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DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
 12 Months Ended
Dec. 31, 2015
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
 
We are exposed to financial market risks, including changes in interest rates and commodity prices, in the course of our normal business operations.  We use derivative instruments to manage risks.
 
Interest Rate Derivatives
 
From time to time, we utilize forward-starting interest rate swaps to hedge the variability of the forecasted interest payments on anticipated debt issuances that may result from changes in the benchmark interest rate until the expected debt is issued.  When entering into interest rate swap transactions, we become exposed to both credit risk and market risk.  We are subject to credit risk when the change in fair value of the swap instrument is positive and the counterparty may fail to perform under the terms of the contract.  We are subject to market risk with respect to changes in the underlying benchmark interest rate that impacts the fair value of the swaps.  We manage our credit risk by entering into swap transactions only with major financial institutions with investment-grade credit ratings.  We manage our market risk by aligning the swap instrument with the existing underlying debt obligation or a specified expected debt issuance generally associated with the maturity of an existing debt obligation.  We designate the swap agreements as cash flow hedges at inception and expect the changes in values to be highly correlated with the changes in value of the underlying borrowings.
 
We entered into six forward-starting interest rate swaps with a total aggregate notional amount of $300.0 million, which we entered into in anticipation of the issuance of debt on or before July 15, 2013, and six forward-starting interest rate swaps with a total aggregate notional amount of $275.0 million, which we entered into in anticipation of the issuance of debt on or before October 15, 2014.
 
In September 2014, we issued $300.0 million of senior unsecured notes (see Note 14 for further discussion) and also settled the related six forward-starting interest rate swaps for $51.5 million.  As a result of the interest rate swap settlement, we recognized $1.1 million hedge ineffectiveness in interest and debt expense attributable to the timing difference between when the swaps were settled and when they were forecasted to settle.  In June 2013, we issued $500.0 million of the 4.150% Notes and also settled the related six forward-starting interest rate swaps for $62.0 million.  As a result of the interest rate swap settlement, we recognized $0.9 million hedge ineffectiveness in interest and debt expense attributable to the timing difference between when the swaps were settled and when they were forecasted to settle.
 
During the year ended December 31, 2014 unrealized loss of $21.4 million was recorded in AOCI to reflect the change in the fair values of the forward-starting interest rate swaps.  Over the next twelve months, we expect to reclassify $12.2 million of net losses from accumulated other comprehensive loss to interest and debt expense.  The loss consists primarily of the amortization of our settled forward-starting interest rate swaps.
 
Commodity Derivatives
 
Our Merchant Services segment primarily uses exchange-traded refined petroleum product futures contracts to manage the risk of market price volatility on its refined petroleum product inventories and its physical derivative contracts which we designated as fair value hedges with changes in fair value of both the futures contracts and physical inventory reflected in earnings.  Our Domestic Pipelines & Terminals segment uses exchange-traded refined petroleum contracts to hedge certain expected future transactions which we designated as cash flow hedges with the effective portion of the hedge reported in other comprehensive income (“OCI”) and reclassified into earnings when the expected future transaction affects earnings. Our Merchant Services segment entered into these contracts on behalf of our Domestic Pipelines & Terminals segment. In both cases, any gains or losses incurred on the derivative instrument that are not effective in offsetting changes in fair value or cash flows of the hedged item are recognized immediately in earnings. Physical forward contracts and futures contracts that have not been designated in a hedge relationship are marked-to-market.  

The following table summarizes our commodity derivative instruments outstanding at December 31, 2015 (amounts in thousands of gallons):
 
 
Volume (1)
 
Accounting
Derivative Purpose 
 
Current
 
Long-Term
 
Treatment
 
 
 
 
 
 
 
Derivatives NOT designated as hedging instruments:
 
 

 
 

 
 
Physical fixed price derivative contracts
 
13,741

 
1,659

 
Mark-to-market
Physical index derivative contracts
 
69,457

 
—

 
Mark-to-market
Futures contracts for refined petroleum products
 
13,587

 
2,562

 
Mark-to-market
 
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 

 
 

 
 
Futures contracts for refined petroleum products
 
136,458

 
—

 
Fair Value Hedge
Futures contracts for refined petroleum products
 
8,400

 
—

 
Cash Flow Hedge
____________________________
(1)
Volume represents absolute value of net notional volume position.
 
The following table sets forth the fair value of each classification of derivative instruments and the locations of the derivative instruments on our consolidated balance sheets at the dates indicated (in thousands):
 
December 31, 2015
 
Derivatives
NOT Designated
as Hedging
Instruments
 
Derivatives
Designated
as Hedging
Instruments
 
Derivative
Carrying
Value
 
Netting
Balance
Sheet
Adjustment (1)
 
Total
Physical fixed price derivative contracts
$
26,698

 
$
—

 
$
26,698

 
$
(79
)
 
$
26,619

Physical index derivative contracts
87

 
—

 
87

 
(62
)
 
25

Futures contracts for refined products
136,131

 
36,834

 
172,965

 
(121,324
)
 
51,641

Total current derivative assets
162,916

 
36,834

 
199,750

 
(121,465
)
 
78,285

Physical fixed price derivative contracts
1,057

 
—

 
1,057

 
—

 
1,057

Total non-current derivative assets
1,057

 
—

 
1,057

 
—

 
1,057

Physical fixed price derivative contracts
(535
)
 
—

 
(535
)
 
79

 
(456
)
Physical index derivative contracts
(116
)
 
—

 
(116
)
 
62

 
(54
)
Futures contracts for refined products
(119,506
)
 
(1,818
)
 
(121,324
)
 
121,324

 
—

Total current derivative liabilities
(120,157
)
 
(1,818
)
 
(121,975
)
 
121,465

 
(510
)
Futures contracts for refined products
(703
)
 
—

 
(703
)
 
—

 
(703
)
Total non-current derivative liabilities
(703
)
 
—

 
(703
)
 
—

 
(703
)
Net derivative assets
$
43,113

 
$
35,016

 
$
78,129

 
$
—

 
$
78,129

____________________________
(1)
Amounts represent the netting of physical fixed and index contracts’ assets and liabilities when a legal right of offset exists. Futures contracts are subject to settlement through margin requirements and are additionally presented on a net basis.
 
 
December 31, 2014
 
Derivatives
NOT Designated
as Hedging
Instruments
 
Derivatives
Designated
as Hedging
Instruments
 
Derivative
Carrying
Value
 
Netting
Balance
Sheet
Adjustment (1)
 
Total
Physical fixed price derivative contracts
$
42,005

 
$
—

 
$
42,005

 
$
(12
)
 
$
41,993

Physical index derivative contracts
112

 
—

 
112

 
(59
)
 
53

Futures contracts for refined products
150,352

 
30,702

 
181,054

 
(153,911
)
 
27,143

Total current derivative assets
192,469

 
30,702

 
223,171

 
(153,982
)
 
69,189

Physical fixed price derivative contracts
2,919

 
—

 
2,919

 
—

 
2,919

Total non-current derivative assets
2,919

 
—

 
2,919

 
—

 
2,919

Physical fixed price derivative contracts
(1,502
)
 
—

 
(1,502
)
 
12

 
(1,490
)
Physical index derivative contracts
(371
)
 
—

 
(371
)
 
59

 
(312
)
Futures contracts for refined products
(153,911
)
 
—

 
(153,911
)
 
153,911

 
—

Total current derivative liabilities
(155,784
)
 
—

 
(155,784
)
 
153,982

 
(1,802
)
Physical fixed price derivative contracts
(5
)
 
—

 
(5
)
 
—

 
(5
)
Futures contracts for refined products
(2,615
)
 
—

 
(2,615
)
 
—

 
(2,615
)
Total non-current derivative liabilities
(2,620
)
 
—

 
(2,620
)
 
—

 
(2,620
)
Net derivative assets
$
36,984

 
$
30,702

 
$
67,686

 
$
—

 
$
67,686

____________________________
(1)
Amounts represent the netting of physical fixed and index contracts’ assets and liabilities when a legal right of offset exists. Futures contracts are subject to settlement through margin requirements and are additionally presented on a net basis.
 
Our futures contracts designated as fair value hedges related to our inventory portfolio extend to the third quarter of 2016 and our futures contracts designated as cash flow hedges related to refined petroleum products extend to the first quarter of 2016. The majority of the unrealized gain at December 31, 2015, for fair value hedges of inventory and cash flow hedges related to refined petroleum products represented by futures contracts of $33.7 million and $1.3 million, respectively, will be realized by the first quarter of 2016. At December 31, 2015, open refined petroleum product derivative contracts (represented by the physical fixed-price contracts, physical index contracts, and futures contracts for fixed-price sales contracts noted above) varied in duration in the overall portfolio, but did not extend beyond April 2018.  In addition, at December 31, 2015, we had refined petroleum product inventories that we intend to use to satisfy a portion of the physical derivative contracts.
 
The gains and losses on our derivative instruments recognized in income were as follows for the periods indicated (in thousands):
 
 
 
Year Ended December 31,
 
Location
 
2015
 
2014
Derivatives NOT designated as hedging instruments:
 
 
 

 
 

Physical fixed price derivative contracts
Product sales
 
$
35,667

 
$
50,293

Physical index derivative contracts
Product sales
 
(268
)
 
(73
)
Physical fixed price derivative contracts
Cost of product sales
 
12,489

 
4,352

Physical index derivative contracts
Cost of product sales
 
101

 
(849
)
Futures contracts for refined products
Cost of product sales
 
(6,559
)
 
(14,151
)
 
 
 
 
 
 
Derivatives designated as fair value hedging instruments:
 
 
 

 
 

Futures contracts for refined products
Cost of product sales
 
$
75,974

 
$
117,283

Physical inventory - hedged items
Cost of product sales
 
(83,703
)
 
(144,142
)
 
 
 
 
 
 
Ineffectiveness excluding the time value component on fair value hedging instruments:
 
 
 

 
 

Fair value hedge ineffectiveness (excluding time value)
Cost of product sales
 
$
2,162

 
$
40

Time value excluded from hedge assessment
Cost of product sales
 
(9,891
)
 
(26,899
)
Net loss in income
 
 
$
(7,729
)
 
$
(26,859
)

 
The change in value recognized in OCI and the losses reclassified from AOCI to income attributable to our derivative instruments designated as cash flow hedges were as follows for the periods indicated (in thousands):
 
Gain (Loss) Recognized
in OCI on Derivatives for the
Year Ended December 31,
 
2015
 
2014
Derivatives designated as cash flow hedging instruments:
 

 
 

Interest rate contracts
$
—

 
$
(21,424
)
Commodity derivatives
1,266

 
—

 
$
1,266

 
$
(21,424
)

 
 
 
Loss Reclassified
From AOCI to Income for the
Year Ended December 31,
 
Location
 
2015
 
2014
Derivatives designated as cash flow hedging instruments:
 
 
 

 
 

Interest rate contracts
Interest and debt expense
 
$
(12,151
)
 
$
(9,753
)


The unrealized gain at December 31, 2015 for refined petroleum products designated as cash flow hedges of $1.3 million will be realized and reclassified from AOCI to product sales by the first quarter of 2016, at the end of the butane blending season. The ineffective portion of the change in fair value of cash flow hedges was not material for the year ended December 31, 2015.