Derivatives

The Company is exposed to price risks due to fluctuations in the price of crude oil, refined products (primarily in the Company’s fuel products segment) and precious metals. The Company uses various strategies to reduce its exposure to commodity price risk. The strategies to reduce the Company’s risk utilize both physical forward contracts and financially settled derivative instruments, such as swaps, to attempt to reduce the Company’s exposure with respect to:


•	crude oil purchases and sales;


•	fuel product sales and purchases;


•	precious metals purchases; and


•	fluctuations in the value of crude oil between geographic regions and between the different types of crude oil such as New York Mercantile Exchange West Texas Intermediate (“NYMEX WTI”), Western Canadian Select (“WCS”), WTI Midland, Mixed Sweet Blend and ICE Brent.

The Company manages its exposure to commodity markets, credit, volumetric and liquidity risks to manage its costs and volatility of cash flows as conditions warrant or opportunities become available. These risks may be managed in a variety of ways that may include the use of derivative instruments. Derivative instruments may be used for the purpose of mitigating risks associated with an asset, liability and anticipated future transactions and the changes in fair value of the Company’s derivative instruments will affect its earnings and cash flows; however, such changes should be offset by price or rate changes related to the underlying commodity or financial transaction that is part of the risk management strategy. The Company does not speculate with derivative instruments or other contractual arrangements that are not associated with its business objectives. Speculation is defined as increasing the Company’s natural position above the maximum position of its physical assets or trading in commodities, currencies or other risk bearing assets that are not associated with the Company’s business activities and objectives. The Company’s positions are monitored routinely by a risk management committee to ensure compliance with its stated risk management policy and documented risk management strategies. All strategies are reviewed on an ongoing basis by the Company’s risk management committee, which will add, remove or revise strategies in anticipation of changes in market conditions and/or its risk profiles. Such changes in strategies are to position the Company in relation to its risk exposures in an attempt to capture market opportunities as they arise.

The Company is obligated to repurchase crude oil and refined products from Macquarie at the termination of the Supply and Offtake Agreements in certain scenarios. The Company has determined that the redemption feature on the initially recognized liability related to the Supply and Offtake Agreements is an embedded derivative indexed to commodity prices. As such, the Company has accounted for this embedded derivative at fair value with changes in the fair value, if any, recorded in gain (loss) on derivative instruments in the Company’s consolidated statements of operations please read Note 9 - “Inventory Financing Agreements" for additional information.

The Company recognizes all derivative instruments at their fair values as either current assets or current liabilities in the consolidated balance sheets (please read Note 12 - “Fair Value Measurements”). Fair value includes any premiums paid or received and unrealized gains and losses. Fair value does not include any amounts receivable from or payable to counterparties, or collateral provided to counterparties. Derivative asset and liability amounts with the same counterparty are netted against each other for financial reporting purposes in accordance with the provisions of our master netting arrangements.

The following tables summarize the Company’s gross fair values of its derivative instruments, presenting the impact of offsetting derivative assets in the Company’s consolidated balance sheets (in millions):



		December 31, 2019								December 31, 2018
	Balance Sheet Location	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Consolidated Balance Sheets			Net Amounts of Assets Presented in the Consolidated Balance Sheets			Gross Amounts of Recognized Assets		Gross Amounts Offset in the Consolidated Balance Sheets			Net Amounts of Assets Presented in the Consolidated Balance Sheets
Derivative instruments not designated as hedges:
Specialty products segment:
Midland crude oil basis swaps	Derivative assets	$	—	$	—		$	—		$	1.0	$	—		$	1.0
Fuel products segment:
Inventory financing obligation	Obligations under inventory financing agreements	—		—			—			1.5		—			1.5
WCS crude oil basis swaps	Derivative assets	—		(1.3		)	(1.3		)	16.5		(1.6		)	14.9
WCS crude oil percentage basis swaps	Derivative assets	—		—			—			—		(6.1		)	(6.1		)
Midland crude oil basis swaps	Derivative assets	—		—			—			7.1		—			7.1
Gasoline crack spread swaps	Derivative assets	1.8		(0.5		)	1.3			—		—			—
Diesel crack spread swaps	Derivative assets	0.9		(0.5		)	0.4			7.4		—			7.4
Diesel percentage basis crack spread swaps	Derivative assets	—		—			—			—		(6.0		)	(6.0		)
2/1/1 Crack spread swap	Derivative assets	0.5		—			0.5			—		—			—
Total derivative instruments		$	3.2	$	(2.3	)	$	0.9		$	33.5	$	(13.7	)	$	19.8

The following tables summarize the Company’s gross fair values of its derivative instruments, presenting the impact of offsetting derivative liabilities in the Company’s consolidated balance sheets (in millions):



		December 31, 2019								December 31, 2018
	Balance Sheet Location	Gross Amounts of Recognized Liabilities			Gross Amounts Offset in the Consolidated Balance Sheets		Net Amounts of Liabilities Presented in the Consolidated Balance Sheets			Gross Amounts of Recognized Liabilities			Gross Amounts Offset in the Consolidated Balance Sheets		Net Amounts of Liabilities Presented in the Consolidated Balance Sheets
Derivative instruments not designated as hedges:
Fuel products segment:
Inventory financing obligation	Obligations under inventory financing agreements	$	(7.2	)	$	—	$	(7.2	)	$	—		$	—	$	—
WCS crude oil basis swaps	Derivative liabilities	(1.3		)	1.3		—			(1.6		)	1.6		—
WCS crude oil percentage basis swaps	Derivative liabilities	—			—		—			(6.1		)	6.1		—
Gasoline crack spread swaps	Derivative liabilities	(0.5		)	0.5		—			—			—		—
Diesel crack spread swaps	Derivative liabilities	(0.5		)	0.5		—			—			—		—
Diesel percentage basis crack spread swaps	Derivative liabilities	—			—		—			(6.0		)	6.0		—
Total derivative instruments		$	(9.5	)	$	2.3	$	(7.2	)	$	(13.7	)	$	13.7	$	—

The Company is exposed to credit risk in the event of nonperformance by its counterparties on these derivative transactions. The Company does not expect nonperformance on any derivative instruments, however, no assurances can be provided. The Company’s credit exposure related to these derivative instruments is represented by the fair value of contracts reported as derivative assets. As of December 31, 2019, the Company had three counterparty relationships in which the derivatives held were in net assets totaling $0.9 million. As of December 31, 2018, the Company had four counterparty relationships in which the derivatives held were in net assets totaling $19.8 million. To manage credit risk, the Company selects and periodically reviews counterparties based on credit ratings. The Company primarily executes its derivative instruments with large financial institutions that have ratings of at least A3 and BBB+ by Moody’s and S&P, respectively. In the event of default, the Company would potentially be subject to losses on derivative instruments with mark-to-market gains. The Company requires collateral from its counterparties when the fair value of the derivatives exceeds agreed-upon thresholds in its master derivative contracts with these counterparties. No such collateral was held by the Company as of December 31, 2019 or 2018. Collateral received from counterparties is reported in other current liabilities, and collateral held by counterparties is reported in prepaid expenses and other current assets on the Company’s consolidated balance sheets and is not netted against derivative assets or liabilities. Any outstanding collateral is released to the Company upon settlement of the related derivative instrument liability. As of December 31, 2019 and 2018, the Company had provided its counterparties with no collateral.

Certain of the Company’s outstanding derivative instruments are subject to credit support agreements with the applicable counterparties which contain provisions setting certain credit thresholds above which the Company may be required to post agreed-upon collateral, such as cash or letters of credit, with the counterparty to the extent that the Company’s mark-to-market net liability, if any, on all outstanding derivatives exceeds the credit threshold amount per such credit support agreement. The majority of the credit support agreements covering the Company’s outstanding derivative instruments also contain a general provision stating that if the Company experiences a material adverse change in its business, in the reasonable discretion of the counterparty, the Company’s credit threshold could be lowered by such counterparty. The Company does not expect that it will experience a material adverse change in its business.

The cash flow impact of the Company’s derivative activities is classified primarily as a change in derivative activity in the operating activities section in the consolidated statements of cash flows.

Derivative Instruments Not Designated as Hedges

For derivative instruments not designated as hedges, the change in fair value of the asset or liability for the period is recorded to unrealized gain (loss) on derivative instruments in the consolidated statements of operations. Upon the settlement of a derivative not designated as a hedge, the gain or loss at settlement is recorded to realized gain (loss) on derivative instruments in the consolidated statements of operations. The Company has entered into gasoline swaps, diesel swaps and certain other crude oil swaps that are not designated as cash flow hedges for accounting purposes. However, these instruments provide economic hedges of the Company’s crude oil, gasoline and diesel sales.

The Company recorded the following gains (losses) in its consolidated statements of operations related to its derivative instruments not designated as hedges (in millions):



	Amount of Gain (Loss) Recognized in Realized Gain on Derivative Instruments					Amount of Gain (Loss) Recognized in Unrealized Gain (Loss) on Derivative Instruments
	Year Ended December 31,					Year Ended December 31,
Type of Derivative	2019		2018			2019			2018
Specialty products segment:
Midland crude oil basis swaps	1.6		0.9			(1.0		)	1.0
Fuel products segment:
Inventory financing obligation	—		—			(8.7		)	5.9
Crude oil swaps	—		—			—			(0.3		)
WCS crude oil basis swaps	14.7		(1.8		)	(16.2		)	14.9
WCS crude oil percentage basis swaps	1.0		—			6.0			(6.1		)
Midland crude oil basis swaps	11.3		6.0			(7.1		)	7.1
Gasoline swaps	—		—			—			0.2
Gasoline crack spread swaps	0.1		(1.0		)	1.3			1.8
Diesel swaps	—		—			—			0.2
Diesel crack spread swaps	6.3		(0.7		)	(6.9		)	11.5
Diesel percentage basis crack spread swaps	—		—			6.0			(6.0		)
2/1/1 crack spread swaps	0.1		0.2			0.5			—
Total	$	35.1	$	3.6		$	(26.1	)	$	30.2

Derivative Positions

WCS Crude Oil Basis Swap Contracts

The Company has entered into crude oil basis swaps to mitigate the risk of future changes in pricing differentials between WCS and NYMEX WTI. At December 31, 2019, the Company had the following derivatives related to WCS crude oil purchases in its fuel products segment, which are not designated as hedges:



WCS Crude Oil Basis Swap Contracts by Expiration Dates	Barrels Purchased	BPD	Average Differential to NYMEX WTI ($/Bbl)
First Quarter 2020	544,000	5,978	$	(18.92	)
Total	544,000
Average differential			$	(18.92	)

At December 31, 2019, the Company had no derivatives related to WCS crude oil basis sales in its fuel products segment, as all positions outstanding at December 31, 2018 were settled during 2019.

At December 31, 2018, the Company had the following derivatives related to WCS crude oil purchases in its fuel products segment, none of which were designated as hedges:



WCS Crude Oil Basis Swap Contracts by Expiration Dates	Barrels Purchased	BPD	Average Differential to NYMEX WTI ($/Bbl)
First Quarter 2019	419,000	4,656	$	(28.10	)
Second Quarter 2019	455,000	5,000	$	(28.22	)
Third Quarter 2019	460,000	5,000	$	(28.22	)
Fourth Quarter 2019	460,000	5,000	$	(28.22	)
Total	1,794,000
Average differential			$	(28.19	)

At December 31, 2018, the Company had the following derivatives related to WCS crude oil basis sales in its fuel products segment, none of which were designated as hedges:



WCS Crude Oil Basis Swap Contracts by Expiration Dates	Barrels Sold	BPD	Average Differential to NYMEX WTI ($/Bbl)
First Quarter 2019	388,000	4,311	$	(19.84	)
Second Quarter 2019	455,000	5,000	$	(19.84	)
Third Quarter 2019	460,000	5,000	$	(19.84	)
Fourth Quarter 2019	460,000	5,000	$	(19.84	)
Total	1,763,000
Average differential			$	(19.84	)

WCS Crude Oil Percentage Basis Swap Contracts

The Company has entered into derivative instruments to secure a percentage differential of WCS crude oil to NYMEX WTI. At December 31, 2019, the Company had no derivatives related to WCS crude oil percentage basis swap purchases in its fuel products segment, as all positions outstanding at December 31, 2018 were settled during 2019.

At December 31, 2018, the Company had the following derivatives related to WCS crude oil percentage basis swap purchases in its fuel products segment, none of which were designated as hedges:



WCS Crude Oil Percentage Basis Swap Contracts by Expiration Dates	Barrels Purchased	BPD	Fixed Percentage of NYMEX WTI (Average % of WTI/Bbl)
First Quarter 2019	450,000	5,000	66.32	%
Second Quarter 2019	455,000	5,000	66.32	%
Third Quarter 2019	460,000	5,000	66.32	%
Fourth Quarter 2019	460,000	5,000	66.32	%
Total	1,825,000
Average percentage			66.32	%

Midland Crude Oil Basis Swap Contracts

The Company has entered into crude oil basis swaps to mitigate the risk of future changes in pricing differentials between WTI Midland and NYMEX WTI. At December 31, 2019, the Company had no derivatives related to Midland crude oil basis swap purchases in its fuel products segment, as all positions outstanding at December 31, 2018 were settled during 2019.

At December 31, 2018, the Company had the following derivatives related to Midland crude oil basis swap purchases in its fuel products segment, none of which were designated as hedges:



Midland Crude Oil Basis Swap Contracts by Expiration Dates	Barrels Purchased	BPD	Average Differential to NYMEX WTI ($/Bbl)
First Quarter 2019	501,500	5,572	$	(12.79	)
Second Quarter 2019	773,500	8,500	$	(11.74	)
Total	1,275,000
Average differential			$	(12.27	)

Gasoline Crack Spread Swap Contracts

At December 31, 2019, the Company had the following derivatives related to gasoline crack spread swap sales in its fuel products segment, none of which are designated as hedges:



Gasoline Crack Spread Swap Contracts by Expiration Dates	Barrels Sold	BPD	Average Swap ($/Bbl)
First Quarter 2020	591,500	6,500	$	12.54
Second Quarter 2020	379,000	4,165	$	16.41
Third Quarter 2020	368,000	4,000	$	15.24
Fourth Quarter 2020	368,000	4,000	$	9.77
Total	1,706,500
Average price			$	13.38

At December 31, 2018, the Company had no derivatives related to gasoline crack spread swap sales in its fuel products segment.

Diesel Crack Spread Swap Contracts

At December 31, 2019, the Company had the following derivatives related to diesel crack spread swap sales in its fuel products segment, none of which are designated as hedges:



Diesel Crack Spread Swap Contracts by Expiration Dates	Barrels Sold	BPD	Average Swap ($/Bbl)
First Quarter 2020	500,500	5,500	$	22.15
Second Quarter 2020	379,000	4,165	$	21.68
Third Quarter 2020	368,000	4,000	$	22.23
Fourth Quarter 2020	368,000	4,000	$	21.91
Total	1,615,500
Average price			$	22.00

At December 31, 2018, the Company had the following derivatives related to diesel crack spread swap sales in its fuel products segment, none of which were designated as hedges:



Diesel Crack Spread Swap Contracts by Expiration Dates	Barrels Sold	BPD	Average Swap ($/Bbl)
First Quarter 2019	450,000	5,000	$	25.58
Second Quarter 2019	455,000	5,000	$	25.58
Third Quarter 2019	460,000	5,000	$	25.58
Fourth Quarter 2019	460,000	5,000	$	25.58
Total	1,825,000
Average price			$	25.58

Diesel Percentage Basis Crack Spread Swap Contracts

The Company has entered into diesel crack spread derivative instruments to secure a fixed percentage of gross profit on diesel in excess of the floating value of NYMEX WTI crude oil. At December 31, 2019, the Company had no derivatives related to diesel percentage basis crack spread swap sales in its fuel products segment, as all positions outstanding at December 31, 2018 were settled during 2019.

At December 31, 2018, the Company had the following derivatives related to diesel percentage basis crack spread swap sales in its fuel products segment, none of which were designated as hedges:



Diesel Percentage Basis Crack Spread Swap Contracts by Expiration Dates	Barrels Sold	BPD	Fixed Percentage of NYMEX WTI (Average % of WTI/Bbl)
First Quarter 2019	450,000	5,000	138.38	%
Second Quarter 2019	455,000	5,000	138.38	%
Third Quarter 2019	460,000	5,000	138.38	%
Fourth Quarter 2019	460,000	5,000	138.38	%
Total	1,825,000
Average percentage			138.38	%

2/1/1 Crack Spread Swap Contracts

At December 31, 2019, the Company had the following derivatives related to 2/1/1 crack spread swap sales in its fuel products segment, none of which are designated as hedges:



2/1/1 Crack Spread Swap Contracts by Expiration Dates	Barrels Sold	BPD	Average Swap ($/Bbl)
First Quarter 2020	364,000	4,000	$	17.43
Second Quarter 2020	30,000	330	$	19.50
Total	394,000
Average price			$	17.58

At December 31, 2018, the Company had no derivatives related to 2/1/1 crack spread swap sales in its fuel products segment.