12. Derivatives

Commodity Derivatives

We have exposure to commodity price changes related to our inventory and purchase commitments. We utilize derivative instruments (primarily futures and options contracts traded on the NYMEX) to hedge our exposure to commodity prices, primarily crude oil, fuel oil and petroleum products; however, only a portion of these instruments are designated as hedges under the accounting guidance. Our decision as to whether to designate derivative instruments as fair value hedges for accounting purposes relates to our expectations of the length of time we expect to have the commodity price exposure and our expectations as to whether the derivative contract will qualify as highly effective under accounting guidance in limiting our exposure to commodity price risk. Most of the petroleum products, including fuel oil that we supply cannot be hedged with a high degree of effectiveness with derivative contracts available on the NYMEX; therefore, we do not designate derivative contracts utilized to limit our price risk related to these products as hedges for accounting purposes. Typically we utilize crude oil and other petroleum products futures and option contracts to limit our exposure to the effect of fluctuations in petroleum products prices on the future sale of our inventory or commitments to purchase petroleum products, and we recognize any changes in fair value of the derivative contracts as increases or decreases in our cost of sales. The recognition of changes in fair value of the derivative contracts not designated as hedges for accounting purposes can occur in reporting periods that do not coincide with the recognition of gain or loss on the actual transaction being hedged. Therefore we will, on occasion, report gains or losses in one period that will be partially offset by gains or losses in a future period when the hedged transaction is completed.

In accordance with NYMEX requirements, we fund the margin associated with our loss positions on commodity derivative contracts traded on the NYMEX. The amount of the margin is adjusted daily based on the fair value of the commodity contracts. The margin requirements are intended to mitigate a party’s exposure to market volatility and the associated contracting party risk. We offset fair value amounts recorded for our NYMEX derivative contracts against margin funding as required by the NYMEX in Current Assets - Other in our Unaudited Condensed Consolidated Balance Sheets.

At June 30, 2012, we had the following outstanding derivative commodity futures and options contracts that were entered into to economically hedge inventory or fixed price purchase commitments. We had no outstanding derivative contracts that were designated as hedges under accounting rules.



	Sell (Short) Contracts		Buy (Long) Contracts
Not qualifying or not designated as hedges under accounting rules:
Crude oil futures:
Contract volumes (1,000 bbls)	157		81
Weighted average contract price per bbl	$	89.58	$	90.88
Heating oil futures:
Contract volumes (1,000 bbls)	25		—
Weighted average contract price per gal	$	2.56	$	—
RBOB gasoline futures:
Contract volumes (1,000 bbls)	12		—
Weighted average contract price per gal	$	2.49	$	—
#6 Fuel oil futures:
Contract volumes (1,000 bbls)	555		145
Weighted average contract price per bbl	$	87.00	$	88.15
Crude oil options:
Contract volumes (1,000 bbls)	285		70
Weighted average premium received	$	2.04	$	1.12

Financial Statement Impacts

Unrealized gains are subtracted from net income and unrealized losses are added to net income in determining cash flows from operating activities. Additionally, the offsetting change in the fair value of inventory that is recorded for our fair value hedges is also eliminated from net income in determining cash flows from operating activities. Changes in margin deposits necessary to fund unrealized losses also affect cash flows from operating activities.

The following tables reflect the estimated fair value gain (loss) position of our derivatives at June 30, 2012 and December 31, 2011:

Fair Value of Derivative Assets and Liabilities



	Unaudited Condensed Consolidated Balance Sheets Location	Fair Value
	Unaudited Condensed Consolidated Balance Sheets Location	June 30, 2012				December 31, 2011
Asset Derivatives:
Commodity derivatives - futures and call options:
Undesignated hedges	Current Assets - Other	$	695			$	306
Total asset derivatives		$	695			$	306
Liability Derivatives:
Commodity derivatives - futures and call options:
Undesignated hedges	Current Assets - Other	$	(2,032	)	⁽¹⁾	$	(2,820	)	⁽¹⁾
Total liability derivatives		$	(2,032	)		$	(2,820	)

(1) These derivative liabilities have been funded with margin deposits recorded in our Unaudited Condensed Consolidated Balance Sheets under Current Assets - Other.

Effect on Operating Results



	Unaudited Condensed Consolidated Statements of Operations Location	Three Months Ended June 30,					Six Months Ended June 30,
		2012		2011			2012		2011
Commodity derivatives - futures and call options:
Contracts designated as hedges under accounting guidance	Supply and logistics product costs	$	—	$	(173	)	$	—	$	(434	)
Contracts not considered hedges under accounting guidance	Supply and logistics product costs	13,569		(13,637		)	2,858		(31,890		)
Total commodity derivatives		$	13,569	$	(13,810	)	$	2,858	$	(32,324	)