Derivative Financial Instruments

12 Months Ended

Dec. 31, 2015

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.

During 2015, 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 2016. The fair values of these contracts at December 31, 2015 were recorded on our balance sheets as an other current asset of $2.2 million and an other current liability of $0.7 million with an offset to other comprehensive income. We account for these agreements as cash flow hedges.

During 2014, we entered into $250.0 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 anticipated issuing in 2015. We accounted for these agreements as cash flow hedges. When we issued the $250.0 million of 4.20% notes due 2045 in first quarter 2015, we settled the associated interest rate swap agreements for a loss of $42.9 million. The loss was recorded to other comprehensive income ($26.5 million and $16.4 million recorded in 2014 and 2015, respectively) and will be 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 a net payment on financial derivatives in the financing activities of our consolidated statements of cash flows in 2015.

Also during 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 in 2014.

During 2013, we entered into $150.0 million of Treasury lock contracts to hedge against the risk of variability of future interest payments on an anticipated debt issuance. We accounted for these contracts as cash flow hedges. These contracts were settled in fourth quarter 2013 for a loss of $0.2 million upon issuance of the associated debt. 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 in 2013.

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 NYMEX and forward purchase and sale contracts to help manage commodity price changes, which is intended to mitigate the risk of decline in the product margin realized from our butane blending activities that we choose to hedge. Further, certain of our other commercial operations generate petroleum products. We use NYMEX contracts to hedge against future price changes for some of these commodities.

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.

The NYMEX contracts that we enter into fall into one of three hedge categories:

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 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 and amounts excluded from the assessment of hedge effectiveness 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 value of these agreements are recognized currently in earnings.

During the years ended December 31, 2014 and 2015, none of the commodity hedging contracts we entered into qualified for or were designated as cash flow hedges.

Period changes in the fair value of NYMEX agreements that are accounted for as economic hedges (other than those economic hedges of our butane purchases and our pipeline product overages as discussed 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 NYMEX contracts, 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.

We 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.

Additionally, we hold crude oil barrels that we use for operational purposes which we classify as a long-term asset on our balance sheets and which is reported as tank bottoms. We use NYMEX contracts to hedge against changes in the price of these crude oil barrels. We record the effective portion of the gains or losses for those contracts that qualify as fair value hedges as adjustments to the asset being hedged and the ineffective portions as well as amounts excluded from the assessment of hedge effectiveness as adjustments to other income or expense.

As outlined in the table below, our open NYMEX contracts at December 31, 2015 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 2016 and November 2017
NYMEX - Economic Hedges	4.5 million barrels of refined products and crude oil	Between January and December 2016
NYMEX - Economic Hedges	0.9 million barrels of butane	Between January and December 2016

Energy Commodity Derivatives Contracts and Deposits Offsets

At December 31, 2015, we had received margin deposits of $24.3 million for our NYMEX contracts with our counterparties, which were recorded as a current liability under energy commodity derivatives deposits on our consolidated balance sheets. We have the right to offset the combined fair values of our open NYMEX 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 NYMEX contracts 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 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, 2014 and 2015 (in thousands):

	December 31, 2014
Description	Gross Amounts of Recognized Assets		Gross Amounts of Liabilities Offset in the Consolidated Balance Sheets			Net Amounts of Assets Presented in the Consolidated Balance Sheets(1)		Margin Deposit Amounts Not Offset in the Consolidated Balance Sheets			Net Asset Amount(3)
Energy commodity derivatives	$	106,764	$	(10,622	)	$	96,142	$	(78,279	)	$	17,863

	December 31, 2015
Description	Gross Amounts of Recognized Assets		Gross Amounts of Liabilities Offset in the Consolidated Balance Sheets			Net Amounts of Assets Presented in the Consolidated Balance Sheets(2)		Margin Deposit Amounts Not Offset in the Consolidated Balance Sheets			Net Asset Amount(3)
Energy commodity derivatives	$	48,367	$	(5,646	)	$	42,721	$	(24,252	)	$	18,469

(1) Net amount includes energy commodity derivative contracts classified as current assets, net, of $87,151, current liabilities of $5,413 and noncurrent assets of $14,404.

(2) Net amount includes energy commodity derivative contracts classified as current assets, net, of $39,243 and noncurrent assets of $3,478.

(3) This represents the maximum amount of loss we would incur if our counterparties failed to perform on their derivative contracts.

Impact of Derivatives on Our Financial Statements

Comprehensive Income

The changes in derivative activity included in AOCL for the years ended December 31, 2013, 2014 and 2015 were as follows (in thousands):

	Year Ended December 31,
Derivative Gains (Losses) Included in AOCL	2013			2014			2015
Beginning balance	$	14,126		$	13,627		$	(16,587	)
Net loss on interest rate contract cash flow hedges	(4,744		)	(30,090		)	(14,904		)
Reclassification of net loss (gain) on cash flow hedges to income	4,245			(124		)	1,365
Ending balance	$	13,627		$	(16,587	)	$	(30,126	)

The following is a summary of the effect on our consolidated statements of income for the years ended December 31, 2013, 2014 and 2015 of derivatives accounted for under ASC 815-30, Derivatives and Hedging—Cash Flow Hedges, that were designated as hedging instruments (in thousands).

	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
						Effective Portion				Ineffective Portion
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	)		$	—

	Year Ended December 31, 2014
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
						Effective Portion				Ineffective Portion
Interest rate contracts		$	(30,090	)	Interest expense		$	(242	)		$	366

	Year Ended December 31, 2015
Derivative Instrument	Amount of Loss Recognized in AOCL on  Derivative				Location of Loss Reclassified from AOCL into Income	Amount of Loss Reclassified from AOCL into Income
						Effective Portion				Ineffective Portion
Interest rate contracts		$	(14,904	)	Interest expense		$	(1,365	)		$	—

As of December 31, 2015, the net loss estimated to be classified to interest expense over the next twelve months from AOCL is approximately $1.4 million. This amount relates to the amortization of the hedged losses on the interest rate swap contracts over the life of the related debt instruments.

During 2014 and 2015, we had open NYMEX contracts on 0.7 million barrels of crude oil that were designated as fair value hedges. Because there was no ineffectiveness recognized on these hedges, the cumulative gains at December 31, 2014 and 2015 of $13.3 million and $27.9 million, respectively, from the agreements were offset by a cumulative decrease to tank bottoms and linefill. The differential between the current spot price and forward price is excluded from the assessment of hedge effectiveness for these fair value hedges.

During 2014 and 2015, we recognized a gain (loss) of $(8.6) million and $1.0 million, respectively, for the amounts we excluded from the assessment of effectiveness of these fair value hedges, which we reported as other income/expense on our consolidated statements of income.

The following table provides a summary of the effect on our consolidated statements of income for the years ended December 31, 2013, 2014 and 2015 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	2013			2014			2015
NYMEX commodity contracts	Product sales revenue	$	(6,189	)	$	145,320		$	68,426
NYMEX commodity contracts	Operating expenses	(3,770		)	17,818			11,819
NYMEX commodity contracts	Cost of product sales	2,682			(17,141		)	(8,997		)
	Total	$	(7,277	)	$	145,997		$	71,248

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 amounts included on our consolidated balance sheets that were designated as hedging instruments as of December 31, 2014 and 2015 (in thousands):

	December 31, 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	$	360	Energy commodity derivatives contracts, net	$	—
NYMEX commodity contracts	Other noncurrent assets	14,404		Other noncurrent liabilities	—
Interest rate contracts	Other current assets	—		Other current liabilities	26,478
	Total	$	14,764	Total	$	26,478
	December 31, 2015
	Asset Derivatives			Liability Derivatives
Derivative Instrument	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
NYMEX commodity contracts	Energy commodity derivatives contracts, net	$	60	Energy commodity derivatives contracts, net	$	—
NYMEX commodity contracts	Other noncurrent assets	3,478		Other noncurrent liabilities	—
Interest rate contracts	Other current assets	2,179		Other current liabilities	653
	Total	$	5,717	Total	$	653

The following tables provide a summary of the amounts included on our consolidated balance sheets that were not designated as hedging instruments as of December 31, 2014 and 2015 (in thousands):

	December 31, 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	$	92,000	Energy commodity derivatives contracts, net	$	10,622
	December 31, 2015
	Asset Derivatives			Liability Derivatives
Derivative Instrument	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
NYMEX commodity contracts	Energy commodity derivatives contracts, net	$	44,829	Energy commodity derivatives contracts, net	$	5,646

See Note 19 – Fair Value Disclosures for additional details regarding our derivative contracts.