Derivative Financial Instruments

9 Months Ended

Sep. 30, 2016

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 our debt or interest on 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 2016, we entered into $100.0 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 2018. The fair values of these contracts at September 30, 2016 were recorded on our balance sheets as an other noncurrent liability of $3.5 million, with the offset recorded to other comprehensive income. We account for these agreements as cash flow hedges.

During 2015 and 2016, 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 2016. We accounted for these agreements as cash flow hedges. When we issued $500.0 million of 4.25% notes due 2046 in September 2016, we settled the associated interest rate swap agreements for a loss of $19.3 million. The loss was recorded to other comprehensive income and will be recognized into earnings as an adjustment to our periodic interest expense accruals over the first ten-year payment period 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 2016.

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 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 fair 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 fair 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 are 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 Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging.	Changes in the fair value of these agreements are recognized currently in earnings.

During the three and nine months ended September 30, 2015 and 2016, 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 AOCL 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 obtain 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 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 consolidated balance sheets 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 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.

As outlined in the table below, our open NYMEX contracts at September 30, 2016 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	November 2017
NYMEX - Economic Hedges	5.1 million barrels of refined products and crude oil	Between October 2016 and April 2017
NYMEX - Economic Hedges	1.3 million barrels of future purchases of butane	Between October 2016 and April 2017

Energy Commodity Derivatives Contracts and Deposits Offsets

At September 30, 2016, we had made margin deposits of $30.6 million for our NYMEX contracts with our counterparties, which were recorded as a current asset 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, 2015 and September 30, 2016 (in thousands):

	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(1)		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

	September 30, 2016
Description	Gross Amounts of Recognized Liabilities			Gross Amounts of Assets Offset in the Consolidated Balance Sheets		Net Amounts of Liabilities Presented in the Consolidated Balance Sheets(2)			Margin Deposit Amounts Not Offset in the Consolidated Balance Sheets		Net Asset Amount(3)
Energy commodity derivatives	$	(15,576	)	$	3,247	$	(12,329	)	$	30,559	$	18,230

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

(2) Net amount includes energy commodity derivative contracts classified as current liabilities, net, of $12,430 and noncurrent assets of $101.

(3) Amount represents the maximum loss we would incur if all of 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 three and nine months ended September 30, 2015 and 2016 were as follows (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
Derivative Losses Included in AOCL	2015			2016			2015			2016
Beginning balance	$	(29,528	)	$	(50,459	)	$	(16,587	)	$	(30,126	)
Net loss on cash flow hedges	(3,410		)	(3,169		)	(16,939		)	(24,278		)
Reclassification of net loss on cash flow hedges to income	388			512			976			1,288
Ending balance	$	(32,550	)	$	(53,116	)	$	(32,550	)	$	(53,116	)

Income Statements

The following tables provide a summary of the effect on our consolidated statements of income for the three and nine months ended September 30, 2015 and 2016 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, 2015
	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		$	(3,410	)	Interest expense		$	(388	)		$	—

	Three Months Ended September 30, 2016
	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		$	(3,169	)	Interest expense		$	(512	)		$	—

	Nine Months Ended September 30, 2015
	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		$	(16,939	)	Interest expense		$	(976	)		$	—

	Nine Months Ended September 30, 2016
	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		$	(24,278	)	Interest expense		$	(1,288	)		$	—

As of September 30, 2016, the net loss estimated to be classified to interest expense over the next twelve months from AOCL is approximately $3.0 million.

During 2015 and 2016, 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, 2015 and September 30, 2016 of $27.9 million and $17.6 million, respectively, from these agreements were offset by a cumulative decrease to tank bottoms. The differential between the current spot price and forward price is excluded from the assessment of hedge effectiveness for these fair value hedges. For the three months ended September 30, 2015 and 2016, we recognized a gain (loss) of $(1.7) million and $0.3 million, respectively, and for the nine months ended September 30, 2015 and 2016, we recognized a gain of $4.6 million and $4.5 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 three and nine months ended September 30, 2015 and 2016 of derivatives accounted for under ASC 815, Derivatives and Hedging, 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		2015			2016			2015			2016
NYMEX commodity contracts	Product sales revenue	$	71,902		$	(12,650	)	$	52,432		$	(8,438	)
NYMEX commodity contracts	Operating expenses	14,761			4,212			7,181			(1,192		)
NYMEX commodity contracts	Cost of product sales	(3,767		)	831			(5,847		)	3,643
	Total	$	82,896		$	(7,607	)	$	53,766		$	(5,987	)

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 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, 2015 and September 30, 2016 (in thousands):

	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

	September 30, 2016
	Asset Derivatives			Liability Derivatives
Derivative Instrument	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
NYMEX commodity contracts	Other noncurrent assets	$	101	Other noncurrent liabilities	$	—
Interest rate contracts	Other noncurrent assets	—		Other noncurrent liabilities	3,465
	Total	$	101	Total	$	3,465

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, 2015 and September 30, 2016 (in thousands):

	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
	September 30, 2016
	Asset Derivatives			Liability Derivatives
Derivative Instrument	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
NYMEX commodity contracts	Energy commodity derivatives contracts, net	$	3,146	Energy commodity derivatives contracts, net	$	15,576