FINANCIAL INSTRUMENTS

Fair value of financial instruments

We record certain financial assets and liabilities at fair value at each balance sheet date. The tables below summarize the balances of derivative assets and liabilities at March 31, 2018 and December 31, 2017 (in thousands):



	March 31, 2018
	Level 1			Level 2			Level 3			Netting ⁽¹⁾			Total - Net
Assets:
Commodity derivatives ⁽²⁾	$	31		$	—		$	—		$	(31	)	$	—
Interest rate swaps	—			—			130			—			130
Total assets	31			—			130			(31		)	130
Liabilities:
Commodity derivatives	3,625			—			—			(31		)	3,594
Foreign currency forwards	—			1,778			—			—			1,778
Total liabilities	3,625			1,778			—			(31		)	5,372
Net assets (liabilities) at fair value	$	(3,594	)	$	(1,778	)	$	130		$	—		$	(5,242	)

	December 31, 2017
	Level 1			Level 2			Level 3			Netting ⁽¹⁾			Total - Net
Assets:
Commodity derivatives ⁽²⁾	$	602		$	—		$	—		$	(602	)	$	—
Foreign currency forwards	—			2,564			—			—			2,564
Total assets	602			2,564			—			(602		)	2,564
Liabilities:
Commodity derivatives	1,970			—			—			(602		)	1,368
Interest rate swaps	—			—			1,228			—			1,228
Total liabilities	1,970			—			1,228			(602		)	2,596
Net assets (liabilities) at fair value	$	(1,368	)	$	2,564		$	(1,228	)	$	—		$	(32	)

(1) Relates primarily to exchange traded futures. Gain and loss positions on multiple contracts are settled net on a daily basis with the exchange.

(2) Commodity derivatives are subject to netting arrangements.

“Level 1” measurements are based on inputs consisting of unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. These include commodity futures contracts that are traded on an exchange.

“Level 2” measurements are based on inputs consisting of market observable and corroborated prices for similar derivative contracts. Assets and liabilities classified as Level 2 include over the counter (“OTC”) traded physical fixed priced purchases and sales forward contracts.

“Level 3” measurements are based on inputs from a pricing service and/or internal valuation models incorporating observable and unobservable market data. These could include commodity derivatives, such as forwards and swaps for which there is not a highly liquid market and therefore are not included in Level 2 above and interest rate swaps for which certain unobservable inputs are used in the valuation.

Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the measurement requires judgment and may affect the valuation of assets and liabilities and their placement within the fair value levels. At March 31, 2018, all of our physical fixed price forward purchases and sales commodity contracts were being accounted for as normal purchases and normal sales.

The following table summarizes changes in the fair value of our net financial liabilities classified as Level 3 in the fair value hierarchy (in thousands):



	Three Months Ended March 31, 2018
Net liabilities (asset) - beginning balance	$	1,228
Transfers out of Level 3	—
Realized/Unrealized (gain) loss included in earnings*	(1,074		)
Settlements	(284		)
Net liabilities (asset) - ending balance	$	(130	)

*Gains and losses related to interest rate swaps are recorded in interest expense in the condensed consolidated statements of operations and comprehensive income (loss).

There were no financial assets or liabilities recorded at fair value which were classified as Level 3 during the three months ended March 31, 2017.

See Note 6 for fair value of debt instruments. The approximate fair value of cash and cash equivalents, accounts receivable and accounts payable is equal to book value due to the short-term nature of these items.

Commodity derivative contracts

Our consolidated results of operations and cash flows are impacted by changes in market prices for petroleum products. This exposure to commodity price risk is managed, in part, by entering into various commodity derivatives.

We seek to manage the price risk associated with our marketing operations by limiting our net open positions through (i) the concurrent purchase and sale of like quantities of petroleum products to create back-to-back transactions that are intended to lock in positive margins based on the timing, location or quality of the petroleum products purchased and delivered or (ii) derivative contracts. Our storage and transportation assets can also be used to mitigate time and location basis risks, respectively. All marketing activities are subject to our Comprehensive Risk Management Policy, Delegation of Authority policy and their supporting policies and procedures, which establish limits in order to manage risk and mitigate financial exposure.

Our commodity derivatives can be comprised of swaps, futures contracts and forward contracts of crude oil, natural gas and natural gas liquids. These are defined as follows:

Swaps – OTC transactions where a floating price, basis or index is exchanged for a fixed (or a different floating) price, basis or index at a preset schedule in the future, according to an agreed-upon formula.

Futures contracts – Exchange traded contracts to buy or sell a commodity. These contracts are standardized by the exchange in terms of quality, quantity, delivery period and location for each commodity.

Forward contracts – OTC contracts to buy or sell a commodity at an agreed upon future date. The buyer and seller agree on specific terms (price, quantity, delivery period and location) and conditions at the inception of the contract.

The following table sets forth the notional quantities for derivative instruments entered into (in thousands of barrels):



	Three Months Ended March 31,
	2018	2017
Sales	4,139	4,312
Purchases	3,375	4,131

We have not designated any of our commodity derivative instruments as accounting hedges. We have recorded the fair value of our commodity derivative instruments on our condensed consolidated balance sheets in “other current assets” and “other current liabilities” in the following amounts (in thousands):



	March 31, 2018				December 31, 2017
	Assets		Liabilities		Assets		Liabilities
Commodity contracts	$	—	$	3,594	$	—	$	1,368

We have posted margin deposits as collateral with brokers who have the right of set off associated with these funds. At March 31, 2018 and December 31, 2017, our margin deposit balances were in net asset positions of $5.0 million and $1.9 million, respectively. These margin account balances have not been offset against our net commodity derivative instrument (contract) positions. Had these margin deposits been netted against our net commodity derivative instrument (contract) positions as of March 31, 2018 and December 31, 2017, we would have had asset positions of $1.4 million and $0.5 million, respectively.

Realized and unrealized gains (losses) from our commodity derivatives were recorded to product revenue in the following amounts (in thousands):



	Three Months Ended March 31,
	2018			2017
Commodity contracts	$	(3,136	)	$	4,661

Interest rate swaps

At March 31, 2018, we had interest rate swaps which allow us to limit exposure to interest rate fluctuations. The swaps only apply to a portion of our outstanding debt and provide only partial mitigation of interest rate fluctuations. We have not designated the swaps as hedges, as such, changes in the fair value of the swaps are recorded through current period earnings as a component of interest expense. At March 31, 2018, we had interest rate swaps with notional values of $490.4 million. At March 31, 2018, the fair value of our interest rate swaps was $0.1 million which was reported within “other current assets” in our condensed consolidated balance sheet. For the three months ended March 31, 2018, we recognized realized and unrealized gains of $1.1 million related to interest rate swaps.

Foreign currency forwards

At March 31, 2018, we had foreign currency forwards primarily to purchase Canadian dollars to limit exposure to foreign currency rate fluctuations for capital contributions to our SemCAMS segment primarily to fund capital projects. We have not designated the forwards as hedges, as such, changes in the fair value of the forwards are recorded through current period earnings as a component of foreign currency translation gains and losses. At March 31, 2018, we had foreign currency forwards with notional values of $148.7 million. At March 31, 2018, the fair value of our foreign currency swaps was $1.8 million, which is reported within "other current liabilities" and "other noncurrent liabilities" in our consolidated balance sheet. For the three months ended March 31, 2018, we recognized realized and unrealized losses of $4.4 million related to foreign currency forwards.

Concentrations of risk

During the three months ended March 31, 2018, one customer, primarily of our Crude Supply and Logistics segment, accounted for more than 10% of our consolidated revenue with revenues of $240.2 million. No suppliers accounted for more than 10% of our consolidated costs of products sold.

At March 31, 2018, two third-party customers, primarily of our Crude Supply and Logistics segment, accounted for approximately 32% of our consolidated accounts receivable.