Fair Value Measurements

9 Months Ended

Sep. 30, 2015

The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis at September 30, 2015, December 31, 2014 and September 30, 2014:



(in thousands)	September 30, 2015
Assets (liabilities)	Level 1		Level 2			Level 3		Total
Cash equivalents	$	16,121	$	—		$	—	$	16,121
Restricted cash	181		—			—		181
Commodity derivatives, net (a)	34,337		(24,611		)	—		9,726
Convertible preferred securities (b)	—		—			12,800		12,800
Other assets and liabilities (c)	10,814		(4,010		)	350		7,154
Total	$	61,453	$	(28,621	)	$	13,150	$	45,982



(in thousands)	December 31, 2014
Assets (liabilities)	Level 1		Level 2			Level 3		Total
Cash equivalents	$	269	$	—		$	—	$	269
Restricted cash	429		—			—		429
Commodity derivatives, net (a)	72,868		(46,983		)	—		25,885
Convertible preferred securities (b)	—		—			13,300		13,300
Other assets and liabilities (c)	10,869		(2,666		)	—		8,203
Total	$	84,435	$	(49,649	)	$	13,300	$	48,086



(in thousands)	September 30, 2014
Assets (liabilities)	Level 1		Level 2			Level 3		Total
Cash equivalents	$	85,663	$	—		$	—	$	85,663
Restricted cash	173		—			—		173
Commodity derivatives, net (a)	32,606		(159,295		)	—		(126,689		)
Convertible preferred securities (b)	—		—			15,000		15,000
Other assets and liabilities (c)	10,671		(1,636		)	—		9,035
Total	$	129,113	$	(160,931	)	$	15,000	$	(16,818	)


(a)	Includes associated cash posted/received as collateral


(b)	Recorded in “Other noncurrent assets” on the Company’s Condensed Consolidated Balance Sheets


(c)	Included in other assets and liabilities are deferred compensation assets (Level 1), interest rate derivatives (Level 2), and contingent consideration to the former owners of Kay Flo Industries, Inc (Level 3).

Level 1 commodity derivatives reflect the fair value of the exchange-traded futures and options contracts that the Company holds, net of the cash collateral that the Company has in its margin account.

The majority of the Company’s assets and liabilities measured at fair value are based on the market approach valuation technique. With the market approach, fair value is derived using prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

The Company’s net commodity derivatives primarily consist of futures or options contracts via regulated exchanges and contracts with producers or customers under which the future settlement date and bushels (or gallons in the case of ethanol contracts) of commodities to be delivered (primarily wheat, corn, soybeans and ethanol) are fixed and under which the price may or may not be fixed. Depending on the specifics of the individual contracts, the fair value is derived from the futures or options prices on the CME or the New York Mercantile Exchange for similar commodities and delivery dates as well as observable quotes for local basis adjustments (the difference, which is attributable to local market conditions, between the quoted futures price and the local cash price). Because basis for a particular commodity and location typically has multiple quoted prices from other agribusinesses in the same geographical vicinity and is used as a common pricing mechanism in the Agribusiness industry, we have concluded that basis is a Level 2 fair value input for purposes of the fair value disclosure requirements related to our commodity derivatives. Although nonperformance risk, both of the Company and the counterparty, is present in each of these commodity contracts and is a component of the estimated fair values, based on the Company’s historical experience with its producers and customers and the Company’s knowledge of their businesses, the Company does not view nonperformance risk to be a material input to fair value for these commodity contracts.

The Company’s convertible preferred securities are measured at fair value using a combination of the income and market approaches on a quarterly basis. Specifically, the income approach incorporates the use of the Discounted Cash Flow method, whereas the Market Approach incorporates the use of the Guideline Public Company method. Application of the Discounted Cash Flow method requires estimating the annual cash flows that the business enterprise is expected to generate in the future. The assumptions input into this method are estimated annual cash flows for a specified estimation period, the discount rate, and the terminal value at the end of the estimation period. In the Guideline Public Company method, valuation multiples, including total invested capital, are calculated based on financial statements and stock price data from selected guideline publicly traded companies. A comparative analysis is then performed for factors including, but not limited to size, profitability and growth to determine fair value.

A reconciliation of beginning and ending balances for the Company’s fair value measurements using Level 3 inputs is as follows:



(in thousands)	2015		2014		2015			2014
	Contingent Consideration		Contingent Consideration		Convertible Preferred Securities			Convertible Preferred Securities
Asset at January 1,	$	—	$	—	$	13,300		$	25,720
Unrealized gains (losses) included in other comprehensive income	—		—		—			(5,190		)
Asset at March 31,	$	—	$	—	$	13,300		$	20,530
Unrealized gains (losses) included in other comprehensive income	—		—		—			(3,580		)
New agreements	$	350	$	—	$	—		$	—
Asset at June 30,	$	350	$	—	$	13,300		$	16,950
Unrealized gains (losses) included in other comprehensive income	—		—		—			(1,950		)
Sales proceeds	—		—		(992		)	—
Realized gains (losses) included in earnings	—		—		492			—
Asset at September 30,	$	350	$	—	$	12,800		$	15,000

The following tables summarize quantitative information about the Company's Level 3 fair value measurements as of September 30, 2015, December 31, 2014 and September 30, 2014:



Quantitative Information about Level 3 Fair Value Measurements
(in thousands)	Fair Value as of September 30, 2015		Valuation Method	Unobservable Input	Weighted Average
Convertible Preferred Securities	$	12,800	Market Approach	EBITDA Multiples	5.535
			Income Approach	Discount Rate	14.5	%



(in thousands)	Fair Value as of December 31, 2014		Valuation Method	Unobservable Input	Weighted Average
Convertible Preferred Securities	$	13,300	Market Approach	EBITDA Multiples	7.00
			Income Approach	Discount Rate	14.5	%



(in thousands)	Fair Value as of September 30, 2014		Valuation Method	Unobservable Input	Weighted Average
Convertible Preferred Securities	$	15,000	Market Approach	EBITDA Multiples	8.35
			Income Approach	Discount Rate	14.5	%

Fair Value of Financial Instruments

The fair value of the Company’s long-term debt is estimated using quoted market prices or discounted future cash flows based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. As such, the Company has concluded that the fair value of long-term debt is considered Level 2 in the fair value hierarchy.



(in thousands)	September 30, 2015		December 31, 2014		September 30, 2014
Fair value of long-term debt, including current maturities	$	448,590	$	382,139	$	369,000
Fair value in excess of carrying value	8,040		7,086		2,795

The fair value of the Company’s cash equivalents, accounts receivable and accounts payable approximate their carrying value as they are close to maturity.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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