Fair Value Measurements

12 Months Ended

Dec. 31, 2018

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair Value Measurements

ASC 820 requires disclosures that categorize assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are observable inputs other than quoted prices included within Level 1 for the asset or liability, either directly or indirectly through market-corroborated inputs. Level 3 inputs are unobservable inputs for the asset or liability reflecting our assumptions about pricing by market participants.

Commodity swaps, exchange-traded futures, options, physical commodity forward purchase and sale contracts (that do qualify as normal purchases or normal sales), and interest rate swaps are generally valued using industry-standard models that consider various assumptions, including quoted forward prices, spot prices, interest rates, time value, volatility factors and contractual prices for the underlying instruments, as well as other relevant economic measures. The degree to which these inputs are observable in the forward markets determines the classification as Level 2 or 3. Our contracts are valued based on exchange pricing and/or price index developers such as Platts or Argus and are, therefore, classified as Level 2. Commodity investments are valued using published market prices of the commodity on the applicable exchange and are, therefore, classified as Level 1.

 Our RINs Obligation surplus or deficit is based on the amount of RINs we must purchase, net of amounts internally generated and purchased and the price of those RINs as of the balance sheet date. The RINs Obligation surplus or deficit is categorized as Level 2, and is measured at fair value based on quoted prices from an independent pricing service.

In both March 1, 2018 and March 1, 2017, the El Dorado refinery received approval from the EPA for a small refinery exemption from the requirements of the renewable fuel standard for the 2017 and 2016 calendar years, respectively which resulted in a reduction of our RINs Obligation and related cost of material other of approximately $59.3 million and $47.5 million for the year ended December 31, 2018 and 2017, respectively. In March 2018, the Krotz Springs refinery received such approval as well, which resulted in a reduction of our RINs Obligation and related cost of materials and other of approximately $31.6 million for the year ended December 31, 2018.

Our RIN commitment contracts are 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 RIN commitment contracts are categorized as Level 2, and are measured at fair value based on quoted prices from an independent pricing service. Changes in the fair value of these future RIN commitment contracts are recorded in cost of materials and other in the consolidated statements of income.

With respect to the J. Aron Agreements in effect as of December 31, 2018 and 2017, we elected to account for our related supply and offtake obligations at fair value in accordance with ASC 825, as it pertains to the fair value option. This standard permits the election to carry financial instruments and certain other items similar to financial instruments at fair value on the balance sheet, with all changes in fair value reported in earnings. For those periods for the El Dorado and Krotz Springs Agreements and at December 31, 2017 for our Big Spring Agreement, our corresponding J. Aron supply and offtake obligations are categorized as Level 2, and are measured at fair value using market prices for the consigned crude oil and refined products we are required to repurchase from J. Aron at the end of the term of the Supply and Offtake Agreements. These obligations are presented in the current portion of the Obligation under Supply and Offtake Agreements on our consolidated balance sheets. Gains (losses) related to the change in fair value are recorded as a component of cost of materials and other in the consolidated statements of income. At December 31, 2018 with respect to the Big Spring Agreement, we apply fair value measurement as follows: (1) we determine fair value

for our amended fixed-price step-out liability based on changes in fair value related to interest rate risk where such obligation is categorized as Level 2 and is presented in the long-term portion of the Obligation under Supply and Offtake Agreements on our consolidated balance sheets, and where gains (losses) related to changes in fair value are recorded as a component of interest expense in the consolidated statements of income; and (2) we determine fair value of the short-term commodity-indexed financing facility based on the market prices for the consigned crude oil and refined products collateralizing the financing/funding where such obligation is categorized as Level 2 and is presented in the current portion of the Obligation under Supply and Offtake Agreements on our consolidated balance sheets, and where gains (losses) related to the change in fair value are recorded as a component of cost of materials and other in the consolidated statements of income.

Commodity investments represent those commodities (generally crude oil) physically on hand as a result of trading activities with physical forward contracts. Such investment stores are maintained on a weighted average cost basis for determining realized gains and losses on physical sales under forward contracts, and ending balances are adjusted to fair value at each reporting date. The unrealized loss on the commodity investments for the year ended December 31, 2018 totaled $2.0 million.

The fair value hierarchy for our financial assets and liabilities accounted for at fair value on a recurring basis at December 31, 2018 and 2017, was as follows (in millions):

	As of December 31, 2018
	Level 1		Level 2			Level 3		Total
Assets
Commodity derivatives	$	—	$	459.8		$	—	$	459.8
Commodity investments	15.8		—			—		15.8
RIN commitment contracts	—		2.0			—		2.0
Total assets	15.8		461.8			—		477.6
Liabilities
Commodity derivatives	—		(409.0		)	—		(409.0		)
RIN commitment contracts	—		(6.7		)	—		(6.7		)
RINs obligation deficit	—		(11.8		)	—		(11.8		)
J. Aron supply and offtake obligations	—		(362.2		)	—		(362.2		)
Total liabilities	—		(789.7		)	—		(789.7		)
Net liabilities	$	15.8	$	(327.9	)	$	—	$	(312.1	)

	As of December 31, 2017
	Level 1		Level 2			Level 3		Total
Assets
Commodity derivatives	$	—	$	178.0		$	—	$	178.0
RIN commitment contracts	—		1.4			—		1.4
RINs Obligation surplus	—		1.1			—		1.1
Total assets	—		180.5			—		180.5
Liabilities
Commodity derivatives	—		(203.9		)	—		(203.9		)
Interest rate derivatives	—		(0.9		)	—		(0.9		)
RIN commitment contracts	—		(24.0		)	—		(24.0		)
RINs obligation deficit	—		(130.8		)	—		(130.8		)
J. Aron supply and offtake obligations	—		(435.6		)	—		(435.6		)
Total liabilities	—		(795.2		)	—		(795.2		)
Net liabilities	$	—	$	(614.7	)	$	—	$	(614.7	)

The derivative values above are based on analysis of each contract as the fundamental unit of account as required by ASC 820. In the table above, derivative assets and liabilities with the same counterparty are not netted where the legal right of offset exists. This differs from the presentation

in the financial statements which reflects our policy, wherein we have elected to offset the fair value amounts recognized for multiple derivative instruments executed with the same counterparty and where the legal right of offset exists. As of December 31, 2018 and 2017, $(0.4) million and $10.0 million, respectively, of cash (obligation) collateral was held by counterparty brokerage firms and has been netted with the net derivative positions with each counterparty. See Note 12 for further information regarding derivative instruments.