Fair Value Measurements

12 Months Ended

Dec. 31, 2019

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair Value Measurements

Our assets and liabilities that are measured at fair value include commodity derivatives, investment commodities, environmental credits obligations and Supply and Offtake Agreements. ASC 820 requires disclosures that we 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.

Our commodity derivative contracts, which consist of commodity swaps, exchange-traded futures, options and physical commodity forward purchase and sale contracts (that do not qualify as normal purchases or normal sales exception under ASC 815), are valued based on exchange pricing and/or price index developers such as Platts or Argus and are, therefore, classified as Level 2.

Investment commodities, which represent those commodities (generally crude oil) physically on hand as a result of trading activities with physical forward contracts, are valued using published market prices of the commodity on the applicable exchange and are, therefore, classified as Level 1.

Our RIN commitment contracts are 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 RIN commitment contracts are categorized as Level 2, and are measured at fair value based on quoted prices from an independent pricing service.

Our environmental credits obligation surplus or deficit is based on the amount of RINs or other emissions credits we must purchase, net of amounts internally generated and purchased and the price of those RINs or other emissions credits as of the balance sheet date by refinery/obligor. The environmental credits obligation surplus or deficit is categorized as Level 2, and is measured at fair value either directly through observable inputs or indirectly through market-corroborated inputs.

The environmental credits obligation is impacted by government regulation requiring such credits, and the obligation, and likewise the value of the underlying credits, may be impacted by exemptions granted by the regulatory agencies. During the third quarter of 2019, the Tyler, El Dorado and Krotz Springs refineries received approval from the EPA for a small refinery exemption from the requirements of the renewable fuel standard ("RIN Waivers") for the 2018 calendar year, which resulted in a reduction of our RINs Obligation and related cost of materials and other of approximately $20.7 million for the year ended December 31, 2019. During the first quarter 2019, the Tyler and Big Spring refineries received RIN Waivers for the 2017 calendar year, which had an immaterial impact on our results of operations, while the 2017 RIN Waivers for the El Dorado and Krotz Springs refineries received in March 2018 resulted in a reduction of our RINs Obligation and related cost of materials and other of approximately $90.9 million for the year ended December 31, 2018. In March 2017, the El Dorado refinery received a RIN Waiver for the 2016 calendar year which resulted in a reduction of our RINs Obligation and related cost of material other of approximately $47.5 million for the year ended December 31, 2017.

As of and for the years ended December 31, 2019 and 2018, we 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. As of December 31, 2018, our J. Aron step-out liability related to the El Dorado and Krotz Spring Supply and Offtake Agreements was categorized as Level 2, and measured at fair value using market prices for the consigned crude oil and refined products we were required to repurchase from J. Aron at the end of the term of the Supply and Offtake Agreement. With respect to the amended Supply and Offtake Agreements, such amendments being effective December 2018 for our Big Spring Agreement and January 2019 for our El Dorado and Krotz Springs Agreements and as all subsequently amended on September 19, 2019, we apply fair value measurement as follows: (1) we determine fair value for our amended fixed-price step-out liability based on changes in fair value related to interest rate risk where such obligation is categorized as Level 2; and (2) we determine fair value of the short-term commodity-indexed financing facility based on the market prices for the consigned crude oil and refined products collateralizing the financing/funding where such obligation is categorized as Level 2.

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

	As of December 31, 2019
	Level 1		Level 2			Level 3		Total
Assets
Commodity derivatives	$	—	$	240.3		$	—	$	240.3
Investment commodities	12.1		—			—		12.1
RIN commitment contracts	—		0.6			—		0.6
Environmental Credits Obligation surplus	—		16.8			—		16.8
Total assets	12.1		257.7			—		269.8
Liabilities
Commodity derivatives	—		(263.0		)	—		(263.0		)
RIN commitment contracts	—		(1.9		)	—		(1.9		)
Environmental credits obligation deficit	—		(18.5		)	—		(18.5		)
J. Aron supply and offtake obligations	—		(477.3		)	—		(477.3		)
Total liabilities	—		(760.7		)	—		(760.7		)
Net liabilities	$	12.1	$	(503.0	)	$	—	$	(490.9	)

	As of December 31, 2018
	Level 1		Level 2			Level 3		Total
Assets
Commodity derivatives	$	—	$	459.8		$	—	$	459.8
Investment commodities	15.8		—			—		15.8
RIN commitment contracts	—		2.0			—		2.0
Environmental credits obligation surplus	—		—			—		—
Total assets	15.8		461.8			—		477.6
Liabilities
Commodity derivatives	—		(409.0		)	—		(409.0		)
RIN commitment contracts	—		(6.7		)	—		(6.7		)
Environmental credits obligation deficit	—		(11.8		)	—		(11.8		)
J. Aron supply and offtake obligations	—		(362.2		)	—		(362.2		)
Total liabilities	—		(789.7		)	—		(789.7		)
Net liabilities	$	15.8	$	(327.9	)	$	—	$	(312.1	)

The derivative values above are based on analysis of each contract as the fundamental unit of account as required by ASC 820. In the table above, 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, 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 December 31, 2019 and 2018, $38.8 million and $(0.4) million, respectively, of cash collateral (obligation) was held by counterparty brokerage firms and has been netted with the net derivative positions with each counterparty. See Note 12 for further information regarding derivative instruments.