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Derivative Instruments
 3 Months Ended
Mar. 31, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
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 credits for commitments required by the U.S. Environmental Protection Agency ("EPA") to blend biofuels into fuel products ("RINs Obligation") using future commitments to purchase or sell renewable identification numbers ("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 or cap 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.
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 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 at fair value with changes in fair value recognized in earnings in the period of change. As of March 31, 2020 and December 31, 2019, and for the three months ended March 31, 2020 and March 31, 2019, all of our forward contracts that were accounted for as derivative instruments primarily 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 the actual inventory that will be used in production, such unrealized and realized gains and losses are recognized in other operating income, net rather than cost of materials and other on the accompanying condensed consolidated statements of income.
Futures, swaps or other commodity related derivative instruments that are utilized to specifically provide economic hedges on our Canadian forward contract or investment positions are recognized in other operating income, net because that is where the related underlying transactions are reflected.
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.
As of March 31, 2020, we do not believe there is any material credit risk with respect to the counterparties to any of our derivative contracts.
In accordance with ASC 815, certain of our commodity swap contracts have been designated as cash flow hedges and the change in fair value between the execution date and the end of period has been recorded in other comprehensive income. The fair value of these contracts is recognized in income in the same financial statement line item as hedged transaction at the time the positions are closed and the hedged transactions are recognized in income.
The following table presents the fair value of our derivative instruments as of March 31, 2020 and December 31, 2019. 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 10 for further information regarding the fair value of derivative instruments (in millions).
 
 
 
March 31, 2020
 
December 31, 2019
Derivative Type
Balance Sheet Location
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Commodity derivatives(1)
Other current assets
 
$
2,159.2

 
$
(2,087.9
)
 
$
188.9

 
$
(202.1
)
Commodity derivatives(1)
Other current liabilities
 
244.1

 
(275.7
)
 
24.4

 
(34.0
)
Commodity derivatives(1)
Other long-term assets
 
152.8

 
(149.6
)
 
—

 
—

Commodity derivatives(1)
Other long-term liabilities
 
23.3

 
(24.4
)
 
23.4

 
(24.8
)
RIN commitment contracts(2)
Other current assets
 
2.2

 
—

 
0.6

 
—

RIN commitment contracts(2)
Other current liabilities
 
—

 
(1.7
)
 
—

 
(1.9
)
 
 
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
Commodity derivatives (1)
Other current assets
 
7.3

 
(5.2
)
 
3.4

 
(2.0
)
Commodity derivatives (1)
Other current liabilities
 
4.5

 
(3.2
)
 
—

 
—

Commodity derivatives (1)
Other long-term assets
 
—

 
—

 
0.2

 
(0.1
)
Total gross fair value of derivatives
 
$
2,593.4

 
$
(2,547.7
)
 
$
240.9

 
$
(264.9
)
Less: Counterparty netting and cash collateral(3)
 
2,505.5

 
(2,512.5
)
 
210.7

 
(249.5
)
Total net fair value of derivatives
 
$
87.9

 
$
(35.2
)
 
$
30.2

 
$
(15.4
)
(1) 
As of March 31, 2020 and December 31, 2019, we had open derivative positions representing 185,713,596 and 86,484,065 barrels, respectively, of crude oil and refined petroleum products. Of these open positions, contracts representing 450,000 and 600,000 barrels were designated as cash flow hedging instruments as of March 31, 2020 and December 31, 2019, respectively. Additionally, as of March 31, 2020 and December 31, 2019, we had open derivative positions representing 91,502,500 and 40,050,000 One Million British Thermal Units, ("MMBTU") of natural gas products, respectively.
(2) 
As of March 31, 2020 and December 31, 2019, we had open RIN commitment contracts representing 86,300,000 and 147,000,000 RINs, respectively.
(3) 
As of March 31, 2020 and December 31, 2019, $7.0 million and $38.8 million, respectively, of cash collateral held by counterparties has been netted with the derivatives with each counterparty.
Total gains on our hedging derivatives and RIN commitment contracts recorded in the condensed consolidated statements of income are as follows (in millions):
 
 
Three Months Ended March 31,
 
 
2020
 
2019
Gains on commodity derivatives not designated as hedging instruments recognized in cost of materials and other (1)
 
$
77.2

 
$
38.9

Losses on commodity derivatives not designated as hedging instruments recognized in other operating income (expense), net (1) (2)
 
—

 
(2.3
)
Realized gains (losses) reclassified out of accumulated other comprehensive income and into cost of materials and other on commodity derivatives designated as cash flow hedging instruments
 
0.7

 
(19.1
)
 Total gains
 
$
77.9

 
$
17.5


(1)
Gains (losses) on commodity derivatives that are economic hedges but not designated as hedging instruments include unrealized gains (losses) of $52.0 million and $(27.1) million for the three months ended March 31, 2020 and 2019, respectively. Of these amounts, approximately $37.6 million and $(5.6) million for three months ended March 31, 2020 and 2019, respectively, represent unrealized gains (losses) where the instrument has matured but where it has not cash settled as of period end, excluding the reversal of prior period settlement differences. 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."
The effect of cash flow hedge accounting on the condensed consolidated statements of income is as follows (in millions):
 
 
Three Months Ended March 31,
 
 
2020
 
2019
Gain (loss) on cash flow hedging relationships recognized in cost of materials and other:
 
 
 
 
Commodity contracts:
 
 
 
 
Hedged items
 
$
(0.7
)
 
$
19.1

Derivative designated as hedging instruments
 
0.7

 
(19.1
)
Total
 
$
—

 
$
—


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, 2020 or 2019. Gains (losses) of $0.6 million and $(15.1) 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 months ended March 31, 2020 and 2019, respectively. As of March 31, 2020, we estimate that $3.3 million of deferred gains 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.
Total (losses) gains on our trading physical 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 March 31,
 
 
2020
 
2019
Realized (losses) gains
 
$
(1.7
)
 
$
3.9

Unrealized (losses) gains
 
(1.0
)
 
2.1

 Total
 
$
(2.7
)
 
$
6.0