Sunoco 2012 Annual Report Download - page 99

Partnership continuously manages the variance to a balanced position over a period of time. Pursuant to the
Partnership’s approved risk management policy, derivative contracts may be used to hedge or reduce exposure to
price risk associated with acquired inventory or forecasted physical transactions.
Price Risk Management
The Partnership is exposed to risks associated with changes in the market price of crude oil and refined
products as a result of the forecasted purchase or sale of these products. These risks are primarily associated with
price volatility related to pre-existing or anticipated purchases, sales and storage. Price changes are often caused
by shifts in the supply and demand for these commodities, as well as their locations. The physical contracts
related to the Partnership’s crude oil and refined products businesses that qualify as derivatives have been
designated as normal purchases and sales and are accounted for using traditional accrual accounting. The
Partnership accounts for derivatives that do not qualify as normal purchases and sales at fair value. The
Partnership does not utilize derivative instruments to manage its exposure to prices related to crude oil purchase
and sale activities. The Partnership does utilize derivatives such as swaps, futures and other derivative
instruments to mitigate the risk associated with market movements in the price of refined products. These
derivative contracts act as a hedging mechanism against the volatility of prices by allowing the Partnership to
transfer this price risk to counterparties who are able and willing to bear it.
While all derivative instruments utilized by the Partnership represent economic hedges, certain of these
derivatives are not designated as hedges for accounting purposes. Such derivatives include certain contracts that
were entered into and closed during the same accounting period and a limited number of contracts for where
there is not sufficient correlation to the related items being economically hedged.
For refined products derivative contracts that are not designated as hedges for accounting purposes, all
realized and unrealized gains and losses are recognized in the consolidated statement of comprehensive income
during the current period. For refined products derivative contracts that are designated and qualify as cash flow
hedges, the portion of the gain or loss on the derivative contract that is effective in offsetting the variable cash
flows associated with the hedged forecasted transaction is reported as a component of other comprehensive
income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction
affects earnings. The remaining gain or loss on the derivative contract in excess of the cumulative change in the
present value of future cash flows of the hedged item, if any (i.e., the ineffective portion), is recognized in
earnings during the current period. The amount of hedge ineffectiveness on derivative contracts was not material
during the 2010 - 2012 period. All realized gains and losses associated with refined products derivative contracts
are recorded in earnings in the same line item associated with the forecasted transaction, either sales and other
operating revenue or cost of products sold and operating expenses.
The Partnership had open derivative positions on 1.5 million barrels of refined products at December 31,
2012 and 2011, respectively. The derivatives outstanding at December 31, 2012 vary in duration but do not
extend beyond one year. The Partnership records its derivatives at fair value based on observable market prices
(levels 1 and 2). As of December 31, 2012 and 2011, the fair values of the Partnership’s derivative assets and
liabilities were:
Successor Predecessor
December 31,
2012
December 31,
2011
(in millions) (in millions)
Derivative assets ........................... $4 $6
Derivative liabilities ......................... (7) (2)
$(3) $ 4
Derivative asset and liability balances are recorded in accounts receivable and accrued liabilities,
respectively, in the consolidated balance sheets.
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