v3.20.2
Derivative Financial Instruments
 9 Months Ended
Sep. 30, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments Derivative Financial Instruments
Interest Rate Derivatives

In second quarter 2020, upon issuance of $500.0 million of 3.25% notes due 2030, we terminated and settled $100.0 million of treasury lock agreements that we had previously entered into to protect against the variability of future interest payments for a loss of $10.4 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 and will be recognized into earnings as an adjustment to our periodic interest expense over the term of the hedged transaction in accordance with our hedging strategy.

Commodity Derivatives

Our open futures contracts at September 30, 2020 were as follows:
Type of Contract/Accounting MethodologyProduct Represented by the Contract and Associated BarrelsMaturity Dates
Futures - Economic Hedges
3.1 million barrels of refined products and crude oil
Between October 2020 and November 2022
Futures - Economic Hedges
0.6 million barrels of gas liquids
Between October and December 2020
Commodity Derivatives Contracts and Deposits Offsets

At December 31, 2019 and September 30, 2020, we had made margin deposits of $27.4 million and $14.0 million, respectively, for our futures contracts with our counterparties, which were recorded as current assets under commodity derivatives deposits on our consolidated balance sheets. We have the right to offset the combined fair values of our open futures contracts against our margin deposits under a master netting arrangement for each counterparty; however, we have elected to present the combined fair values of our open futures contracts separately from the related margin deposits on our consolidated balance sheets. Additionally, we have the right to offset the fair values of our futures contracts together for each counterparty, which we have elected to do, and we report the combined net balances on our consolidated balance sheets. A schedule of the derivative amounts we have offset and the deposit amounts we could offset under a master netting arrangement are provided below as of December 31, 2019 and September 30, 2020 (in thousands):
DescriptionGross Amounts of Recognized LiabilitiesGross Amounts of Assets Offset in the Consolidated Balance SheetsNet Amounts of Liabilities Presented in the Consolidated Balance SheetsMargin Deposit Amounts Not Offset in the Consolidated Balance Sheets
Net Asset Amount(1)
As of 12/31/2019$(11,033)$811 $(10,222)$27,415 $17,193 
As of 9/30/2020$(4,386)$2,740 $(1,646)$14,031 $12,385 
(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 September 30, 2020 was $17.3 million and $12.3 million, respectively.

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, 2019 and 2020 were as follows (in thousands):
 
Three Months EndedNine Months Ended
 September 30,September 30,
Derivative Losses Included in AOCL2019202020192020
Beginning balance$(36,287)$(57,748)$(26,480)$(48,960)
Net loss on cash flow hedges(14,181)— (25,216)(10,444)
Reclassification of net loss on cash flow hedges to income699 896 1,927 2,552 
Ending balance$(49,769)$(56,852)$(49,769)$(56,852)
The following is a summary of the effect on our consolidated statements of income for the three and nine months ended September 30, 2019 and 2020 of derivatives that were designated as cash flow hedges (in thousands):
Interest Rate Contracts
Amount of Loss Recognized in AOCL on DerivativesLocation of Loss Reclassified from AOCL into  IncomeAmount of Loss Reclassified from AOCL into Income
Three Months Ended September 30, 2019$(14,181)Interest expense$(699)
Three Months Ended September 30, 2020$— Interest expense$(896)
Nine Months Ended September 30, 2019$(25,216)Interest expense$(1,927)
Nine Months Ended September 30, 2020$(10,444)Interest expense$(2,552)

As of September 30, 2020, the net loss estimated to be classified to interest expense over the next twelve months from AOCL is approximately $3.3 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, 2019 and 2020 of derivatives that were not designated as hedging instruments (in thousands):
  Amount of Gain (Loss) Recognized on Derivatives
Three Months EndedNine Months Ended
 Location of Gain (Loss)
Recognized on Derivatives		September 30,September 30,
Derivative Instrument2019202020192020
Futures contractsProduct sales revenue$17,626 $(7,734)$(41,504)$89,280 
Futures contractsCost of product sales(5,581)1,815 (9,456)(2,529)
Basis derivative agreementOther operating income (expense)(3,910)(3,155)(8,869)(2,654)
Total$8,135 $(9,074)$(59,829)$84,097 
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 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 September 30, 2020 (in thousands):
 December 31, 2019
 Asset DerivativesLiability Derivatives
Derivative InstrumentBalance Sheet LocationFair ValueBalance Sheet LocationFair 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 
 September 30, 2020
 Asset DerivativesLiability Derivatives
Derivative InstrumentBalance Sheet LocationFair ValueBalance Sheet LocationFair Value
Futures contracts
Commodity derivatives contracts, net
$1,095 
Commodity derivatives contracts, net
$3,983 
Futures contractsOther noncurrent assets1,645 Other noncurrent assets403 
Basis derivative agreementOther current assets— Other current liabilities9,280 
Basis derivative agreementOther noncurrent assets— Other noncurrent liabilities2,994 
Total$2,740 Total$16,660