Financial Instruments and Concentrations of Risk

12 Months Ended

Dec. 31, 2018

Fair Value Disclosures [Abstract]

Financial Instruments and Concentrations of Risk

FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF RISK

Fair value of financial instruments

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

	December 31, 2018
	Level 1			Level 2			Level 3			Netting(1)			Total
Assets:
Commodity derivatives (2)	$	4,658		$	—		$	—		$	(973	)	$	3,685
Total assets	4,658			—			—			(973		)	3,685
Liabilities:
Commodity derivatives	973			—			—			(973		)	—
Foreign currency forwards	—			2,985			—			—			2,985
Interest rate swaps	—			—			1,482			—			1,482
Total liabilities	973			2,985			1,482			(973		)	4,467
Net assets (liabilities) at fair value	$	3,685		$	(2,985	)	$	(1,482	)	$	—		$	(782	)
	December 31, 2017
	Level 1			Level 2			Level 3			Netting(1)			Total
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 December 31, 2018, all of our physical fixed price forward purchases and sales contracts were being accounted for as normal purchases and normal sales.

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. 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):

	Year Ended December 31, 2018		Year Ended December 31, 2017
Net liabilities - beginning balance	$	1,228	$	—
Interest rate swaps acquired through acquisition (Note 5)	—		3,275
Transfers out of Level 3	—		—
Realized/Unrealized (gain) loss included in earnings*	163		(1,124		)
Settlements	91		(923		)
Net liabilities - ending balance	$	1,482	$	1,228

*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 classified as Level 3 during the year ended December 31, 2016.

See Note 12 for fair value of debt instruments and Note 13 for fair value of benefit plan assets. 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, a 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):

	Year Ended December 31,
	2018	2017	2016
Sales	14,013	12,979	33,694
Purchases	13,417	13,430	33,819

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 consolidated balance sheets in "other current assets" and "other current liabilities" in the following amounts (in thousands):

December 31, 2018				December 31, 2017
Other Current Assets		Other Current Liabilities		Other Current Assets		Other Current Liabilities
$	3,685	$	—	$	—	$	1,368

 

We have posted margin deposits as collateral with brokers who have the right of set off associated with these funds. Our margin deposit balances were $0.1 million and $1.9 million at December 31, 2018 and 2017, respectively. These margin account balances have not been offset against our net commodity derivative instrument (contract) positions. Had these margin account balances been netted against our net commodity derivative instrument (contract) positions as of December 31, 2018 and 2017, we would have had net asset positions of $3.8 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):

	Year Ended December 31,
	2018		2017			2016
Realized and unrealized gain (loss)	$	12,088	$	(2,193	)	$	(4,485	)

Interest rate swaps

We have 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 December 31, 2018 and 2017, we had interest rate swaps with notional values of $524.3 million and $491.1 million, respectively. At December 31, 2018 and 2017, the fair value of our interest rate swaps was $1.5 million and $1.2 million, respectively, which was reported within "other current liabilities" and "other noncurrent liabilities” in our condensed consolidated balance sheet. For the year ended December 31, 2018, we recognized realized and unrealized losses of $0.2 million related to interest rate swaps. For the year ended December 31, 2017, we recognized realized and unrealized gains of $1.1 million related to interest rate swaps. We did not have any interest rate swaps during the year ended December 31, 2016.

Foreign currency forwards

We have foreign currency forwards primarily to purchase Canadian dollars to limit exposure to foreign currency rate fluctuations for capital contributions to our Canadian operations. 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 gain/loss. At December 31, 2018 and 2017, we had foreign currency forwards with notional values of $56.1 million and $197.7 million, respectively. At December 31, 2018 and 2017, the fair value of our foreign currency swaps was $3.0 million and $2.6 million, respectively, which is reported within "other current liabilities" and "other noncurrent assets, net", respectively, in our consolidated balance sheet. For the year ended December 31, 2018, we recognized realized and unrealized losses of $10.2 million, related to foreign currency forwards. For the year ended December 31, 2017, we recognized realized and unrealized gains of $2.8 million, related to foreign currency forwards. We did not have any foreign currency forwards during the year ended December 31, 2016.

Concentrations of risk

During the year ended December 31, 2018, one customer, primarily of our U.S. Liquids segment, accounted for more than 10% of our consolidated revenue with revenues of $645.0 million. One third-party supplier, primarily of our U.S. Liquids segment, accounted for more than 10% of our costs of products sold with purchases of $248.7 million. At December 31, 2018, two customers, primarily of our U.S. Liquids segment, accounted for approximately 28% of our consolidated accounts receivable.

Our U.S. Gas segment has a significant concentration of producers which account for a large portion of our U.S. Gas segment's volumes. During the year ended December 31, 2018, three producers accounted for approximately 89% of our total processed volumes. During the year ended December 31, 2018, two producers accounted for 83% of our total

gathered volumes. Additionally, all of the processing and gathering volumes from these customers are produced in the Northern Oklahoma region.

Our Canada segment's processing plants require a minimum rate of sulfur tonnage to operate, and to comply with the regulatory requirements for air emissions.  We have several large producers that provide significant sour gas to our plants.  If these producers shut in their sour gas production due to low commodity prices, it could result in regulatory non-compliance, as well as operating and financial impacts to our Canada segment.

Assets and liabilities of subsidiaries outside the United States

The following table summarizes the assets and liabilities (excluding affiliate balances) at December 31, 2018, of our subsidiaries outside the United States (in thousands):

	Canada
Cash and cash equivalents	$	17,107
Other current assets	78,542
Noncurrent assets	590,714
Total assets	$	686,363
Current liabilities	$	69,798
Noncurrent liabilities	76,192
Total liabilities	145,990
Net assets	$	540,373

Employees

At December 31, 2018, we had approximately 880 employees, including approximately 265 employees in Canada. Approximately 55 of the employees in Canada are represented by labor unions and are subject to collective bargaining agreements governing their employment with us. This collective agreement expires on January 31, 2019. We have never had a labor related work stoppage and believe our employee relations are good.