Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
A portion of our long-term debt is variable-rate debt. Changes in interest rates impact the interest payments of our variable-rate debt but generally do not impact the fair value of the liability. Conversely, changes in interest rates impact the fair value of our fixed-rate debt but do not impact its cash flows.
The ABL Facility is variable-rate debt with interest rates that are generally indexed to the Wall Street Journal prime rate or LIBOR interest rate (or successor rate). At March 31, 2021, we had $4.0 million of outstanding borrowings under the ABL Facility at a weighted average interest rate of 5.25%. A change in interest rates of 0.125% would result in an increase or decrease of our annual interest expense of less than $0.1 million, based on borrowings outstanding at March 31, 2021.
The Sawtooth credit agreement is variable-rate debt with interest rates that are generally indexed to the rate the lender announces from time to time as its prime rate or base commercial lending rate or LIBOR interest rate (or successor rate). At March 31, 2021, we had $5.0 million of outstanding borrowings under the Sawtooth credit agreement at an average interest rate of 2.36%. A change in interest rates of 0.125% would result in an increase or decrease of our annual interest expense of less than $0.1 million, based on borrowings outstanding at March 31, 2021.
Commodity Price Risk
Our operations are subject to certain business risks, including commodity price risk. Commodity price risk is the risk that the market value of crude oil, natural gas liquids, or refined and renewables products will change, either favorably or unfavorably, in response to changing market conditions. Procedures and limits for managing commodity price risks are specified in our market risk policy. Open commodity positions and market price changes are monitored daily and are reported to senior management and to marketing operations personnel.
The crude oil, natural gas liquids, and refined and renewables products industries are “margin-based” and “cost-plus” businesses in which gross profits depend on the differential of sales prices over supply costs. We have no control over market conditions. As a result, our profitability may be impacted by sudden and significant changes in the price of crude oil, natural gas liquids, and refined and renewables products.
We engage in various types of forward contracts and financial derivative transactions to reduce the effect of price volatility on our product costs, to protect the value of our inventory positions, and to help ensure the availability of product during periods of short supply. We attempt to balance our contractual portfolio by purchasing volumes when we have a matching purchase commitment from our wholesale and retail customers. We may experience net unbalanced positions from time to time. In addition to our ongoing policy to maintain a balanced position, for accounting purposes we are required, on an ongoing basis, to track and report the market value of our derivative portfolio.
Although we use financial derivative instruments to reduce the market price risk associated with forecasted transactions, we do not account for financial derivative transactions as hedges. All changes in the fair value of our physical
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contracts that do not qualify as normal purchases and normal sales and settlements (whether cash transactions or non-cash mark-to-market adjustments) are reported either within revenue (for sales contracts) or cost of sales (for purchase contracts) in our consolidated statements of operations, regardless of whether the contract is physically or financially settled.
The following table summarizes the hypothetical impact on the March 31, 2021 fair value of our commodity derivatives of an increase of 10% in the value of the underlying commodity (in thousands):
Increase
(Decrease)
To Fair Value
Crude oil (Water Solutions segment) $ (796)
Crude oil (Crude Oil Logistics segment) $ (8,075)
Propane (Liquids Logistics segment) $ (1,071)
Butane (Liquids Logistics segment) $ (3,191)
Refined Products (Liquids Logistics segment) $ (3,764)
Other Products (Liquids Logistics segment) $ 7,856
Canadian dollars (Liquids Logistics segment) $ 175
Changes in commodity prices may also impact the volumes that we are able to transport, dispose, store and market, which also impact our cash flows.
Credit Risk
Our operations are also subject to credit risk, which is the risk of loss from nonperformance by suppliers, customers or financial counterparties to a contract. Procedures and limits for managing credit risk are specified in our credit policy. Credit risk is monitored daily and we try to minimize exposure through the following,
• requiring certain customers to prepay or place deposits for our products and services;
• requiring certain customers to post letters of credit or other forms of surety;
• monitoring individual customer receivables relative to previously-approved credit limits;
• requiring certain customers to take delivery of their contracted volume ratably rather than allow them to take delivery at their discretion;
• entering into master netting agreements that allow for offsetting counterparty receivable and payable balances for certain transactions;
• reviewing the receivable aging regularly to identify issues or trends that may develop; and
• requiring marketing personnel to manage their customers’ receivable position and suspend sales to customers that have not timely paid outstanding invoices.
At March 31, 2021, our primary counterparties were retailers, resellers, energy marketers, producers, refiners, and dealers.
Fair Value
We use observable market values for determining the fair value of our derivative instruments. In cases where actively quoted prices are not available, other external sources are used which incorporate information about commodity prices in actively quoted markets, quoted prices in less active markets and other market fundamental analysis.
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