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Fair Value Measurements | 9 Months Ended
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Sep. 30, 2023
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 Billings Acquisition The preliminary fair values of the assets acquired and liabilities assumed as a result of the Billings Acquisition were estimated as of June 1, 2023, the date of the acquisition, using valuation techniques described in notes (1) through (5) below.
|  |  | Valuation
| Fair Value |  | Technique
| (in thousands) |  |
Net working capital excluding operating leases | $ | 294,507 |  |  | (1)
Property, plant, and equipment | 259,088 |  |  | (2)
Operating lease right-of-use assets | 3,562 |  |  | (3)
Refining and logistics equity investments | 86,600 |  |  | (4)
Other long-term assets | 4,094 |  |  | (1)
Current operating lease liabilities | (2,081) |  |  | (3)
Long-term operating lease liabilities | (1,481) |  |  | (3)
Environmental liabilities | (18,869) |  |  | (5)
Total | $ | 625,420 |  |  |
(1)Current assets acquired and liabilities assumed were recorded at their net realizable value. Other long-term assets includes preliminary costs for future turnarounds that were recently incurred and 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. We consider this to be a Level 3 fair value measurement. (3)Operating lease right-of-use 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 fair value of our investments in YELP and YPLC were determined using a combination of the income approach and the market approach. Under the income approach, we estimated the present value of expected future cash flows using a market participant discount rate. Under the market approach, we estimated fair value using observable multiples for comparable companies in the investments’ industries. These valuation methods require us to make significant estimates and assumptions regarding future cash flows, capital projects, commodity prices, long-term growth rates, and discount rates. We consider this to be a Level 3 fair value measurement. (5)Environmental liabilities are based on management’s best estimates of probable future costs using currently available information. We consider this to be a Level 3 fair value measurement. Assets and Liabilities Measured at Fair Value on a Recurring Basis 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 utilize exchange traded futures contracts to manage a portion of our cost for credits required by certain environmental agencies to offset our carbon emissions. We also utilize interest rate swaps to manage our interest rate risk. 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 the embedded derivatives related to our J. Aron repurchase and MLC terminal obligations is based on 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 West Texas Intermediate Crude Oil (“WTI”) indices, and unobservable inputs, such as contractual price differentials as defined in the Supply and Offtake Agreement and Washington Refinery Intermediation Agreement. Such contractual differentials vary by location and by the type of product, have a weighted average premium of $17.98, and range from a discount of $6.18 per barrel to a premium of $67.61 per barrel as of September 30, 2023. Contractual price differentials are considered unobservable inputs; therefore, these embedded derivatives are classified as Level 3 instruments. We did not have other commodity derivatives classified as Level 3 at September 30, 2023, or December 31, 2022. Please read Note 12—Derivatives for further information on derivatives. The embedded derivative related to our MLC terminal obligation and certain commodity derivative contracts were terminated along with the wind-down of the Washington Refinery Intermediation Agreement on October 4, 2023. Please read Note 20—Subsequent Events for further information. Gross Environmental credit obligations Estimates of our gross environmental credit obligations are based on the amount of RINs or other environmental credits required to comply with U.S. Environmental Protection Agency (“EPA”) and the State of Washington’s regulations and the market prices of those RINs or other environmental credits as of the end of the reporting period. The gross environmental credit obligations are classified as Level 2 instruments as we obtain the pricing inputs for our RINs and other environmental credits from brokers based on market quotes on similar instruments. Please read Note 15—Commitments and Contingencies for further information on the EPA and the State of Washington’s regulations related to greenhouse gases. Financial Statement Impact Fair value amounts by hierarchy level as of September 30, 2023 and December 31, 2022, are presented gross in the tables below (in thousands):
| September 30, 2023
| Level 1 |  | Level 2 |  | Level 3 |  | Gross Fair Value |  | Effect of Counter-Party Netting |  | Net Carrying Value on Balance Sheet (1)
Assets |  |  |  |  |  |  |  |  |  |  |
Commodity derivatives | $ | 411,270 |  |  | $ | 14,521 |  |  | $ | — |  |  | $ | 425,791 |  |  | $ | (410,584) |  |  | $ | 15,207 |
Interest rate derivatives | — |  |  | 664 |  |  | — |  |  | 664 |  |  | — |  |  | 664 |
Total | $ | 411,270 |  |  | $ | 15,185 |  |  | $ | — |  |  | $ | 426,455 |  |  | $ | (410,584) |  |  | $ | 15,871 |
Liabilities |  |  |  |  |  |  |  |  |  |  |
Commodity derivatives | $ | (412,939) |  |  | $ | (33,057) |  |  | $ | — |  |  | $ | (445,996) |  |  | $ | 410,584 |  |  | $ | (35,412) |
J. Aron repurchase obligation derivative | — |  |  | — |  |  | (57,972) |  |  | (57,972) |  |  | — |  |  | (57,972) |
MLC terminal obligation derivative | — |  |  | — |  |  | (6,429) |  |  | (6,429) |  |  | — |  |  | (6,429) |
Gross environmental credit obligations (2) | — |  |  | (326,598) |  |  | — |  |  | (326,598) |  |  | — |  |  | (326,598) |
Total liabilities | $ | (412,939) |  |  | $ | (359,655) |  |  | $ | (64,401) |  |  | $ | (836,995) |  |  | $ | 410,584 |  |  | $ | (426,411) |
| December 31, 2022
| Level 1 |  | Level 2 |  | Level 3 |  | Gross Fair Value |  | Effect of Counter-Party Netting |  | Net Carrying Value on Balance Sheet (1)
Assets |  |  |  |  |  |  |  |  |  |  |
Commodity derivatives | $ | 161,541 |  |  | $ | 8,369 |  |  | $ | — |  |  | $ | 169,910 |  |  | $ | (169,415) |  |  | $ | 495 |
Liabilities |  |  |  |  |  |  |  |  |  |  |
Commodity derivatives | $ | (172,529) |  |  | $ | (7,875) |  |  | $ | — |  |  | $ | (180,404) |  |  | $ | 169,415 |  |  | $ | (10,989) |
J. Aron repurchase obligation derivative | — |  |  | — |  |  | (12,156) |  |  | (12,156) |  |  | — |  |  | (12,156) |
MLC terminal obligation derivative | — |  |  | — |  |  | 14,435 |  |  | 14,435 |  |  | — |  |  | 14,435 |
Gross environmental credit obligations (2) | — |  |  | (549,791) |  |  | — |  |  | (549,791) |  |  | — |  |  | (549,791) |
Total liabilities | $ | (172,529) |  |  | $ | (557,666) |  |  | $ | 2,279 |  |  | $ | (727,916) |  |  | $ | 169,415 |  |  | $ | (558,501) |
_________________________________________________________ (1)Does not include cash collateral of $32.4 million and $50.3 million as of September 30, 2023 and December 31, 2022, respectively, included within Prepaid and other current assets and Other long-term assets on our condensed consolidated balance sheets. (2)Does not include RINs assets and other environmental credits of $223.4 million and $258.2 million presented as Inventories on our condensed consolidated balance sheet and stated at the lower of cost and net realizable value as of September 30, 2023 and December 31, 2022, respectively. A roll forward of Level 3 derivative instruments measured at fair value on a recurring basis is as follows (in thousands):
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2023 |  | 2022 |  | 2023 |  | 2022
Balance, at beginning of period | $ | (5,584) |  |  | $ | (8,492) |  |  | $ | 2,279 |  |  | $ | (37,321) |
Settlements | 30,143 |  |  | (55,448) |  |  | 13,285 |  |  | 93,613 |
Total gains (losses) included in earnings (1) | (88,960) |  |  | 77,274 |  |  | (79,965) |  |  | (42,958) |
Balance, at end of period | $ | (64,401) |  |  | $ | 13,334 |  |  | $ | (64,401) |  |  | $ | 13,334 |
_________________________________________________________ (1)Included in Cost of revenues (excluding depreciation) on our condensed consolidated statements of operations. The carrying value and fair value of long-term debt and other financial instruments as of September 30, 2023 and December 31, 2022 are as follows (in thousands):
| September 30, 2023
| Carrying Value |  | Fair Value
ABL Credit Facility due 2028 (2) | $ | — |  |  | $ | — |
LC Facility due 2024 (2) | — |  |  | — |
Term Loan Credit Agreement due 2030 (1) | 532,039 |  |  | 545,882 |
Other long-term debt (1) | 4,901 |  |  | 4,680 |
| December 31, 2022
| Carrying Value |  | Fair Value
Prior ABL Credit Facility due 2025 (2) | $ | — |  |  | $ | — |
7.75% Senior Secured Notes due 2025 (1) (3) | 277,137 |  |  | 276,785 |
Term Loan B Facility due 2026 (1) (3) | 198,268 |  |  | 201,094 |
12.875% Senior Secured Notes due 2026 (1) (3) | 30,127 |  |  | 34,029 |
_________________________________________________________ (1)The fair value measurements of the Term Loan Credit Agreement, Other long-term debt, 7.75% Senior Secured Notes, Term Loan B Facility, and 12.875% Senior Secured Notes are considered Level 2 measurements in the fair value hierarchy as discussed below. (2)The fair value measurement of the ABL Credit Facility, LC Facility, and the Prior ABL Credit Facility is considered a Level 3 measurement in the fair value hierarchy. (3)The 7.75% Senior Secured Notes, Term Loan B Facility, and 12.875% Senior Secured Notes were fully repaid in 2023, please read Note 11—Debt for more information. The fair value of the Term Loan Credit Agreement, Other long-term debt, 7.75% Senior Secured Notes, Term Loan B Facility, and 12.875% Senior Secured Notes 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 Term Loan Credit Agreement, Other long-term debt, 7.75% Senior Secured Notes, Term Loan B Facility, and 12.875% Senior Secured Notes may not be actively traded. The carrying value of our ABL Credit Facility was determined to approximate fair value as of September 30, 2023. 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 -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 2 -Publisher FASB -URI https://asc.fasb.org//1943274/2147482106/820-10-50-2 + Details
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