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Derivatives
 6 Months Ended
Jun. 30, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivatives 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), natural gas 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, collars, options and futures, to attempt to reduce the Company’s exposure with respect to:
•
crude oil purchases and sales;
•
fuel product sales and purchases;
•
natural gas 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”), Light Louisiana Sweet, Western Canadian Select (“WCS”), WTI Midland, Mixed Sweet Blend, Magellan East Houston 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 these embedded derivatives at fair value with changes in the fair value, if any, recorded in gain (loss) on derivative instruments in the Company’s unaudited condensed consolidated statements of operations.
The Company recognizes all derivative instruments at their fair values (please read Note 10 - “Fair Value Measurements”) as either current assets or current liabilities in the condensed consolidated balance sheets. 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 condensed consolidated balance sheets (in millions):
 
 
June 30, 2020
 
December 31, 2019
 
Balance Sheet Location
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheets
 
Net Amounts of Assets Presented
in the Condensed Consolidated Balance Sheets
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheets
 
Net Amounts of Assets Presented
in the Condensed Consolidated Balance Sheets
Derivative instruments not designated as hedges:
 
 
 
 
 
 
 
 
 
 
Specialty products segment:
 
 
 
 
 
 
 
 
 
 
 
Natural gas swaps
Derivative assets
$
0.2

 
$
(0.4
)
 
$
(0.2
)
 
$
—

 
$
—

 
$
—

Fuel products segment:
 
 
 
 
 


 
 
 
 
 


Inventory financing obligation
Obligations under inventory financing agreements
$
4.4

 
$
—

 
$
4.4

 
$
—

 
$
—

 
$
—

WCS crude oil basis swaps
Derivative assets
5.2

 
(0.3
)
 
4.9

 
—

 
(1.3
)
 
(1.3
)
Gasoline crack spread swaps
Derivative assets
4.6

 
—

 
4.6

 
1.8

 
(0.5
)
 
1.3

Diesel crack spread swaps
Derivative assets
9.5

 
—

 
9.5

 
0.9

 
(0.5
)
 
0.4

Diesel-MEH crack spread swap
Derivative assets
0.9


—


0.9

 
—

 
—

 
—

2/1/1 crack spread swaps
Derivative assets
—

 
—

 
—

 
0.5

 
—

 
0.5

Total derivative instruments
 
$
24.8


$
(0.7
)

$
24.1


$
3.2


$
(2.3
)

$
0.9


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 condensed consolidated balance sheets (in millions):
 
 
June 30, 2020
 
December 31, 2019
 
Balance Sheet Location
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheets
 
Net Amounts of Liabilities Presented
in the Condensed Consolidated Balance Sheets
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheets
 
Net Amounts of Liabilities Presented
in the Condensed Consolidated Balance Sheets
Derivative instruments not designated as hedges:
 
 
 
 
 
 
 
 
 
 
Specialty products segment:
 
 
 
 
 
 
 
 
 
 
 
Natural gas swaps
Other current liabilities
$
(0.4
)
 
$
0.4

 
$
—

 
$
—

 
$
—

 
$
—

Fuel products segment:
 
 
 
 
 
 
 
 
 
 
 
 
Inventory financing obligation
Obligations under inventory financing agreements
$
—

 
$
—

 
—

 
$
(7.2
)
 
$
—

 
$
(7.2
)
WCS crude oil basis swaps
Other current liabilities

(0.3
)
 
0.3

 
—

 
(1.3
)
 
1.3

 
—

Gasoline crack spread swaps
Other current liabilities

—

 
—

 
—

 
(0.5
)
 
0.5

 
—

Diesel crack spread swaps
Other current liabilities

—

 
—

 
—

 
(0.5
)
 
0.5

 
—

Total derivative instruments
 
$
(0.7
)
 
$
0.7

 
$
—

 
$
(9.5
)
 
$
2.3

 
$
(7.2
)

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 June 30, 2020, the Company had four counterparties in which the derivatives held were in net assets totaling $24.1 million. As of
December 31, 2019, the Company had three counterparties in which the derivatives held were net assets. 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 June 30, 2020 or December 31, 2019. 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 condensed consolidated balance sheets and is not netted against derivative assets or liabilities.
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. Any outstanding collateral is released to the Company upon settlement of the related derivative instrument liability. As of June 30, 2020 and December 31, 2019, the Company had provided no collateral to its counterparties.
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 unaudited condensed 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 gain (loss) on derivative instruments in the unaudited condensed consolidated statements of operations. Upon the settlement of a derivative not designated as a hedge, the gain or loss at settlement is recorded to gain (loss) on derivative instruments in the unaudited condensed consolidated statements of operations. The Company has entered into natural gas swaps, gasoline swaps, diesel swaps and certain crude oil basis swaps that do not qualify as cash flow hedges for accounting purposes. However, these instruments provide economic hedges of the purchases and sales of the Company’s natural gas, crude oil, gasoline and diesel.
The Company recorded the following gains (losses) in its unaudited condensed consolidated statements of operations, related to its derivative instruments not designated as hedges (in millions):
Type of Derivative
Amount of Realized Gain Recognized in Gain on Derivative Instruments
 
Amount of Unrealized Loss Recognized in Gain on Derivative Instruments
Three Months Ended June 30,
 
Three Months Ended June 30,
2020
 
2019
 
2020
 
2019
Specialty products segment:
 
 
 
 
 
 
 
Natural gas swaps
$
(0.5
)
 
$
—

 
$
0.1

 
$
—

Midland crude oil basis swaps
—

 
0.5

 
—

 
(0.5
)
Fuel products segment:
 
 
 
 
 
 
 
Inventory financing obligation
—

 
—

 
0.7

 
15.5

WCS crude oil basis swaps
4.6

 
13.5

 
12.3

 
(11.4
)
WCS crude oil percentage basis swaps
—

 
0.8

 
—

 
(0.9
)
Midland crude oil basis swaps
—

 
1.7

 
—

 
(5.0
)
Gasoline crack spread swaps
3.4

 
—

 
(13.5
)
 
—

2/1/1 crack spread swaps
0.2

 
—

 
(0.4
)
 
—

Diesel crack spread swaps
4.8

 
5.4

 
(1.3
)
 
(6.6
)
Diesel percentage basis crack spread swaps
—

 
0.6

 
—

 
(3.3
)
Diesel-MEH crack spread swap

—

 
—

 
0.9

 
—

Total
$
12.5

 
$
22.5

 
$
(1.2
)
 
$
(12.2
)

The Company recorded the following gains (losses) in its unaudited condensed consolidated statements of operations for the six months ended June 30, 2020 and 2019, related to its derivative instruments not designated as hedges (in millions):
Type of Derivative
Amount of Realized Gain Recognized in Gain on Derivative Instruments
 
Amount of Unrealized Gain (Loss) Recognized in Gain on Derivative Instruments
Six Months Ended June 30,
 
Six Months Ended June 30,
2020
 
2019
 
2020
 
2019
Specialty products segment:
 
 
 
 
 
 
 
Natural gas swaps
$
(0.6
)
 
$
—

 
$
(0.2
)
 
$
—

Midland crude oil basis swaps
—

 
1.6

 
—

 
(1.0
)
Fuel products segment:
 
 
 
 
 
 
 
Inventory financing obligation
—

 
—

 
11.7

 
2.8

WCS crude oil basis swaps
4.6

 
17.1

 
6.1

 
(14.9
)
WCS crude oil percentage basis swaps
—

 
0.9

 
—

 
6.3

Midland crude oil basis swaps
—

 
9.0

 
—

 
(7.1
)
Gasoline crack spread swaps
5.5

 
—

 
3.3

 
—

2/1/1 crack spread swaps
2.1

 
—

 
(0.5
)
 
—

Diesel crack spread swaps
7.8

 
6.1

 
9.1

 
(7.4
)
Diesel-MEH crack spread swap

—

 
—

 
0.9

 
—

Diesel percentage basis crack spread swaps
—

 
(0.5
)
 
—

 
6.5

Total
$
19.4

 
$
34.2

 
$
30.4

 
$
(14.8
)

Derivative Positions
WCS Crude Oil Basis Swap Contracts
At June 30, 2020, the Company had the following derivatives related to WCS crude oil basis purchases in its fuel products segment, none of which are designated as hedges:
WCS Crude Oil Basis Swap Contracts by Expiration Dates
Barrels Purchased
 
BPD
 
Average Differential to NYMEX WTI ($/Bbl)
Third Quarter 2020 (1)
1,610,000

 
17,500

 
$
(13.68
)
Fourth Quarter 2020
1,610,000

 
17,500

 
$
(15.02
)
Total
3,220,000

 
 
 
 
Average differential
 
 
 
 
$
(14.35
)
(1) 
The volumes include 418,500 barrels of WCS crude oil basis purchases that settled at $(13.05)/Bbl average differential to WTI in the quarter ended June 30, 2020.
At December 31, 2019, the Company had the following derivatives related to WCS crude oil basis purchases in its fuel products segment, none of which are 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
)

Diesel Crack Spread Swap Contracts
At June 30, 2020, 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)
Third Quarter 2020
368,000

 
4,000

 
$
22.23

Fourth Quarter 2020
368,000

 
4,000

 
$
21.91

Total
736,000

 
 
 
 
Average price
 
 
 
 
$
22.07

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


Gasoline Crack Spread Swap Contracts
At June 30, 2020, 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)
Third Quarter 2020
368,000

 
4,000

 
$
15.24

Fourth Quarter 2020
368,000

 
4,000

 
$
9.77

Total
736,000

 
 
 
 
Average price
 
 
 
 
$
12.50

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


2/1/1 Crack Spread Swap Contracts
At June 30, 2020, the Company had no derivatives related to 2/1/1 crack spread swap sales in its fuel products segment.
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


Natural Gas Swap Contracts
At June 30, 2020, the Company had the following derivatives related to natural gas swap purchases in its specialty products segment, none of which are designated as hedges:
Natural Gas Swap Contracts by Expiration Dates
MMBtu
 
Average Swap
($/MMBtu)
Third Quarter 2020 (1)
1,518,000

 
$
2.08

Fourth Quarter 2020
1,518,000

 
$
2.25

Total
3,036,000

 
 
Average price
 
 
$
2.16

(1) 
These volumes include 511,500 MMBtu of natural gas swap purchases that settled at $2.05/MMBtu average swap price to NYMEX Henry Hub in the quarter ended June 30, 2020.
At December 31, 2019, the Company had no derivatives related to natural gas swap purchases in its specialty products segment.
Diesel - MEH Crack Spread Swap Contracts
At June 30, 2020, the Company had the following derivatives related to diesel - MEH crack spread swap sales in its fuel products segment, none of which are designated as hedges:
Diesel - MEH Crack Spread Swap Contracts by Expiration Dates
Barrels Sold
 
BPD
 
Average Swap
($/Bbl)
Third Quarter 2020
368,000

 
4,000

 
$
9.51

Fourth Quarter 2020
368,000

 
4,000

 
$
9.51

Total
736,000

 
 
 
 
Average price
 
 
 
 
$
9.51

At December 31, 2019, the Company had no derivatives related to diesel - MEH crack spread swap sales in its fuel products segment.