Derivative Financial Instruments | 6 Months Ended |
Jun. 30, 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 June 30, 2014, we have accounted for certain commodity contracts as fair value hedges with contract purchase volumes of 766 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 June 30, 2014, we have accounted for certain commodity swap contracts as cash flow hedges with net contract purchase volumes of 3,600 thousand barrels of crude oil and net contract sales volumes of 3,600 thousand barrels of refined products with the longest remaining contract term of eighteen months. Related to these transactions in other comprehensive income (“OCI”), we recognized unrealized gains of $11,078 and $2,351 for the three months and $42,935 and $11,756 for the six months ended June 30, 2014 and 2013, respectively. |
In November 2013 and April 2014, we elected to de-designate certain commodity swap contracts that were previously designated as cash flow hedges. As of June 30, 2014, we have total net unrealized losses of $5,144 classified in OCI that related to the application of hedge accounting prior to de-designation, which will be recorded into earnings as the underlying transactions occur through the remainder of 2014. During the three and six months ended June 30, 2014, we reclassified $2,153 and $10,428 of losses, respectively, related to these de-designated cash flow hedges from OCI into cost of sales. |
Interest Rate Derivatives. We selectively utilize interest rate swaps to manage our exposure to interest rate risk. In April 2014, we entered into three interest rate swap agreements, maturing March 2019, that effectively fix the variable LIBOR interest component of the term loan feature of the Alon Retail Credit Agreement, as defined in Note 12. The aggregate notional amount under these agreements covers approximately 75% of the outstanding principal of the term loan throughout the duration of the interest rate swaps. As of June 30, 2014, the outstanding principal of the term loan was $106,333. The interest rate swaps lock in an average fixed interest rate of 0.25% in 2014; 0.60% in 2015; 1.47% in 2016; 2.35% in 2017; 3.09% in 2018 and 3.28% thereafter. The interest rate swaps have been accounted for as cash flow hedges. Related to these transactions in OCI, we recognized unrealized losses of $788 during the three and six months ended June 30, 2014. |
For the three and six months ended June 30, 2014 and 2013, there was no cash flow hedge ineffectiveness recognized in income. No component of our cash flow hedges’ gains or losses was excluded from the assessment of hedge effectiveness. |
As of June 30, 2014, we have net unrealized gains of $12,166 classified in OCI related to cash flow hedges. Assuming commodity prices and interest rates remain unchanged, unrealized gains of $3,008 will be reclassified from OCI into earnings as the underlying transactions occur over the next twelve-month period. |
The following tables present the effect of derivative instruments on the consolidated statements of financial position: |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| As of June 30, 2014 | | | | | | | | | | | | |
| Asset Derivatives | | Liability Derivatives | | | | | | | | | | | | |
| Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | | | | | | | | | | | | |
Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | | | | | | |
Commodity contracts (futures and forwards) | Accounts receivable | | $ | 1,353 | | | Accrued liabilities | | $ | 1,457 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Total derivatives not designated as hedging instruments | | | $ | 1,353 | | | | | $ | 1,457 | | | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Derivatives designated as hedging instruments: | | | | | | | | | | | | | | | | | | | |
Commodity contracts (swaps) | Accounts receivable | | $ | 4,552 | | | | | $ | — | | | | | | | | | | | | | |
| | | | | | | | | | | |
Commodity contracts (swaps) | Other assets, net | | 1,976 | | | | | — | | | | | | | | | | | | | |
| | | | | | | | | | | |
Interest rate swaps | | | — | | | Other non-current liabilities | | 788 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Fair value hedges | | | — | | | Other non-current liabilities | | 10,390 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Total derivatives designated as hedging instruments | | | 6,528 | | | | | 11,178 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Total derivatives | | | $ | 7,881 | | | | | $ | 12,635 | | | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2013 | | | | | | | | | | | | |
| Asset Derivatives | | Liability Derivatives | | | | | | | | | | | | |
| Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | | | | | | | | | | | | |
Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | | | | | | |
Commodity contracts (futures and forwards) | Accounts receivable | | $ | 1,533 | | | Accrued liabilities | | $ | 1,198 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Total derivatives not designated as hedging instruments | | | $ | 1,533 | | | | | $ | 1,198 | | | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Derivatives designated as hedging instruments: | | | | | | | | | | | | | | | | | | | |
Commodity contracts (swaps) | | | $ | — | | | Accrued liabilities | | $ | 15,328 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Commodity contracts (swaps) | | | — | | | Other non-current liabilities | | 11,569 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Fair value hedges | | | — | | | Other non-current liabilities | | 3,339 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Total derivatives designated as hedging instruments | | | — | | | | | 30,236 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Total derivatives | | | $ | 1,533 | | | | | $ | 31,434 | | | | | | | | | | | | | |
| | | | | | | | | | | |
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: |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
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 June 30, 2014 | | | | | | | | | | | | | | | |
Commodity contracts (swaps) | | $ | 11,078 | | | Cost of sales | | $ | (2,153 | ) | | | | $ | — | | | | | | | | |
| | | | | | |
Interest rate swaps | | (788 | ) | | Interest expense | | (14 | ) | | | | — | | | | | | | | |
| | | | | | |
Total derivatives | | $ | 10,290 | | | | | $ | (2,167 | ) | | | | $ | — | | | | | | | | |
| | | | | | |
| | | | | | | | | | | | | | | | | |
For the Three Months Ended June 30, 2013 | | | | | | | | | | | | | | | |
Commodity contracts (swaps) | | $ | 2,351 | | | Cost of sales | | $ | 10,018 | | | | | $ | — | | | | | | | | |
| | | | | | |
Total derivatives | | $ | 2,351 | | | | | $ | 10,018 | | | | | $ | — | | | | | | | | |
| | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
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 Six Months Ended June 30, 2014 | | | | | | | | | | | | | | | |
Commodity contracts (swaps) | | $ | 42,935 | | | Cost of sales | | $ | (10,428 | ) | | | | $ | — | | | | | | | | |
| | | | | | |
Interest rate swaps | | (788 | ) | | Interest expense | | (14 | ) | | | | — | | | | | | | | |
| | | | | | |
Total derivatives | | $ | 42,147 | | | | | $ | (10,442 | ) | | | | $ | — | | | | | | | | |
| | | | | | |
| | | | | | | | | | | | | | | | | |
For the Six Months Ended June 30, 2013 | | | | | | | | | | | | | | | |
Commodity contracts (swaps) | | $ | 11,756 | | | Cost of sales | | $ | 9,994 | | | | | $ | — | | | | | | | | |
| | | | | | |
Total derivatives | | $ | 11,756 | | | | | $ | 9,994 | | | | | $ | — | | | | | | | | |
| | | | | | |
Derivatives in fair value hedging relationships: |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Gain (Loss) Recognized in Income | | | | | | |
| | | For the Three Months Ended | | For the Six Months Ended | | | | | | |
| | | June 30, | | June 30, | | | | | | |
| Location | | 2014 | | 2013 | | 2014 | | 2013 | | | | | | |
Fair value hedges | Cost of sales | | $ | (4,444 | ) | | $ | 961 | | | $ | (7,051 | ) | | $ | (1,858 | ) | | | | | | |
| | | | | |
Total derivatives | | | $ | (4,444 | ) | | $ | 961 | | | $ | (7,051 | ) | | $ | (1,858 | ) | | | | | | |
| | | | | |
Derivatives not designated as hedging instruments: |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Gain (Loss) Recognized in Income | | | | | | |
| | | For the Three Months Ended | | For the Six Months Ended | | | | | | |
| | | June 30, | | June 30, | | | | | | |
| Location | | 2014 | | 2013 | | 2014 | | 2013 | | | | | | |
Commodity contracts (futures & forwards) | Cost of sales | | $ | (5,133 | ) | | $ | 2,532 | | | $ | (6,118 | ) | | $ | 10,519 | | | | | | | |
| | | | | |
Commodity contracts (swaps) | Cost of sales | | (236 | ) | | — | | | 1,801 | | | — | | | | | | | |
| | | | | |
Total derivatives | | | $ | (5,369 | ) | | $ | 2,532 | | | $ | (4,317 | ) | | $ | 10,519 | | | | | | | |
| | | | | |
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 June 30, 2014 and December 31, 2013: |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Gross Amounts of Recognized Assets/Liabilities | | Gross Amounts offset in the Statement of Financial Position | | Net Amounts 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 June 30, 2014 | | | | | | | | | | | |
Derivative Assets: | | | | | | | | | | | |
Commodity contracts (futures & forwards) | $ | 1,483 | | | $ | (130 | ) | | $ | 1,353 | | | $ | (1,353 | ) | | $ | — | | | $ | — | |
|
Commodity contracts (swaps) | 6,528 | | | — | | | 6,528 | | | — | | | — | | | 6,528 | |
|
Derivative Liabilities: | | | | | | | | | | | |
Commodity contracts (futures & forwards) | $ | 1,587 | | | $ | (130 | ) | | $ | 1,457 | | | $ | (1,353 | ) | | $ | — | | | $ | 104 | |
|
Interest rate swaps | 788 | | | — | | | 788 | | | — | | | — | | | 788 | |
|
Fair value hedges | 10,390 | | | — | | | 10,390 | | | — | | | — | | | 10,390 | |
|
| | | | | | | | | | | |
As of December 31, 2013 | | | | | | | | | | | |
Derivative Assets: | | | | | | | | | | | |
Commodity contracts (futures & forwards) | $ | 2,287 | | | $ | (754 | ) | | $ | 1,533 | | | $ | (1,198 | ) | | $ | — | | | $ | 335 | |
|
Derivative Liabilities: | | | | | | | | | | | |
Commodity contracts (futures & forwards) | $ | 1,952 | | | $ | (754 | ) | | $ | 1,198 | | | $ | (1,198 | ) | | $ | — | | | $ | — | |
|
Commodity contracts (swaps) | 26,897 | | | — | | | 26,897 | | | — | | | — | | | 26,897 | |
|
Fair value hedges | 3,339 | | | — | | | 3,339 | | | — | | | — | | | 3,339 | |
|
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 $4,742 and $8,016 for the three months ended and $12,755 and $8,016 for the six months ended June 30, 2014 and 2013, respectively. These amounts are reflected in cost of sales. |