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Derivative Instruments (Notes)
 3 Months Ended
Mar. 31, 2017
Derivative Instruments [Abstract]  
Derivative Instruments
Derivative Instruments

We use derivatives to reduce normal operating and market risks with the primary objective of reducing the impact of market price volatility on our results of operations. As such, our use of derivative contracts is aimed at:

•
limiting the exposure to price fluctuations of commodity inventory above or below target levels at each of our segments;
•
managing our exposure to commodity price risk associated with the purchase or sale of crude oil, feedstocks and finished grade fuel products at each of our segments; and
•
limiting the exposure to interest rate fluctuations on our floating rate borrowings.
We primarily utilize OTC commodity swaps, generally with maturity dates of three years or less, and interest rate swap and cap agreements to achieve these objectives. OTC commodity swap contracts require cash settlement for the commodity based on the difference between a fixed or floating price and the market price on the settlement date. As of March 31, 2017, there are no interest rate swap or cap agreements outstanding. At this time, we do not believe there is any material credit risk with respect to the counterparties to these contracts.
From time to time, we also enter into future commitments to purchase or sell RINs at fixed prices and quantities, which are used to manage the costs associated with our RINs Obligation. These future RIN commitment contracts meet the definition of derivative instruments under ASC 815, and are recorded at estimated fair value in accordance with the provisions of ASC 815. Changes in the fair value of these future RIN commitment contracts are recorded in cost of goods sold on the consolidated statements of income.

In accordance with ASC 815, certain of our OTC commodity swap contracts have been designated as cash flow hedges and the effective portion of the change in fair value between the execution date and the end of period has been recorded in other comprehensive income. The effective portion of the fair value of these contracts is recognized in income at the time the positions are closed and the hedged transactions are recognized in income.

From time to time, we also enter into futures contracts with supply vendors that secure supply of product to be purchased for use in the normal course of business at our refining segment. These contracts are priced based on an index that is clearly and closely related to the product being purchased, contain no net settlement provisions and typically qualify under the normal purchase exemption from derivative accounting treatment under ASC 815.

The following table presents the fair value of our derivative instruments as of March 31, 2017 and December 31, 2016. The fair value amounts below are presented on a gross basis and do not reflect the netting of asset and liability positions permitted under our master netting arrangements, including cash collateral on deposit with our counterparties. We have elected to offset the recognized fair value amounts for multiple derivative instruments executed with the same counterparty in our financial statements. As a result, the asset and liability amounts below differ from the amounts presented in our condensed consolidated balance sheets (in millions):
 
 
 
March 31, 2017
 
December 31, 2016
Derivative Type
Balance Sheet Location
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
OTC commodity swaps(1)
Other current assets
 
$
13.7

 
$
(11.7
)
 
$
37.4

 
$
(30.6
)
OTC commodity swaps(1)
Other current liabilities
 
9.3

 
(16.6
)
 
14.4

 
(35.2
)
OTC commodity swaps(1)
Other long term assets
 
1.3

 
(1.2
)
 
—

 
—

OTC commodity swaps(1)
Other long term liabilities
 
2.3

 
(2.7
)
 
—

 
—

RIN commitment contracts(2)
Other current liabilities
 
—

 
(3.4
)
 
—

 
(0.8
)
 
 
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
OTC commodity swaps(1)
Other current assets
 
1.4

 
(1.0
)
 
0.1

 
(2.5
)
OTC commodity swaps(1)
Other current liabilities
 
0.5

 
(14.8
)
 
1.2

 
(18.0
)
OTC commodity swaps(1)
Other long term liabilities
 
—

 
(22.6
)
 
—

 
(17.3
)
Total gross fair value of derivatives
 
$
28.5

 
$
(74.0
)
 
$
53.1

 
$
(104.4
)
Less: Counterparty netting and cash collateral(3)
 
25.0

 
(33.9
)
 
46.3

 
(61.0
)
Total net fair value of derivatives
 
$
3.5

 
$
(40.1
)
 
$
6.8

 
$
(43.4
)
            
(1) 
As of March 31, 2017 and December 31, 2016, we had open derivative positions representing 24,019,000 barrels and 9,348,000 barrels, respectively, of crude oil and refined petroleum products. Of these open positions, contracts representing 1,968,000 barrels and 3,392,000 barrels were designated as cash flow hedging instruments as of March 31, 2017 and December 31, 2016, respectively.
(2) 
As of March 31, 2017 and December 31, 2016, we had open RIN contracts representing 252,670,299 and 36,750,000 RINs, respectively.
(3) 
As of March 31, 2017 and December 31, 2016, $8.9 million and $14.7 million, respectively, of cash collateral held by counterparties has been netted with the derivatives with each counterparty.

Total losses on our commodity derivatives and RIN commitment contracts recorded in cost of goods sold on the condensed consolidated statements of income for the three months ended March 31, 2017 and 2016 are as follows (in millions):
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Gains on derivatives not designated as hedging instruments
 
2.7

 
0.5

Realized losses reclassified out of OCI on derivatives designated as cash flow hedging instruments
 
(7.8
)
 
(7.3
)
Gains (losses) recognized due to cash flow hedging ineffectiveness
 
2.2

 
(1.0
)
 Total
 
$
(2.9
)
 
$
(7.8
)


For cash flow hedges, no component of the derivative instruments’ gains or losses was excluded from the assessment of hedge effectiveness for the three months ended March 31, 2017 or 2016. As of March 31, 2017 and December 31, 2016, losses of $15.0 million and $16.2 million, respectively, on cash flow hedges, net of tax, primarily related to future purchases of crude oil and the associated sale of finished grade fuel, remained in accumulated other comprehensive income. Losses of $5.1 million and $4.7 million, net of tax, on settled contracts were reclassified into the condensed consolidated statements of income during the three months ended March 31, 2017 and 2016, respectively. We estimate that $31.2 million of deferred losses will be reclassified into cost of sales over the next 12 months as a result of hedged transactions that are forecasted to occur. For the three months ended March 31, 2017 and March 31, 2016, there were no amounts reclassified from accumulated other comprehensive income into income as a result of the discontinuation of cash flow hedge accounting.