Derivative Financial Instruments

9 Months Ended

Sep. 30, 2014

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities Disclosure

Derivative Financial Instruments

We selectively utilize crude oil and refined product commodity derivative contracts to reduce the risk associated with potential price changes on committed obligations as well as to reduce earnings volatility. We do not speculate using derivative instruments. Credit risk on our derivative instruments is mitigated by transacting with counterparties meeting established collateral and credit criteria.

Mark to Market

We have certain contracts that serve as economic hedges, which are derivatives used for risk management but not designated as hedges for financial accounting purposes. All economic hedge transactions are recorded at fair value and any changes in fair value between periods are recognized in earnings.

We have contracts that are used to fix prices on forecasted purchases of inventory. Forwards represent physical trades for which pricing and quantities have been set, but the physical product delivery has not occurred by the end of the reporting period. Futures represent trades executed on the New York Mercantile Exchange which have not been closed or settled at the end of the reporting period.

Fair Value Hedge

Fair value hedges are used to hedge price volatility of certain refining inventories and firm commitments to purchase inventories. The gain or loss on a derivative instrument designated and qualifying as a fair value hedge, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, is recognized in earnings in the same period.

As of September 30, 2014, we have accounted for certain commodity contracts as fair value hedges with contract purchase volumes of 333 thousand barrels of crude oil with remaining contract terms through May 2019.

The following tables present the effect of derivative instruments on the consolidated statements of financial position:

	As of September 30, 2014
	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives not designated as hedging instruments:
Commodity contracts (futures and forwards)	Accounts receivable	$	1,678	Accrued liabilities	$	2,395
Total derivatives not designated as hedging instruments		$	1,678		$	2,395
Derivatives designated as hedging instruments:
Fair value hedge		$	—	Other non-current liabilities	$	878
Total derivatives designated as hedging instruments		—			878
Total derivatives		$	1,678		$	3,273

	As of December 31, 2013
	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives not designated as hedging instruments:
Commodity contracts (futures and forwards)	Accounts receivable	$	303	Accrued liabilities	$	281
Total derivatives not designated as hedging instruments		$	303		$	281
Derivatives designated as hedging instruments:
Fair value hedge		$	—	Other non-current liabilities	$	2,304
Total derivatives designated as hedging instruments		—			2,304
Total derivatives		$	303		$	2,585

The following tables present the effect of derivative instruments on the consolidated statements of operations:

Derivatives in fair value hedging relationships:

		Gain (Loss) Recognized in Income
		For the Three Months Ended					For the Nine Months Ended
		September 30,					September 30,
	Location	2014		2013			2014		2013
Fair value hedge	Cost of sales	$	3,818	$	(2,232	)	$	1,426	$	(3,830	)
Total derivatives		$	3,818	$	(2,232	)	$	1,426	$	(3,830	)

Derivatives not designated as hedging instruments:

		Gain (Loss) Recognized in Income
		For the Three Months Ended						For the Nine Months Ended
		September 30,						September 30,
	Location	2014			2013			2014			2013
Commodity contracts (futures & forwards)	Cost of sales	$	(2,329	)	$	(2,091	)	$	(4,604	)	$	4,559
Total derivatives		$	(2,329	)	$	(2,091	)	$	(4,604	)	$	4,559

Offsetting Assets and Liabilities

Our commodity derivative financial instruments are subject to master netting arrangements to manage counterparty credit risk associated with derivatives and we offset the fair value amounts recorded for derivative instruments to the extent possible under these agreements on our consolidated balance sheets.

The following table presents offsetting information regarding our derivatives by type of transaction as of September 30, 2014 and December 31, 2013:

	Gross Amounts of Recognized Assets/Liabilities		Gross Amounts offset in the Statement of Financial Position			Net Amounts Presented in the Statement of Financial Position		Gross Amounts Not offset in the Statement of Financial Position					Net Amount
								Financial Instruments			Cash Collateral Pledged
As of September 30, 2014
Derivative Assets:
Commodity contracts (futures & forwards)	$	1,833	$	(155	)	$	1,678	$	(1,678	)	$	—	$	—
Derivative Liabilities:
Commodity contracts (futures & forwards)	$	2,550	$	(155	)	$	2,395	$	(1,678	)	$	—	$	717
Fair value hedge	878		—			878		—			—		878
As of December 31, 2013
Derivative Assets:
Commodity contracts (futures & forwards)	$	514	$	(211	)	$	303	$	(281	)	$	—	$	22
Derivative Liabilities:
Commodity contracts (futures & forwards)	$	492	$	(211	)	$	281	$	(281	)	$	—	$	—
Fair value hedge	2,304		—			2,304		—			—		2,304

Compliance Program Market Risk

We are obligated by government regulations to blend a certain percentage of biofuels into the products we produce that are consumed in the U.S. We purchase biofuels from third parties and blend those biofuels into our products, and each gallon of biofuel purchased includes a RIN. To the degree we are unable to blend biofuels at the required percentage, a RINs deficit is generated and we must acquire that number of RINs by the annual reporting deadline in order to remain in compliance with applicable regulations.

We are exposed to market risk related to the volatility in the price of credits needed to comply with these government regulations. We manage this risk by purchasing RINs when prices are deemed favorable utilizing fixed price purchase contracts. Some of these contracts are derivative instruments; however, we elect the normal purchase and sale exception and do not record these contracts at their fair values.

The cost of meeting our obligations under these compliance programs was $2,590 and $1,178 for the three months ended and $4,757 and $9,194 for the nine months ended September 30, 2014 and 2013, respectively. These amounts are reflected in cost of sales.