Contract and Associated Barrels
 
Maturity Dates
Futures - Economic Hedges
 
2.3 million barrels of refined products and crude oil
 
Between April 2020 and November 2022
Futures - Economic Hedges
 
0.1 million barrels of gas liquids
 
April 2020


Commodity Derivatives Contracts and Deposits Offsets

At March 31, 2020, we had received margin deposits of $50.3 million for our futures contracts with our counterparties, which were recorded as current liabilities under commodity derivatives deposits on our consolidated balance sheets. At December 31, 2019, we had made margin deposits of $27.4 million for our futures contracts with our counterparties, which were recorded as current assets under 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, 2019 and March 31, 2020 (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 12/31/2019
 
$
(11,033
)
 
$
811

 
$
(10,222
)
 
$
27,415

 
$
17,193

As of 3/31/2020
 
$
66,007

 
$
(1,054
)
 
$
64,953

 
$
(50,345
)
 
$
14,608

 
 
 
 
 
 
 
 
 
 
 

(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 December 31, 2019 and March 31, 2020 was $17.3 million and $18.5 million, respectively.

Impact of Derivatives on Our Financial Statements

Comprehensive Income

The changes in derivative activity included in AOCL for the three months ended March 31, 2019 and 2020 were as follows (in thousands):
 
 
Three Months Ended
 
March 31,
Derivative Losses Included in AOCL
2019
 
2020
Beginning balance
$
(26,480
)
 
$
(48,960
)
Net loss on cash flow hedges
(4,376
)
 
(11,914
)
Reclassification of net loss on cash flow hedges to income
627

 
809

Ending balance
$
(30,229
)
 
$
(60,065
)

The following is a summary of the effect on our consolidated statements of income for the three months ended March 31, 2019 and 2020 of derivatives that were designated as cash flow hedges (in thousands):
 
 
Interest Rate Contracts
 
 
Amount of 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 March 31, 2019
 
$
(4,376
)
 
Interest expense
 
$
(627
)
Three Months Ended March 31, 2020
 
$
(11,914
)
 
Interest expense
 
$
(809
)

As of March 31, 2020, 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 months ended March 31, 2019 and 2020 of derivatives that were not designated as hedging instruments (in thousands):
 
 
 
 
Amount of Gain (Loss) Recognized on Derivatives
 
 
 
 
Three Months Ended
 
 
 
Location of Gain (Loss)
Recognized on Derivatives
 
March 31,
 
Derivative Instrument
 
 
2019
 
2020
 
Futures contracts
 
Product sales revenue
 
$
(54,511
)
 
$
123,769

 
Futures contracts
 
Cost of product sales
 
2,273

 
(3,927
)
 
Basis derivative agreement
 
Other operating income (expense)
 
—

 
(2,899
)
 
 
 
Total
 
$
(52,238
)
 
$
116,943

 

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 March 31, 2020 (in thousands).
There were no balances outstanding at December 31, 2019.
 
 
 
 
 
 
 
 
 
 
 
March 31, 2020
 
 
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Interest rate contracts
 
Other current assets
 
$
—

 
Other current liabilities
 
$
11,914

 
 
 
 
 
 
 
 
 


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, 2019 and March 31, 2020 (in thousands):
 
 
December 31, 2019
 
 
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Futures contracts
 
Commodity derivatives contracts, net
 
$
811

 
Commodity derivatives contracts, net
 
$
11,033

Basis derivative agreement
 
Other current assets
 
—

 
Other current liabilities
 
8,457

Basis derivative agreement
 
Other noncurrent assets
 
—

 
Other noncurrent liabilities
 
8,847

 
 
Total
 
$
811

 
Total
 
$
28,337

 
 
 
 
 
 
 
 
 
 
 
March 31, 2020
 
 
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Futures contracts
 
Commodity derivatives contracts, net
 
$
62,845

 
Commodity derivatives contracts, net
 
$
1,046

Futures contracts
 
Other noncurrent assets
 
3,162

 
Other noncurrent liabilities
 
8

Basis derivative agreement
 
Other current assets
 
—

 
Other current liabilities
 
9,791

Basis derivative agreement
 
Other noncurrent assets
 
—

 
Other noncurrent liabilities
 
8,685

 
 
Total
 
$
66,007

 
Total
 
$
19,530