Sunoco 2015 Annual Report Download - page 92

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Based on the unit grants and performance factor adjustments outlined in the table above, the Partnership recognized unit-
based compensation expense related to the awards granted under the LTIP and Restated LTIP within operating expenses and
selling, general and administrative expenses in the consolidated statements of comprehensive income of $17, $16, and $14
million for the years ended December 31, 2015, 2014 and 2013, 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 changes in interest rates.
Price Risk Management
The Partnership is exposed to risks associated with changes in the market price of crude oil, NGLs and refined 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. In order to manage
such exposure, the Partnership's policy is (i) to only purchase crude oil, NGLs and refined products 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) to not 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.
The physical contracts related to the Partnership's commodity purchase and sale activities that qualify as derivatives have
been designated as normal purchases and sales and are accounted for using accrual accounting under United States' generally
accepted accounting principles. The Partnership accounts for derivatives that do not qualify as normal purchases or 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. All derivative balances are presented on a gross basis.
Pursuant to the Partnership's approved risk management policy, derivative contracts, such as swaps, futures and other
derivative instruments, may be used to hedge or reduce exposure to price risk associated with acquired inventory or forecasted
physical transactions. The Partnership utilizes derivative instruments to mitigate the risk associated with market movements in the
price of NGLs, refined products, and other commodities as necessary. 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 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 in the period in which they occur. The hedge ineffectiveness assessed on derivative contracts was not
material during 2015, 2014 or 2013. All realized gains and losses associated with the Partnership's 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).
The Partnership had open derivative positions on 9.2 and 3.6 million barrels of NGLs and refined products at December 31,
2015 and 2014, respectively. The derivatives outstanding at December 31, 2015 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), of which positions at
December 31, 2015 and 2014 were primarily categorized at level 2. As of December 31, 2015 and 2014, the fair values of the
Partnership's derivative assets and liabilities were:
December 31,
2015 2014
(in millions)
Derivative assets $ 30 $ 29
Derivative liabilities (18)(14)
$ 12 $ 15
Derivative asset and liability balances are recorded in accounts receivable and accrued liabilities, respectively, in the
consolidated balance sheets.