Derivative Financial Instruments | 3 Months Ended |
Mar. 31, 2014 |
Derivative Instruments and Hedging Activities Disclosure [Abstract] | ' |
Derivative Instruments and Hedging Activities Disclosure | ' |
Derivative Financial Instruments |
Mark to Market |
Commodity Derivatives. We selectively utilize crude oil and refined product commodity derivative contracts to reduce the risk associated with potential price changes on committed obligations. We do not speculate using derivative instruments. Credit risk on our derivative instruments is mitigated by transacting with counterparties meeting established collateral and credit criteria. |
Fair Value Hedges |
Fair value hedges are used to hedge price volatility of certain refining inventories and firm commitments to purchase inventories. The gain or loss on a derivative instrument designated and qualifying as a fair value hedge, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, is recognized in earnings in the same period. |
As of March 31, 2014, we have accounted for certain commodity contracts as fair value hedges with contract purchase volumes of 756 thousand barrels of crude oil with remaining contract terms through May 2019. |
Cash Flow Hedges |
To designate a derivative as a cash flow hedge, we document at the inception of the hedge the assessment that the derivative will be highly effective in offsetting expected changes in cash flows from the item hedged. This assessment, which is updated at least quarterly, is generally based on the most recent relevant historical correlation between the derivative and the item hedged. If, during the term of the derivative, the hedge is determined to be no longer highly effective, hedge accounting is prospectively discontinued and any remaining unrealized gains or losses, based on the effective portion of the derivative at that date, are reclassified to earnings when the underlying transactions occur. |
Commodity Derivatives. As of March 31, 2014, we have accounted for certain commodity swap contracts as cash flow hedges with contract purchase volumes of 5,220 thousand barrels of crude oil and net contract sales volumes of 5,220 thousand barrels of refined products with the longest remaining contract term of twenty-one months. Related to these transactions in Other Comprehensive Income (“OCI”), we recognized unrealized gains of $31,857 and $9,405 for the three months ended March 31, 2014 and 2013, respectively. |
In November 2013, we elected to de-designate certain commodity swap contracts that were previously designated as cash flow hedges. Consequently, hedge accounting was discontinued for the commodity swap contracts and prospectively all changes in fair value were recorded in cost of sales in the consolidated statements of operations. The commodity derivative contracts were subsequently re-designated as cash flow hedges as of December 31, 2013 on a product basis. As of March 31, 2014, we have unrealized losses of $21,707 classified in OCI that related to the application of hedge accounting prior to de-designation that will be recorded into earnings as the underlying forecasted transactions occur through the remainder of 2014. During the three months ended March 31, 2014, we reclassified $8,275 of losses related to these de-dedesignated cash flow hedges from OCI into cost of sales. |
For the three months ended March 31, 2014 and 2013, there was no hedge ineffectiveness recognized in income. No component of the derivative instruments’ gains or losses was excluded from the assessment of hedge effectiveness. |
The following table presents the effect of derivative instruments on the consolidated statements of financial position: |
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| As of March 31, 2014 | | | | | | | | | | | | |
| Asset Derivatives | | Liability Derivatives | | | | | | | | | | | | |
| Balance Sheet | | | | Balance Sheet | | | | | | | | | | | | | | |
| Location | | Fair Value | | Location | | Fair Value | | | | | | | | | | | | |
Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | | | | | | |
Commodity contracts (futures and forwards) | Accounts receivable | | $ | 706 | | | Accrued liabilities | | $ | 3,001 | | | | | | | | | | | | | |
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Commodity contracts (swaps) | Accounts receivable | | (790 | ) | | | | — | | | | | | | | | | | | | |
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Total derivatives not designated as hedging instruments | | | $ | (84 | ) | | | | $ | 3,001 | | | | | | | | | | | | | |
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Derivatives designated as hedging instruments: | | | | | | | | | | | | | | | | | | | |
Commodity contracts (swaps) | Accounts receivable | | $ | 1,544 | | | Other non-current liabilities | | $ | 2,398 | | | | | | | | | | | | | |
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Fair value hedges | | | — | | | Other non-current liabilities | | 5,946 | | | | | | | | | | | | | |
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Total derivatives designated as hedging instruments | | | 1,544 | | | | | 8,344 | | | | | | | | | | | | | |
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Total derivatives | | | $ | 1,460 | | | | | $ | 11,345 | | | | | | | | | | | | | |
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| As of December 31, 2013 | | | | | | | | | | | | |
| Asset Derivatives | | Liability Derivatives | | | | | | | | | | | | |
| Balance Sheet | | | | Balance Sheet | | | | | | | | | | | | | | |
| Location | | Fair Value | | Location | | Fair Value | | | | | | | | | | | | |
Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | | | | | | |
Commodity contracts (futures and forwards) | Accounts receivable | | $ | 1,533 | | | Accrued liabilities | | $ | 1,198 | | | | | | | | | | | | | |
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Total derivatives not designated as hedging instruments | | | $ | 1,533 | | | | | $ | 1,198 | | | | | | | | | | | | | |
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Derivatives designated as hedging instruments: | | | | | | | | | | | | | | | | | | | |
Commodity contracts (swaps) | | | $ | — | | | Accrued liabilities | | $ | 15,328 | | | | | | | | | | | | | |
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Commodity contracts (swaps) | | | — | | | Other non-current liabilities | | 11,569 | | | | | | | | | | | | | |
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Fair value hedges | | | — | | | Other non-current liabilities | | 3,339 | | | | | | | | | | | | | |
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Total derivatives designated as hedging instruments | | | — | | | | | 30,236 | | | | | | | | | | | | | |
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Total derivatives | | | $ | 1,533 | | | | | $ | 31,434 | | | | | | | | | | | | | |
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The following tables present the effect of derivative instruments on the consolidated statements of operations and accumulated other comprehensive income: |
Derivatives designated as hedging instruments: |
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Cash Flow Hedging Relationships | | Gain (Loss) Recognized | | Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | | Gain (Loss) Reclassified | | | | | | | |
in OCI | from Accumulated OCI into | | | | | | | |
| Income (Ineffective | | | | | | | |
| Portion and Amount | | | | | | | |
| Excluded from | | | | | | | |
| Effectiveness Testing) | | | | | | | |
| | | | Location | | Amount | | Location | | Amount | | | | | | | |
For the Three Months Ended March 31, 2014 | | | | | | | | | | | | | | | |
Commodity contracts (swaps) | | $ | 31,857 | | | Cost of sales | | $ | (8,275 | ) | | | | $ | — | | | | | | | | |
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Total derivatives | | $ | 31,857 | | | | | $ | (8,275 | ) | | | | $ | — | | | | | | | | |
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For the Three Months Ended March 31, 2013 | | | | | | | | | | | | | | | |
Commodity contracts (swaps) | | $ | 9,405 | | | Cost of sales | | $ | (24 | ) | | | | $ | — | | | | | | | | |
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Total derivatives | | $ | 9,405 | | | | | $ | (24 | ) | | | | $ | — | | | | | | | | |
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Derivatives in fair value hedging relationships: |
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| | | Gain (Loss) Recognized in Income | | | | | | | | | | | | | | |
| | | For the Three Months Ended | | | | | | | | | | | | | | |
| | | March 31, | | | | | | | | | | | | | | |
| Location | | 2014 | | 2013 | | | | | | | | | | | | | | |
Fair value hedges | Cost of sales | | $ | (2,607 | ) | | $ | (2,819 | ) | | | | | | | | | | | | | | |
Total derivatives | | | $ | (2,607 | ) | | $ | (2,819 | ) | | | | | | | | | | | | | | |
Derivatives not designated as hedging instruments: |
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| | | Gain (Loss) Recognized in Income | | | | | | | | | | | | | | |
| | | For the Three Months Ended | | | | | | | | | | | | | | |
| | | March 31, | | | | | | | | | | | | | | |
| Location | | 2014 | | 2013 | | | | | | | | | | | | | | |
Commodity contracts (futures & forwards) | Cost of sales | | $ | (985 | ) | | $ | 7,987 | | | | | | | | | | | | | | | |
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Commodity contracts (swaps) | Cost of sales | | 2,037 | | | — | | | | | | | | | | | | | | | |
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Total derivatives | | | $ | 1,052 | | | $ | 7,987 | | | | | | | | | | | | | | | |
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Offsetting Assets and Liabilities |
Our derivative financial instruments are subject to master netting arrangements to manage counterparty credit risk associated with derivatives and we offset the fair value amounts recorded for derivative instruments to the extent possible under these agreements on our consolidated balance sheets. |
The following table presents offsetting information regarding our derivatives by type of transaction as of March 31, 2014 and December 31, 2013: |
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| Gross Amounts of Recognized Assets/Liabilities | | Gross Amounts offset in the Statement of Financial Position | | Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position | | Gross Amounts Not offset in the Statement of Financial Position | | Net Amount |
| | | Financial Instruments | | Cash Collateral Pledged | |
As of March 31, 2014 | | | | | | | | | | |
Commodity Derivative Assets: | | | | | | | | | | |
Futures & forwards | $ | 1,297 | | | $ | (591 | ) | | $ | 706 | | | $ | (706 | ) | | $ | — | | | $ | — | |
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Swaps | 1,544 | | | (790 | ) | | 754 | | | (754 | ) | | — | | | — | |
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Commodity Derivative Liabilities: | | | | | | | | | | |
Futures & forwards | $ | 3,592 | | | $ | (591 | ) | | $ | 3,001 | | | $ | (706 | ) | | $ | — | | | $ | 2,295 | |
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Swaps | 3,188 | | | (790 | ) | | 2,398 | | | (754 | ) | | — | | | 1,644 | |
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Fair value hedges | 5,946 | | | — | | | 5,946 | | | — | | | — | | | 5,946 | |
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As of December 31, 2013 | | | | | | | | | | |
Commodity Derivative Assets: | | | | | | | | | | |
Futures & forwards | $ | 2,287 | | | $ | (754 | ) | | $ | 1,533 | | | $ | (1,198 | ) | | $ | — | | | $ | 335 | |
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Commodity Derivative Liabilities: | | | | | | | | | | |
Futures & forwards | $ | 1,952 | | | $ | (754 | ) | | $ | 1,198 | | | $ | (1,198 | ) | | $ | — | | | $ | — | |
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Swaps | 26,897 | | | — | | | 26,897 | | | — | | | — | | | 26,897 | |
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Fair value hedges | 3,339 | | | — | | | 3,339 | | | — | | | — | | | 3,339 | |
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Compliance Program Market Risk |
We are obligated by government regulations to blend a certain percentage of biofuels into the products we produce that are consumed in the U.S. We purchase biofuels from third parties and blend those biofuels into our products, and each gallon of biofuel purchased includes a RIN. To the degree we are unable to blend biofuels at the required percentage, a RINs deficit is generated and we must acquire that number of RINs by the annual reporting deadline in order to remain in compliance with applicable regulations. |
We are exposed to market risk related to the volatility in the price of RINs needed to comply with these government regulations. We manage this risk by purchasing RINs when prices are deemed favorable utilizing fixed price purchase contracts. Some of these contracts are derivative instruments; however, we elect the normal purchase and sale exception and do not record these contracts at their fair values. The cost of meeting our obligations under these compliance programs was $8,013 for the three months ended March 31, 2014. This amount is reflected in cost of sales. For the three months ended March 31, 2013, we utilized carryover RINs from 2012 to completely offset our RINs deficit. |