Fair Value Measurements

6 Months Ended

Jun. 30, 2020

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair Value Measurements

In accordance with ASC 820, the Company uses a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. Observable inputs are from sources independent of the Company. Unobservable inputs reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. These tiers include the following:

• Level 1 — inputs include observable unadjusted quoted prices in active markets for identical assets or liabilities

• Level 2 — inputs include other than quoted prices in active markets that are either directly or indirectly observable

• Level 3 — inputs include unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions

In determining fair value, the Company uses various valuation techniques and prioritizes the use of observable inputs. The availability of observable inputs varies from instrument to instrument and depends on a variety of factors including the type of instrument, whether the instrument is actively traded and other characteristics particular to the instrument. For many financial instruments, pricing inputs are readily observable in the market, the valuation methodology used is widely accepted by market

participants and the valuation does not require significant management judgment. For other financial instruments, pricing inputs are less observable in the marketplace and may require management judgment.

Recurring Fair Value Measurements

Derivative Assets and Liabilities

Derivative instruments are reported in the accompanying unaudited condensed consolidated financial statements at fair value. The Company’s derivative instruments consist of over-the-counter contracts, which are not traded on a public exchange. Substantially all of the Company’s derivative instruments are with counterparties that have long-term credit ratings of at least A3 and BBB+ by Moody’s and S&P, respectively.

Commodity derivative instruments are measured at fair value using a market approach. To estimate the fair values of the Company’s commodity derivative instruments, the Company uses the forward rate, the strike price, contractual notional amounts, the risk-free rate of return and contract maturity. Various analytical tests are performed to validate the counterparty data. The fair values of the Company’s derivative instruments are adjusted for nonperformance risk and creditworthiness of the counterparty through the Company’s credit valuation adjustment (“CVA”). The CVA is calculated at the counterparty level utilizing the fair value exposure at each payment date and applying a weighted probability of the appropriate survival and marginal default percentages. The Company uses the counterparty’s marginal default rate and the Company’s survival rate when the Company is in a net asset position at the payment date and uses the Company’s marginal default rate and the counterparty’s survival rate when the Company is in a net liability position at the payment date. As a result of applying the applicable CVA at June 30, 2020 and December 31, 2019, the Company’s net assets and net liabilities changed, in each case, by an immaterial amount.

Observable inputs utilized to estimate the fair values of the Company’s derivative instruments were based primarily on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. Based on the use of various unobservable inputs, principally non-performance risk, creditworthiness of the counterparties and unobservable inputs in the forward rate, the Company has categorized these derivative instruments as Level 3. Significant increases (decreases) in any of those unobservable inputs in isolation would result in a significantly lower (higher) fair value measurement. The Company believes it has obtained the most accurate information available for the types of derivative instruments it holds. Please read Note 9 - “Derivatives” for further information on derivative instruments.

Pension Assets

Pension assets are reported at fair value in the accompanying unaudited condensed consolidated financial statements. At June 30, 2020, the Company’s investments associated with its pension plan consisted of (i) cash and cash equivalents, (ii) fixed income bond funds, (iii) mutual equity funds, and (iv) mutual balanced funds. The fixed income bond funds, mutual equity funds, and mutual balanced funds are measured at fair value using a market approach based on quoted prices from national securities exchanges and are categorized in Level 1 of the fair value hierarchy.

Liability Awards

Unit-based compensation liability awards are awards that are currently expected to be settled in cash on their vesting dates, rather than in equity units (“Liability Awards”). The Liability Awards are categorized as Level 1 because the fair value of the Liability Awards is based on the Company’s quoted closing unit price as of each balance sheet date.

Renewable Identification Numbers Obligation

The Company’s RINs Obligation is categorized as Level 2 and is measured at fair value using the market approach based on quoted prices from an independent pricing service. Please read Note 6 - “Commitments and Contingencies” for further information on the Company’s RINs Obligation.

Precious Metals Leases

The fair value of precious metals leases is based upon unadjusted exchange-quoted prices and is, therefore, classified within Level 1 of the fair value hierarchy.

Hierarchy of Recurring Fair Value Measurements

The Company’s recurring assets and liabilities measured at fair value were as follows (in millions):

	June 30, 2020												December 31, 2019
	Level 1			Level 2			Level 3			Total			Level 1			Level 2			Level 3			Total
Assets:
Derivative assets:
Natural gas swaps	$	—		$	—		$	(0.2	)	$	(0.2	)	$	—		$	—		$	—		$	—
Gasoline crack spread swaps	—			—			4.6			4.6			—			—			1.3			1.3
Inventory financing obligation	—			—			4.4			4.4			—			—			—			—
Diesel crack spread swaps	—			—			9.5			9.5			—			—			0.4			0.4
Diesel - MEH crack spread swaps	—			—			0.9			0.9			—			—			—			—
2/1/1 crack spread swaps	—			—			—			—			—			—			0.5			0.5
WCS crude oil basis swaps	—			—			4.9			4.9			—			—			(1.3		)	(1.3		)
Total derivative assets	$	—		$	—		$	24.1		$	24.1		$	—		$	—		$	0.9		$	0.9
Pension plan investments	31.9			—			—			31.9			32.5			—			—			32.5
Total recurring assets at fair value	$	31.9		$	—		$	24.1		$	56.0		$	32.5		$	—		$	0.9		$	33.4
Liabilities:
Derivative liabilities:
Inventory financing obligation	$	—		$	—		$	—		$	—		$	—		$	—		$	(7.2	)	$	(7.2	)
Total derivative liabilities	—			—			—			—			—			—			(7.2		)	(7.2		)
RINs Obligation	—			(58.8		)	—			(58.8		)	—			(13.0		)	—			(13.0		)
Precious Metals leases	(5.0		)	—			—			(5.0		)	(5.8		)	—			—			(5.8		)
Liability Awards	(8.4		)	—			—			(8.4		)	(7.4		)	—			—			(7.4		)
Total recurring liabilities at fair value	$	(13.4	)	$	(58.8	)	$	—		$	(72.2	)	$	(13.2	)	$	(13.0	)	$	(7.2	)	$	(33.4	)

The table below sets forth a summary of net changes in fair value of the Company’s Level 3 financial assets and liabilities (in millions):

	Six Months Ended June 30,
	2020			2019
Fair value at January 1,	$	(6.3	)	$	19.8
Realized (gain) loss on derivative instruments	(19.4		)	(34.2		)
Unrealized gain (loss) on derivative instruments	30.4			(14.8		)
Settlements	19.4			34.2
Fair value at June 30,	$	24.1		$	5.0
Total gain (loss) included in net income (loss) attributable to changes in unrealized gain (loss) relating to financial assets and liabilities held as of June 30,	$	30.4		$	(14.8	)

All settlements from derivative instruments not designated as hedges are recorded in Gain on derivative instruments in the unaudited condensed consolidated statements of operations. Please read Note 9 - “Derivatives” for further information on derivative instruments.

Nonrecurring Fair Value Measurements

Certain non-financial assets and liabilities are measured at fair value on a nonrecurring basis and are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. Assets and liabilities acquired in business combinations are recorded at their fair value as of the date of acquisition.

The Company assesses goodwill for impairment annually and whenever events or changes in circumstances indicate its carrying value may not be recoverable. The fair value of the reporting units is determined using the income approach. The income approach focuses on the income-producing capability of an asset, measuring the current value of the asset by calculating the present value of its future economic benefits such as cash earnings, cost savings, corporate tax structure and product offerings. Value indications are developed by discounting expected cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of funds, the expected rate of inflation and risks associated with the reporting unit. These assets would generally be classified within Level 3, in the event that the Company were required to measure and record such assets at fair value within its unaudited condensed consolidated financial statements.

The Company periodically evaluates the carrying value of long-lived assets to be held and used, including definite-lived intangible assets and property, plant and equipment, when events or circumstances warrant such a review. Fair value is determined primarily using anticipated cash flows assumed by a market participant discounted at a rate commensurate with the risk involved and these assets would generally be classified within Level 3, in the event that the Company was required to measure and record such assets at fair value within its unaudited condensed consolidated financial statements.

The Company’s investment in FHC is a non-marketable equity security without a readily determinable fair value. The Company recorded this investment using a measurement alternative which measures the security at cost minus impairment, if any, plus or minus changes resulting from qualifying observable price changes with a same or similar security from the same issuer. The investment in FHC is recorded at fair value only if an impairment or observable price adjustment is recognized in the current period. If an observable price adjustment or impairment is recognized, the Company would classify this asset as Level 3 within the fair value hierarchy based on the nature of the fair value inputs. In the second quarter of 2019, the Company recorded an impairment charge of $16.1 million on the investment in FHC and the categorization of the framework used to value the assets is considered Level 3. Please read Note 14 - “Investment in Unconsolidated Affiliates” for further information.

Estimated Fair Value of Financial Instruments

Cash and cash equivalents

The carrying value of cash and cash equivalents is each considered to be representative of its fair value.

Debt

The estimated fair value of long-term debt at June 30, 2020 and December 31, 2019, consists primarily of senior notes. The estimated aggregate fair value of the Company’s senior notes defined as Level 1 was based upon quoted market prices in an active market. The estimated fair value of the Company’s senior notes defined as Level 2 was based upon quoted prices for identical or similar liabilities in markets that are not active. The carrying value of borrowings, if any, under the Company’s revolving credit facility, finance lease obligations and other obligations approximate their fair values as determined by discounted cash flows and are classified as Level 3. Please read Note 8 - “Long-Term Debt” for further information on long-term debt.

The Company’s carrying and estimated fair value of the Company’s financial instruments, carried at adjusted historical cost were as follows (in millions):

		June 30, 2020				December 31, 2019
	Level	Fair Value		Carrying Value		Fair Value		Carrying Value
Financial Instrument:
2022 Notes and 2023 Notes	1	$	644.1	$	669.4	$	676.4	$	668.1
2025 Notes	2	$	533.2	$	541.4	$	598.8	$	540.5
Revolving credit facility	3	$	110.3	$	110.3	$	—	$	—
Finance lease and other obligations	3	$	6.9	$	6.9	$	6.5	$	6.5