Derivative Financial Instruments | 3 Months Ended |
Mar. 31, 2015 |
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 2015, we entered into a $50.0 million forward-starting interest rate swap agreement to hedge against the risk of variability of future interest payments on a portion of debt we anticipate issuing in 2016. The fair value of this contract at March 31, 2015 was recorded on our balance sheet as an other noncurrent asset of $1.0 million. We account for this agreement as a cash flow hedge. |
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In third and fourth quarter of 2014, 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 2015. We accounted for these agreements as cash flow hedges. When we issued the $250.0 million of 4.20% notes due 2045 in first quarter 2015, we settled the associated interest rate swap agreements for a loss of $42.9 million. The loss was recorded to other comprehensive income ($26.5 million and $16.4 million recorded in 2014 and 2015, respectively) and will be 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 interest payments on an anticipated debt issuance, which was completed during first quarter 2015. The effective portion of this gain in the amount of $10.6 million at March 31, 2015 will be recognized into earnings as an adjustment to our periodic interest expense over the life of the $250.0 million of 4.20% notes due 2045 that were issued in first quarter 2015. |
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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 Chicago Mercantile Exchange ("CME") butane futures agreements 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. |
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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 March 31, 2015, we had commitments under these forward purchase and sale contracts as follows (in millions): |
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| Notional Value | | Barrels | | | | | | | | | | | | | | | |
Forward purchase contracts | $ | 72.8 | | | 1.8 | | | | | | | | | | | | | | | |
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Forward sale contracts | $ | 4.5 | | | 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 Accounting Standards Codification ("ASC") 815, Derivatives and Hedging. | | Changes in the fair value of these agreements are recognized currently in earnings. | | | | | | | | | | | | | | | | |
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During the three months ended March 31, 2014 and 2015, none of the commodity hedging contracts we entered into qualified for or were designated as cash flow hedges. |
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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 as discussed 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 CME-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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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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Additionally, we hold crude oil barrels that we use for operational purposes which we classify as long-term assets on our balance sheet and which are reported as tank bottom and linefill assets. 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. |
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As outlined in the table below, our open NYMEX contracts and CME butane futures agreements at March 31, 2015 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 December 2015 and November 2016 | | | | | | | | | | | | | | | | |
NYMEX - Economic Hedges(1) | | 3.2 million barrels of refined products and crude oil | | Between April 2015 and January 2016 | | | | | | | | | | | | | | | | |
CME Butane Futures Agreements - Economic Hedges | | 0.3 million barrels of butane | | Between April and December 2015 | | | | | | | | | | | | | | | | |
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(1) Of the 3.2 million barrels of products we have economically hedged at March 31, 2015, we had open agreements which swap the pricing on 0.1 million of those barrels from New York harbor to Platts Group 3 or Platts Gulf Coast, which are the geographic locations where these barrels will be sold. |
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Energy Commodity Derivatives Contracts and Deposits Offsets |
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At March 31, 2015, we had received margin deposits of $31.5 million for our NYMEX and CME contracts with one of our counterparties, which were recorded as a current liability under energy commodity derivatives deposits on our consolidated balance sheet. Additionally, we made margin deposits of $1.1 million for our CME contracts with a second counterparty, 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 CME butane futures agreements 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 and CME 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 CME 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, 2014 and March 31, 2015 (in thousands): |
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| | 31-Dec-14 |
Description | | Gross Amounts of Recognized Assets | | Gross Amounts of Liabilities Offset in the Consolidated Balance Sheet | | Net Amounts of Assets Presented in the Consolidated Balance Sheet(1) | | Margin Deposit Amounts Not Offset in the Consolidated Balance Sheet | | Net Asset Amount(3) |
Energy commodity derivatives | | $ | 106,764 | | | $ | (10,622 | ) | | $ | 96,142 | | | $ | (78,279 | ) | | $ | 17,863 | |
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| | 31-Mar-15 |
Description | | Gross Amounts of Recognized Assets | | Gross Amounts of Liabilities Offset in the Consolidated Balance Sheet | | Net Amounts of Assets Presented in the Consolidated Balance Sheet(2) | | Margin Deposit Amounts Not Offset in the Consolidated Balance Sheet | | Net Asset Amount(3) |
Energy commodity derivatives | | $ | 55,770 | | | $ | (1,691 | ) | | $ | 54,079 | | | $ | (30,412 | ) | | $ | 23,667 | |
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-1 | Net amount includes energy commodity derivative contracts classified as current assets, net, of $87,151, current liabilities of $5,413 and noncurrent assets of $14,404. | | | | | | | | | | | | | | | | | | | |
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-2 | Net amount includes energy commodity derivative contracts classified as current assets, net, of $36,725, current liabilities of $814 and noncurrent assets of $18,168. | | | | | | | | | | | | | | | | | | | |
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-3 | This represents the maximum amount of loss we would incur if our counterparties failed to perform on their derivative contracts. | | | | | | | | | | | | | | | | | | | |
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Impact of Derivatives on Our Financial Statements |
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Comprehensive Income |
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The changes in derivative activity included in AOCL for the three months ended March 31, 2014 and 2015 were as follows (in thousands): |
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| Three Months Ended March 31, | | | | | | | | | | | | | |
Derivative Gains (Losses) Included in AOCL | 2014 | | 2015 | | | | | | | | | | | | | |
Beginning balance | $ | 13,627 | | | $ | (16,587 | ) | | | | | | | | | | | | | |
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Net loss on interest rate contract cash flow hedges | (3,613 | ) | | (15,465 | ) | | | | | | | | | | | | | |
Reclassification of net loss (gain) on cash flow hedges to income | (26 | ) | | 200 | | | | | | | | | | | | | | |
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Ending balance | $ | 9,988 | | | $ | (31,852 | ) | | | | | | | | | | | | | |
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The following tables provide a summary of the effect on our consolidated statements of income for the three months ended March 31, 2014 and 2015 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 March 31, 2014 |
| | Amount of Loss 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 | | | $ | (3,613 | ) | | | Interest expense | | | $ | 26 | | | | | $ | — | | |
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| | Three Months Ended March 31, 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 | | | $ | (15,465 | ) | | | Interest expense | | | $ | (200 | ) | | | | $ | — | | |
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As of March 31, 2015, the net loss estimated to be classified to interest expense over the next twelve months from AOCL is approximately $1.5 million. |
Income Statement |
The following table provides a summary of the effect on our consolidated statements of income for the three months ended March 31, 2014 and 2015 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 | | | | | | | | | | |
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| | Location of Gain (Loss) | | March 31, | | | | | | | | | | |
Derivative Instrument | | Recognized on Derivative | | 2014 | | 2015 | | | | | | | | | | |
NYMEX commodity contracts | | Product sales revenue | | $ | 2,823 | | | $ | 3,880 | | | | | | | | | | | |
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NYMEX commodity contracts | | Operating expenses | | 365 | | | 1,303 | | | | | | | | | | | |
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CME butane futures agreements | | Cost of product sales | | 144 | | | (1,224 | ) | | | | | | | | | | |
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| | Total | | $ | 3,332 | | | $ | 3,959 | | | | | | | | | | | |
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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. |
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During 2014 and 2015, 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, 2014 and March 31, 2015 of $13.3 million and $17.5 million, respectively, from the agreements were offset by a cumulative decrease to tank bottoms and linefill. We exclude the differential between the current spot price and forward price from our assessment of hedge effectiveness for these fair value hedges. For the three months ended March 31, 2015, we recognized a loss of $0.3 million for the amounts we excluded from the assessment of effectiveness of these fair value hedges, which we reported as other expense on our consolidated statements of income. |
Balance Sheet |
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, 2014 and March 31, 2015 (in thousands): |
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| | December 31, 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 | | $ | 360 | | | Energy commodity derivatives contracts, net | | $ | — | | | | | | | | | |
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NYMEX commodity contracts | | Other noncurrent assets | | 14,404 | | | Other noncurrent liabilities | | — | | | | | | | | | |
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Interest rate contracts | | Other current assets | | — | | | Other current liabilities | | 26,478 | | | | | | | | | |
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| | Total | | $ | 14,764 | | | Total | | $ | 26,478 | | | | | | | | | |
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| | March 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 | | $ | 541 | | | Energy commodity derivatives contracts, net | | $ | — | | | | | | | | | |
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NYMEX commodity contracts | | Other noncurrent assets | | 18,168 | | | Other noncurrent liabilities | | — | | | | | | | | | |
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Interest rate contracts | | Other noncurrent assets | | 965 | | | Other noncurrent liabilities | | — | | | | | | | | | |
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| | Total | | $ | 19,674 | | | Total | | $ | — | | | | | | | | | |
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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, 2014 and March 31, 2015 (in thousands): |
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| | December 31, 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 | | $ | 92,000 | | | Energy commodity derivatives contracts, net | | $ | — | | | | | | | | | |
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CME butane futures agreements | | Energy commodity derivatives contracts, net | | — | | | Energy commodity derivatives contracts, net | | 10,622 | | | | | | | | | |
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| | Total | | $ | 92,000 | | | Total | | $ | 10,622 | | | | | | | | | |
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| | March 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 | | $ | 37,061 | | | Energy commodity derivatives contracts, net | | $ | 13 | | | | | | | | | |
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CME butane futures agreements | | Energy commodity derivatives contracts, net | | — | | | Energy commodity derivatives contracts, net | | 1,678 | | | | | | | | | |
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| | Total | | $ | 37,061 | | | Total | | $ | 1,691 | | | | | | | | | |
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