Quarterly report pursuant to Section 13 or 15(d)

Derivative Financial Instruments

v3.7.0.1
Derivative Financial Instruments
6 Months Ended
Jun. 30, 2017
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, which we refer to as futures and forwards. Futures represent trades executed on the New York Mercantile Exchange which have not been closed or settled at the end of the reporting period. 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.
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.
We have certain commodity contracts associated with the Supply and Offtake Agreement discussed in Note 5 that have been accounted for as a fair value hedge, which had purchase volumes of 116 thousand barrels of crude oil as of June 30, 2017.
The following tables present the effect of derivative instruments on the consolidated balance sheets:
 
As of June 30, 2017
 
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)
 
 
$

 
Accrued liabilities
 
$
662

Total derivatives not designated as hedging instruments
 
 

 
 
 
662

 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Fair value hedge of consigned inventory
Other assets
 
$
5,130

 
 
 
$

Total derivatives designated as hedging instruments
 
 
5,130

 
 
 

Total derivatives
 
 
$
5,130

 
 
 
$
662

 
As of December 31, 2016
 
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
 
$
30

 
Accrued liabilities
 
$
719

Total derivatives not designated as hedging instruments
 
 
30

 
 
 
719

 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Fair value hedge of consigned inventory
Other assets
 
$
4,389

 
 
 
$

Total derivatives designated as hedging instruments
 
 
4,389

 
 
 

Total derivatives
 
 
$
4,419

 
 
 
$
719


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 Six Months Ended
 
 
 
June 30,
 
June 30,
 
Location
 
2017
 
2016
 
2017
 
2016
Fair value hedge of consigned inventory (1)
Interest expense
 
$
(325
)
 
$
(5,249
)
 
$
741

 
$
(4,223
)
Total derivatives
 
 
$
(325
)
 
$
(5,249
)
 
$
741

 
$
(4,223
)

_______________________
(1)
Changes in the fair value hedge are substantially offset in earnings by changes in the hedged item.
Derivatives not designated as hedging instruments:
 
 
 
Gain Recognized in Income
 
 
 
For the Three Months Ended
 
For the Six Months Ended
 
 
 
June 30,
 
June 30,
 
Location
 
2017
 
2016
 
2017
 
2016
Commodity contracts (futures and forwards)
Cost of sales
 
$
1,323

 
$
823

 
$
3,479

 
$
6,197

Total derivatives
 
 
$
1,323

 
$
823

 
$
3,479

 
$
6,197


Offsetting Assets and Liabilities
Our derivative 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 June 30, 2017 and December 31, 2016:
 
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 June 30, 2017
 
 
 
 
 
 
 
 
 
 
Derivative Assets:
 
 
 
 
 
 
 
 
 
 
Commodity contracts (futures and forwards)
$
719

 
$
(719
)
 
$

 
$

 
$

 
$

Fair value hedge of consigned inventory
5,130

 

 
5,130

 

 

 
5,130

Derivative Liabilities:
 
 
 
 
 
 
 
 
 
 
Commodity contracts (futures and forwards)
$
1,381

 
$
(719
)
 
$
662

 
$

 
$

 
$
662

 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2016
 
 
 
 
 
 
 
 
 
 
Derivative Assets:
 
 
 
 
 
 
 
 
 
 
Commodity contracts (futures and forwards)
$
980

 
$
(950
)
 
$
30

 
$
(30
)
 
$

 
$

Fair value hedge of consigned inventory
4,389

 

 
4,389

 

 

 
4,389

Derivative Liabilities:
 
 
 
 
 
 
 
 
 
 
Commodity contracts (futures and forwards)
$
1,669

 
$
(950
)
 
$
719

 
$
(30
)
 
$

 
$
689


Compliance Program Market Risk
We are obligated by government regulations to blend a certain percentage of biofuels into the products that we produce and 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 renewable identification number, or 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. Alternatively, if we have a RINs surplus, some of those RINs could be sold. Any such sales would be subject to our normal credit evaluation process.
We are exposed to market risk related to the volatility in the price of credits needed to comply with these governmental and regulatory programs. We manage this risk by purchasing RINs when prices are deemed favorable utilizing fixed price purchase contracts. We may also sell the RINs with an agreement to repurchase in the future at a fixed price. 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 $2,280 and $2,089 for the three months ended and $6,438 and $2,908 for the six months ended June 30, 2017 and 2016, respectively. These amounts are reflected in cost of sales in the consolidated statements of operations.