Financial Instruments and Off-Balance Sheet Risk | 3 Months Ended |
Mar. 31, 2015 |
Derivative Instruments and Hedging Activities Disclosure [Abstract] | |
Financial Instruments and Off-Balance Sheet Risk | 8. Financial Instruments and Off-Balance Sheet Risk |
Cash and Cash Equivalents, Accounts Receivable and Debt |
As of March 31, 2015 and December 31, 2014, the carrying amounts of cash and cash equivalents and accounts receivable approximated fair value because of the short maturity of these instruments. As of March 31, 2015 and December 31, 2014, the carrying value of the Partnership’s debt approximated fair value due to the variable interest nature of these instruments. |
Derivative Instruments |
The Partnership utilizes derivative instruments consisting of futures contracts, forward contracts, swaps, options and other derivatives individually or in combination, to mitigate its exposure to fluctuations in prices of refined petroleum products and natural gas. On a limited basis and within the Partnership’s risk management guidelines, the Partnership can utilize derivatives to generate profits from changes in market prices. The Partnership enters into futures and over-the-counter (“OTC”) transactions either on regulated exchanges or in the OTC market. Futures contracts are exchange-traded contractual commitments to either receive or deliver a standard amount or value of a commodity at a specified future date and price, with some futures contracts based on cash settlement rather than a delivery requirement. Futures exchanges typically require margin deposits as security. OTC contracts, which may or may not require margin deposits as security, involve parties that have agreed either to exchange cash payments or deliver or receive the underlying commodity at a specified future date and price. The Partnership posts initial margin with futures transaction brokers, along with variation margin, which is paid or received on a daily basis, and is included in other current assets in the Consolidated Balance Sheets. In addition, the Partnership may either pay or receive margin based upon exposure with counterparties. Payments made by the Partnership are included in other current assets, whereas payments received by the Partnership are included in accrued liabilities in the Consolidated Balance Sheets. Substantially all of the Partnership’s commodity derivative contracts outstanding as of March 31, 2015 will settle prior to September 30, 2016. |
The Partnership enters into some master netting arrangements to mitigate credit risk with significant counterparties. Master netting arrangements are standardized contracts that govern all specified transactions with the same counterparty and allow the Partnership to terminate all contracts upon occurrence of certain events, such as counterparty’s default. The Partnership has elected not to offset the fair value of its derivatives, even where these arrangements provide the right to do so. |
The Partnership’s derivative instruments are recorded at fair value, with changes in fair value recognized in net income or other comprehensive income each period as appropriate. The Partnership’s fair value measurements are determined using the market approach and includes non-performance risk and time value of money considerations. Counterparty credit is considered for receivable balances, and the Partnership’s credit is considered for payable balances. |
The Partnership determines fair value in accordance with Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures” which established a hierarchy for the inputs used to measure the fair value of financial assets and liabilities based on the source of the input, which generally range from quoted prices for identical instruments in a principal trading market (Level 1) to estimates determined using significant unobservable inputs (Level 3). Multiple inputs may be used to measure fair value, however, the level of fair value is based on the lowest significant input level within this fair value hierarchy. |
Details on the methods and assumptions used to determine the fair values are as follows: |
Fair value measurements based on Level 1 inputs: Measurements that are most observable and are based on quoted prices of identical instruments obtained from the principal markets in which they are traded. Closing prices are both readily available and representative of fair value. Market transactions occur with sufficient frequency and volume to assure liquidity. |
Fair value measurements based on Level 2 inputs: Measurements that are derived indirectly from observable inputs or from quoted prices from markets that are less liquid. Measurements based on Level 2 inputs include over-the-counter derivative instruments that are priced on an exchange traded curve, but have contractual terms that are not identical to exchange traded contracts. The Partnership utilizes fair value measurements based on Level 2 inputs for its fixed forward contracts, over-the-counter commodity price swaps and interest rate swaps. The Partnership did not have any transfers between Level 1 and Level 2 fair value measurement during the three months ended March 31, 2015. |
Fair value measurements based on Level 3 inputs: Measurements that are least observable are estimated from significant unobservable inputs determined from sources with little or no market activity for comparable contracts or for positions with longer durations. |
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The Partnership does not offset fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) against the fair value of derivative instruments executed with the same counterparty under the same master netting arrangement. The Partnership had no right to reclaim, or obligation to return, cash collateral as of March 31, 2015 or December 31, 2014. |
The following table presents all financial assets and financial liabilities of the Partnership measured at fair value on a recurring basis as of March 31, 2015 and December 31, 2014: |
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| | As of March 31, 2015 | | | | | | | | | |
| | Fair Value | | | Quoted | | | Significant | | | Significant | | | | | | | | | |
Measurement | Prices in | Other | Unobservable | | | | | | | | |
| Active | Observable | Inputs | | | | | | | | |
| Markets | Inputs | Level 3 | | | | | | | | |
| Level 1 | Level 2 | | | | | | | | | |
Financial assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Commodity fixed forwards | | $ | 169,186 | | | $ | — | | | $ | 169,186 | | | $ | — | | | | | | | | | |
Commodity swaps and options | | | 112 | | | | — | | | | 112 | | | | — | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 169,298 | | | $ | — | | | $ | 169,298 | | | $ | — | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
Commodity exchange contracts | | $ | 93 | | | $ | 93 | | | $ | — | | | $ | — | | | | | | | | | |
Commodity fixed forwards | | | 47,508 | | | | — | | | | 47,508 | | | | — | | | | | | | | | |
Commodity swaps and options | | | 7,055 | | | | — | | | | 7,055 | | | | — | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Commodity derivatives | | | 54,656 | | | | 93 | | | | 54,563 | | | | — | | | | | | | | | |
Interest rate swaps | | | 987 | | | | — | | | | 987 | | | | — | | | | | | | | | |
Currency swaps | | | 42 | | | | — | | | | 42 | | | | — | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 55,685 | | | $ | 93 | | | $ | 55,592 | | | $ | — | | | | | | | | | |
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| | | | | | | | | |
| | As of December 31, 2014 | | | | | | | | | |
| | Fair Value | | | Quoted | | | Significant | | | Significant | | | | | | | | | |
Measurement | Prices in | Other | Unobservable | | | | | | | | |
| Active | Observable | Inputs | | | | | | | | |
| Markets | Inputs | Level 3 | | | | | | | | |
| Level 1 | Level 2 | | | | | | | | | |
Financial assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Commodity fixed forwards | | $ | 229,679 | | | $ | — | | | $ | 229,679 | | | $ | — | | | | | | | | | |
Commodity swaps and options | | | 74 | | | | — | | | | 74 | | | | — | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Commodity derivatives | | | 229,753 | | | | — | | | | 229,753 | | | | — | | | | | | | | | |
Interest rate swaps | | | 137 | | | | — | | | | 137 | | | | — | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 229,890 | | | $ | — | | | $ | 229,890 | | | $ | — | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
Commodity exchange contracts | | $ | 97 | | | $ | 97 | | | $ | — | | | $ | — | | | | | | | | | |
Commodity fixed forwards | | | 80,080 | | | | — | | | | 80,080 | | | | — | | | | | | | | | |
Commodity swaps and options | | | 8,424 | | | | — | | | | 8,424 | | | | — | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Commodity derivatives | | | 88,601 | | | | 97 | | | | 88,504 | | | | — | | | | | | | | | |
Interest rate swaps | | | 553 | | | | — | | | | 553 | | | | — | | | | | | | | | |
Currency swaps | | | 22 | | | | — | | | | 22 | | | | — | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 89,176 | | | $ | 97 | | | $ | 89,079 | | | $ | — | | | | | | | | | |
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The Partnership enters into derivative contracts with counterparties, some of which are subject to master netting arrangements, which allow net settlements under certain conditions. The Partnership presents derivatives at gross fair values in the Consolidated Balance Sheets. The maximum amount of loss due to credit risk that the Partnership would incur if its counterparties failed completely to perform according to the terms of the contracts, based on the gross fair value of these financial instruments, was $169.3 million at March 31, 2015. Information related to these offsetting arrangements as of March 31, 2015 and December 31, 2014 is as follows: |
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| | As of March 31, 2015 | |
| | | | | | | | | | | Gross Amount Not Offset in | | | | |
| | Gross | | | | | | | | | the Balance Sheet | | | | |
| | Amounts of | | | Gross | | | Amounts of | | | Financial | | | Cash | | | Net Amount | |
Recognized | Amounts | Assets/ | Instruments | Collateral |
Assets/ | Offset in the | Liabilities in | | Posted |
Liabilities | Balance Sheet | Balance Sheet | | |
Fair value of commodity derivative assets | | $ | 169,298 | | | $ | — | | | $ | 169,298 | | | $ | (3,371 | ) | | $ | (1,147 | ) | | $ | 164,780 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Commodity derivative liabilities | | $ | (54,656 | ) | | $ | — | | | $ | (54,656 | ) | | $ | 3,371 | | | $ | — | | | $ | (51,285 | ) |
Interest rate swap derivative liabilities | | | (987 | ) | | | — | | | | (987 | ) | | | — | | | | — | | | | (987 | ) |
Currency swap derivative liabilities | | | (42 | ) | | | — | | | | (42 | ) | | | — | | | | — | | | | (42 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Fair value of derivative liabilities | | $ | (55,685 | ) | | $ | — | | | $ | (55,685 | ) | | $ | 3,371 | | | $ | — | | | $ | (52,314 | ) |
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| | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2014 | |
| | | | | | | | | | | Gross Amount Not Offset in | | | | |
| | Gross | | | | | | | | | the Balance Sheet | | | | |
| | Amounts of | | | Gross | | | Amounts of | | | Financial | | | Cash | | | Net Amount | |
Recognized | Amounts | Assets/ | Instruments | Collateral |
Assets/ | Offset in the | Liabilities in | | Posted |
Liabilities | Balance Sheet | Balance Sheet | | |
Commodity derivative assets | | $ | 229,753 | | | $ | — | | | $ | 229,753 | | | $ | (4,831 | ) | | $ | (2,417 | ) | | $ | 222,505 | |
Interest rate swap derivative assets | | | 137 | | | | — | | | | 137 | | | | — | | | | — | | | | 137 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Fair value of derivative assets | | $ | 229,890 | | | $ | — | | | $ | 229,890 | | | $ | (4,831 | ) | | $ | (2,417 | ) | | $ | 222,642 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Commodity derivative liabilities | | $ | (88,601 | ) | | $ | — | | | $ | (88,601 | ) | | $ | 4,831 | | | $ | — | | | $ | (83,770 | ) |
Interest rate swap derivative liabilities | | | (553 | ) | | | — | | | | (553 | ) | | | — | | | | — | | | | (553 | ) |
Currency swap derivative liabilities | | | (22 | ) | | | — | | | | (22 | ) | | | — | | | | — | | | | (22 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Fair value of derivative liabilities | | $ | (89,176 | ) | | $ | — | | | $ | (89,176 | ) | | $ | 4,831 | | | $ | — | | | $ | (84,345 | ) |
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The following table presents total realized and unrealized gains (losses) on derivative instruments utilized for commodity risk management purposes for the three months ended March 31, 2015 and 2014. Such amounts are included in cost of products sold (exclusive of depreciation and amortization) in the Condensed Consolidated Statements of Operations: |
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| | Three Months Ended March 31, | | | | | | | | | | | | | | | | | |
| | 2015 | | | 2014 | | | | | | | | | | | | | | | | | |
Refined products contracts | | $ | 61,804 | | | $ | 6,342 | | | | | | | | | | | | | | | | | |
Natural gas contracts | | | (4,328 | ) | | | (13,693 | ) | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 57,476 | | | $ | (7,351 | ) | | | | | | | | | | | | | | | | |
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There were no discretionary trading activities for the three months ended March 31, 2015 and 2014. The following table presents the gross volume of commodity derivative instruments outstanding as of March 31, 2015 and December 31, 2014: |
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| | As of March 31, 2015 | | | As of December 31, 2014 | | | | | | | | | |
| | Refined Products | | | Natural Gas | | | Refined Products | | | Natural Gas | | | | | | | | | |
| | (Barrels) | | | (MMBTUs) | | | (Barrels) | | | (MMBTUs) | | | | | | | | | |
Long contracts | | | 8,711 | | | | 117,614 | | | | 10,823 | | | | 131,376 | | | | | | | | | |
Short contracts | | | (11,793 | ) | | | (71,417 | ) | | | (15,434 | ) | | | (82,796 | ) | | | | | | | | |
Interest Rate Derivatives |
The Partnership has entered into interest rate swaps to manage its exposure to changes in interest rates on its Credit Agreement. The Partnership’s interest rate swaps hedge actual and forecasted LIBOR borrowings and have been designated as cash flow hedges. Counterparties to the Partnership’s interest rate swaps are large multinational banks and the Partnership does not believe there is a material risk of counterparty non-performance. |
At March 31, 2015, the Partnership held six interest rate swaps with a total notional value of $175.0 million whose swap periods began in January 2015, expiring in January 2016; and five interest rate swaps with a total notional value of $150.0 million whose swap periods begin in January 2016, expiring in January 2017. There was no material ineffectiveness determined for the cash flow hedges for the three months ended March 31, 2015 and 2014. |
The Partnership records unrealized gains and losses on its interest rate swaps as a component of accumulated other comprehensive loss, net of tax, which is reclassified to earnings as interest expense when the payments are made. As of March 31, 2015, the amount of unrealized losses, net of tax, expected to be reclassified to earnings during the following twelve-month period was approximately $0.5 million. |
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Currency Derivatives |
Kildair enters into forward currency contracts to manage the risk of currency rate fluctuations between its Canadian dollar denominated activity and the U.S. dollar, which is its functional currency. At March 31, 2015, Kildair has entered into a series of forward currency swaps that mature through April 2015. The contracts obligate Kildair to purchase $10.0 million in Canadian dollars at an exchange rate of 1.2734 to 1. The Canadian to U.S. dollar exchange rate was 1.2666 to 1 at March 31, 2015. |