Derivative Financial Instruments

6 Months Ended

Jun. 30, 2011

Derivative Financial Instruments

Derivative Financial Instruments

9. Derivative Financial Instruments

Commodity Derivatives

Our petroleum products blending activities produce gasoline products and we can estimate the timing and quantities of sales of these products. We use a combination of forward purchase and sales contracts, NYMEX contracts and butane price swap purchase agreements to lock in most of the product margins realized from our blending activities that we choose to hedge.

We account for the forward purchase and sales contracts we use in our blending activities as normal purchases and sales. As of June 30, 2011, we had commitments under forward purchase contracts for product purchases of approximately 0.8 million barrels that are being accounted for as normal purchases totaling approximately $77.1 million, and we had commitments under forward sales contracts for product sales of approximately 1.1 million barrels that are being accounted for as normal sales totaling approximately $138.3 million.

We use NYMEX contracts and butane price swap purchase agreements to help manage commodity price risk.  We use NYMEX contracts to hedge against changes in the price of petroleum products we expect to sell in future periods.  Some of these NYMEX contracts qualify for hedge accounting treatment, and we designate and account for these as either cash flow or fair value hedges.  We account for those NYMEX contracts that do not qualify for hedge accounting treatment as economic hedges.  We use butane price swap purchase agreements to hedge against changes in the price of butane we expect to purchase in the future. We elected to not designate the butane price swap purchase agreements we have entered into as hedges for accounting purposes because the related NYMEX contracts associated with the gasoline that will be produced and sold from these future butane purchases did not qualify for hedge accounting treatment. At June 30, 2011, we had open NYMEX contracts representing 3.9 million barrels of petroleum products we expect to sell in the future in connection with the business activities listed below-listed business activities. Additionally, we had open butane price swap agreements on the purchase of 0.3 million barrels of butane.

• Petroleum products blending and fractionation - NYMEX contracts representing 1.9 million barrels of petroleum products, of which 0.7 million barrels were designated as cash flow hedges and 1.2 million barrels that did not qualify as hedges for accounting purposes that mature between July 2011 and April 2012. The open butane swap positions noted above, which mature between September and December 2011, are also associated with our blending and fractionation activities;

• Linefill on our Houston-to-El Paso pipeline section - NYMEX contracts representing 1.0 million barrels of petroleum products that did not qualify as hedges for accounting purposes that mature between July 2011 and May 2012;

• Petroleum products pipeline over/short activity - NYMEX contracts representing 0.2 million barrels of petroleum products that did not qualify as hedges for accounting purposes that mature in July 2011; and

• Crude oil storage and pipeline:

NYMEX contracts associated with our crude oil tank bottom inventory for our Cushing storage facility representing 0.7 million barrels of crude oil, designated as fair value hedges for accounting purposes, that mature in November 2013;

NYMEX contracts associated with our crude oil pipeline linefill representing less than 0.1 million barrels of crude oil, designated as fair value hedges for accounting purposes, that mature in August 2011; and

NYMEX contracts associated with our crude oil pipeline over/short activity representing 0.1 million barrels of crude oil that did not qualify as fair value hedges for accounting purposes that mature in July 2011.

At June 30, 2011, the fair value of our open NYMEX contracts was a net liability of $18.4 million and the value of our butane butane price swap purchase agreements was a liability of $0.8 million. Combined, the net liability was $19.2 million, of which $8.2 million was recorded as energy commodity derivatives contracts and $11.0 million was recorded as other noncurrent liabilities on our consolidated balance sheet. At June 30, 2011, we had made margin deposits of $43.5 million for these contracts, which were recorded as energy commodity derivatives deposits on our consolidated balance sheet. We have the right to offset the combined fair values of our open NYMEX contracts and our open butane price swap purchase agreements against our margin deposits under a master netting arrangement with our counterparty; however, we have elected to disclose the combined fair values of our open NYMEX and butane price swap purchase agreements separately from these related margin deposits on our consolidated balance sheet. We have netted the fair values of our NYMEX agreements and butane price swap agreements together on our consolidated balance sheets.

Interest Rate Derivatives

In 2011, we entered into $100.0 million of interest rate swap agreements to hedge against changes in the fair value of a portion of our 6.40% notes due 2018. We account for these agreements as fair value hedges. These agreements effectively convert $100.0 million of our 6.40% fixed-rate notes to floating-rate debt. Under the terms of the agreements, we receive the 6.40% fixed rate of the notes and pay a weighted average rate of six-month LIBOR in arrears plus 2.75%. The agreements terminate in July 2018, which is the maturity date of the related notes. Payments settle in January and July each year. During each period, we record the impact of these swaps based on the forward LIBOR curve. Any differences between actual LIBOR determined on the settlement date and our estimate of LIBOR will result in an adjustment to our interest expense. These interest rate derivatives contain credit-risk-related contingent features, which provide that, in the event we default on any material obligation or in case of a merger in which our credit rating becomes "materially weaker," which would generally be interpreted as falling below investment grade, the counterparties to our interest rate derivative agreements could terminate their respective agreements and require immediate settlement. Our interest rate swap agreements were in a net asset position as of June 30, 2011.

Derivative activity included in accumulated other comprehensive loss ("AOCL") for the three and six months ended June 30, 2010 and 2011 was as follows (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
Derivative Activity Included in AOCL	2010			2011			2010			2011
Beginning balance	$	3,448		$	3,284		$	1,743		$	3,325
Net gain (loss) on commodity hedges	—			4,613			(289		)	4,613
Reclassification of net gain on cash flow hedges to interest expense	(41		)	(41		)	(82		)	(82		)
Reclassification of net loss on commodity hedges to product sales revenues	—			—			2,035			—
Ending balance	$	3,407		$	7,856		$	3,407		$	7,856

As of June 30, 2011, the net gain estimated to be classified to interest expense and product sales revenues over the next twelve months from AOCL is approximately $0.2 million and $4.6 million, respectively.

The following table provides a summary of the effect on our consolidated statements of income for the three and six months ended June 30, 2010 and 2011 of derivatives accounted for under ASC 815-25, Derivatives and Hedging—Fair Value Hedges, that were designated as hedging instruments (in thousands):

Derivative  Instrument	Location of Gain Recognized on Derivative	Amount of Gain Recognized on Derivative								Amount of Interest Expense Recognized on Fixed-Rate Debt (Related Hedged Item)
		Three Months Ended				Six Months Ended				Three Months Ended						Six Months Ended
		June 30, 2010		June 30, 2011		June 30, 2010		June 30, 2011		June 30, 2010			June 30, 2011			June 30, 2010			June 30, 2011
Interest rate swap agreements	Interest expense	$	1,588	$	808	$	4,604	$	1,011	$	(8,636	)	$	(4,001	)	$	(17,277	)	$	(6,223	)

During 2011, we had open NYMEX contracts on 0.7 million barrels of crude oil which were designated as fair value hedges. Because there was no ineffectiveness recognized on these hedges, the unrealized losses of $11.1 million from the agreements as of June 30, 2011 were fully offset by adjustments of $11.0 million and $0.1 million to tank bottom inventory and other current assets, respectively; therefore, there was no net impact on product sales revenues.

The following is a summary of the effect on our consolidated statements of income for the three and six months ended June 30, 2010 and 2011 of the effective portion of derivatives accounted for under ASC 815-30, Derivatives and Hedging—Cash Flow Hedges, that were designated as hedging instruments (in thousands). See Note 4 - Product Sales Revenues for further details regarding the impact of our NYMEX agreements on product sales.

	Three Months Ended June 30, 2010 Effective Portion
Derivative Instrument	Amount of  Gain Recognized in AOCL on Derivative			Location of Gain  Reclassified from AOCL into Income	Amount of Gain Reclassified from AOCL into Income
Interest rate swap agreements		$	—	Interest expense		$	41
	Three Months Ended June 30, 2011 Effective Portion
Derivative Instrument	Amount of Gain Recognized in AOCL on Derivative			Location of Gain Reclassified from AOCL into Income	Amount of Gain Reclassified from AOCL into Income
Interest rate swap agreements		$	—	Interest expense		$	41
NYMEX commodity contracts		4,613		Product sales revenues		—
Total cash flow hedges		$	4,613	Total		$	41

	Six Months Ended June 30, 2010 Effective Portion
Derivative Instrument	Amount of  Gain (Loss) Recognized in AOCL on Derivative				Location of Gain (Loss)  Reclassified from AOCL into Income	Amount of Gain (Loss) Reclassified from AOCL into Income
Interest rate swap agreements		$	—		Interest expense		$	82
NYMEX commodity contracts		(289		)	Product sales revenues		(2,035		)
Total cash flow hedges		$	(289	)	Total		$	(1,953	)
	Six Months Ended June 30, 2011 Effective Portion
Derivative Instrument	Amount of Gain Recognized in AOCL on Derivative				Location of Gain Reclassified from AOCL into Income	Amount of Gain Reclassified from AOCL into Income
Interest rate swap agreements		$	—		Interest expense		$	82
NYMEX commodity contracts		4,613			Product sales revenues		—
Total cash flow hedges		$	4,613		Total		$	82

There was no ineffectiveness recognized for any of our cash flow or fair value hedges during the three and six months ended June 30, 2010 or 2011.

The following table provides a summary of the effect on our consolidated statements of income for the three and six months ended June 30, 2010 and 2011 of derivatives accounted for under ASC 815-10-35; Derivatives and Hedging—Overall—Subsequent Measurement, that were not designated as hedging instruments (in thousands):

		Amount of Gain (Loss) Recognized on Derivative
		Three Months  Ended June 30,					Six Months Ended June 30,
Derivative Instrument	Location of Gain (Loss) Recognized on Derivative	2010		2011			2010		2011
NYMEX commodity contracts	Product sales revenues	$	23,766	$	2,150		$	16,832	$	(36,183	)
Butane price swap purchase contracts	Product purchases	—		(839		)	—		(839		)
	Total	$	23,766	$	1,311		$	16,832	$	(37,022	)

The following tables provide a summary of the amounts included on our consolidated balance sheets of the fair value of derivatives accounted for under ASC 815, Derivatives and Hedging, that were designated as hedging instruments as of December 31, 2010 and June 30, 2011 (in thousands):

	December 31, 2010
	Asset Derivatives			Liability Derivatives
Derivative Instrument	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
NYMEX commodity contracts	Other noncurrent assets	$	—	Other noncurrent liabilities	$	4,920
	June 30, 2011
	Asset Derivatives			Liability Derivatives
Derivative Instrument	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Interest rate swap agreement, current portion	Other current assets	$	2,678	Other current liabilities	$	—
Interest rate swap agreement, noncurrent portion	Other noncurrent assets	1,849		Other noncurrent liabilities	—
NYMEX commodity contracts	Energy commodity derivatives contracts	2,209		Energy commodity derivatives contracts	107
NYMEX commodity contracts	Other noncurrent assets	—		Other noncurrent liabilities	10,962
	Total	$	6,736	Total	$	11,069

The following tables provide a summary of the amounts included on our consolidated balance sheets of the fair value of derivatives accounted for under ASC 815, Derivatives and Hedging, that were not designated as hedging instruments as of December 31, 2010 and June 30, 2011 (in thousands):

	December 31, 2010
	Asset Derivatives			Liability Derivatives
Derivative Instrument	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
NYMEX commodity contracts	Energy commodity derivatives contracts	$	—	Energy commodity derivatives contracts	$	11,790
	June 30, 2011
	Asset Derivatives			Liability Derivatives
Derivative Instrument	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
NYMEX commodity contracts	Energy commodity derivatives contracts	$	5,191	Energy commodity derivatives contracts	$	14,634
Butane price swap purchase contracts	Energy commodity derivatives contracts	—		Energy commodity derivatives contracts	839
		$	5,191		$	15,473