Note 9. Fair Value Measurements

Recurring Fair Value Measures

Assets and liabilities are classified in the entirety based on the lowest level of input that is significant to the fair value measurement. The Partnership’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the fair value assets and liabilities and their placement within the fair value hierarchy levels. The following tables present, by level within the fair value hierarchy, the Partnership’s financial assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2018 and 2017 (in thousands):


	Fair Value at December 31, 2018
							Cash Collateral
	Level 1		Level 2		Level 3		Netting		Total
Assets:
Forward derivative contracts (1)	$	—	$	24,183	$	886	$	—	$	25,069
Swap agreements and options		—		1,321		—		—		1,321
Exchange-traded/cleared derivative instruments (2)		83,617		—		—		(68,851)		14,766
Pension plans		15,800		—		—		—		15,800
Total assets	$	99,417	$	25,504	$	886	$	(68,851)	$	56,956

Liabilities:
Forward derivative contracts (1)	$	—	$	(3,878)	$	(616)	$	—	$	(4,494)


	Fair Value at December 31, 2017
							Cash Collateral
	Level 1		Level 2		Level 3		Netting		Total
Assets:
Forward derivative contracts (1)	$	—	$	3,207	$	633	$	—	$	3,840
Exchange-traded/cleared derivative instruments (2)		(38,600)		—		—		48,281		9,681
Pension plans		17,581		—		—		—		17,581
Total assets	$	(21,019)	$	3,207	$	633	$	48,281	$	31,102

Liabilities:
Forward derivative contracts (1)	$	—	$	(12,671)	$	(1,037)	$	—	$	(13,708)
Interest rate swaps		—		(134)		—		—		(134)
Total liabilities	$	—	$	(12,805)	$	(1,037)	$	—	$	(13,842)

(1)

Forward derivative contracts include the Partnership’s petroleum and ethanol physical and financial forwards and OTC swaps

(2)

Amount includes the effect of cash balances on deposit with clearing brokers.

This table excludes cash on hand and assets and liabilities that are measured at historical cost or any basis other than fair value. The carrying amounts of certain of the Partnership’s financial instruments, including cash equivalents, accounts receivable, accounts payable and other accrued liabilities approximate fair value due to their short maturities. The carrying value of the credit facility approximates fair value due to the variable rate nature of these financial instruments.

The carrying value of the inventory qualifying for fair value hedge accounting approximates fair value due to adjustments for changes in fair value of the hedged item. The fair values of the derivatives used by the Partnership are disclosed in Note 8.

The determination of the fair values above incorporates factors including not only the credit standing of the counterparties involved, but also the impact of the Partnership’s nonperformance risks on its liabilities.

The values of the Level 1 exchange-traded/cleared derivative instruments and pension plan assets were determined using quoted prices in active markets for identical assets. Specifically, the fair values of the Level 1 exchange-traded/cleared derivative instruments were based on quoted process obtained from the NYMEX, CME and ICE. The fair values of the Level 1 pension plan assets were based on quoted prices for identical assets which primarily consisted of fixed income securities, equity securities and cash and cash equivalents.

The values of the Level 2 derivative contracts were calculated using expected cash flow models and market approaches based on observable market inputs, including published and quoted commodity pricing data, which is verified against other available market data. Specifically, the fair values of the Level 2 derivative commodity contracts were derived from published and quoted NYMEX, CME, ICE, New York Harbor and third-party pricing information for the underlying instruments using market approaches. The fair value of the Level 2 interest rate instruments was derived from the implied forward LIBOR yield curve for the sale period as the future interest rate swap settlements using expected cash flow models. The Partnership has not changed its valuation techniques or Level 2 inputs during the years ended December 31, 2018 and 2017.

The Partnership estimates the fair values of its 6.25% senior notes and 7.00% senior notes using a combination of quoted market prices for similar financing arrangements and expected future payments discounted at risk-adjusted rates, which are considered Level 2 inputs. The fair values of the 6.25% senior notes and 7.00% senior notes, estimated by observing market trading prices of the 6.25% senior notes and 7.00% senior notes, respectively, were as follows at December 31 (in thousands):


	2018				2017
	Face		Fair		Face		Fair
	Value		Value		Value		Value
6.25% senior notes	$	375,000	$	363,750	$	375,000	$	383,906
7.00% senior notes	$	300,000	$	294,000	$	300,000	$	308,250

Level 3 Information

The values of the Level 3 derivative contracts were calculated using market approaches based on a combination of observable and unobservable market inputs, including published and quoted NYMEX, CME, ICE, New York Harbor and third-party pricing information for a component of the underlying instruments as well as internally developed assumptions where there is little, if any, published or quoted prices or market activity. The unobservable inputs used in the measurement of the Level 3 derivative contracts include estimates for location basis, transportation and throughput costs net of an estimated margin for current market participants. The estimates for these inputs for crude oil were ($3.25) to $2.00 per barrel and ($8.50) to ($1.00) per barrel as of December 31, 2018 and 2017, respectively. The estimates for these inputs for propane were $0.02 to $0.25 per barrel and ($3.36) to $8.40 per barrel as of December 31, 2018 and 2017, respectively. Gains and losses recognized in earnings (or changes in net assets) are disclosed in Note 8.

Sensitivity of the fair value measurement to changes in the significant unobservable inputs is as follows:


Significant			Impact on Fair Value
Unobservable Input	Position	Change to Input	Measurement
Location basis	Long	Increase (decrease)	Gain (loss)
Location basis	Short	Increase (decrease)	Loss (gain)
Transportation	Long	Increase (decrease)	Gain (loss)
Transportation	Short	Increase (decrease)	Loss (gain)
Throughput costs	Long	Increase (decrease)	Gain (loss)
Throughput costs	Short	Increase (decrease)	Loss (gain)

The following table presents a reconciliation of changes in fair value of the Partnership’s derivative contracts classified as Level 3 in the fair value hierarchy at December 31 (in thousands):


Fair value at December 31, 2017	$	(404)
Derivatives entered into during the period		750
Derivatives sold during the period		(501)
Realized gains (losses) recorded in cost of sales		419
Unrealized gains (losses) recorded in cost of sales		6
Fair value at December 31, 2018	$	270

The Partnership’s policy is to recognize transfers between levels with the fair value hierarchy as of the beginning of the reporting period. The Partnership also excludes any activity for derivative instruments that were not classified as Level 3 at either the beginning or end of the reporting period.

Non-Recurring Fair Value Measures

Certain nonfinancial assets and liabilities are measured at fair value on a non-recurring basis and are subject to fair value adjustments in certain circumstances, such as acquired assets and liabilities, losses related to firm non-cancellable purchase commitments or long-lived assets subject to impairment. For assets and liabilities measured on a non-recurring basis during the year, accounting guidance requires quantitative disclosures about the fair value measurements separately for each major category. See Note 2 for a discussion of the Partnership’s losses on impairment of assets, Note 6 for assets held for sale and Note 19 for acquired assets and liabilities measured on a non-recurring basis during the year ended December 31, 2018.