8. Fair Value Measurements

3 Months Ended

Mar. 31, 2017

Fair Value Disclosures [Abstract]

Fair Value Measurements

The fair value hierarchy prioritizes the inputs used in valuation techniques into three levels, as follows:

· Level 1 – Observable inputs – unadjusted quoted prices in active markets for identical assets and liabilities;

· Level 2 – Observable inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data; and

· Level 3 – Unobservable inputs – includes amounts derived from valuation models where one or more significant inputs are unobservable. For fair value measurements using significant unobservable inputs, a description of the inputs and the information used to develop the inputs is required along with a reconciliation of Level 3 values from the prior reporting period.

Warrants – The Company’s warrants were valued using a Monte Carlo Binomial Lattice-Based valuation methodology, adjusted for marketability restrictions. The Company recorded its warrants issued in 2012 at fair value and designated them as Level 3 on their issuance dates.

Significant assumptions used and related fair values for the warrants as of March 31, 2017 were as follows:

Original Issuance	Exercise Price	Volatility	Risk Free Interest Rate	Term (years)	Market Discount	Warrants Outstanding	Fair Value
07/3/2012	$6.09	38.2%	0.76%	0.26	7.6%	211,000	$196,000

Significant assumptions used and related fair values for the warrants as of December 31, 2016 were as follows:

Original Issuance	Exercise Price	Volatility	Risk Free Interest Rate	Term (years)	Market Discount	Warrants Outstanding	Fair Value
07/3/2012	$6.09	40.9%	0.62%	0.50	11.3%	211,000	$651,000

The estimated fair values of the warrants are affected by the above underlying inputs. Observable inputs include the values of exercise price, stock price, term and risk-free interest rate. As separate inputs, an increase (decrease) in either the term or risk free interest rate will result in an increase (decrease) in the estimated fair value of the warrants.

Unobservable inputs include volatility and market discount. An increase (decrease) in volatility will result in an increase (decrease) in the estimated fair value of the warrants and an increase (decrease) in the market discount will result in a decrease (increase) in the estimated fair value of the warrants.

The volatility utilized was a blended average of the Company’s historical volatility and implied volatilities derived from a selected peer group. The implied volatility component has remained relatively constant over time given that implied volatility is a forward-looking assumption based on observable trades in public option markets. Should the Company’s historical volatility increase (decrease) on a go-forward basis, the resulting fair value of the warrants would increase (decrease).

The market discount, or a discount for lack of marketability, is quantified using a Black-Scholes option pricing model, with a primary model input of assumed holding period restriction. As the assumed holding period increases (decreases), the market discount increases (decreases), conversely impacting the fair value of the warrants.

Other Derivative Instruments – The Company’s other derivative instruments consist of commodity positions. The fair values of the commodity positions are based on quoted prices on the commodity exchanges and are designated as Level 1 inputs.

The following table summarizes recurring fair value measurements by level at March 31, 2017 (in thousands):

	Fair
	Value			Level 1			Level 2		Level 3
Assets:
Derivative instruments	$	594		$	594		$	–	$	–
	$	594		$	594		$	–	$	–
Liabilities:
Warrants	$	(196	)	$	–		$	–	$	(196	)
Derivative instruments		(1,171	)		(1,171	)		–		–
	$	(1,367	)	$	(1,171	)	$	–	$	(196	)

The following table summarizes recurring fair value measurements by level at December 31, 2016 (in thousands):

												Benefit Plan
	Fair											Percentage
	Value			Level 1			Level 2		Level 3			Allocation
Assets:
Derivative instruments	$	978		$	978		$	–	$	–
Defined benefit plan assets
(pooled separate accounts):
Large U.S. Equity(1)		3,134			–			3,134		–			25%
Small/Mid U.S. Equity(2)		1,802			–			1,802		–			15%
International Equity(3)		2,006			–			2,006		–			16%
Fixed Income(4)		5,481			–			5,481		–			44%
	$	13,401		$	978		$	12,423	$	–
Liabilities:
Warrants	$	(651	)	$	–		$	–	$	(651	)
Derivative instruments		(4,115	)		(4,115	)		–		–
	$	(4,766	)	$	(4,115	)	$	–	$	(651	)

__________

(1) This category includes investments in funds comprised of equity securities of large U.S. companies. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund.

(2) This category includes investments in funds comprised of equity securities of small- and medium-sized U.S. companies. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund.

(3) This category includes investments in funds comprised of equity securities of foreign companies including emerging markets. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund.

(4) This category includes investments in funds comprised of U.S. and foreign investment-grade fixed income securities, high-yield fixed income securities that are rated below investment-grade, U.S. treasury securities, mortgage-backed securities, and other asset-backed securities. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund.

The changes in the Company’s fair value of its Level 3 inputs with respect to its warrants were as follows (in thousands):

Balance, December 31, 2016	$	651
Adjustments to fair value for the period		(455	)
Balance, March 31, 2017	$	196