Fair Value Measurements |
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Fair Value Measurements | Note 14—Fair Value Measurements Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis Purchase Price Allocation of Northwest Retail The fair values of the assets acquired and liabilities assumed as a result of the Northwest Retail acquisition were estimated as of March 23, 2018, the date of the acquisition, using valuation techniques described in notes (1) through (5) described below.
Purchase Price Allocation of Wyoming Refining The fair values of the assets acquired and liabilities assumed as a result of the Wyoming Refining acquisition were estimated as of July 14, 2016, the date of the acquisition, using valuation techniques described in notes (1) through (5) described below.
Assets and Liabilities Measured at Fair Value on a Recurring Basis Common stock warrants As of December 31, 2018 and 2017, we had 354,350 common stock warrants outstanding. We estimate the fair value of our outstanding common stock warrants using the difference between the strike price of the warrant and the market price of our common stock, which is a Level 3 fair value measurement. As of December 31, 2018, the warrants had a weighted-average exercise price of $0.09 and a remaining term of 3.67 years. The estimated fair value of the common stock warrants was $14.13 and $19.21 per share as of December 31, 2018 and 2017, respectively. Increases in the value of our common stock will increase the value of the common stock warrants. Likewise, decreases in the value of our common stock will result in a decrease in the value of the common stock warrants. Derivative instruments We utilize commodity derivative contracts to manage our price exposure in our inventory positions, future purchases of crude oil, future sales and purchases of refined products, and cost of crude oil consumed in the refining process. We utilize interest rate swaps to manage our interest rate risk. Please read Note 13—Derivatives for further information on derivatives. We are obligated to repurchase the crude oil and refined products from J. Aron at the termination of the Supply and Offtake Agreements. We have determined that this obligation contains an embedded derivative, similar to forward purchase contracts of crude oil and refined products. As such, we have accounted for this embedded derivative at fair value with changes in the fair value recorded in Cost of revenues (excluding depreciation) on our consolidated statements of operations. Upon redemption of our 5.00% Convertible Senior Notes on or after June 20, 2019 at our election, we are obligated to pay a make-whole premium equal to the present value of the remaining scheduled payments of interest on the 5.00% Convertible Senior Notes to be redeemed from the relevant redemption date to the maturity date of June 15, 2021. We have determined that the redemption option and the related make-whole premium represent an embedded derivative that is not clearly and closely related to the 5.00% Convertible Senior Notes. As of December 31, 2018 and 2017, this embedded derivative was deemed to have a de minimis fair value. We classify financial assets and liabilities according to the fair value hierarchy. Financial assets and liabilities classified as Level 1 instruments are valued using quoted prices in active markets for identical assets and liabilities. These include our exchange traded futures. Level 2 instruments are valued using quoted prices for similar assets and liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability. Our Level 2 instruments include OTC swaps and options. These commodity derivatives are valued using market quotations from independent price reporting agencies and commodity exchange price curves that are corroborated with market data. Level 3 instruments are valued using significant unobservable inputs that are not supported by sufficient market activity. The valuation of our J. Aron repurchase obligation derivative requires that we make estimates of the prices and differentials assuming settlement at the end of the reporting period. Estimates of the J. Aron settlement prices are based on observable inputs, such as Brent and WTI indices, and unobservable inputs, such as contractual price differentials as defined in the Supply and Offtake Agreements; therefore it is classified as a Level 3 instrument. We do not have other commodity derivatives classified as Level 3 at December 31, 2018 or 2017. Please read Note 13—Derivatives for further information on derivatives. Contingent consideration The cash consideration for our acquisition of PHR was subject to an earn-out provision. As of December 31, 2016, the earn-out measurement period was complete and our estimated liability no longer relied on forecasts and simulations. Prior to December 31, 2016, the liability was remeasured at the end of each reporting period using an estimate based on actual results to date and a Monte Carlo simulation analysis for future periods. Significant inputs used in the valuation model included estimated future gross margin, annual gross margin volatility, and a present value factor. We considered this to be a Level 3 fair value measurement. See Note 15—Commitments and Contingencies for further discussion. Financial Statement Impact Fair value amounts by hierarchy level as of December 31, 2018 and 2017 are presented gross in the tables below (in thousands):
A roll forward of Level 3 derivative instruments measured at fair value on a recurring basis is as follows (in thousands):
The carrying value and fair value of long-term debt and other financial instruments as of December 31, 2018 and 2017 is as follows (in thousands):
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The fair value of the 5.00% Convertible Senior Notes was determined by aggregating the fair value of the liability and equity components of the notes. The fair value of the liability component of the 5.00% Convertible Senior Notes was determined using a discounted cash flow analysis in which the projected interest and principal payments were discounted at an estimated market yield for a similar debt instrument without the conversion feature. The equity component was estimated based on the Black-Scholes model for a call option with strike price equal to the conversion price, a term matching the remaining life of the 5.00% Convertible Senior Notes, and an implied volatility based on market values of options outstanding as of December 31, 2018. The fair value of the 5.00% Convertible Senior Notes is considered a Level 2 measurement in the fair value hierarchy. The fair value of the 7.75% Senior Secured Notes was determined using a market approach based on quoted prices. Because the 7.75% Senior Secured Notes may not be actively traded, the inputs used to measure the fair value are classified as Level 2 inputs within the fair value hierarchy. The fair value of all non-derivative financial instruments included in current assets, including cash and cash equivalents, restricted cash, and trade accounts receivable, current liabilities, and accounts payable approximate their carrying value due to their short term nature. |