Derivative Instruments And Hedging Activities

9 Months Ended

Sep. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments And Hedging Activities

Derivative Instruments and Hedging Activities

Commodity Price Risk Management

Our primary market risk is commodity price risk. We are exposed to market risks related to the volatility in crude oil and refined products, as well as volatility in the price of natural gas used in our refining operations. We periodically enter into derivative contracts in the form of commodity price swaps, forward purchase and sales and futures contracts to mitigate price exposure with respect to our inventory positions, natural gas purchases, sales prices of refined products and crude oil costs.

Foreign Currency Risk Management

We are exposed to market risk related to the volatility in foreign currency exchange rates. We periodically enter into derivative contracts in the form of foreign exchange forward and foreign exchange swap contracts to mitigate the exposure associated with fluctuations on intercompany notes with our foreign subsidiaries that are not denominated in the U.S. dollar.

Accounting Hedges

We have swap contracts serving as cash flow hedges against price risk on forecasted purchases of natural gas and to lock in basis spread differentials on forecasted purchases of crude oil. We also periodically have forward sales contracts that lock in the prices of future sales of crude oil and refined product. These contracts have been designated as accounting hedges and are measured at fair value with offsetting adjustments (gains/losses) recorded directly to other comprehensive income. These fair value adjustments are later reclassified to earnings as the hedging instruments mature.

The following table presents the pre-tax effect on other comprehensive income (“OCI”) and earnings due to fair value adjustments and maturities of derivatives designated as hedging instruments under hedge accounting:

	Net Unrealized Gain (Loss) Recognized in OCI					Gain (Loss) Reclassified into Earnings
Derivatives Designated as Cash Flow Hedging Instruments	Three Months Ended September 30,					Income Statement Location	Three Months Ended September 30,
	2019			2018			2019			2018
	(In thousands)
Commodity contracts	$	(7,562	)	$	5,792	Sales and other revenues	$	—		$	(1,422	)
						Cost of products sold	6,027			—
						Operating expenses	(454		)	(209		)
Total	$	(7,562	)	$	5,792		$	5,573		$	(1,631	)

	Net Unrealized Gain (Loss) Recognized in OCI				Gain (Loss) Reclassified into Earnings
Derivatives Designated as Cash Flow Hedging Instruments	Nine Months Ended September 30,				Income Statement Location	Nine Months Ended September 30,
	2019		2018			2019			2018
	(In thousands)
Commodity contracts	$	372	$	1,796	Sales and other revenues	$	(1,799	)	$	(5,093	)
					Cost of products sold	15,323			—
					Operating expenses	(987		)	(945		)
Total	$	372	$	1,796		$	12,537		$	(6,038	)

Economic Hedges

We have commodity contracts including contracts to lock in basis spread differentials on forecasted purchases of crude oil, swap contracts to lock in the crack spread of WTI and gasoline, NYMEX futures contracts to lock in prices on forecasted purchases and sales of inventory and forward purchase and sell contracts that serve as economic hedges (derivatives used for risk management, but not designated as accounting hedges). We also have forward currency contracts to fix the rate of foreign currency. In addition, our catalyst financing arrangements discussed in Note 11 could require repayment under certain conditions based on the futures price of platinum, which is an embedded derivative. These contracts are measured at fair value with offsetting adjustments (gains/losses) recorded directly to income.

The following table presents the pre-tax effect on income due to maturities and fair value adjustments of our economic hedges:

	Gain (Loss) Recognized in Earnings
Derivatives Not Designated as Hedging Instruments	Income Statement Location	Three Months Ended September 30,						Nine Months Ended September 30,
		2019			2018			2019			2018
		(In thousands)
Commodity contracts	Cost of products sold	$	8,640		$	(8,252	)	$	1,561		$	(20,580	)
	Interest expense	(1,720		)	—			(2,995		)	—
Foreign currency contracts	Gain on foreign currency transactions	5,713			(7,052		)	(8,983		)	18,504
	Total	$	12,633		$	(15,304	)	$	(10,417	)	$	(2,076	)

As of September 30, 2019, we have the following notional contract volumes related to outstanding derivative instruments:

		Notional Contract Volumes by Year of Maturity
	Total Outstanding Notional	2019	2020	2021	Unit of Measure
Derivatives Designated as Hedging Instruments
Natural gas price swaps - long	4,050,000	450,000	1,800,000	1,800,000	MMBTU
Crude oil price swaps (basis spread) - long	5,954,000	1,196,000	4,758,000	—	Barrels
Forward crude oil contracts - short	423,739	423,739	—	—	Barrels
Derivatives Not Designated as Hedging Instruments
NYMEX futures (WTI) - short	1,825,000	1,713,000	112,000	—	Barrels
Crude oil price swaps (basis spread) - long	1,464,000	—	1,464,000	—	Barrels
WTI and gasoline crack spread swaps - short	200,000	200,000	—	—	Barrels
Forward gasoline and diesel contracts - long	538,500	538,500	—	—	Barrels
Forward crude oil contracts - long	140,849	140,849	—	—	Barrels
Physical contracts - long	350,000	350,000	—	—	Barrels
Physical contracts - short	350,000	350,000	—	—	Barrels
Foreign currency forward contracts	434,443,896	114,213,501	320,230,395	—	U.S. dollar
Forward commodity contracts (platinum)	41,147	41,147	—	—	Troy ounces

The following table presents the fair value and balance sheet locations of our outstanding derivative instruments. These amounts are presented on a gross basis with offsetting balances that reconcile to a net asset or liability position in our consolidated balance sheets. We present on a net basis to reflect the net settlement of these positions in accordance with provisions of our master netting arrangements.

	Derivatives in Net Asset Position							Derivatives in Net Liability Position
	Gross Assets		Gross Liabilities Offset in Balance Sheet			Net Assets Recognized in Balance Sheet		Gross Liabilities		Gross Assets Offset in Balance Sheet			Net Liabilities Recognized in Balance Sheet
			(In thousands)
September 30, 2019
Derivatives designated as cash flow hedging instruments:
Commodity price swap contracts	$	13,182	$	(1,576	)	$	11,606	$	1,614	$	(500	)	$	1,114
Commodity forward contracts	—		—			—		258		—			258
	$	13,182	$	(1,576	)	$	11,606	$	1,872	$	(500	)	$	1,372
Derivatives not designated as cash flow hedging instruments:
Foreign currency forward contracts	$	2,511	$	—		$	2,511	$	17	$	—		$	17
NYMEX futures contracts	2,976		—			2,976		—		—			—
Commodity price swap contracts	6,401		—			6,401		—		(20		)	(20		)
Commodity forward contracts	1,453		—			1,453		1,109		—			1,109
	$	13,341	$	—		$	13,341	$	1,126	$	(20	)	$	1,106
Total net balance						$	24,947						$	2,478
Balance sheet classification:	Prepayment and other					$	23,295	Accrued liabilities					$	1,922
	Intangibles and other					1,652		Other long-term liabilities					556
						$	24,947						$	2,478

December 31, 2018
Derivatives designated as cash flow hedging instruments:
Commodity price swap contracts	$	11,790	$	(973	)	$	10,817	$	1,755	$	(799	)	$	956
	$	11,790	$	(973	)	$	10,817	$	1,755	$	(799	)	$	956
Derivatives not designated as cash flow hedging instruments:
Foreign currency forward contracts	$	25,956	$	—		$	25,956	$	—	$	—		$	—
NYMEX futures contracts	2,473		—			2,473		—		—			—
Commodity forward contracts	1,034		—			1,034		1,137		—			1,137
	$	29,463	$	—		$	29,463	$	1,137	$	—		$	1,137
Total net balance						$	40,280						$	2,093
Balance sheet classification:	Prepayment and other					$	37,982	Accrued liabilities					$	1,137
	Intangibles and other					2,298		Other long-term liabilities					956
						$	40,280						$	2,093

At September 30, 2019, we had a pre-tax net unrealized gain of $10.2 million classified in accumulated other comprehensive income that relates to all accounting hedges having contractual maturities through 2021. Assuming commodity prices remain unchanged, an unrealized gain of $10.3 million will be effectively transferred from accumulated other comprehensive income into the statement of income as the hedging instruments contractually mature over the next twelve-month period.