Note 11—Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Common Stock Warrants

As of September 30, 2016 and December 31, 2015, we had 354,350 and 345,135 common stock warrants outstanding, respectively. Beginning with the first quarter 2016, 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. Previously, we estimated the fair value of our outstanding common stock warrants using a simulation model, which is considered to be a Level 3 fair value measurement. Significant inputs used in the simulation model as of December 31, 2015 include:



	December 31, 2015
Stock price	$	23.54
Weighted-average exercise price	$	0.10
Term (years)	6.67
Risk-free interest rate	2.04		%
Expected volatility	43.0		%

The expected volatility is based on the 7-year historical volatilities of comparable public companies. The estimated fair value of the common stock warrants was $13.04 and $23.47 per share as of September 30, 2016 and December 31, 2015, respectively. Since the common stock warrants were in the money upon issuance, we do not believe that changes in the inputs to the simulation models will have a significant impact to the value of the common stock warrants other than changes in the value of our common stock. 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 crude oil commodity derivative contracts to manage our price exposure to our inventory positions, future purchases of crude oil and future sales of refined products. We utilize interest rate swaps to manage our interest rate risk. Please read Note 10—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 condensed 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% 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 September 30, 2016, 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 J.Aron repurchase obligation derivative is a Level 3 instrument.

Contingent Consideration

The cash consideration for our acquisition of PHR may be increased pursuant to an earnout provision. The liability is 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 include estimated future gross margin, annual gross margin volatility and a present value factor. We consider this to be a Level 3 fair value measurement.

Financial Statement Impact

Fair value amounts by hierarchy level as of September 30, 2016 and December 31, 2015 are presented gross in the tables below (in thousands):



	September 30, 2016
	Level 1			Level 2			Level 3			Gross Fair Value			Effect of Counter-Party Netting			Net Carrying Value on Balance Sheet (1)
Assets
Commodity derivatives	$	—		$	9,290		$	—		$	9,290		$	(7,293	)	$	1,997
Interest rate derivatives	—			228			—			228			(77		)	151
Total	$	—		$	9,518		$	—		$	9,518		$	(7,370	)	$	2,148

Liabilities
Common stock warrants	$	—		$	—		$	(4,619	)	$	(4,619	)	$	—		$	(4,619	)
Contingent consideration	—			—			(17		)	(17		)	—			(17		)
Commodity derivatives	(2,322		)	(10,550		)	—			(12,872		)	7,293			(5,579		)
J. Aron repurchase obligation derivative	—			—			(10,546		)	(10,546		)	—			(10,546		)
Interest rate derivatives	—			(723		)	—			(723		)	77			(646		)
Total	$	(2,322	)	$	(11,273	)	$	(15,182	)	$	(28,777	)	$	7,370		$	(21,407	)



	December 31, 2015
	Level 1			Level 2			Level 3			Gross Fair Value			Effect of Counter-Party Netting			Net Carrying Value on Balance Sheet (1)
Assets
Commodity derivatives	$	429		$	33,797		$	—		$	34,226		$	(29,649	)	$	4,577
J. Aron repurchase obligation derivative	—			—			9,810			9,810			(9,810		)	—
Total	$	429		$	33,797		$	9,810		$	44,036		$	(39,459	)	$	4,577

Liabilities
Common stock warrants	$	—		$	—		$	(8,096	)	$	(8,096	)	$	—		$	(8,096	)
Contingent consideration	—			—			(27,581		)	(27,581		)	—			(27,581		)
Commodity derivatives	(396		)	(43,712		)	—			(44,108		)	29,649			(14,459		)
J. Aron repurchase obligation derivative	—			—			—			—			9,810			9,810
Total	$	(396	)	$	(43,712	)	$	(35,677	)	$	(79,785	)	$	39,459		$	(40,326	)

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(1)	Does not include cash collateral of $13.0 million and $28.0 million as of September 30, 2016 and December 31, 2015, respectively, included within Prepaid and other current assets and Other long-term assets on our condensed consolidated balance sheets.

A roll forward of Level 3 financial instruments measured at fair value on a recurring basis is as follows (in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Balance, at beginning of period	$	(8,564	)	$	(37,387	)	$	(25,867	)	$	(21,254	)
Settlements	—			7,691			16,810			7,691
Total unrealized income (loss) included in earnings	(6,618		)	(5,278		)	(6,125		)	(21,411		)
Balance, at end of period	$	(15,182	)	$	(34,974	)	$	(15,182	)	$	(34,974	)

The carrying value and fair value of long-term debt and other financial instruments as of September 30, 2016 and December 31, 2015 are as follows (in thousands):



	September 30, 2016
	Carrying Value		Fair Value (1)
Hawaii Retail Credit Agreement (2)	$	99,712	$	99,712
5% Convertible Senior Notes due 2021 (3)	90,011		115,491
Term Loan	58,613		60,854
Par Wyoming Holdings Term Loan (2)	63,508		63,508
Wyoming Refining Senior Secured Term Loan (2)	57,768		57,768
Wyoming Refining Senior Secured Revolver (2)	16,604		16,604
Common stock warrants	4,619		4,619
Contingent consideration	17		17



	December 31, 2015
	Carrying Value		Fair Value (1)
Hawaii Retail Credit Agreement (2)	$	110,000	$	110,000
Term Loan	60,119		62,037
Common stock warrants	8,096		8,096
Contingent consideration	27,581		27,581

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(1)	The fair values of these instruments are considered Level 3 measurements in the fair value hierarchy with the exception of the fair value measurement of the 5.00% Convertible Senior Notes which is considered a Level 2 measurement as discussed below.


(2)	Fair value approximates carrying value due to the floating rate interest which approximates a current market rate.


(3)	The carrying value of the 5.00% Convertible Senior Notes excludes the fair value of the equity component, which was classified as equity upon issuance.

We estimate the fair value of the Term Loan using a discounted cash flow analysis and an estimate of the current yield of 11.05% and 9.63% as of September 30, 2016 and December 31, 2015, respectively, by reference to market interest rates for term debt of comparable companies.

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 formula 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 September 30, 2016. 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 all non-derivative financial instruments included in current assets, including cash and cash equivalents, restricted cash and trade accounts receivable and current liabilities, including accounts payable, approximate their carrying value due to their short-term nature.