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Derivative Instruments
 9 Months Ended
Sep. 30, 2018
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments Derivative Instruments
We use the majority of our 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;
•
managing the cost of our RINs Obligation using future commitments to purchase or sell RINs at fixed prices and quantities; and
•
limiting the exposure to interest rate fluctuations on our floating rate borrowings.
We primarily utilize commodity swaps, futures, forward contracts and options contracts, generally with maturity dates of three years or less, and from time to time interest rate swap agreements to achieve these objectives. Futures contracts are standardized agreements, traded on a futures exchange, to buy or sell the commodity at a predetermined price at a specified future date. Options provide the right, but not the obligation to buy or sell the commodity at a specified price in the future. Commodity swap and futures 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, and options require payment of an upfront premium. Because these derivatives are entered into to achieve objectives specifically related to our inventory and production risks, such gains and losses (to the extent not designated as accounting hedges and recognized on an unrealized basis in other comprehensive income) are recognized in cost of materials and other.
Interest rate swap agreements economically hedge floating rate debt by exchanging interest rate cash flows, based on a notional amount from a floating rate to a fixed rate. Effective with the Delek/Alon Merger, we had four interest rate swap agreements (maturing March 2019) that effectively fixed the variable LIBOR interest component of the term loans within the Alon Retail Credit Agreement. The aggregate notional amount under these agreements were to cover approximately 77% of the outstanding principal of these term loans throughout the duration of the interest rate swaps. These interest rate swap agreements were terminated due to the extinguishment of the Alon Retail Credit Agreement in connection with the Refinancing on March 30, 2018, resulting in a reclassification of unrealized loss of $0.6 million from accumulated other comprehensive income to interest expense on the condensed consolidated income statement during the nine months ended September 30, 2018 - see Note 8 for further information.
Forward contracts are agreements to buy or sell a commodity at a predetermined price at a specified future date, and for our transactions, generally require physical delivery. Forward contracts where the underlying commodity will be used or sold in the normal course of business qualify as normal purchases and normal sales pursuant to ASC 815 Derivatives and Hedging ("ASC 815") and are not accounted for as derivative instruments. Rather, such forward contracts are accounted for under other applicable GAAP. Forward contracts entered into for trading purposes that do not meet the normal purchases, normal sales exception are accounted for as derivative instruments. As of and for the three and nine months ended September 30, 2018, all of our forward contracts that were accounted for as derivative instruments consisted of contracts related to our Canadian crude trading operations. Since Canadian crude trading activity is not related to managing supply or pricing risk of inventory that will be used in production, such unrealized and realized gains and losses are recognized in other operating income (expense), net rather than cost of materials and other on the accompanying condensed consolidated incomes statement. There were no forward contract transactions that were accounted for as derivatives during the three and nine months ended September 30, 2017, and there were no forward contract derivative assets or liabilities outstanding as of December 31, 2017.
Futures, swaps or other commodity related derivative instruments that are utilized to specifically hedge our Canadian forward contract or investment positions are recognized in other operating income (expense), net because that is where the related underlying transactions are reflected.
At this time, we do not believe there is any material credit risk with respect to the counterparties to any of our derivative 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 materials and other on the condensed consolidated statements of income.
In accordance with ASC 815, certain of our commodity swap contracts and our interest rate agreements 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 (or early termination date in regards to the four Alon Retail interest rate swaps discussed above) 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. In regards to our interest rate swap agreements, the amount of losses in accumulated other comprehensive income were reclassified into earnings as a result of the discontinuance of cash flow hedges since the originally forecasted Alon Retail Credit Agreement interest payments will not occur by the end of the originally specified time period due to the Refinancing on March 30, 2018, as discussed above.
The following table presents the fair value of our derivative instruments as of September 30, 2018 and December 31, 2017. 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. See Note 15 for further information regarding the fair value of derivative instruments (in millions):
 
 
 
September 30, 2018
 
December 31, 2017
Derivative Type
Balance Sheet Location
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Commodity derivatives(1)
Other current assets
 
$
376.6

 
$
(378.7
)
 
$
164.6

 
$
(162.0
)
Commodity derivatives(1)
Other current liabilities
 
18.0

 
(28.4
)
 
13.4

 
(28.3
)
Commodity derivatives(1)
Other long-term assets
 
45.3

 
(46.4
)
 
—

 
—

Commodity derivatives(1)
Other long-term liabilities
 
0.7

 
(1.1
)
 
—

 
—

RIN commitment contracts(2)
Other current assets
 
2.3

 
—

 
1.4

 
—

RIN commitment contracts(2)
Other current liabilities
 
—

 
(8.4
)
 
—

 
(24.0
)
 
 
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
Commodity derivatives (1)
Other current assets
 
128.5

 
(131.8
)
 
—

 
—

Commodity derivatives (1)
Other current liabilities
 
—

 
(0.2
)
 
—

 
(13.6
)
Commodity derivatives (1)
Other long-term assets
 
20.0

 
(15.3
)
 
—

 
—

Interest rate derivatives
Other long term-liabilities
 
—

 
—

 
—

 
(0.9
)
Total gross fair value of derivatives
 
$
591.4

 
$
(610.3
)
 
$
179.4

 
$
(228.8
)
Less: Counterparty netting and cash collateral(3)
 
557.6

 
(590.1
)
 
163.5

 
(173.6
)
Total net fair value of derivatives
 
$
33.8

 
$
(20.2
)
 
$
15.9

 
$
(55.2
)
(1) 
As of September 30, 2018 and December 31, 2017, we had open derivative positions representing 152,355,222 and 35,978,000 barrels, respectively, of crude oil and refined petroleum products. Of these open positions, contracts representing 16,013,000 and 575,000 barrels were designated as cash flow hedging instruments as of September 30, 2018 and December 31, 2017, respectively.
(2) 
As of September 30, 2018 and December 31, 2017, we had open RIN commitment contracts representing 58,955,000 and 163,361,320 RINs, respectively.
(3) 
As of September 30, 2018 and December 31, 2017, $32.5 million and $10.0 million, respectively, of cash collateral held by counterparties has been netted with the derivatives with each counterparty.
Total losses on our hedging derivatives and RIN commitment contracts recognized in the condensed consolidated statements of income are as follows (in millions):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Losses on commodity derivatives not designated as hedging instruments recognized in cost of materials and other (1)
 
$
(9.3
)
 
$
(15.5
)
 
$
(23.7
)
 
$
(5.6
)
Losses on commodity derivatives not designated as hedging instruments recognized in other operating income (expense), net (1) (2)
 
(0.6
)
 
—

 
(3.5
)
 
—

Realized (losses) gains reclassified out of OCI on commodity derivatives designated as cash flow hedging instruments
 
(9.6
)
 
1.0

 
(18.4
)
 
(38.5
)
Gains recognized on commodity derivatives due to cash flow hedging ineffectiveness
 
—

 
0.1

 
0.7

 
0.5

 Total losses
 
$
(19.5
)
 
$
(14.4
)
 
$
(44.9
)
 
$
(43.6
)

(1)
Losses on commodity derivatives that are economic hedges but not designated as hedging instruments include unrealized gains (losses) of $13.0 million and $2.8 million for the months ended September 30, 2018, respectively, and $(10.9) million and $(11.0) million for the months ended September 30, 2017, respectively. Of these amounts, approximately $5.9 million for the months ended September 30, 2018, and $(6.5) million for the months ended September 30, 2017, respectively, represent unrealized gains (losses) where the instrument has matured but where it has not cash settled as of period end. Derivative instruments that have matured but not cash settled at the balance sheet date continue to be reflected in derivative assets or liabilities on our balance sheet.
(2) 
See separate table below for disclosures about "trading derivatives."

For cash flow hedges, no component of the derivative instruments’ gains or losses was excluded from the assessment of hedge effectiveness for the three and nine months ended September 30, 2018 or 2017. As of September 30, 2018 and December 31, 2017, gains of $1.1 million (related to Midland to Cushing crude price differentials at our refineries) and gains of $7.6 million (related to future purchases of crude oil), respectively, on cash flow hedges, net of tax, remained in accumulated other comprehensive income. Losses of $14.5 million, net of tax, on settled commodity contracts were reclassified into cost of materials and other in the condensed consolidated statements of income during both the three and nine months ended September 30, 2018. Losses of $0.7 million and $25.0 million, net of tax, on settled commodity contracts were reclassified into cost of materials and other in the condensed consolidated statements of income during the three and nine months ended September 30, 2017, respectively. We estimate that $3.5 million of deferred losses related to commodity cash flow hedges will be reclassified into cost of materials and other over the next 12 months as a result of hedged transactions that are forecasted to occur.
As of December 31, 2017, gains of $0.4 million, net of tax, related to the interest rate cash flow hedges, remained in accumulated other comprehensive income. Related to Alon's interest rate swap cash flow hedges during the nine months ended September 30, 2018, we recognized $0.1 million and $0.6 million in interest expense on the condensed consolidated statements of income in regards to normal settlements and for early termination settlements reclassified from accumulated other comprehensive income into income as a result of the discontinuation of cash flow hedge accounting, respectively. There was no cash flow hedge ineffectiveness for the nine months ended September 30, 2018 in regards to Alon's interest rate swap cash flow hedges.
Total gains on our trading forward contract derivatives (none of which were designated as hedging instruments) recorded in other operating income (expense), net on the condensed consolidated statements of income are as follows (in millions):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Realized gains
 
$
1.7

 
$
—

 
$
10.5

—

$
—

Unrealized gains
 
3.8

 
—

 
6.7

 
—

 Total
 
$
5.5

 
$
—

 
$
17.2

 
$
—