Derivative Financial Instruments | 3 Months Ended |
Mar. 31, 2015 |
Derivative Instruments and Hedging Activities Disclosure [Abstract] | |
Derivative Instruments and Hedging Activities Disclosure | Derivative Financial Instruments |
We selectively utilize crude oil and refined product commodity derivative contracts to reduce the risk associated with potential price changes on committed obligations as well as to reduce earnings volatility. 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. |
Mark to Market |
We have certain contracts that serve as economic hedges, which are derivatives used for risk management but not designated as hedges for financial accounting purposes. All economic hedge transactions are recorded at fair value and any changes in fair value between periods are recognized in earnings. |
We have contracts that are used to fix prices on forecasted purchases of inventory. Forwards represent physical trades for which pricing and quantities have been set, but the physical product delivery has not occurred by the end of the reporting period. Futures represent trades executed on the New York Mercantile Exchange which have not been closed or settled at the end of the reporting period. |
Fair Value Hedge |
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. |
We have certain commodity contracts associated with the Supply and Offtake Agreement discussed in Note 5 that have been accounted for as a fair value hedge, which had purchase volumes of 333 thousand barrels of crude oil as of March 31, 2015. |
The following tables present the effect of derivative instruments on the consolidated balance sheets: |
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| As of March 31, 2015 | | | | | | | | | | | | |
| 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 | | $ | 497 | | | Accrued liabilities | | $ | 271 | | | | | | | | | | | | | |
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Total derivatives not designated as hedging instruments | | | 497 | | | | | 271 | | | | | | | | | | | | | |
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Derivatives designated as hedging instruments: | | | | | | | | | | | | | | | | | | | |
Fair value hedge | Other assets | | $ | 13,146 | | | | | $ | — | | | | | | | | | | | | | |
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Total derivatives designated as hedging instruments | | | 13,146 | | | | | — | | | | | | | | | | | | | |
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Total derivatives | | | $ | 13,643 | | | | | $ | 271 | | | | | | | | | | | | | |
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| As of December 31, 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 | | $ | 2,629 | | | Accrued liabilities | | $ | 1,223 | | | | | | | | | | | | | |
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Total derivatives not designated as hedging instruments | | | 2,629 | | | | | 1,223 | | | | | | | | | | | | | |
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Derivatives designated as hedging instruments: | | | | | | | | | | | | | | | | | | | |
Fair value hedge | Other assets | | $ | 10,223 | | | | | $ | — | | | | | | | | | | | | | |
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Total derivatives designated as hedging instruments | | | 10,223 | | | | | — | | | | | | | | | | | | | |
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Total derivatives | | | $ | 12,852 | | | | | $ | 1,223 | | | | | | | | | | | | | |
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The following tables present the effect of derivative instruments on the consolidated statements of operations: |
Derivatives in fair value hedging relationships: |
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| | | Gain (Loss) Recognized in Income | | | | | | | | | | | | | | |
| | | For the Three Months Ended | | | | | | | | | | | | | | |
| | | March 31, | | | | | | | | | | | | | | |
| Location | | 2015 | | 2014 | | | | | | | | | | | | | | |
Fair value hedge (1) | Interest expense | | $ | 2,923 | | | $ | (823 | ) | | | | | | | | | | | | | | |
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Total derivatives | | | $ | 2,923 | | | $ | (823 | ) | | | | | | | | | | | | | | |
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-1 | Changes in the fair value hedge are substantially offset by changes in the hedged item. | | | | | | | | | | | | | | | | | | | | | | |
Derivatives not designated as hedging instruments: |
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| | | Gain (Loss) Recognized in Income | | | | | | | | | | | | | | |
| | | For the Three Months Ended | | | | | | | | | | | | | | |
| | | March 31, | | | | | | | | | | | | | | |
| Location | | 2015 | | 2014 | | | | | | | | | | | | | | |
Commodity contracts (futures and forwards) | Cost of sales | | $ | 474 | | | $ | 623 | | | | | | | | | | | | | | | |
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Total derivatives | | | $ | 474 | | | $ | 623 | | | | | | | | | | | | | | | |
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Offsetting Assets and Liabilities |
Our derivative 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, 2015 and December 31, 2014: |
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| 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 March 31, 2015 | | | | | | | | | | |
Derivative Assets: | | | | | | | | | | |
Commodity contracts (futures and forwards) | $ | 551 | | | $ | (54 | ) | | $ | 497 | | | $ | (271 | ) | | $ | — | | | $ | 226 | |
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Fair value hedge | 13,146 | | | — | | | 13,146 | | | — | | | — | | | 13,146 | |
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Derivative Liabilities: | | | | | | | | | | |
Commodity contracts (futures and forwards) | $ | 325 | | | $ | (54 | ) | | $ | 271 | | | $ | (271 | ) | | $ | — | | | $ | — | |
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As of December 31, 2014 | | | | | | | | | | |
Derivative Assets: | | | | | | | | | | |
Commodity contracts (futures and forwards) | $ | 3,309 | | | $ | (680 | ) | | $ | 2,629 | | | $ | (1,223 | ) | | $ | — | | | $ | 1,406 | |
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Fair value hedge | 10,223 | | | — | | | 10,223 | | | — | | | — | | | 10,223 | |
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Derivative Liabilities: | | | | | | | | | | |
Commodity contracts (futures and forwards) | $ | 1,903 | | | $ | (680 | ) | | $ | 1,223 | | | $ | (1,223 | ) | | $ | — | | | $ | — | |
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Compliance Program Market Risk |
We are obligated by government regulations to blend a certain percentage of biofuels into the products that we produce and 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 renewable identification number, or 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. Alternatively, if we have a RINs surplus, some of those RINs could be sold. Any such sales would be subject to our normal credit evaluation process. |
We are exposed to market risk related to the volatility in the price of credits needed to comply with these governmental and regulatory programs. 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 $4,538 and $2,926 for the three months ended March 31, 2015 and 2014, respectively. These amounts are reflected in cost of sales in the consolidated statements of operations. |