Derivative Financial Instruments

6 Months Ended

Jun. 30, 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 sale contracts, NYMEX contracts and butane swap agreements to help manage price changes, which has the effect of locking in most of the product margin realized from our blending activities that we choose to hedge.

     We account for the forward purchase and sale 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 June 30, 2012, we had commitments under these forward purchase and sale contracts as follows (in millions):

		Amount	Barrels
Forward purchase contracts	$	41.2	0.6
Forward sale contracts	$	27.4	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, we had the following open NYMEX contracts at June 30, 2012:

	Product Represented by the
Type of Contract/Accounting	Contract and Associated
Methodology	Barrels	Maturity Dates
NYMEX - Fair Value Hedges	0.7million barrels of crude oil	Between August 2012 and November 2013
NYMEX - Economic Hedges	2.6million barrels of refined petroleum products	Between July 2012 and April 2013
NYMEX - Cash Flow Hedges	0.1million barrels of refined petroleum products	September 2012
Butane Swap Agreements - Economic Hedges	0.4million barrels of butane	Between August 2012 and March 2013

     At June 30, 2012, we held $17.2 million in margin deposits for our NYMEX contracts, which were recorded as a current liability under 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. Additionally, we have the right to offset the fair values of our NYMEX agreements and butane swap agreements together for each counterparty, which we have elected to do, and we report the combined net balances on our consolidated balance sheets.

Interest Rate Derivatives

     In June 2012, we entered into a total of $100.0 million of forward-starting interest rate swap agreements to hedge against the variability of future interest payments on debt that we anticipate issuing between December 1, 2013 and December 1, 2014 to refinance our $250.0 million of 6.45% notes due June 1, 2014. Under the terms of these agreements, we will pay a weighted-average fixed interest rate of 2.7% and receive LIBOR. The hedges have a 30-year maturity, which matches the expected maturity of the anticipated debt issuance. We account for these agreements as cash flow hedges.

Impact of Derivatives on Income Statement, Balance Sheet and AOCL

     The changes in derivative activity included in accumulated other comprehensive loss ("AOCL") for the three and six months ended June 30, 2011 and 2012 were as follows (in thousands):

		Three Months Ended					Six Months Ended
		June 30,					June 30,
Derivative Gains Included in AOCL		2011		2012			2011		2012
Beginning balance	$	3,284	$	3,120		$	3,325	$	3,161
Net gain on interest rate cash flow hedges		—		1,008			—		1,008
Net gain on commodity cash flow hedges		4,613		1,667			4,613		1,667
Reclassification of net gain on interest rate cash flow hedges to interest expense		(41	)	(41	)		(82	)	(82	)
Ending balance	$	7,856	$	5,754		$	7,856	$	5,754

     As of June 30, 2012, 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 $1.7 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, 2011 of derivatives accounted for under ASC 815-25, Derivatives and Hedging—Fair Value Hedges, that were designated as hedging instruments (in thousands):

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

     During 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 $1.9 million from the agreements as of June 30, 2012 were fully offset by an increase of $2.0 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 and six months ended June 30, 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 June 30, 2011
		Amount of Gain			Amount of Gain
		Recognized in	Location of Gain Reclassified		Reclassified
Derivative Instrument		AOCL on Derivative	from AOCL into Income		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

			Three Months Ended June 30, 2012
		Amount of Gain			Amount of Gain
		Recognized in	Location of Gain Reclassified		Reclassified
Derivative Instrument		AOCL on Derivative	from AOCL into Income		from AOCL into Income
Interest rate swap agreements	$	1,008	Interest expense	$	41
NYMEX commodity contracts		1,667	Product sales revenues		—
Total cash flow hedges	$	2,675	Total	$	41

			Six Months Ended June 30, 2011
		Amount of Gain			Amount of Gain
		Recognized in	Location of Gain Reclassified		Reclassified
Derivative Instrument		AOCL on Derivative	from AOCL into Income		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

			Six Months Ended June 30, 2012
		Amount of Gain			Amount of Gain
		Recognized in	Location of Gain Reclassified		Reclassified
Derivative Instrument		AOCL on Derivative	from AOCL into Income		from AOCL into Income
Interest rate swap agreements	$	1,008	Interest expense	$	82
NYMEX commodity contracts		1,667	Product sales revenues		—
Total cash flow hedges	$	2,675	Total	$	82

     There was no ineffectiveness recognized on the financial instruments disclosed in the above tables during the three and six months ended June 30, 2011 or 2012.

     The following table provides a summary of the effect on our consolidated statements of income for the three and six months ended June 30, 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						Six Months Ended
	Location of Gain (Loss)
Derivative Instrument	Recognized on Derivative		June 30, 2011			June 30, 2012			June 30, 2011			June 30, 2012
NYMEX commodity contracts	Product sales revenues	$	2,150		$	37,150		$	(36,183	)	$	5,174
NYMEX commodity contracts	Operating expenses		1,568			9,701			1,521			4,517
Butane swap agreements	Product purchases		(839	)		(4,670	)		(839	)		(4,627	)
	Total	$	2,879		$	42,181		$	(35,501	)	$	5,064

     The following tables provide a summary of the fair value of derivatives accounted for under ASC 815, Derivatives and Hedging, which are presented on a net basis in our consolidated balance sheets, that were designated as hedging instruments as of December 31, 2011 and June 30, 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	$	31	Energy commodity derivatives contracts	$	—
NYMEX commodity contracts	Other noncurrent assets		—	Other noncurrent liabilities		6,457
	Total	$	31	Total	$	6,457

	June 30, 2012
	Asset Derivatives			Liability Derivatives
Derivative Instrument	Balance Sheet Location		Fair Value	Balance Sheet Location		Fair Value
NYMEX commodity contracts	Energy commodity derivatives contracts	$	1,790	Energy commodity derivatives contracts	$	—
NYMEX commodity contracts	Other noncurrent assets		—	Other noncurrent liabilities		2,008
Forward-starting interest rate swap agreements	Other noncurrent assets		1,008	Other noncurrent liabilities		—
	Total	$	2,798	Total	$	2,008

     The following tables provide a summary of the fair value of derivatives accounted for under ASC 815, Derivatives and Hedging, which are presented on a net basis in our consolidated balance sheets, that were not designated as hedging instruments as of December 31, 2011 and June 30, 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			Energy commodity derivatives
	contracts			contracts
		$	6,403		$	1,514
Butane swap agreements	Energy commodity derivatives			Energy commodity derivatives
	contracts		28	contracts		34
	Total	$	6,431	Total	$	1,548

	June 30, 2012
	Asset Derivatives			Liability Derivatives
Derivative Instrument	Balance Sheet Location		Fair Value	Balance Sheet Location		Fair Value
NYMEX commodity contracts	Energy commodity derivatives			Energy commodity derivatives
	contracts	$	21,912	contracts	$	5,149
Butane swap agreements	Energy commodity derivatives			Energy commodity derivatives
	contracts		—	contracts		4,675
	Total	$	21,912	Total	$	9,824