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DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
 3 Months Ended
Mar. 31, 2016
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
6. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

We are exposed to financial market risks, including changes in commodity prices, in the course of our normal business operations.  We use derivative instruments to manage risks.
 
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.  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 March 31, 2016 (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
 
191

 
1,721

 
Mark-to-market
Physical index derivative contracts
 
58,199

 
—

 
Mark-to-market
Futures contracts for refined petroleum products
 
2,342

 
2,730

 
Mark-to-market
 
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 

 
 

 
 
Futures contracts for refined petroleum products
 
124,278

 
—

 
Fair Value 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 unaudited condensed consolidated balance sheets at the dates indicated (in thousands):
 
March 31, 2016
 
Derivatives
NOT Designated
as Hedging
Instruments
 
Derivatives
Designated
as Hedging
Instruments
 
Derivative
Carrying
Value
 
Netting
Balance
Sheet
Adjustment (1)
 
Net Total
Physical fixed price derivative contracts
$
10,461

 
$
1,696

 
$
12,157

 
$
545

 
$
12,702

Physical index derivative contracts
126

 
—

 
126

 
(63
)
 
63

Futures contracts for refined products
14,783

 
605

 
15,388

 
(15,388
)
 
—

Total current derivative assets
25,370

 
2,301

 
27,671

 
(14,906
)
 
12,765

Physical fixed price derivative contracts
462

 
—

 
462

 
(35
)
 
427

Futures contracts for refined products
40

 
—

 
40

 
(40
)
 
—

Total non-current derivative assets
502

 
—

 
502

 
(75
)
 
427

Physical fixed price derivative contracts
(979
)
 
(2,671
)
 
(3,650
)
 
(545
)
 
(4,195
)
Physical index derivative contracts
(132
)
 
—

 
(132
)
 
63

 
(69
)
Futures contracts for refined products
(24,512
)
 
(3,542
)
 
(28,054
)
 
15,388

 
(12,666
)
Total current derivative liabilities
(25,623
)
 
(6,213
)
 
(31,836
)
 
14,906

 
(16,930
)
Physical fixed price derivative contracts
(72
)
 
—

 
(72
)
 
35

 
(37
)
Futures contracts for refined products
(377
)
 
—

 
(377
)
 
40

 
(337
)
Total non-current derivative liabilities
(449
)
 
—

 
(449
)
 
75

 
(374
)
Net derivative liabilities
$
(200
)
 
$
(3,912
)
 
$
(4,112
)
 
$
—

 
$
(4,112
)
                                                      
(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, 2015
 
Derivatives NOT Designated
as Hedging
Instruments
 
Derivatives Designated
as Hedging
Instruments
 
Derivative
Carrying
Value
 
Netting
Balance
Sheet
Adjustment (1)
 
Net 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.
 
Our futures contracts designated as fair value hedges related to our inventory portfolio extend to the third quarter of 2016.  The majority of the unrealized loss at March 31, 2016 for fair value hedges of inventory represented by future contracts of $2.9 million will be realized by the second quarter of 2016.  At March 31, 2016, open refined petroleum product derivative contracts (represented by the physical fixed-price contracts, physical index contracts, and futures contracts for refined products contracts noted above) varied in duration in the overall portfolio, but did not extend beyond November 2018.  In addition, at March 31, 2016, 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):
 
 
 
Three Months Ended 
 March 31,
 
Location
 
2016
 
2015
Derivatives NOT designated as hedging instruments:
 
 
 

 
 

Physical fixed price derivative contracts
Product sales
 
$
(2,255
)
 
$
7,055

Physical index derivative contracts
Product sales
 
(27
)
 
(5
)
Physical fixed price derivative contracts
Cost of product sales
 
5,115

 
2,639

Physical index derivative contracts
Cost of product sales
 
214

 
(156
)
Futures contracts for refined products
Cost of product sales
 
(1,482
)
 
8,705

 
 
 
 
 
 
Derivatives designated as fair value hedging instruments:
 
 
 

 
 

Futures contracts for refined products
Cost of product sales
 
$
1,613

 
$
(17,847
)
Physical inventory - hedged items
Cost of product sales
 
8,326

 
9,424

 
 
 
 
 
 
Ineffectiveness excluding the time value component on fair value hedging instruments:
 
 
 

 
 

Fair value hedge ineffectiveness (excluding time value)
Cost of product sales
 
$
647

 
$
1,066

Time value excluded from hedge assessment
Cost of product sales
 
9,292

 
(9,489
)
Net gain (loss) in income
 
 
$
9,939

 
$
(8,423
)


The gains and losses reclassified from accumulated other comprehensive income (“AOCI”) to income attributable to our derivative instruments designated as cash flow hedges were as follows for the periods indicated (in thousands):
 
 
 
(Loss) Gain Reclassified from AOCI to 
Income (Effective Portion) for the
 
 
 
Three Months Ended 
 March 31,
 
Location
 
2016
 
2015
Derivatives designated as cash flow hedging instruments:
 
 
 

 
 

Interest rate contracts
Interest and debt expense
 
$
(3,038
)
 
$
(3,037
)
Commodity derivatives
Product Sales
 
1,266

 
—

Total
 
 
$
(1,772
)
 
$
(3,037
)


Over the next twelve months, we expect to reclassify $12.2 million of net losses attributable to interest rate derivative instruments from AOCI to earnings as an increase to interest and debt expense. For additional information on the net losses attributable to interest rate derivative instruments, see our Annual Report on Form 10-K for the year ended December 31, 2015.