Derivative Instruments And Hedging Activities

3 Months Ended

Mar. 31, 2016

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments And Hedging Activities

Derivative Instruments and Hedging Activities

Commodity Price Risk Management

Our primary market risk is commodity price risk. We are exposed to market risks related to the volatility in crude oil and refined products, as well as volatility in the price of natural gas used in our refining operations. We periodically enter into derivative contracts in the form of commodity price swaps, forward purchase and sales and futures contracts to mitigate price exposure with respect to:

• our inventory positions;

• natural gas purchases;

• costs of crude oil and related grade differentials;

• prices of refined products; and

• our refining margins.

Accounting Hedges

We have swap contracts serving as cash flow hedges against price risk on forecasted purchases of natural gas. We also have forward sales and purchase contracts that lock in the prices of future sales and purchases of refined product. Additionally, in 2015, we had swap contracts serving as cash flow hedges against price risk on forecasted purchases of WTI crude oil and forecasted sales of refined product. These contracts have been designated as accounting hedges and are measured at fair value with offsetting adjustments (gains/losses) recorded directly to other comprehensive income. These fair value adjustments are later reclassified to earnings as the hedging instruments mature. On a quarterly basis, hedge ineffectiveness is measured by comparing the change in fair value of the swap contracts against the expected future cash inflows/outflows on the respective transaction being hedged. Any hedge ineffectiveness is also recognized in earnings.

The following table presents the pre-tax effect on other comprehensive income (“OCI”) and earnings due to fair value adjustments and maturities of commodity price swaps and forward sales under hedge accounting:

	Unrealized Gain (Loss) Recognized in OCI			Gain (Loss) Recognized in Earnings Due to Settlements				Gain (Loss) Attributable to Hedge Ineffectiveness Recognized in Earnings
				Location	Amount			Location	Amount
	(In thousands)
Three Months Ended March 31, 2016
Change in fair value	$	(11,921	)	Sales and other revenues	$	(4,756	)
Loss reclassified to earnings due to settlements	11,056			Cost of products sold	—
Amortization of discontinued hedges reclassified to earnings	270			Operating expenses	(6,570		)	Operating expenses	$	—
Total	$	(595	)		$	(11,326	)		$	—
Three Months Ended March 31, 2015
Change in fair value	$	(14,148	)	Sales and other revenues	$	49,180		Sales and other revenues	$	(133	)
Gain reclassified to earnings due to settlements	(4,692		)	Cost of products sold	(40,769		)	Cost of products sold	1,244
Amortization of discontinued hedges reclassified to earnings	270			Operating expenses	(3,989		)	Operating expenses	547
Total	$	(18,570	)		$	4,422			$	1,658

As of March 31, 2016, we have the following notional contract volumes related to outstanding derivative instruments serving as cash flow hedges against price risk on forecasted transactions:

		Notional Contract Volumes by Year of Maturity
Derivative Instruments	Total Outstanding Notional	2016	2017	Unit of Measure
Natural gas price swaps - long	16,800,000	7,200,000	9,600,000	MMBTU
Forward gasoline and diesel contracts - short	975,000	975,000	—	Barrels

In 2013, we dedesignated certain commodity price swaps (long positions) that previously received hedge accounting treatment. These contracts now serve as economic hedges against price risk on forecasted natural gas purchases totaling 16,800,000 MMBTU’s to be purchased ratably through 2017. As of March 31, 2016, we have an unrealized loss of $1.9 million classified in accumulated other comprehensive loss that relates to the application of hedge accounting prior to dedesignation that is amortized as a charge to operating expenses as the contracts mature.

Economic Hedges

We also have swap contracts that serve as economic hedges (derivatives used for risk management, but not designated as accounting hedges) to fix our purchase price on forecasted purchases of WTI crude oil, and to lock in basis spread differentials on forecasted purchases of crude oil and natural gas. Also, we have NYMEX futures contracts to lock in prices on forecasted purchases of inventory. These contracts are measured at fair value with offsetting adjustments (gains/losses) recorded directly to income.

The following table presents the pre-tax effect on income due to maturities and fair value adjustments of our economic hedges:

	Three Months Ended March 31,
Location of Gain (Loss) Recognized in Income	2016			2015
	(In thousands)
Cost of products sold	$	474		$	22,281
Operating expenses	(3,469		)	(296		)
Total	$	(2,995	)	$	21,985

As of March 31, 2016, we have the following notional contract volumes related to our outstanding derivative contracts serving as economic hedges:

		Notional Contract Volumes by Year of Maturity
Derivative Instrument	Total Outstanding Notional	2016	2017	Unit of Measure
Crude price swaps (basis spread) - long	8,800,000	8,800,000	—	Barrels
Natural gas price swaps (basis spread) - long	18,039,000	7,731,000	10,308,000	MMBTU
Natural gas price swaps - long	16,800,000	7,200,000	9,600,000	MMBTU
Natural gas price swaps - short	16,800,000	7,200,000	9,600,000	MMBTU
NYMEX futures (WTI) - short	910,000	910,000	—	Barrels
Forward gasoline and diesel contracts - long	1,175,000	1,175,000	—	Barrels

Interest Rate Risk Management

HEP uses interest rate swaps to manage its exposure to interest rate risk.

As of March 31, 2016, HEP had two interest rate swap contracts with identical terms that hedge its exposure to the cash flow risk caused by the effects of LIBOR changes on $150.0 million in credit agreement advances. The swaps effectively convert $150.0 million of LIBOR based debt to fixed rate debt having an interest rate of 0.74% plus an applicable margin of 2.25% as of March 31, 2016, which equaled an effective interest rate of 2.99%. Both of these swap contracts mature in July 2017 and have been designated as cash flow hedges. To date, there has been no ineffectiveness on these cash flow hedges.

The following table presents the pre-tax effect on other comprehensive income and earnings due to fair value adjustments and maturities of HEP’s interest rate swaps under hedge accounting:

	Unrealized Gain (Loss) Recognized in OCI			Loss Recognized in Earnings Due to Settlements
				Location	Amount
	(In thousands)
Three Months Ended March 31, 2016
Interest rate swaps
Change in fair value	$	(683	)
Loss reclassified to earnings due to settlements	230			Interest expense	$	(230	)
Total	$	(453	)		$	(230	)
Three Months Ended March 31, 2015
Interest rate swaps
Change in fair value	$	(1,280	)
Loss reclassified to earnings due to settlements	531			Interest expense	$	(531	)
Total	$	(749	)		$	(531	)

The following table presents the fair value and balance sheet locations of our outstanding derivative instruments. These amounts are presented on a gross basis with offsetting balances that reconcile to a net asset or liability position in our consolidated balance sheets. We present on a net basis to reflect the net settlement of these positions in accordance with provisions of our master netting arrangements.

	Derivatives in Net Asset Position						Derivatives in Net Liability Position
	Gross Assets		Gross Liabilities Offset in Balance Sheet		Net Assets Recognized in Balance Sheet		Gross Liabilities		Gross Assets Offset in Balance Sheet			Net Liabilities Recognized in Balance Sheet
			(In thousands)
March 31, 2016
Derivatives designated as cash flow hedging instruments:
Commodity price swap contracts	$	—	$	—	$	—	$	35,810	$	—		$	35,810
Forward contracts	—		—		—		2,587		—			2,587
Interest rate swap contracts	—		—		—		263		—			263
	$	—	$	—	$	—	$	38,660	$	—		$	38,660
Derivatives not designated as cash flow hedging instruments:
Commodity price swap contracts	$	—	$	—	$	—	$	55,505	$	(33,639	)	$	21,866
NYMEX futures contracts	—		—		—		768		—			768
Forward contracts	4,197		—		4,197		4,360		—			4,360
	$	4,197	$	—	$	4,197	$	60,633	$	(33,639	)	$	26,994
Total net balance					$	4,197						$	65,654
Balance sheet classification:							Accrued liabilities					$	45,911
	Prepayment and other				$	4,197	Other long-term liabilities					19,743
					$	4,197						$	65,654

	Derivatives in Net Asset Position						Derivatives in Net Liability Position
	Gross Assets		Gross Liabilities Offset in Balance Sheet		Net Assets Recognized in Balance Sheet		Gross Liabilities		Gross Assets Offset in Balance Sheet			Net Liabilities Recognized in Balance Sheet
			(In thousands)
December 31, 2015
Derivatives designated as cash flow hedging instruments:
Commodity price swap contracts	$	—	$	—	$	—	$	38,755	$	—		$	38,755
Interest rate swap contracts	304		—		304		114		—			114
	$	304	$	—	$	304	$	38,869	$	—		$	38,869
Derivatives not designated as cash flow hedging instruments:
Commodity price swap contracts	$	—	$	—	$	—	$	60,196	$	(37,118	)	$	23,078
NYMEX futures contracts	3,469		—		3,469		—		—			—
	$	3,469	$	—	$	3,469	$	60,196	$	(37,118	)	$	23,078
Total net balance					$	3,773						$	61,947
Balance sheet classification:	Prepayment and other				$	3,469	Accrued liabilities					$	36,976
	Intangibles and other				304		Other long-term liabilities					24,971
					$	3,773						$	61,947

At March 31, 2016, we had a pre-tax net unrealized loss of $41.7 million classified in accumulated other comprehensive loss that relates to all accounting hedges having contractual maturities through 2017. Assuming commodity prices and interest rates remain unchanged, an unrealized loss of $26.4 million will be effectively transferred from accumulated other comprehensive loss into the statement of income as the hedging instruments contractually mature over the next twelve-month period.