Derivative Instruments and Hedging Activities

6 Months Ended

Jun. 30, 2016

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities

Derivative Instruments and Hedging Activities

The Partnership’s revenues and cost of products sold are materially impacted by changes in NGL prices. Additionally, the Partnership's results of operations are materially impacted by changes in interest rates. In an effort to manage its exposure to these risks, the Partnership periodically enters into various derivative instruments, including commodity and interest rate hedges. All of the Partnership's derivatives are non-hedge derivatives and therefore all changes in fair values are recognized as gains and losses in the earnings of the periods in which they occur.

(a)    Commodity Derivative Instruments

The Partnership from time to time has used derivatives to manage the risk of commodity price fluctuation. Commodity risk is the adverse effect on the value of a liability or future purchase that results from a change in commodity price.  The Partnership has established a hedging policy and monitors and manages the commodity market risk associated with potential commodity risk exposure.  In addition, the Partnership has focused on utilizing counterparties for these transactions whose financial condition is appropriate for the credit risk involved in each specific transaction. The Partnership has entered into hedging transactions as of June 30, 2016 to protect a portion of its commodity price risk exposure. These hedging arrangements are in the form of swaps for NGLs. The Partnership has instruments totaling a net notional quantity of 383,000 barrels settling during the period from October 31, 2016 through March 31, 2017. These instruments settle against OPIS Mont Belvieu (non-TET) monthly average price. Martin Energy Trading LLC ("MET") serves as the counterparty for all positions outstanding at June 30, 2016.

(b)    Interest Rate Derivative Instruments

The Partnership is exposed to market risks associated with interest rates. Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates. We minimize this market risk by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken. The Partnership enters into interest rate swaps to manage interest rate risk associated with the Partnership’s variable rate credit facility and its fixed rate senior unsecured notes. All derivatives and hedging instruments are included on the balance sheet as an asset or a liability measured at fair value and changes in fair value are recognized currently in earnings.

During the six months ended June 30, 2016 and 2015, the Partnership entered into contracts which provided the counterparty the option to enter into swap contracts to hedge the Partnership's exposure to changes in the fair value of its senior unsecured notes ("interest rate swaptions") through June 30, 2016 and 2015, respectively. In connection with the interest rate swaption contracts, the Partnership received premiums of $0 and $630, which represented their fair value on the date the transactions were initiated and were initially recorded as derivative liabilities on the Partnership's Consolidated and Condensed Balance Sheets, during the three and six months ended June 30, 2016, respectively. In connection with the interest rate swaption contracts, the Partnership received premiums of $1,120 and $1,745, which represented their fair value on the date the transactions were initiated and were initially recorded as derivative liabilities on the Partnership's Consolidated and Condensed Balance Sheets, during the three and six months ended June 30, 2015, respectively. Each of the interest rate swaptions was fully amortized as of June 30, 2016 and 2015. Interest rate swaption contract premiums received are amortized over the period from initiation of the contract through their termination date. For the three and six months ended June 30, 2016, the Partnership recognized $0 and $630, respectively, of premiums in "Interest expense, net" on the Partnership's Consolidated and Condensed Statements of Operations related to the interest rate swaption contracts. For the three and six months ended June 30, 2015, the Partnership recognized $1,120 and $1,745, respectively, of premiums in "Interest expense, net" on the Partnership's Consolidated and Condensed Statements of Operations related to the interest rate swaption contracts.

As of December 31, 2015, the Partnership had a fixed-to-variable interest rate swap agreement with a notional principal amount of $50,000 of fixed-to-variable interest rate swap agreements, effectively converting the interest expense associated with a portion of the Partnership's 2021 senior unsecured notes from fixed rate to variable rate based on the LIBOR interest rate. The Partnership's swap agreement had a termination date that corresponded to the maturity date of the 2021 senior unsecured notes. This instrument was recorded on the Partnership's Consolidated and Condensed Balance Sheets at December 31, 2015 in "Fair value of derivatives" as a non current liability of $206. This position terminated on January 7, 2016, resulting in a benefit of $160.

For information regarding gains and losses on interest rate derivative instruments, see "Tabular Presentation of Gains and Losses on Derivative Instruments" below.

(c)    Tabular Presentation of Gains and Losses on Derivative Instruments

The following table summarizes the fair value and classification of the Partnership’s derivative instruments in its Consolidated and Condensed Balance Sheets:

	Fair Values of Derivative Instruments in the Consolidated Balance Sheets
	Derivative Assets					Derivative Liabilities
		Fair Values					Fair Values
	Balance Sheet Location	June 30, 2016		December 31, 2015		Balance Sheet Location	June 30, 2016		December 31, 2015
Derivatives not designated as hedging instruments:	Current:
Commodity contracts	Fair value of derivatives	$	—	$	675	Fair value of derivatives	$	862	$	—
Derivatives not designated as hedging instruments:	Non Current:					Non Current:
Interest rate contracts	Fair value of derivatives	—		—		Fair value of derivatives	—		206
Total derivatives not designated as hedging instruments		$	—	$	675		$	862	$	206

Effect of Derivative Instruments on the Consolidated and Condensed Statements of Operations

For the Three Months Ended June 30, 2016 and 2015

	Location of Gain (Loss) Recognized in Income on  Derivatives	Amount of Gain (Loss) Recognized in Income on Derivatives
		2016			2015
Derivatives not designated as hedging instruments:
Interest rate swaption contracts	Interest expense	$	—		$	1,120
Commodity contracts	Cost of products sold	(876		)	—
Total derivatives not designated as hedging instruments		$	(876	)	$	1,120

Effect of Derivative Instruments on the Consolidated and Condensed Statements of Operations

For the Six Months Ended June 30, 2016 and 2015

	Location of Gain (Loss) Recognized in Income on  Derivatives	Amount of Gain (Loss) Recognized in Income on Derivatives
		2016		2015
Derivatives not designated as hedging instruments:
Interest rate swaption contracts	Interest expense	$	630	$	1,745
Interest rate contracts	Interest expense	366		—
Commodity contracts	Cost of products sold	129		—
Total derivatives not designated as hedging instruments		$	1,125	$	1,745