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DERIVATIVES AND RISK MANAGEMENT ACTIVITIES | 9 Months Ended
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Sep. 30, 2012
DERIVATIVES AND RISK MANAGEMENT ACTIVITIES [Abstract] |
DERIVATIVES AND RISK MANAGEMENT ACTIVITIES | DERIVATIVES AND RISK MANAGEMENT ACTIVITIES We utilize various derivative instruments to: (i) manage our exposure to commodity price risk; (ii) manage our exposure to interest rate risk; and (iii) attempt to profit from market fluctuations. Our risk management policies and procedures are designed to monitor interest rates, futures and swap positions and over-the-counter positions, as well as physical volumes, grades, locations and delivery schedules, to help ensure that our hedging activities address our market risks. Our risk management committee oversees our trading controls and procedures and certain aspects of our commodity and trading risk management. Our risk management committee also reviews all new commodity and trading risk management strategies in accordance with our risk management policy, which was approved by our board of directors. Interest Rate Risk We are a party to certain interest rate swap agreements that we use to manage our exposure to changes in interest rates. We entered into fixed-to-floating interest rate swap agreements associated with a portion of our fixed-rate senior notes. During the six months ended June 30, 2012, we entered into and terminated fixed-to-floating interest rate swap agreements with an aggregate notional amount of $200.0 million related to the 4.75% senior notes issued on February 2, 2012. Under the terms of these interest rate swap agreements, we received a fixed rate of 4.75% and paid a variable rate based on one month USD LIBOR plus a percentage that varied with each agreement. We also terminated fixed-to-floating interest rate swap agreements with an aggregate notional amount of $270.0 million associated with our 4.80% senior notes. We received $19.7 million in connection with the terminations, which we are amortizing into “Interest expense, net” over the remaining lives of the 4.80% and 4.75% senior notes. The termination payments are included in cash flows from financing activities on the consolidated statements of cash flows. We had no fixed-to-floating interest rate swaps as of September 30, 2012, and the total aggregate notional amount of the fixed-to-floating interest rate swaps was $270.0 million as of December 31, 2011. We are also a party to forward-starting interest rate swap agreements related to forecasted probable debt issuances. We entered into these swaps in order to hedge the risk of changes in the interest payments attributable to changes in the benchmark interest rate during the period from the effective date of the swap to the issuance of the forecasted debt. These swaps are designated and qualify as cash flow hedges. In connection with the issuance of the 4.75% senior notes on February 2, 2012, we terminated forward-starting interest rate swap agreements with an aggregate notional amount of $225.0 million. We paid $25.4 million in connection with the terminations, which is being amortized into “Interest expense, net” over the life of the 4.75% senior notes. The termination payment is included in cash flows from financing activities on the consolidated statements of cash flows. As of September 30, 2012 and December 31, 2011, the total aggregate notional amount of the forward-starting interest rate swaps was $275.0 million and $500.0 million, respectively. Commodity Price Risk We are exposed to market risks related to the volatility of crude oil and refined product prices. In order to attempt to reduce the risk of commodity price fluctuations with respect to our crude oil and finished product inventories and related firm commitments to purchase and/or sell such inventories, we utilize commodity futures and swap contracts, which qualify, and we designate them as, fair value hedges. We also enter into commodity swap contracts to attempt to hedge the price risk associated with the San Antonio refinery. These contracts fix the purchase price of crude oil and sales prices of refined products for a portion of the expected production of the San Antonio refinery, thereby attempting to mitigate the risk of volatility of future cash flows associated with hedged volumes. These contracts qualify, and we designate them, as cash flow hedges. During the second quarter of 2012, we reduced the hedged volumes of the expected production of the San Antonio refinery, thereby exposing us to additional price risk. Derivatives that are intended to hedge our commodity price risk, but fail to qualify as fair value or cash flow hedges, are considered economic hedges, and we record associated gains and losses from such derivatives in net income. We also entered into commodity derivatives in order to attempt to profit from market fluctuations. These derivative instruments were financial positions entered into without underlying physical inventory and were not considered hedges. Changes in the fair values were recorded in net income. The volume of commodity contracts is based on open derivative positions and represents the combined volume of our long and short positions on an absolute basis, which totaled 23.0 million b arrels and 27.8 million barrels as of September 30, 2012 and December 31, 2011, respectively. The fair values of our derivative instruments included in our consolidated balance sheets were as follows:
|  |  | Asset Derivatives |  | Liability Derivatives
| Balance Sheet Location |  | September 30, 2012 |  | December 31, 2011 |  | September 30, 2012 |  | December 31, 2011
|  |  | (Thousands of Dollars)
Derivatives Designated as Hedging Instruments: |  |  |  |  |  |  |  |  |
Commodity contracts | Other current assets |  | $ | 4,182 |  |  | $ | 36,116 |  |  | $ | (783 | ) |  | $ | (33,616 | )
Commodity contracts | Other long-term assets, net |  | 22,943 |  |  | 86,052 |  |  | (20,761 | ) |  | (66,175 | )
Interest rate swaps | Other long-term assets, net |  | — |  |  | 2,335 |  |  | — |  |  | — |
Commodity contracts | Accrued liabilities |  | 15,132 |  |  | — |  |  | (40,708 | ) |  | — |
Interest rate swaps | Accrued liabilities |  | — |  |  | — |  |  | (41,117 | ) |  | (22,009 | )
Commodity contracts | Other long-term liabilities |  | 9,861 |  |  | — |  |  | (9,171 | ) |  | — |
Interest rate swaps | Other long-term liabilities |  | — |  |  | — |  |  | — |  |  | (27,190 | )
Total |  |  | 52,118 |  |  | 124,503 |  |  | (112,540 | ) |  | (148,990 | )
Derivatives Not Designated as Hedging Instruments: |  |  |  |  |  |  |  |  |
Commodity contracts | Other current assets |  | 26,484 |  |  | 15,568 |  |  | (8,505 | ) |  | (5,956 | )
Commodity contracts | Other long-term assets, net |  | 13,726 |  |  | 7,207 |  |  | (9,233 | ) |  | — |
Commodity contracts | Accrued liabilities |  | 21,035 |  |  | 519 |  |  | (22,249 | ) |  | (5,943 | )
Commodity contracts | Other long-term liabilities |  | — |  |  | — |  |  | (1,955 | ) |  | — |
Total |  |  | 61,245 |  |  | 23,294 |  |  | (41,942 | ) |  | (11,899 | )
Total Derivatives |  |  | $ | 113,363 |  |  | $ | 147,797 |  |  | $ | (154,482 | ) |  | $ | (160,889 | )
The earnings impact of our derivative activity was as follows:
Derivatives Designated as Fair Value Hedging Instruments |  | Income Statement Location |  | Amount of Gain (Loss) Recognized in Income on Derivative (Effective Portion) |  | Amount of Gain (Loss) Recognized in Income on Hedged Item |  | Amount of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion)
|  |  |  | (Thousands of Dollars)
Three months ended September 30, 2012: |  |  |  |  |  |  |  |
Interest rate swaps |  | Interest expense, net |  | $ | — |  |  | $ | — |  |  | $ | — |
Commodity contracts |  | Cost of product sales |  | (23,131 | ) |  | 22,505 |  |  | (626 | )
Total |  |  |  | $ | (23,131 | ) |  | $ | 22,505 |  |  | $ | (626 | )
Three months ended September 30, 2011: |  |  |  |  |  |  |  |
Interest rate swaps |  | Interest expense, net |  | $ | 45,963 |  |  | $ | (46,320 | ) |  | $ | (357 | )
Commodity contracts |  | Cost of product sales |  | 3,772 |  |  | (4,508 | ) |  | (736 | )
Total |  |  |  | $ | 49,735 |  |  | $ | (50,828 | ) |  | $ | (1,093 | )
Nine months ended September 30, 2012: |  |  |  |  |  |  |  |
Interest rate swaps |  | Interest expense, net |  | $ | (17,345 | ) |  | $ | 17,345 |  |  | $ | — |
Commodity contracts |  | Cost of product sales |  | (20,496 | ) |  | 19,058 |  |  | (1,438 | )
Total |  |  |  | $ | (37,841 | ) |  | $ | 36,403 |  |  | $ | (1,438 | )
Nine months ended September 30, 2011: |  |  |  |  |  |  |  |
Interest rate swaps |  | Interest expense, net |  | $ | 54,577 |  |  | $ | (55,172 | ) |  | $ | (595 | )
Commodity contracts |  | Cost of product sales |  | (7,292 | ) |  | 6,212 |  |  | (1,080 | )
Total |  |  |  | $ | 47,285 |  |  | $ | (48,960 | ) |  | $ | (1,675 | )
Derivatives Designated as Cash Flow Hedging Instruments |  | Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion) |  | Income Statement Location (a) |  | Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |  | Amount of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion)
|  | (Thousands of Dollars) |  |  |  | (Thousands of Dollars)
Three months ended September 30, 2012: |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | (3,825 | ) |  | Interest expense, net |  | $ | (645 | ) |  | $ | — |
Commodity contracts |  | (20,629 | ) |  | Cost of product sales |  | (8,728 | ) |  | 277 |
Total |  | $ | (24,454 | ) |  |  |  | $ | (9,373 | ) |  | $ | 277 |
Three months ended September 30, 2011: |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | (63,100 | ) |  | Interest expense, net |  | $ | — |  |  | $ | — |
Commodity contracts |  | (46,532 | ) |  | Cost of product sales |  | (7,733 | ) |  | 3,594 |
Total |  | $ | (109,632 | ) |  |  |  | $ | (7,733 | ) |  | $ | 3,594 |
Nine months ended September 30, 2012: |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | (17,276 | ) |  | Interest expense, net |  | $ | (1,697 | ) |  | $ | — |
Commodity contracts |  | (73,289 | ) |  | Cost of product sales |  | (24,590 | ) |  | 4,287 |
Total |  | $ | (90,565 | ) |  |  |  | $ | (26,287 | ) |  | $ | 4,287 |
Nine months ended September 30, 2011: |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | (75,930 | ) |  | Interest expense, net |  | $ | — |  |  | $ | — |
Commodity contracts |  | (62,986 | ) |  | Cost of product sales |  | (8,958 | ) |  | 3,594 |
Total |  | $ | (138,916 | ) |  |  |  | $ | (8,958 | ) |  | $ | 3,594 |
(a) | Amounts are included in specified location for both the gain (loss) reclassified from accumulated other comprehensive income (OCI) into income (effective portion) and the gain (loss) recognized in income on derivative (ineffective portion).
Derivatives Not Designated as Hedging Instruments |  | Income Statement Location |  | Amount of Gain (Loss) Recognized in Income
|  |  |  | (Thousands of Dollars)
Three months ended September 30, 2012: |  |  |  |
Commodity contracts |  | Cost of product sales |  | $ | (846 | )
Three months ended September 30, 2011: |  |  |  |
Commodity contracts |  | Cost of product sales |  | $ | 5,482 |
Nine months ended September 30, 2012: |  |  |  |
Commodity contracts |  | Revenues |  | $ | (7,654 | )
Commodity contracts |  | Cost of product sales |  | 23,091 |
|  |  |  | $ | 15,437 |
Nine months ended September 30, 2011: |  |  |  |
Commodity contracts |  | Revenues |  | $ | 235 |
Commodity contracts |  | Cost of product sales |  | (5,685 | )
Commodity contracts |  | Operating expenses |  | 46 |
|  |  |  | $ | (5,404 | )
For derivatives designated as cash flow hedging instruments, once a hedged transaction occurs, we reclassify the effective portion from accumulated OCI to “Cost of product sales” or “Interest expense, net.” As of September 30, 2012, we expect to reclassify a loss of $25.6 million to “Cost of product sales” and a loss of $4.2 million to “Interest expense, net” within the next twelve months. The maximum length of time over which we are hedging our exposure to the variability in future cash flows is approximately three years for our commodity contracts and less than one year for our forward-starting interest rate swaps.

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- Definition The entire disclosure for the entity's entire derivative instruments and hedging activities. Describes an entity's risk management strategies, derivatives in hedging activities and non-hedging derivative instruments, the assets, obligations, liabilities, revenues and expenses arising therefrom, and the amounts of and methodologies and assumptions used in determining the amounts of such items. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=7668309&loc=d3e80784-113994 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4C -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5624171-113959 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4E -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5624181-113959 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4K -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5708775-113959 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1A -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5579245-113959 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(n)) -URI http://asc.fasb.org/extlink&oid=6881521&loc=d3e23780-122690 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=7476318&loc=d3e41641-113959 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5579240-113959 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 45 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6441202&loc=d3e80720-113993 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=7476318&loc=d3e41638-113959 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=7476318&loc=d3e41635-113959 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 133 -Paragraph 44 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. 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