Derivative Financial Instruments

3 Months Ended

Mar. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

Derivative Financial Instruments

Interest Rate Derivatives

In first quarter 2020, we entered into $100.0 million of treasury lock agreements to protect against the risk of variability on a portion of a debt issuance we anticipate to occur by early 2021. The fair value of these interest rate derivative agreements at March 31, 2020 was recorded as a current liability of $11.9 million, with the offset recorded to other comprehensive income. We account for these agreements as cash flow hedges.

Commodity Derivatives

Our open futures contracts at March 31, 2020 were as follows:

Type of Contract/Accounting Methodology	Product Represented by the Contract and Associated Barrels	Maturity Dates
Futures - Economic Hedges	2.3 million barrels of refined products and crude oil	Between April 2020 and November 2022
Futures - Economic Hedges	0.1 million barrels of gas liquids	April 2020

Commodity Derivatives Contracts and Deposits Offsets

At March 31, 2020, we had received margin deposits of $50.3 million for our futures contracts with our counterparties, which were recorded as current liabilities under commodity derivatives deposits on our consolidated balance sheets. At December 31, 2019, we had made margin deposits of $27.4 million for our futures contracts with our counterparties, which were recorded as current assets under commodity derivatives deposits on our consolidated balance sheets. We have the right to offset the combined fair values of our open futures contracts 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 futures contracts separately from the related margin deposits on our consolidated balance sheets. Additionally, we have the right to offset the fair values of our futures contracts 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, 2019 and March 31, 2020 (in thousands):

Description	Gross Amounts of Recognized Assets (Liabilities)			Gross Amounts of Assets (Liabilities) Offset in the Consolidated Balance Sheets			Net Amounts of Assets (Liabilities) Presented in the Consolidated Balance Sheets			Margin Deposit Amounts Not Offset in the Consolidated Balance Sheets			Net Asset Amount(1)
As of 12/31/2019	$	(11,033	)	$	811		$	(10,222	)	$	27,415		$	17,193
As of 3/31/2020	$	66,007		$	(1,054	)	$	64,953		$	(50,345	)	$	14,608

(1) Amount represents the maximum loss we would incur if all of our counterparties failed to perform on their derivative contracts.

Basis Derivative Agreement

During 2019, we entered into a basis derivative agreement with a joint venture co-owner’s affiliate, and, contemporaneously, that affiliate entered into an intrastate transportation services agreement with the joint venture. Settlements under the basis derivative agreement are determined based on the basis differential of crude oil prices at different market locations and a notional volume of 30,000 barrels per day. As a result, we account for this agreement as a derivative. The agreement will expire in early 2022. We recognize the changes in fair value of this agreement based on forward price curves for crude oil in West Texas and the Houston Gulf Coast in other operating income (expense) in our consolidated statements of income. The liability for this agreement at December 31, 2019 and March 31, 2020 was $17.3 million and $18.5 million, respectively.

Impact of Derivatives on Our Financial Statements

Comprehensive Income

The changes in derivative activity included in AOCL for the three months ended March 31, 2019 and 2020 were as follows (in thousands):

 

	Three Months Ended
	March 31,
Derivative Losses Included in AOCL	2019			2020
Beginning balance	$	(26,480	)	$	(48,960	)
Net loss on cash flow hedges	(4,376		)	(11,914		)
Reclassification of net loss on cash flow hedges to income	627			809
Ending balance	$	(30,229	)	$	(60,065	)

The following is a summary of the effect on our consolidated statements of income for the three months ended March 31, 2019 and 2020 of derivatives that were designated as cash flow hedges (in thousands):

	Interest Rate Contracts
	Amount of Loss Recognized in AOCL on Derivatives			Location of Loss Reclassified from AOCL into  Income	Amount of Loss Reclassified from AOCL into Income
Three Months Ended March 31, 2019	$	(4,376	)	Interest expense	$	(627	)
Three Months Ended March 31, 2020	$	(11,914	)	Interest expense	$	(809	)

As of March 31, 2020, the net loss estimated to be classified to interest expense over the next twelve months from AOCL is approximately $3.2 million. This amount relates to the amortization of losses on interest rate contracts over the life of the related debt instruments.

The following table provides a summary of the effect on our consolidated statements of income for the three months ended March 31, 2019 and 2020 of derivatives that were not designated as hedging instruments (in thousands):

		Amount of Gain (Loss) Recognized on Derivatives
		Three Months Ended
	Location of Gain (Loss) Recognized on Derivatives	March 31,
Derivative Instrument		2019			2020
Futures contracts	Product sales revenue	$	(54,511	)	$	123,769
Futures contracts	Cost of product sales	2,273			(3,927		)
Basis derivative agreement	Other operating income (expense)	—			(2,899		)
	Total	$	(52,238	)	$	116,943

The impact of the derivatives in the above table was reflected as cash from operations on our consolidated statements of cash flows.

Balance Sheets

The following table provides a summary of the fair value of derivatives, which are presented on a net basis in our consolidated balance sheets, that were designated as hedging instruments as of March 31, 2020 (in thousands).

There were no balances outstanding at December 31, 2019.

	March 31, 2020
	Asset Derivatives			Liability Derivatives
Derivative Instrument	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Interest rate contracts	Other current assets	$	—	Other current liabilities	$	11,914

The following tables provide a summary of the fair value of derivatives, which are presented on a net basis in our consolidated balance sheets, that were not designated as hedging instruments as of December 31, 2019 and March 31, 2020 (in thousands):

	December 31, 2019
	Asset Derivatives			Liability Derivatives
Derivative Instrument	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Futures contracts	Commodity derivatives contracts, net	$	811	Commodity derivatives contracts, net	$	11,033
Basis derivative agreement	Other current assets	—		Other current liabilities	8,457
Basis derivative agreement	Other noncurrent assets	—		Other noncurrent liabilities	8,847
	Total	$	811	Total	$	28,337
	March 31, 2020
	Asset Derivatives			Liability Derivatives
Derivative Instrument	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Futures contracts	Commodity derivatives contracts, net	$	62,845	Commodity derivatives contracts, net	$	1,046
Futures contracts	Other noncurrent assets	3,162		Other noncurrent liabilities	8
Basis derivative agreement	Other current assets	—		Other current liabilities	9,791
Basis derivative agreement	Other noncurrent assets	—		Other noncurrent liabilities	8,685
	Total	$	66,007	Total	$	19,530