Fair Value Measurements (Notes)

3 Months Ended

Mar. 31, 2017

Fair Value Measurements [Abstract]

Fair Value Measurements

Fair Value Measurements

The fair values of financial instruments are estimated based upon current market conditions and quoted market prices for the same or similar instruments. Management estimates that the carrying value approximates fair value for all of Delek’s assets and liabilities that fall under the scope of ASC 825, Financial Instruments ("ASC 825").

Delek applies the provisions of ASC 820, Fair Value Measurements ("ASC 820"), which defines fair value, establishes a framework for its measurement and expands disclosures about fair value measurements. ASC 820 applies to our commodity derivatives that are measured at fair value on a recurring basis. The standard also requires that we assess the impact of nonperformance risk on our derivatives. Nonperformance risk is not considered material to our financial statements at this time.

ASC 820 requires disclosures that categorize assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are observable inputs other than quoted prices included within Level 1 for the asset or liability, either directly or indirectly through market-corroborated inputs. Level 3 inputs are unobservable inputs for the asset or liability reflecting our assumptions about pricing by market participants.

Over the counter ("OTC") commodity swaps, physical commodity purchase and sale contracts and interest rate swaps and caps are generally valued using industry-standard models that consider various assumptions, including quoted forward prices, spot prices, interest rates, time value, volatility factors and contractual prices for the underlying instruments, as well as other relevant economic measures. The degree to which these inputs are observable in the forward markets determines the classification as Level 2 or 3. Our contracts are valued based on exchange pricing and/or price index developers such as Platts or Argus and are, therefore, classified as Level 2.

The U.S. Environmental Protection Agency ("EPA") requires certain refiners to blend biofuels into the fuel products they produce pursuant to the EPA’s Renewable Fuel Standard - 2.  Alternatively, credits called RINs, which may be generated and/or purchased, can be used to satisfy this obligation instead of physically blending biofuels ("RINs Obligation"). Our RINs Obligation surplus or deficit is based on the amount of RINs we must purchase, net of amounts internally generated and purchased and the price of those RINs as of the balance sheet date. The RINs Obligation surplus or deficit is categorized as Level 2 and is measured at fair value based on quoted prices from an independent pricing service.

On March 1, 2017, the El Dorado refinery received approval from the EPA for a small refinery exemption from the requirements of the renewable fuel standard for the 2016 calendar year. This waiver resulted in a reduction of our RINs Obligation and related cost of goods sold of approximately $47.5 million for the three months ended March 31, 2017.

From time to time, Delek enters into future commitments to purchase or sell RINs at fixed prices and quantities, which are used to manage the costs associated with our RINs Obligation. These future RIN commitment contracts meet the definition of derivative instruments under ASC 815, Derivatives and Hedging ("ASC 815"). They are categorized as Level 2, and are measured at fair value based on quoted prices from an independent pricing service. Changes in the fair value of these future RIN commitment contracts are recorded in cost of goods sold on the consolidated statements of income.

We have elected to account for our J. Aron step-out liability at fair value in accordance with ASC 825, as it pertains to the fair value option. This standard permits the election to carry financial instruments and certain other items similar to financial instruments at fair value on the balance sheet, with all changes in fair value reported in earnings. Our J. Aron step-out liability is categorized as Level 2, and is measured at fair value using market prices for the consigned crude oil and refined products we are required to repurchase from J. Aron at the end of the term of the Supply and Offtake Agreement.

The fair value hierarchy for our financial assets and liabilities accounted for at fair value on a recurring basis at March 31, 2017 and December 31, 2016, was as follows (in millions):

	As of March 31, 2017
	Level 1		Level 2			Level 3		Total
Assets
OTC commodity swaps	$	—	$	28.5		$	—	$	28.5
RINs Obligation surplus	—		15.0			—		15.0
Total assets	—		43.5			—		43.5
Liabilities
OTC commodity swaps	—		(70.6		)	—		(70.6		)
RIN commitment contracts	—		(3.4		)	—		(3.4		)
J. Aron step-out liability	—		(130.2		)	—		(130.2		)
Total liabilities	—		(204.2		)	—		(204.2		)
Net liabilities	$	—	$	(160.7	)	$	—	$	(160.7	)

	As of December 31, 2016
	Level 1		Level 2			Level 3		Total
Assets
OTC commodity swaps	$	—	$	53.1		$	—	$	53.1
RINs Obligation surplus	—		4.9			—		4.9
Total assets	—		58.0			—		58.0
Liabilities
OTC commodity swaps	—		(103.6		)	—		(103.6		)
RIN commitment contracts	—		(0.8		)	—		(0.8		)
RINs Obligation deficit	—		(25.6		)	—		(25.6		)
J. Aron step-out liability	—		(144.8		)	—		(144.8		)
Total liabilities	—		(274.8		)	—		(274.8		)
Net liabilities	$	—	$	(216.8	)	$	—	$	(216.8	)

The derivative values above are based on analysis of each contract as the fundamental unit of account as required by ASC 820. Derivative assets and liabilities with the same counterparty are not netted where the legal right of offset exists. This differs from the presentation in the financial statements which reflects our policy under the guidance of ASC 815-10-45, wherein we have elected to offset the fair value amounts recognized for multiple derivative instruments executed with the same counterparty and where the legal right of offset exists. As of March 31, 2017 and December 31, 2016, $8.9 million and $14.7 million, respectively, of cash collateral was held by counterparty brokerage firms and has been netted with the net derivative positions with each counterparty.