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DERIVATIVES AND RISK MANAGEMENT ACTIVITIES | 6 Months Ended
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Jun. 30, 2018
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
DERIVATIVES AND RISK MANAGEMENT ACTIVITIES | DERIVATIVES AND RISK MANAGEMENT ACTIVITIES We utilize various derivative instruments to manage our exposure to interest rate risk and commodity price risk. Our risk management policies and procedures are designed to monitor interest rates, futures and swap positions and over-the-counter positions, as well as physical commodity volumes, grades, locations and delivery schedules, to help ensure that our hedging activities address our market risks. Interest Rate Risk We are a party to certain interest rate swap agreements to manage our exposure to changes in interest rates, which include forward-starting interest rate swap agreements related to forecasted debt issuances in 2020. We entered into these swaps in order to hedge the risk of fluctuations in the required interest payments attributable to changes in the benchmark interest rate during the period from the effective date of the swap to the issuance of the forecasted debt. Under the terms of the swaps, we pay a fixed rate and receive a rate based on the three-month USD LIBOR. These swaps qualify as cash flow hedges, and we designate them as such. We record the effective portion of mark-to-market adjustments as a component of “Accumulated other comprehensive income (loss)” (AOCI), and the amount in AOCI will be recognized in “Interest expense, net” as the forecasted interest payments occur or if the interest payments are probable not to occur. As of June 30, 2018 and December 31, 2017, the aggregate notional amount of forward-starting interest rate swaps totaled $250.0 million and $600.0 million, respectively. In April 2018, in connection with the maturity of the 7.65% senior notes due April 15, 2018, we terminated forward-starting interest rate swaps with an aggregate notional amount of $350.0 million and received $8.0 million. Commodity Price Risk We are exposed to market risks related to the volatility of petroleum product prices. In order to reduce the risk of commodity price fluctuations with respect to our petroleum product inventories and related firm commitments to purchase and/or sell such inventories, we utilize commodity futures and swap contracts, which qualify, and we designate, as fair value hedges. Derivatives that are intended to hedge our commodity price risk but fail to qualify as fair value or cash flow hedges are considered economic hedges, and we record associated gains and losses in net income. Our risk management committee oversees our trading controls and procedures and certain aspects of commodity and trading risk management. Our risk management committee also reviews all new commodity and trading risk management strategies in accordance with our risk management policy, as approved by our board of directors. We ceased marketing crude oil in the second quarter of 2017 and exited our heavy fuels trading operations in the third quarter of 2017, thereby reducing our overall hedging activity. The volume of commodity contracts is based on open derivative positions and represents the combined volume of our long and short open positions on an absolute basis, which totaled 1.2 million barrels as of June 30, 2018 and December 31, 2017. We had $0.2 million and $0.3 million of margin deposits as of June 30, 2018 and December 31, 2017, respectively. The fair values of our derivative instruments included in our consolidated balance sheets were as follows:
|  |  | Asset Derivatives |  | Liability Derivatives
| Balance Sheet Location |  | June 30, 2018 |  | December 31, 2017 |  | June 30, 2018 |  | December 31, 2017
|  |  | (Thousands of Dollars)
Derivatives Designated as Hedging Instruments: |  |  |  |  |  |  |  |  |
Interest rate swaps | Other long-term assets, net |  | $ | 4,491 |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Commodity contracts | Accrued liabilities |  | — |  |  | — |  |  | (70 | ) |  | (112 | )
Interest rate swaps | Accrued liabilities |  | — |  |  | — |  |  | — |  |  | (5,394 | )
Interest rate swaps | Other long-term liabilities |  | — |  |  | — |  |  | — |  |  | (4,594 | )
Total |  |  | 4,491 |  |  | — |  |  | (70 | ) |  | (10,100 | )
Derivatives Not Designated as Hedging Instruments: |  |  |  |  |  |  |  |  |
Commodity contracts | Accrued liabilities |  | 1,278 |  |  | 742 |  |  | (1,455 | ) |  | (1,508 | )
Total Derivatives |  |  | $ | 5,769 |  |  | $ | 742 |  |  | $ | (1,525 | ) |  | $ | (11,608 | )
Certain of our derivative instruments are eligible for offset in the consolidated balance sheets and subject to master netting arrangements. Under our master netting arrangements, there is a legally enforceable right to offset amounts, and we intend to settle such amounts on a net basis. The following are the net amounts presented on the consolidated balance sheets:
Commodity Contracts |  | June 30, 2018 |  | December 31, 2017
|  | (Thousands of Dollars)
Net amounts of assets presented in the consolidated balance sheets |  | $ | — |  |  | $ | — |
Net amounts of liabilities presented in the consolidated balance sheets |  | $ | (247 | ) |  | $ | (878 | )
We recognize the impact of our commodity contracts on earnings in “Cost of product sales” on the condensed consolidated statements of comprehensive income, as follows:
| Three Months Ended June 30, |  | Six Months Ended June 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
| (Thousands of Dollars)
Derivatives Designated as Fair Value Hedging Instruments: |  |  |  |  |  |  |
(Loss) gain recognized in income on derivative | $ | (1,007 | ) |  | $ | 364 |  |  | $ | (1,303 | ) |  | $ | 2,461 |
Gain (loss) recognized in income on hedged item | 981 |  |  | (313 | ) |  | 1,218 |  |  | (2,147 | )
(Loss) gain recognized in income for ineffective portion | $ | (26 | ) |  | $ | 51 |  |  | $ | (85 | ) |  | $ | 314 |
Derivatives Not Designated as Hedging Instruments: |  |  |  |  |  |  |
(Loss) gain recognized in income on derivative | $ | (90 | ) |  | $ | 52 |  |  | $ | (231 | ) |  | $ | (86 | )
Our interest rate swaps had the following impact on earnings:
| Three Months Ended June 30, |  | Six Months Ended June 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
| (Thousands of Dollars)
Derivatives Designated as Cash Flow Hedging Instruments: |  |  |  |  |  |  |
Gain (loss) recognized in other comprehensive income on derivative (effective portion) | $ | 5,106 |  |  | $ | (7,980 | ) |  | $ | 22,527 |  |  | $ | (7,941 | )
Loss reclassified from AOCI into interest expense, net (effective portion) | $ | (1,162 | ) |  | $ | (1,729 | ) |  | $ | (2,552 | ) |  | $ | (3,528 | )
As of June 30, 2018, we expect to reclassify a loss of $3.7 million to “Interest expense, net” within the next twelve months associated with unwound forward-starting interest rate swaps.

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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