Derivative Instruments And Hedging Activities

3 Months Ended

Mar. 31, 2013

Derivative Instruments And Hedging Activities [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 and futures contracts to mitigate price exposure with respect to:

• our inventory positions;

• natural gas purchases;

• costs of crude oil and related grade differentials;

• prices of refined products; and

• our refining margins.

Accounting Hedges

We have swap contracts serving as cash flow hedges against price risk on forecasted purchases of natural gas and WTI crude oil and forecasted sales of ultra-low sulfur diesel. We also have forward sales contracts that lock in the sales prices of future sales of refined product. These contracts have been designated as accounting hedges and are measured quarterly 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. Also on a quarterly basis, hedge ineffectiveness is measured by comparing the change in fair value of the swap contracts against the expected future cash inflows/outflows on the respective transaction being hedged. Any hedge ineffectiveness is also recognized in earnings.

The following table presents the pre-tax effect on other comprehensive income (“OCI”) and earnings due to fair value adjustments and maturities of commodity price swaps under hedge accounting:

	Unrealized Gain (Loss) Recognized in OCI			Gain (Loss) Recognized in Earnings Due to Settlements				Gain (Loss) Attributable to Hedge Ineffectiveness Recognized in Earnings
				Location	Amount			Location	Amount
				(In thousands)
Three Months Ended March 31, 2013
Commodity price swaps
Change in fair value	$	(10,404	)	Sales and other revenues	$	(19,185	)	Sales and other revenues	$	(356	)
Loss reclassified to earnings due to settlements	27,200			Cost of products sold	(6,532		)	Cost of products sold	3,131
Amortization of discontinued hedge reclassified to earnings	90			Operating expenses	(1,573		)	Operating expenses	(365		)
Total	$	16,886			$	(27,290	)		$	2,410
Three Months Ended March 31, 2012
Commodity price swaps
Change in fair value	$	(140,121	)	Sales and other revenues	$	(34,125	)	Sales and other revenues	$	(1,330	)
Loss reclassified to earnings due to settlements	(16,416		)	Cost of products sold	50,541
Total	$	(156,537	)		$	16,416			$	(1,330	)

As of March 31, 2013, we have the following notional contract volumes related to outstanding derivative instruments serving as cash flow hedges against price risk on forecasted purchases of natural gas and crude oil and sales of refined products:

		Notional Contract Volumes by Year of Maturity
Derivative Instrument	Total Outstanding Notional	2013	2014	2015	2016	2017	Unit of Measure
Commodity Price Swaps:
Natural gas - long	45,600,000	7,200,000	9,600,000	9,600,000	9,600,000	9,600,000	MMBTU
WTI crude oil - long	8,340,000	7,975,000	365,000	—	—	—	Barrels
Ultra-low sulfur diesel - short	8,340,000	7,975,000	365,000	—	—	—	Barrels
Forward sales - diesel and gasoline	535,000	535,000	—	—	—	—	Barrels

In the first quarter of 2013, we dedesignated certain commodity price swaps (long positions) that previously received hedge accounting treatment. These contracts now serve as economic hedges against price risk on forecasted natural gas purchases totaling 45,600,000 MMBTU's to be purchased ratably through 2017. As of March 31, 2013, we have an unrealized loss of $5.1 million classified as OCI that relates to the application of hedge accounting prior to dedesignation that will be amortized as a charge to operating expenses as the contracts mature.

Economic Hedges

We also have swap contracts that serve as economic hedges (derivatives used for risk management, but not designated as accounting hedges) to fix our purchase price on forecasted natural gas and crude oil and other feedstock purchases, and to lock in the spread between WCS and WTI crude oil and between WTS and WTI crude oil on forecasted purchases of WCS and WTS. Also, we have NYMEX futures contracts to lock in prices on purchases of inventory. These contracts are measured quarterly 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:

	Three Months Ended March 31,
Location of Gain (Loss) Recognized in Income	2013			2012
	(In thousands)
Cost of products sold	$	33,592		$	(14,994	)
Operating expenses	(4,993		)	(1,701		)
Total	$	28,599		$	(16,695	)

As of March 31, 2013, we have the following notional contract volumes related to our outstanding derivative contracts serving as economic hedges:

		Notional Contract Volumes by Year of Maturity
Derivative Instrument	Total Outstanding Notional	2013	2014	2015	2016	2017	Unit of Measure
Commodity price swap (gasoline) - long	125,000	125,000	—	—	—	—	Barrels
Commodity price swap (gasoline) - short	125,000	125,000	—	—	—	—	Barrels
Commodity price swap (WCS spread) - long	5,362,500	5,362,500	—	—	—	—	Barrels
Commodity price swap (WTS spread) - long	1,960,000	1,960,000	—	—	—	—	Barrels
Commodity price swap (natural gas) - long	45,600,000	7,200,000	9,600,000	9,600,000	9,600,000	9,600,000	MMBTU
Commodity price swap (natural gas) - short	45,600,000	7,200,000	9,600,000	9,600,000	9,600,000	9,600,000	MMBTU
NYMEX futures (WTI) - long	234,000	234,000	—	—	—	—	Barrels
NYMEX futures (WTI) - short	1,178,000	1,178,000	—	—	—	—	Barrels
Physical contracts - long	540,000	540,000	—	—	—	—	Barrels
Physical contracts - short	540,000	540,000	—	—	—	—	Barrels

Interest Rate Risk Management

HEP uses interest rate swaps to manage its exposure to interest rate risk.

As of March 31, 2013, HEP had three interest rate swap contracts that hedge its exposure to the cash flow risk caused by the effects of LIBOR changes on $305.0 million in credit agreement advances. The first interest rate swap effectively converts $155.0 million of LIBOR based debt to fixed rate debt having an interest rate of 0.99% plus an applicable margin of 2.50% as of March 31, 2013, which equaled an effective interest rate of 3.49%. This swap matures in February 2016. HEP has two additional interest rate swaps with identical terms which effectively convert $150.0 million of LIBOR based debt to fixed rate debt having an interest rate of 0.74% plus an applicable margin of 2.50% as of March 31, 2013, which equaled an effective interest rate of 3.24%. Both of these swap contracts mature in July 2017. All of these swap contracts have been designated as cash flow hedges. To date, there has been no ineffectiveness on these cash flow hedges.

The following table presents the pre-tax effect on other comprehensive income and earnings due to fair value adjustments and maturities of HEP's interest rate swaps under cash flow hedge accounting:

	Unrealized Gain (Loss) Recognized in OCI			Loss Recognized in Earnings Due to Settlements
				Location	Amount
	(In thousands)
Three Months Ended March 31, 2013
Interest rate swaps
Change in fair value	$	58
Loss reclassified to earnings due to settlements	504			Interest expense	$	(1,353	)
Amortization of discontinued hedge reclassified to earnings	849
Total	$	1,411			$	(1,353	)
Three Months Ended March 31, 2012
Interest rate swaps
Change in fair value	$	(578	)
Loss reclassified to earnings due to settlements	224			Interest expense	$	(1,498	)
Amortization of discontinued hedge reclassified to earnings	1,274
Total	$	920			$	(1,498	)

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)
March 31, 2013
Derivatives designated as cash flow hedging instruments:
Commodity price swap contracts	$	—	$	—		$	—	$	24,630	$	(27,144	)	$	(2,514	)
Forward sales contracts	1,468		—			1,468		—		—			—
Interest rate swap contracts	—		—			—		2,868		—			2,868
	$	1,468	$	—		$	1,468	$	27,498	$	(27,144	)	$	354
Derivatives not designated as cash flow hedging instruments:
Commodity price swap contracts	$	12,493	$	(1,842	)	$	10,651	$	12,178	$	(4,171	)	$	8,007
NYMEX futures contracts	—		—			—		5,837		—			5,837
	$	12,493	$	(1,842	)	$	10,651	$	18,015	$	(4,171	)	$	13,844
Total net balance						$	12,119						$	14,198
Balance sheet classification:	Prepayment and other					$	12,119	Accrued liabilities					$	562
								Other long-term liabilities					13,636
						$	12,119						$	14,198

	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)
December 31, 2012
Derivatives designated as cash flow hedging instruments:
Commodity price swap contracts	$	—	$	—	$	—	$	37,828	$	(17,383	)	$	20,445
Interest rate swap contracts	—		—		—		3,430		—			3,430
	$	—	$	—	$	—	$	41,258	$	(17,383	)	$	23,875
Derivatives not designated as cash flow hedging instruments:
Commodity price swap contracts	$	—	$	—	$	—	$	46,154	$	—		$	46,154
NYMEX futures contracts	—		—		—		5,563		—			5,563
	$	—	$	—	$	—	$	51,717	$	—		$	51,717
Total net balance					$	—						$	75,592
Balance sheet classification:							Accrued liabilities					$	62,388
							Other long-term liabilities					13,204
												$	75,592

At March 31, 2013, we had a pre-tax net unrealized loss of $4.3 million classified in accumulated other comprehensive income that relates to all accounting hedges. Assuming commodity prices and interest rates remain unchanged, an unrealized gain of approximately $5.3 million will be effectively transferred from accumulated other comprehensive income into the statement of income as the hedging instruments mature over the next twelve-month period.