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 Methodology	Product Represented by the Contract and Associated Barrels	Maturity 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):

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		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 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 Ended				Nine Months Ended
	September 30,				September 30,
Derivative Losses Included in AOCL	2019		2020		2019		2020
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 income	699		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 Derivatives		Location of Loss Reclassified from AOCL into  Income	Amount 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 Ended				Nine Months Ended
	Location of Gain (Loss) Recognized on Derivatives	September 30,				September 30,
Derivative Instrument		2019		2020		2019		2020
Futures contracts	Product sales revenue	$	17,626	$	(7,734)	$	(41,504)	$	89,280
Futures contracts	Cost of product sales	(5,581)		1,815		(9,456)		(2,529)
Basis derivative agreement	Other 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 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
	September 30, 2020
	Asset Derivatives			Liability Derivatives
Derivative Instrument	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Futures contracts	Commodity derivatives contracts, net	$	1,095	Commodity derivatives contracts, net	$	3,983
Futures contracts	Other noncurrent assets	1,645		Other noncurrent assets	403
Basis derivative agreement	Other current assets	—		Other current liabilities	9,280
Basis derivative agreement	Other noncurrent assets	—		Other noncurrent liabilities	2,994
	Total	$	2,740	Total	$	16,660