The Partnership principally uses derivative instruments, which include regulated exchange-traded futures and options contracts (collectively, “exchange-traded derivatives”) and physical and financial forwards and over-the-counter (“OTC”) swaps (collectively, “OTC derivatives”), to reduce its exposure to unfavorable changes in commodity market prices. The Partnership uses these exchange-traded and OTC derivatives to hedge commodity price risk associated with its inventory and undelivered forward commodity purchases and sales (“physical forward contracts”). The Partnership accounts for derivative transactions in accordance with ASC Topic 815, “Derivatives and Hedging,” and recognizes derivatives instruments as either assets or liabilities in the consolidated balance sheet and measures those instruments at fair value. The changes in fair value of the derivative transactions are presented currently in earnings, unless specific hedge accounting criteria are met.

The following table summarizes the notional values related to the Partnership’s derivative instruments outstanding at September 30, 2022:

(1)

Number of open positions and gross notional values do not measure the Partnership’s risk of loss, quantify risk or represent assets or liabilities of the Partnership, but rather indicate the relative size of the derivative instruments and are used in the calculation of the amounts to be exchanged between counterparties upon settlements.

Derivatives Accounted for as Hedges

Fair Value Hedges

The Partnership’s fair value hedges include exchange-traded futures contracts and OTC derivative contracts that are hedges against inventory with specific futures contracts matched to specific barrels. The change in fair value of these futures contracts and the change in fair value of the underlying inventory generally provide an offset to each other in the consolidated statements of operations.

The following table presents the gains and losses from the Partnership’s derivative instruments involved in fair value hedging relationships recognized in the consolidated statements of operations for the periods presented (in thousands):


	Statement of Gain (Loss)	Three Months Ended				Nine Months Ended
	Recognized in Income on	September 30,				September 30,
	Derivatives	2022		2021		2022		2021
Derivatives in fair value hedging relationship
Exchange-traded futures contracts and OTC derivative contracts for petroleum commodity products	Cost of sales	$	11,859	$	(25,270)	$	8,514	$	(54,933)
Hedged items in fair value hedge relationship
Physical inventory	Cost of sales	$	(5,532)	$	28,695	$	19,544	$	53,073

Cash Flow Hedges

In 2020, to hedge the Partnership’s cash flow risk relative to certain trends and the fluctuations in commodity prices observed within the GDSO segment, the Partnership entered into exchange-traded commodity swap contracts and designated them as a cash flow hedge of its fuel purchases designed to reduce its cost of fuel if market prices rise through 2021 or increase its cost of fuel if market prices decrease through 2021. All exchange traded commodity swap contracts expired on December 31, 2021; therefore, the amount of income recognized in other comprehensive income as of September 30, 2022 and expected to be reclassified into earnings within the next 12 months was $0.

The amount of income recognized in other comprehensive income for derivatives designated in cash flow hedging relationships was $0 and $0.5 million for the three months ended September 30, 2022 and 2021, respectively, and $0 and $7.7 million for the nine months ended September 30, 2022 and 2021, respectively. The amount of income reclassified from other comprehensive income into cost of sales for derivatives designated in cash flow hedging relationships was $0

and $4.3 million for the three months ended September 30, 2022 and 2021, respectively, and $0 and $10.7 million for the nine months ended September 30, 2022 and 2021, respectively.

Derivatives Not Accounted for as Hedges

The Partnership utilizes petroleum and ethanol commodity contracts to hedge price and currency risk in certain commodity inventories and physical forward contracts.

The following table presents the gains and losses from the Partnership’s derivative instruments not involved in a hedging relationship recognized in the consolidated statements of operations for the periods presented (in thousands):

Statement of Gain (Loss)

Three Months Ended

Nine Months Ended

Derivatives not designated as

Recognized in

September 30,

hedging instruments

Income on Derivatives

2022

2021

2022

2021

Commodity contracts

Cost of sales

8,195

1,977

17,269

3,110

Commodity Contracts and Other Derivative Activity

The Partnership’s commodity contracts and other derivative activity include: (i) exchange-traded derivative contracts that are hedges against inventory and either do not qualify for hedge accounting or are not designated in a hedge accounting relationship, (ii) exchange-traded derivative contracts used to economically hedge physical forward contracts, (iii) financial forward and OTC swap agreements used to economically hedge physical forward contracts and (iv) the derivative instruments under the Partnership’s controlled trading program. The Partnership does not take the normal purchase and sale exemption available under ASC 815 for any of its physical forward contracts.

The following table presents the fair value of each classification of the Partnership’s derivative instruments and its location in the consolidated balance sheets at September 30, 2022 and December 31, 2021 (in thousands):


		September 30, 2022
		Derivatives		Derivatives Not
		Designated as		Designated as
		Hedging		Hedging
	Balance Sheet Location	Instruments		Instruments		Total
Asset Derivatives:
Exchange-traded derivative contracts	Broker margin deposits	$	4,149	$	115,081	$	119,230
Forward derivative contracts (1)	Derivative assets		—		21,758		21,758
Total asset derivatives		$	4,149	$	136,839	$	140,988

Liability Derivatives:
Exchange-traded derivative contracts	Broker margin deposits	$	—	$	(66,501)	$	(66,501)
Forward derivative contracts (1)	Derivative liabilities		—		(24,425)		(24,425)
Total liability derivatives		$	—	$	(90,926)	$	(90,926)


		December 31, 2021
		Derivatives		Derivatives Not
		Designated as		Designated as
		Hedging		Hedging
	Balance Sheet Location	Instruments		Instruments		Total
Asset Derivatives:
Exchange-traded derivative contracts	Broker margin deposits	$	1,476	$	106,629	$	108,105
Forward derivative contracts (1)	Derivative assets		—		11,652		11,652
Total asset derivatives		$	1,476	$	118,281	$	119,757

Liability Derivatives:
Exchange-traded derivative contracts	Broker margin deposits	$	(9,201)	$	(72,993)	$	(82,194)
Forward derivative contracts (1)	Derivative liabilities		—		(31,654)		(31,654)
Total liability derivatives		$	(9,201)	$	(104,647)	$	(113,848)

(1)	Forward derivative contracts include the Partnership’s petroleum and ethanol physical and financial forwards and OTC swaps.

Credit Risk

The Partnership’s derivative financial instruments do not contain credit risk related to other contingent features that could cause accelerated payments when these financial instruments are in net liability positions.

The Partnership is exposed to credit loss in the event of nonperformance by counterparties to the Partnership’s exchange-traded and OTC derivative contracts, but the Partnership has no current reason to expect any material nonperformance by any of these counterparties. Exchange-traded derivative contracts, the primary derivative instrument utilized by the Partnership, are traded on regulated exchanges, greatly reducing potential credit risks. The Partnership utilizes major financial institutions as its clearing brokers for all New York Mercantile Exchange (“NYMEX”), Chicago Mercantile Exchange (“CME”) and Intercontinental Exchange (“ICE”) derivative transactions and the right of offset exists with these financial institutions under master netting agreements. Accordingly, the fair value of the Partnership’s exchange-traded derivative instruments is presented on a net basis in the consolidated balance sheets. Exposure on OTC derivatives is limited to the amount of the recorded fair value as of the balance sheet dates.

Please read Note 2 of Notes to Consolidated Financial Statements in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2021 for additional information on derivative financial instruments.