Derivative Financial Instruments | 6 Months Ended |
Jun. 30, 2014 |
Derivative Instruments and Hedging Activities Disclosure [Abstract] | ' |
Derivative Financial Instruments | ' |
Derivative Financial Instruments |
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Interest Rate Derivatives |
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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. |
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In first quarter 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. |
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During 2012, we terminated and settled certain interest rate swap agreements and realized a gain of $11.0 million, which was recorded to other comprehensive income as a deferred cash flow hedging gain. The purpose of these swaps was to hedge against the variability of future interest payments on the refinancing of our debt that matured in June 2014. We recognized ineffectiveness of $0.2 million in earnings on this deferred hedging gain in second quarter 2014 due to timing of our debt refinancing. |
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Commodity Derivatives |
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Hedging Strategies |
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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 forward purchase and sale contracts, NYMEX contracts and butane futures agreements to help manage price changes, which has the effect of locking in most of the product margin realized from our butane blending activities that we choose to hedge. |
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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. As of June 30, 2014, we had commitments under these forward purchase and sale contracts as follows (in millions): |
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| Notional Value | | Barrels | | | | | | | | | | | | | | | |
Forward purchase contracts | $ | 137.7 | | | 2.4 | | | | | | | | | | | | | | | |
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Forward sale contracts | $ | 8.8 | | | 0.1 | | | | | | | | | | | | | | | |
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We use NYMEX contracts to hedge against changes in the price of petroleum products we expect to sell in future periods. Our NYMEX contracts fall into one of three hedge categories: |
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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 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 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. | | | | | | | | | | | | | | | | |
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Period changes in the fair value of NYMEX agreements that are accounted for as economic hedges, other than those economic hedges of our pipeline product overages (see discussion of these 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. |
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We also use exchange-traded butane futures agreements, 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. |
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Additionally, we currently 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. |
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As outlined in the table below, our open NYMEX contracts and butane futures agreements at June 30, 2014 were as follows: |
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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 July 2014 and November 2016 | | | | | | | | | | | | | | | | |
NYMEX - Economic Hedges | | 3.4 million barrels of refined products and crude oil | | Between July 2014 and April 2015 | | | | | | | | | | | | | | | | |
Butane Futures Agreements - Economic Hedges | | 0.9 million barrels of butane | | Between September 2014 and April 2015 | | | | | | | | | | | | | | | | |
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Energy Commodity Derivatives Contracts and Deposits Offsets |
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At June 30, 2014, we had made margin deposits of $29.1 million related to our NYMEX contracts, which were recorded as a current asset under energy commodity derivatives deposits on our consolidated balance sheet. We have the right to offset the combined fair values of our open NYMEX contracts and our open butane futures agreements against our margin deposits under a master netting arrangement; however, we have elected to disclose the combined fair values of our open NYMEX and butane futures agreements 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 and butane futures 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, 2013 and June 30, 2014 (in thousands): |
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| | 31-Dec-13 |
Description | | Gross Amounts of Recognized Liabilities | | Gross Amounts of Assets Offset in the Consolidated Balance Sheet | | Net Amounts of Liabilities Presented in the Consolidated Balance Sheet(1) | | Margin Deposit Amounts Not Offset in the Consolidated Balance Sheet | | Net Asset Amount |
Energy commodity derivatives | | $ | (7,167 | ) | | $ | 2,665 | | | $ | (4,502 | ) | | $ | 14,782 | | | $ | 10,280 | |
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| | 30-Jun-14 |
Description | | Gross Amounts of Recognized Liabilities | | Gross Amounts of Assets Offset in the Consolidated Balance Sheet | | Net Amounts of Liabilities Presented in the Consolidated Balance Sheet(2) | | Margin Deposit Amounts Not Offset in the Consolidated Balance Sheet | | Net Asset Amount |
Energy commodity derivatives | | $ | (16,577 | ) | | $ | 1,920 | | | $ | (14,657 | ) | | $ | 29,070 | | | $ | 14,413 | |
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(1) Net amount includes energy commodity derivative contracts classified as current liabilities, net, of $6,737 and noncurrent assets of $2,235. |
(2) Net amount includes energy commodity derivative contracts classified as current liabilities, net, of $11,140 and noncurrent liabilities of $3,517. |
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Impact of Derivatives on Income Statement, Balance Sheet, Cash Flows and AOCL |
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The changes in derivative activity included in AOCL for the three and six months ended June 30, 2013 and 2014 were as follows (in thousands): |
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| Three Months Ended June 30, | | Six Months Ended June 30, | | | | | |
Derivative Gains (Losses) Included in AOCL | 2013 | | 2014 | | 2013 | | 2014 | | | | | |
Beginning balance | $ | 13,933 | | | $ | 9,988 | | | $ | 14,126 | | | $ | 13,627 | | | | | | |
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Net loss on cash flow hedges | — | | | — | | | (4,560 | ) | | (3,613 | ) | | | | | |
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Reclassification of net loss (gain) on cash flow hedges to income | (41 | ) | | (153 | ) | | 4,326 | | | (179 | ) | | | | | |
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Ending balance | $ | 13,892 | | | $ | 9,835 | | | $ | 13,892 | | | $ | 9,835 | | | | | | |
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During 2014, we had open NYMEX contracts on 0.7 million barrels of crude oil that were designated as fair value hedges. These agreements hedge against the change in value of our crude oil linefill and tank bottom inventories. Because there was no ineffectiveness recognized on these hedges, the cumulative losses of $14.9 million from the agreements as of June 30, 2014 were fully offset by a cumulative increase of $14.7 million to tank bottom inventory and a cumulative increase of $0.2 million to our crude oil linefill, which is reported in other current assets; therefore, there was no net impact from these agreements on our results of operations. |
The following tables provide a summary of the effect on our consolidated statements of income for the three and six months ended June 30, 2013 and 2014 of derivatives accounted for under ASC 815-30, Derivatives and Hedging—Cash Flow Hedges, that were designated as hedging instruments (in thousands): |
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| | Three Months Ended June 30, 2013 |
| | Amount of Gain Recognized in AOCL on Derivative | | Location of Gain Reclassified from AOCL into Income | | Amount of Gain Reclassified from AOCL into Income |
Derivative Instrument | | | | Effective Portion | | Ineffective Portion |
Interest rate contracts | | | $ | — | | | | Interest expense | | | $ | 41 | | | | | $ | — | | |
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| | Three Months Ended June 30, 2014 |
| | Amount of Gain (Loss) Recognized in AOCL on Derivative | | Location of Gain (Loss) Reclassified from AOCL into Income | | Amount of Gain (Loss) Reclassified from AOCL into Income |
Derivative Instrument | | | | Effective Portion | | Ineffective Portion |
Interest rate contracts | | | $ | — | | | | Interest expense | | | $ | (30 | ) | | | | $ | 183 | | |
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| | Six Months Ended June 30, 2013 |
| | Amount of Gain (Loss) Recognized in AOCL on Derivative | | Location of Gain (Loss) Reclassified from AOCL into Income | | Amount of Gain (Loss) Reclassified from AOCL into Income |
Derivative Instrument | | | | Effective Portion | | Ineffective Portion |
Interest rate contracts | | | $ | — | | | | Interest expense | | | $ | 82 | | | | | $ | — | | |
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NYMEX commodity contracts | | | (4,560 | ) | | | Product sales revenue | | | (4,408 | ) | | | | — | | |
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Total cash flow hedges | | | $ | (4,560 | ) | | | Total | | | $ | (4,326 | ) | | | | $ | — | | |
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| | Six Months Ended June 30, 2014 |
| | Amount of Gain (Loss) Recognized in AOCL on Derivative | | Location of Gain (Loss) Reclassified from AOCL into Income | | Amount of Gain (Loss) Reclassified from AOCL into Income |
Derivative Instrument | | | | Effective Portion | | Ineffective Portion |
Interest rate contracts | | | $ | (3,613 | ) | | | Interest expense | | | $ | (4 | ) | | | | $ | 183 | | |
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As of June 30, 2014, the net loss estimated to be classified to interest expense over the next twelve months from AOCL is approximately $0.3 million. |
The following table provides a summary of the effect on our consolidated statements of income for the three months ended June 30, 2013 and 2014 of derivatives accounted for under ASC 815; Derivatives and Hedging—Overall, that were not designated as hedging instruments (in thousands): |
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| | | | Amount of Gain (Loss) Recognized on Derivative | | |
| | Location of Gain (Loss) | | Three Months Ended June 30, | | Six Months Ended June 30, | | |
Derivative Instrument | | Recognized on Derivative | | 2013 | | 2014 | | 2013 | | 2014 | | |
NYMEX commodity contracts | | Product sales revenue | | $ | 12,342 | | | $ | (16,653 | ) | | $ | 10,581 | | | $ | (13,830 | ) | | |
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NYMEX commodity contracts | | Operating expenses | | 3,348 | | | (4,268 | ) | | 1,462 | | | (3,903 | ) | | |
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Butane futures agreements | | Cost of product sales | | 20 | | | 632 | | | (761 | ) | | 776 | | | |
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| | Total | | $ | 15,710 | | | $ | (20,289 | ) | | $ | 11,282 | | | $ | (16,957 | ) | | |
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The impact of the derivatives in the above table was reflected as cash from operations on our consolidated statements of cash flows. |
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, 2013 and June 30, 2014 (in thousands): |
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| | December 31, 2013 | | | | | | | | |
| | Asset Derivatives | | Liability Derivatives | | | | | | | | |
Derivative Instrument | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | | | | | | | | |
NYMEX commodity contracts | | Energy commodity derivatives contracts, net | | $ | — | | | Energy commodity derivatives contracts, net | | $ | 146 | | | | | | | | | |
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NYMEX commodity contracts | | Other noncurrent assets | | 2,235 | | | Other noncurrent liabilities | | — | | | | | | | | | |
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| | Total | | $ | 2,235 | | | Total | | $ | 146 | | | | | | | | | |
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| | June 30, 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 | | $ | 34 | | | Energy commodity derivatives contracts, net | | $ | — | | | | | | | | | |
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NYMEX commodity contracts | | Other noncurrent assets | | — | | | Other noncurrent liabilities | | 3,517 | | | | | | | | | |
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| | Total | | $ | 34 | | | Total | | $ | 3,517 | | | | | | | | | |
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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, 2013 and June 30, 2014 (in thousands): |
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| | December 31, 2013 | | | | | | | | |
| | Asset Derivatives | | Liability Derivatives | | | | | | | | |
Derivative Instrument | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | | | | | | | | |
NYMEX commodity contracts | | Energy commodity derivatives contracts, net | | $ | 48 | | | Energy commodity derivatives contracts, net | | $ | 7,021 | | | | | | | | | |
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Butane futures agreements | | Energy commodity derivatives contracts, net | | 382 | | | Energy commodity derivatives contracts, net | | — | | | | | | | | | |
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| | Total | | $ | 430 | | | Total | | $ | 7,021 | | | | | | | | | |
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| | June 30, 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 | | $ | 1,184 | | | Energy commodity derivatives contracts, net | | $ | 12,971 | | | | | | | | | |
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Butane futures agreements | | Energy commodity derivatives contracts, net | | 702 | | | Energy commodity derivatives contracts, net | | 89 | | | | | | | | | |
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| | Total | | $ | 1,886 | | | Total | | $ | 13,060 | | | | | | | | | |
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