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Fair Value Measurements | 12 Months Ended
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Dec. 31, 2018
Fair Value Disclosures [Abstract] |
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.
|  |  | Valuation
| Fair Value |  | Technique
| (in thousands) |  |
Net working capital | $ | 3,822 |  |  | (1)
Property, plant, and equipment | 30,230 |  |  | (2)
Goodwill | 46,210 |  |  | (3)
Long-term capital lease obligations | (5,244 | ) |  | (4)
Other non-current liabilities | (487 | ) |  | (5)
Total | $ | 74,531 |  |  |
(1) | Current assets acquired and liabilities assumed were recorded at their net realizable value.
(2) | The fair value of property, plant, and equipment was estimated using the cost approach. Under the cost approach, the total replacement cost of the property is determined based on industry sources with adjustments for regional factors. The total cost is then adjusted for depreciation based on the physical age of the assets and obsolescence. The fair value of the land was estimated using the sales comparison approach. Under this approach, the sales prices of similar properties are adjusted to account for differences in land characteristics. We consider this to be a Level 3 fair value measurement. The fair value of capital lease assets was estimated using the income approach. Under the income approach, the annual lease market rental rate cash flow stream is estimated and then discounted to present value over the remaining life of the lease using a pre-tax discount rate based on expected return for the specific asset type and location.
(3) | The excess of the purchase price paid over the fair value of the identifiable assets acquired and liabilities assumed is allocated to goodwill.
(4) | Long-term capital lease obligations were estimated based on the present value of lease payments over the term of the lease.
(5) | Other non-current liabilities are primarily related to asset retirement obligations. AROs are calculated based on the present value of the estimated removal and other closure costs using our credit-adjusted risk-free rate.
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.
|  |  | Valuation
| Fair Value |  | Technique
| (in thousands) |  |
Net working capital | $ | (11,092 | ) |  | (1)
Property, plant, and equipment | 254,367 |  |  | (2)
Goodwill | 66,449 |  |  | (3)
Long-term debt | (68,136 | ) |  | (4)
Other non-current liabilities | (32,222 | ) |  | (5)
Total | $ | 209,366 |  |  |
(1) | Current assets acquired and liabilities assumed were recorded at their net realizable value.
(2) | The fair value of property, plant, and equipment was estimated using the cost approach. Under the cost approach, the total replacement cost of the property is determined based on industry sources with adjustments for regional factors. The total cost is then adjusted for depreciation based on the physical age of the assets and obsolescence. The fair value of the land was estimated using the sales comparison approach. Under this approach, the sales prices of similar properties are adjusted to account for differences in land characteristics. We consider this to be a Level 3 fair value measurement.
(3) | The excess of the purchase price paid over the fair value of the identifiable assets acquired and liabilities assumed is allocated to goodwill.
(4) | Long-term debt was recorded at carrying value. The carrying value of long-term debt approximated fair value due to its floating interest rate.
(5) | Other non-current liabilities include environmental liabilities and the underfunded status of the Wyoming Refining defined benefit plan. The underfunded status of the defined benefit plan represents the difference between the fair value of the plan’s assets and the projected benefit obligations. Environmental liabilities are based on management’s best estimates of probable future costs using current available information. We consider this to be a Level 3 fair value measurement.
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):
| December 31, 2018
| Level 1 |  | Level 2 |  | Level 3 |  | Gross Fair Value |  | Effect of Counter-party Netting |  | Net Carrying Value on Balance Sheet (1)
Assets |  |  |  |  |  |  |  |  |  |  |
Commodity derivatives | $ | 170 |  |  | $ | 5,234 |  |  | $ | — |  |  | $ | 5,404 |  |  | $ | (431 | ) |  | $ | 4,973 |
Interest rate derivatives | — |  |  | 191 |  |  | — |  |  | 191 |  |  | — |  |  | 191 |
Total | $ | 170 |  |  | $ | 5,425 |  |  | $ | — |  |  | $ | 5,595 |  |  | $ | (431 | ) |  | $ | 5,164 |
Liabilities |  |  |  |  |  |  |  |  |  |  |
Common stock warrants | $ | — |  |  | $ | — |  |  | $ | (5,007 | ) |  | $ | (5,007 | ) |  | $ | — |  |  | $ | (5,007 | )
Commodity derivatives | (870 | ) |  | (261 | ) |  | — |  |  | (1,131 | ) |  | 431 |  |  | (700 | )
J. Aron repurchase obligation derivative | — |  |  | — |  |  | 4,085 |  |  | 4,085 |  |  | — |  |  | 4,085 |
Total | $ | (870 | ) |  | $ | (261 | ) |  | $ | (922 | ) |  | $ | (2,053 | ) |  | $ | 431 |  |  | $ | (1,622 | )
| December 31, 2017
| Level 1 |  | Level 2 |  | Level 3 |  | Gross Fair Value |  | Effect of Counter-party Netting |  | Net Carrying Value on Balance Sheet (1)
Assets |  |  |  |  |  |  |  |  |  |  |
Commodity derivatives | $ | 557 |  |  | $ | 21,907 |  |  | $ | — |  |  | $ | 22,464 |  |  | $ | (19,650 | ) |  | $ | 2,814 |
Interest rate derivatives | — |  |  | 3,810 |  |  | — |  |  | 3,810 |  |  | — |  |  | 3,810 |
Total | $ | 557 |  |  | $ | 25,717 |  |  | $ | — |  |  | $ | 26,274 |  |  | $ | (19,650 | ) |  | $ | 6,624 |
Liabilities |  |  |  |  |  |  |  |  |  |  |
Common stock warrants | $ | — |  |  | $ | — |  |  | $ | (6,808 | ) |  | $ | (6,808 | ) |  | $ | — |  |  | $ | (6,808 | )
Commodity derivatives | (596 | ) |  | (19,093 | ) |  | — |  |  | (19,689 | ) |  | 19,650 |  |  | (39 | )
J.Aron repurchase obligation derivative | — |  |  | — |  |  | (19,564 | ) |  | (19,564 | ) |  | — |  |  | (19,564 | )
Total | $ | (596 | ) |  | $ | (19,093 | ) |  | $ | (26,372 | ) |  | $ | (46,061 | ) |  | $ | 19,650 |  |  | $ | (26,411 | )
_________________________________________________________
(1) | Does not include cash collateral of $10.9 million and $7.2 million as of December 31, 2018 and 2017, respectively included on our consolidated balance sheets.
A roll forward of Level 3 derivative instruments measured at fair value on a recurring basis is as follows (in thousands):
|  | Year Ended December 31,
|  | 2018 |  | 2017 |  | 2016
Beginning balance |  | $ | (26,372 | ) |  | $ | (25,134 | ) |  | $ | (25,867 | )
Settlements |  | — |  |  | — |  |  | 16,810 |
Total unrealized income (loss) included in earnings |  | 25,450 |  |  | (1,238 | ) |  | (16,077 | )
Ending balance |  | $ | (922 | ) |  | $ | (26,372 | ) |  | $ | (25,134 | )
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):
| Carrying Value |  | Fair Value
December 31, 2018 |  |  |
5.00% Convertible Senior Notes due 2021 (1) (3) | $ | 100,411 |  |  | $ | 121,488 |
7.75% Senior Secured Notes due 2025 (1) | 290,763 |  |  | 270,000 |
Mid Pac Term Loan (2) | 1,466 |  |  | 1,466 |
Common stock warrants (2) | 5,007 |  |  | 5,007 |
December 31, 2017 |  |  |
5.00% Convertible Senior Notes due 2021 (1) (3) | $ | 95,486 |  |  | $ | 149,007 |
7.75% Senior Secured Notes due 2025 (1) | 289,326 |  |  | 300,423 |
Common stock warrants (2) | 6,808 |  |  | 6,808 |
_________________________________________________________
(1) | The fair values of the 5.00% Convertible Senior Notes and the 7.75% Senior Secured Notes are considered Level 2 measurements as discussed below.
(2) | The fair values of the common stock warrants and the Mid Pac Term Loan are considered a Level 3 measurement in the fair value hierarchy.
(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.
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.

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- 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. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -URI http://asc.fasb.org/topic&trid=2155941 + Details
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