Sunoco 2013 Annual Report Download - page 86

84
The following table summarizes the fair value assumptions associated with the performance-based awards issued during
the periods presented. The awards granted subsequent to October 5, 2012 were not performance based awards.
Predecessor
Period from January 1,
2012 to October 4, 2012 Year Ended December 31, 2011
Expected unit-price volatility 22.8% 24.6%
Distribution yield 4.6% 5.4%
Risk-free interest rate 0.3% 1.0%
Weighted average fair value of performance units granted during the year $ 34.94 $ 31.51
Expected unit-price volatility was based on the daily historical volatility of the Partnership's common units, generally for
the three years prior to the grant date. The distribution yield represents the Partnership's annualized distribution yield on the
average closing price of the Partnership's common units 30 days prior to the date of grant. The risk-free interest rate was based
on the zero-coupon U.S. Treasury bond, with a term equal to the remaining contractual term of the restricted unit awards.
Based on the unit grants and performance factor adjustments outlined in the table above, the Partnership recognized unit-
based compensation expense related to the LTIP within selling, general and administrative expenses in the consolidated
statements of comprehensive income of $14, $2, $6, and $6 million for the year ended December 31, 2013, the periods from
October 5, 2012 to December 31, 2012 and from January 1, 2012 to October 4, 2012, and for the year ended December 31,
2011, respectively. The tandem DERs associated with the restricted unit grants are recognized as a reduction of equity when
earned.
15. Derivatives and Risk Management
The Partnership is exposed to various risks, including volatility in the prices of the products that the Partnership markets,
counterparty credit risk and interest rates. In order to manage such exposure, the Partnership's policy is (i) to only purchase
crude oil, refined products and NGLs for which sales contracts have been executed or for which ready markets exist, (ii) to
structure sales contracts so that price fluctuations do not materially impact the margins earned, and (iii) not to acquire and hold
physical inventory, futures contracts or other derivative instruments for the purpose of speculating on commodity price
changes. Although the Partnership seeks to maintain a balanced inventory position within its commodity inventories, net
unbalances may occur for short periods of time due to production, transportation and delivery variances. When physical
inventory builds or draws do occur, the 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, refined products and NGLs
as a result of the forecasted purchase or sale of these products. These risks are primarily associated with price volatility related
to preexisting 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, refined products and
NGL businesses that qualify as derivatives have been designated as normal purchases and sales and are accounted for using
accrual accounting under GAAP. The Partnership accounts for derivatives that do not qualify as normal purchases and sales at
fair value. The Partnership currently does not utilize derivative instruments to manage its exposure to prices related to crude oil
purchase and sale activities.
The Partnership utilizes derivatives such as swaps, futures and other derivative instruments to mitigate the risk associated
with market movements in the price of refined products and NGLs. 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. Since the first quarter 2013, the Partnership has not designated any of its derivative contracts as hedges for
accounting purposes. Therefore, all realized and unrealized gains and losses from these derivative contracts are recognized in
the consolidated statement of comprehensive income during the current period. For refined products derivative contracts that
were designated and qualified as cash flow hedges prior to the first quarter 2013, the portion of the gain or loss on the
derivative contract that was effective in offsetting the variable cash flows associated with the hedged forecasted transaction was
reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods
during which the hedged transaction affected 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), was
recognized in earnings during the current period. The amount of hedge ineffectiveness on derivative contracts was not material
during 2013, 2012 or 2011. All realized gains and losses associated with refined products derivative contracts are recorded in