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Fair Value Measurements | 12 Months Ended
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Dec. 31, 2019
Fair Value Disclosures [Abstract] |
Fair Value Measurements | Fair Value Measurements Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis Purchase Price Allocation of U.S. Oil The fair values of the assets acquired and liabilities assumed as a result of the Washington Acquisition were estimated as of January 11, 2019, the date of the acquisition, using valuation techniques described in notes (1) through (6) below.
|  |  | Valuation
| Fair Value |  | Technique
| (in thousands) |  |
Net working capital excluding operating leases | $ | (35,854 | ) |  | (1)
Property, plant, and equipment | 412,766 |  |  | (2)
Operating lease assets | 62,337 |  |  | (3)
Goodwill | 42,522 |  |  | (4)
Current operating lease liabilities | (21,571 | ) |  | (3)
Long-term operating lease liabilities | (40,766 | ) |  | (3)
Deferred tax liability | (92,103 | ) |  | (5)
Other non-current liabilities | (804 | ) |  | (6)
Total | $ | 326,527 |  |  |
(1) | Current assets acquired and liabilities assumed were recorded at their net realizable value.
(2) | The fair value of personal property was estimated using the cost approach. Key assumptions in the cost approach include determining the replacement cost by evaluating recent purchases of comparable assets or published data, and adjusting replacement cost for economic and functional obsolescence, location, normal useful lives, and capacity (if applicable). The fair value of real property was estimated using the market approach. Key assumptions in the market approach include determining the asset value by evaluating recent purchases of comparable assets under similar circumstances.
(3) | Operating lease assets and liabilities were recognized based on the present value of lease payments over the lease term using the incremental borrowing rate at acquisition of 9.6%.
(4) | The excess of the purchase price paid over the fair value of the identifiable assets acquired and liabilities assumed is allocated to goodwill.
(5) | The deferred tax liability was determined based on the differences between the tax bases of the assets acquired and the values of those assets recorded on our consolidated balance sheets as of the date of acquisition.
(6) | Other non-current liabilities are related to pension plan obligations. 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.
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) 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.
Investment in Laramie Energy At September 30, 2019, we conducted an impairment evaluation of our investment in Laramie Energy because of the significant decline in natural gas prices over the second quarter of 2019 and continued deterioration in the third quarter of 2019. We evaluate equity method investments for impairment when factors indicate that a decrease in the value of our investment has occurred and the carrying amount of our investment may not be recoverable. An impairment loss, based on the difference between the carrying value and the estimated fair value of the investment, is recognized in earnings when an impairment is deemed to be other than temporary. At September 30, 2019, we determined that the estimated fair value of our investment in Laramie Energy was $51.8 million, compared to a carrying value of $133.3 million. The fair value estimate was determined using a discounted cash flow analysis based on natural gas forward strip prices as of September 30, 2019 for two years through December 31, 2021. A blend of 2021 forward strip pricing and third-party analyst pricing was used for years after 2021 through December 31, 2028. Other significant inputs used in the discounted cash flow analysis included proved and unproved reserves information, forecasts of operating expenditures, and the applicable discount rate. As part of our evaluation, we considered the likelihood that Colorado Interstate Gas (“CIG”) prices, which have declined from an average spot price of $2.48 ($/MMBtu) in the first quarter of 2019, to $1.84 ($/MMBtu) in the second quarter of 2019 and $1.77 ($/MMBtu) in the third quarter of 2019, will recover in the near term. As a result, we recorded an impairment charge of $81.5 million on our statement of operations for the year ended December 31, 2019. 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, 2019 and 2018, 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, 2019 and 2018, the warrants had a weighted-average exercise price of $0.09 and $0.09 and a remaining term of 2.67 years and 3.67 years, respectively. The estimated fair value of the common stock warrants was $23.16 and $14.13 per share as of December 31, 2019 and 2018, 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 to our inventory positions, future purchases of crude oil, future purchases and sales of refined products, and cost of crude oil consumed in the refining process. We may utilize interest rate swaps to manage our interest rate risk. We are obligated to repurchase the crude oil and refined products from J. Aron at the termination of the Supply and Offtake Agreements. Our Washington Refinery Intermediation Agreement contains forward purchase obligations for certain volumes of crude oil and refined products that are required to be settled at market prices on a monthly basis. We have determined that these obligations contain embedded derivatives, similar to forward purchase contracts of crude oil and refined products. As such, we have accounted for these embedded derivatives 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, 2019 and 2018, 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 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 and MLC terminal obligations embedded derivatives requires that we make estimates of the prices and differentials assuming settlement at the end of the reporting period. Estimates of the J. Aron and MLC 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 and Washington Refinery Intermediation Agreement; therefore they are classified as Level 3 instruments. We do not have other commodity derivatives classified as Level 3 at December 31, 2019 or 2018. Please read Note 13—Derivatives for further information on derivatives. Financial Statement Impact Fair value amounts by hierarchy level as of December 31, 2019 and 2018 are presented gross in the tables below (in thousands):
| December 31, 2019
| Level 1 |  | Level 2 |  | Level 3 |  | Gross Fair Value |  | Effect of Counter-party Netting |  | Net Carrying Value on Balance Sheet (1)
Assets |  |  |  |  |  |  |  |  |  |  |
Commodity derivatives | $ | 4,595 |  |  | $ | 2,075 |  |  | $ | — |  |  | $ | 6,670 |  |  | $ | (4,595 | ) |  | $ | 2,075 |
Liabilities |  |  |  |  |  |  |  |  |  |  |
Common stock warrants | $ | — |  |  | $ | — |  |  | $ | (8,206 | ) |  | $ | (8,206 | ) |  | $ | — |  |  | $ | (8,206 | )
Commodity derivatives | (10,129 | ) |  | — |  |  | — |  |  | (10,129 | ) |  | 4,595 |  |  | (5,534 | )
J. Aron repurchase obligation derivative | — |  |  | — |  |  | 173 |  |  | 173 |  |  | — |  |  | 173 |
MLC terminal obligation derivative | — |  |  | — |  |  | (14,717 | ) |  | (14,717 | ) |  | — |  |  | (14,717 | )
Interest rate derivatives | — |  |  | (1,427 | ) |  | — |  |  | (1,427 | ) |  | — |  |  | (1,427 | )
Total | $ | (10,129 | ) |  | $ | (1,427 | ) |  | $ | (22,750 | ) |  | $ | (34,306 | ) |  | $ | 4,595 |  |  | $ | (29,711 | )
| 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 | )
_________________________________________________________
(1) | Does not include cash collateral of $19.8 million and $10.9 million as of December 31, 2019 and 2018, respectively, included within Prepaid and other current assets and Other long-term assets 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,
|  | 2019 |  | 2018 |  | 2017
Balance, beginning of period |  | $ | (922 | ) |  | $ | (26,372 | ) |  | $ | (25,134 | )
Settlements |  | 13,263 |  |  | — |  |  | — |
Acquired |  | (8,654 | ) |  | — |  |  | — |
Unrealized and realized income (loss) included in earnings |  | (26,437 | ) |  | 25,450 |  |  | (1,238 | )
Balance, end of period |  | $ | (22,750 | ) |  | $ | (922 | ) |  | $ | (26,372 | )
The carrying value and fair value of long-term debt and other financial instruments as of December 31, 2019 and 2018 are as follows (in thousands):
| December 31, 2019
| Carrying Value |  | Fair Value
5.00% Convertible Senior Notes due 2021 (1) (3) | $ | 44,783 |  |  | $ | 66,477 |
7.75% Senior Secured Notes due 2025 (1) | 292,015 |  |  | 309,375 |
Mid Pac Term Loan (2) | 1,433 |  |  | 1,433 |
Term Loan B Facility (1) | 230,474 |  |  | 240,625 |
Retail Property Term Loan (2) | 43,226 |  |  | 43,226 |
Common stock warrants (2) | 8,206 |  |  | 8,206 |
| December 31, 2018
| Carrying Value |  | Fair Value
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 |
_________________________________________________________
(1) | The fair value measurements of the 5.00% Convertible Senior Notes, 7.75% Senior Secured Notes, and Term Loan B Facility are considered Level 2 measurements in the fair value hierarchy as discussed below.
(2) | The fair value measurements of the common stock warrants, Mid Pac Term Loan, and Retail Property Term Loan are considered Level 3 measurements 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, 2019. 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 and the Term Loan B Facility were determined using a market approach based on quoted prices. The inputs used to measure the fair value are classified as Level 2 inputs within the fair value hierarchy because the 7.75% Senior Secured Notes and the Term Loan B Facility may not be actively traded. The Retail Property Term Loan is subject to a market-based floating interest rate. The Mid Pac Term Loan is subject to a fixed interest rate that approximates the long-term treasury rate. The carrying values of our Retail Property and Mid Pac Term Loans were determined to approximate fair value as of December 31, 2019. The fair value of all non-derivative financial instruments recorded 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.

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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/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 + Details
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