Derivative Financial Instruments

3 Months Ended

Mar. 31, 2012

Derivative Financial Instruments [Abstract]

Derivative Financial Instruments

7. 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 swap agreements to help manage price changes, which has the effect of locking 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 and fractionation activities as normal purchases and sales. Derivatives that qualify for and are designated as normal purchases and sales are accounted for using traditional accrual accounting. As of March 31, 2012, we had commitments under these forward purchase and sales contracts as follows (in millions):

	Amount		Barrels
Forward purchase contracts	$	55.3	0.6
Forward sales contracts	$	44.4	0.3

We use NYMEX contracts to hedge against changes in the price of petroleum products we expect to sell in future periods.

Our NYMEX contracts fall into one of three categories:

Hedge Type	Hedge Purpose	Accounting Treatment
Qualifies for Hedge Accounting Treatment
Cash Flow Hedge	To hedge the variability in cash flows related to a forecasted transaction.	The effective portion of changes in the value of the hedge are recorded to accumulated other comprehensive income/loss and reclassified to earnings when the forecasted transaction occurs. Any ineffectiveness is recognized currently in earnings.
Fair Value Hedge	To hedge against changes in the fair value of a recognized asset or liability.	The effective portion of changes in the value of the hedge are recorded as adjustments to the asset or liability being hedged. Any ineffectiveness is recognized currently in earnings.
Does not Qualify For Hedge Accounting Treatment
Economic Hedge	To effectively serve as either a fair value or a cash flow hedge; however, the derivative agreement does not qualify for hedge accounting treatment or is not designated as a hedge in accordance with Accounting Standards Codification ("ASC") 815, Derivatives and Hedging.	Changes in the value of these agreements are recognized currently in earnings.

     We also use butane swap agreements, which are not designated as hedges for accounting purposes, to hedge against changes in the price of selected butane purchases we expect to complete in the future. Changes in the fair value of these agreements are recognized currently in earnings. As outlined in the table below, at March 31, 2012, we had open NYMEX contracts representing 3.1 million barrels of petroleum products and open butane swap agreements on the purchase of 25 thousand barrels of butane.

Type of Contract/Accounting Methodology	Product Represented by the Contract and Associated Barrels	Maturity Dates
NYMEX - Fair Value Hedges	0.7 million barrels of crude oil	Between June 2012 and November 2013
NYMEX - Economic Hedges	2.4 million barrels of refined petroleum products	Between April and December 2012
Butane Swap Agreements - Economic Hedges	25 thousand barrels of butane	August 2012

     At March 31, 2012, the fair value of our open NYMEX contracts was a net liability of $16.4 million and the fair value of our butane swap agreements was a liability of less than $0.1 million. Combined, the net liability was $16.4 million, of which $4.7 million was recorded as a current liability to energy commodity derivatives contracts and $11.7 million was recorded as other noncurrent liabilities on our consolidated balance sheet. At March 31, 2012, we had made margin deposits of $41.7 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 swap agreements against our margin deposits under a master netting arrangement with each of our counterparties; however, we have elected to disclose the combined fair values of our open NYMEX and butane swap agreements separately from the related margin deposits on our consolidated balance sheet. We have the right of offset under the agreements and, therefore, have offset the fair values of our NYMEX agreements and butane swap agreements together for each counterparty separately on our consolidated balance sheets.

Impact of Derivatives on Income Statement, Balance Sheet and AOCL

     The changes in derivative gains included in accumulated other comprehensive loss ("AOCL") for the three months ended March 31, 2011 and 2012 were as follows (in thousands):

	Three Months Ended March 31,
Derivative Gains Included in AOCL	2011			2012
Beginning balance	$	3,325		$	3,161
Reclassification of net gain on cash flow hedges to interest expense		(41	)		(41	)
Ending balance	$	3,284		$	3,120

     As of March 31, 2012, the net gain estimated to be classified to interest expense over the next twelve months from AOCL is approximately $0.2 million.

     The following table provides a summary of the effect on our consolidated statements of income for the three months ended March 31, 2011 and 2012 of derivatives accounted for under ASC 815-25, Derivatives and Hedging—Fair Value Hedges, that were designated as hedging instruments (in thousands):

		Amount of Gain Recognized on Derivative				Amount of Interest Expense Recognized on Fixed-Rate Debt (Related Hedged Item)
	Location of Gain Recognized on Derivative	Three Months Ended March 31,				Three Months Ended March 31,
Derivative Instrument		2011		2012		2011		2012
Interest rate swap agreements	Interest expense	$	203	$	—	$	2,222	$	—

During first quarter 2012, we had open NYMEX contracts on 0.7 million barrels of crude oil that were designated as fair value hedges. Because there was no ineffectiveness recognized on these hedges, the unrealized losses of $11.6 million from the agreements as of March 31, 2012 were fully offset by an increase of $11.7 million to tank bottom inventory and a decrease of $0.1 million to other current assets; therefore, there was no net impact from these agreements on other income/expense.

     The following tables provide a summary of the effect on our consolidated statements of income for the three months ended March 31, 2011 and 2012 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).

	Three Months Ended March 31, 2011
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	$	41

	Three Months Ended March 31, 2012
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	$	41

     There was no ineffectiveness recognized on the financial instruments disclosed in the above tables during the three months ended March 31, 2011 or 2012.

The following table provides a summary of the effect on our consolidated statements of income for the three months ended March 31, 2011 and 2012 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
	Location of Gain (Loss)
Derivative Instrument	Recognized on Derivative		March 31, 2011		March 31, 2012
NYMEX commodity contracts	Product sales revenues	$	(38,333	)	$	(31,976	)
NYMEX commodity contracts	Operating expenses		(47	)		(5,184	)
Butane swap agreements	Product purchases		—			43
	Total	$	(38,380	)	$	(37,117	)

     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, 2011 and March 31, 2012 (in thousands):

		December 31, 2011
	Asset Derivatives			Liability Derivatives
Derivative Instrument	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
	Energy commodity derivatives			Energy commodity derivatives
NYMEX commodity contracts	contracts	$	31	contracts	$	—
NYMEX commodity contracts	Other noncurrent assets		—	Other noncurrent liabilities		6,457
	Total	$	31	Total	$	6,457

	March 31, 2012
	Asset Derivatives			Liability Derivatives
Derivative Instrument	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
NYMEX commodity contracts	Energy commodity derivatives contracts	$	169	Energy commodity derivatives contracts	$	—
NYMEX commodity contracts	Other noncurrent assets		—	Other noncurrent liabilities		11,744
	Total	$	169	Total	$	11,744

     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, 2011 and March 31, 2012 (in thousands):

	December 31, 2011
	Asset Derivatives			Liability Derivatives
Derivative Instrument	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
NYMEX commodity contracts	Energy commodity derivatives contracts	$	6,403	Energy commodity derivatives contracts	$	1,514
Butane swap agreements	Energy commodity derivatives contracts		28	Energy commodity derivatives contracts		34
	Total	$	6,431	Total	$	1,548

	March 31, 2012
	Asset Derivatives			Liability Derivatives
Derivative Instrument	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
NYMEX commodity contracts	Energy commodity derivatives contracts	$	3,414	Energy commodity derivatives contracts	$	8,230
Butane swap agreements	Energy commodity derivatives contracts		—	Energy commodity derivatives contracts		7
	Total	$	3,414	Total	$	8,237