FAIR VALUE OF FINANCIAL INSTRUMENTS, DERIVATIVES AND FAIR VALUE DISCLOSURES

The following methods and assumptions were used to estimate the fair value of each class of financial instrument.

Cash and cash equivalents and restricted cash— The carrying amounts reported in the consolidated balance sheets for interest-bearing deposits approximate their fair value.

Debt— The fair values of the Company’s publicly traded and non-public debt are estimated based on quoted market prices.

ASC 820, Fair Value Measurements and Disclosures, relating to fair value measurements, defines fair value and established a framework for measuring fair value. The ASC 820 fair value hierarchy distinguishes between market participant assumptions developed based on market data obtained from sources independent of the reporting entity and the reporting entity's own assumptions about market participant assumptions developed based on the best information available in the circumstances. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price. In addition, the fair value of assets and liabilities should include consideration of non-performance risk, which for the liabilities described below includes the Company's own credit risk.

The levels of the fair value hierarchy established by ASC 820 are as follows:

Level 1 - Quoted prices in active markets for identical assets or liabilities

Level 2 - Quoted prices for similar assets and liabilities in active markets or inputs that are observable

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value

of the assets or liabilities

Financial Instruments that are not Measured at Fair Value on a Recurring Basis

The estimated fair values of the Company’s financial instruments, other than derivatives, that are not measured at fair value on a recurring basis, categorized based upon the fair value hierarchy, at December 31, 2017 and 2016, are as follows:



	Carrying Value		Fair Value
	Carrying Value		Level 1		Level 2
December 31, 2017:
Assets
Cash (1)	$	166,269	$	166,269	$	—
Total	$	166,269	$	166,269	$	—
Liabilities
OBS Term loan	$	448,251	$	—	$	441,630
7.5% Election 2 notes due 2021	295		—		305
7.5% notes due 2024	390		—		380
Total	$	448,936	$	—	$	442,315



	Carrying Value		Fair Value
	Carrying Value		Level 1		Level 2
December 31, 2016:
Assets
Cash (1)	$	206,933	$	206,933	$	—
Total	$	206,933	$	206,933	$	—
Liabilities
8.125% notes due 2018	$	80,213	$	—	$	84,935
OBS Term loan	444,186		—		442,199
7.5% Election 2 notes due 2021	293		—		303
7.5% notes due 2024	390		—		392
Total	$	525,082	$	—	$	527,829

⁽¹⁾ Includes current and non-current restricted cash aggregating $275 and $15,844 at December 31, 2017 and 2016, respectively.

Derivatives

Interest Rate Risk

The Company manages its exposure to interest rate volatility risks by using interest rate caps and swap derivative instruments. At December 31, 2017 and 2016, OBS was party to an interest rate cap agreement (“Interest Rate Cap”) with a start date of February 15, 2015 with a major financial institution covering a notional amount of $375,000 to limit the floating interest rate exposure associated with the OBS Term Loan. The Interest Rate Cap was designated and qualified as a cash flow hedge and contains no leverage features. The Interest Rate Cap had a cap rate of 2.5% through February 5, 2017, at which time the cap rate increased to 3.0% through the termination date of February 5, 2018.

The following tables present information with respect to gains and losses on derivative positions reflected in the consolidated statements of operations or in the consolidated statements of other comprehensive income/(loss).

The effect of cash flow hedging relationships recognized in other comprehensive income/(loss) excluding amounts reclassified from accumulated other comprehensive loss (effective portion), including hedges of equity method investees, for the years ended December 31, 2017, 2016 and 2015 follows:



	For Years Ended December 31,
	2017			2016			2015
Interest Rate Cap of continuing operations	$	(2	)	$	(97	)	$	(1,537	)
Interest rate caps of discontinued operations	—			(3		)	(472		)
Interest rate swaps of discontinued operations	—			(5,794		)	(9,721		)
Total	$	(2	)	$	(5,894	)	$	(11,730	)

The effect of cash flow hedging relationships on the consolidated statements of operations is presented excluding hedges of equity method investees. The effect of the Company’s cash flow hedging relationships on the consolidated statement of operations for the years ended 2017 and 2016 is shown below:



	Statement of Operations
	Effective Portion of Gain/(Loss) Reclassified from Accumulated Other Comprehensive Loss				Ineffective Portion
	Location	Amount of Loss			Location	Amount of Loss
For the year ended December 31, 2017:
Interest Rate Cap	Interest expense	$	(1,423	)	Interest expense	$	—
Total		$	(1,423	)		$	—

For the year ended December 31, 2016:
Interest Rate Cap	Interest expense	$	(339	)	Interest expense	$	—
Interest rate caps	Net (loss)/income from discontinued operations	(408		)		—
Total		$	(747	)		$	—

For the year ended December 31, 2015:
Interest Rate Cap	Interest expense	$	(1	)	Interest expense	$	—
Interest rate caps	Net (loss)/income from discontinued operations	(2		)		—
		$	(3	)		$	—

See Note 15, “Accumulated Other Comprehensive Loss,” for disclosures relating to the impact of derivative instruments on accumulated other comprehensive loss.

Nonfinancial Instruments that are Measured at Fair Value on a Nonrecurring Basis

Vessel Impairments

Based on the sale of one of the Company's ATBs during the fourth quarter of 2017 (see Note 6, “Vessels, Other Property and Deferred Drydock”), the Company noted declines in the current fair market value for scrap metal in the U.S. for these vessel types. In addition, the Company determined that five of the Company's ATBs are more likely than not to be sold or disposed of during the next six to eighteen months, which is either at or towards the end of their estimated useful lives, at this lower scrap value. These factors were viewed as impairment triggering events for seven of the Company's rebuilt ATBs as of December 31, 2017. The indicators discussed above were not considered to be impairment triggering events for the other ATBs and tankers in the Company’s fleet as these vessels (i) were fairly recently built and do not face the same commercial obsolescence issues faced by the rebuilt ATBs, and (ii) are currently operating under long-term charters or contracts of affreightment.

In developing estimates of undiscounted future cash flows for performing Step 1 of the impairment tests, management made assumptions about future performance, including estimated charter rates, ship operating expenses, utilization, drydocking requirements, salvage value and the estimated remaining useful lives of the vessels. The assumptions about the estimated remaining useful lives of the seven ATBs reflects management’s current belief that the Company would dispose of these ATBs at the expiry of associated charters or before the performance of the next required drydocking. Based on tests performed, the sum of the undiscounted cash flows for four of the seven ATBs were less than their December 31, 2017 carrying values. Accordingly, the Company recorded an impairment charge of $5,878, which is included in loss on disposal of vessels and other property, including impairments in the consolidated statements of operations, to write down the carrying values of the four ATBs to their estimated fair values as of December 31, 2017, using estimates of discounted future cash flows for each of the vessels.

During the quarter ended September 30, 2016, the Company considered changes in circumstances that appeared to be indicative of a continued weakening of the Jones Act crude oil transportation market. Such indicators included a decline in the number of Jones Act tank vessels transporting crude oil, which led to (i) increased competition for clean cargoes and the idling of some Jones Act vessels; (ii) a sharp decrease in estimated spot rates for Jones Act Product Carriers and large ATBs between July and September 2016; and (iii) a significant decline in forecasted near term TCE rates reported by a leading third party industry analyst. These factors were viewed as an impairment triggering event for the Company’s eight rebuilt ATBs at September 30, 2016. In addition, given the uncertainty around how long the weak market conditions discussed above could last taking into consideration the large number of newbuildings scheduled for delivery, management believed it was more likely than not that some of the rebuilt ATBs will be laid-up, scrapped or disposed of before the end of their estimated useful lives, which currently ranged between 2019 and 2020. The indicators discussed above were not considered to be impairment triggering events for the other ATBs and tankers in the Company’s fleet as these vessels (i) were fairly recently built and do not face the same commercial obsolescence issues faced by the rebuilt ATBs, and (ii) are currently operating under long-term charters or contracts of affreightment.

In developing estimates of undiscounted future cash flows for performing Step 1 of the impairment tests, management made assumptions about future performance, with significant assumptions including charter rates, ship operating expenses, utilization, drydocking requirements, residual value and the estimated remaining useful lives of the vessels. The assumptions about the estimated remaining useful lives of the ATBs reflected management’s belief that the Company would scrap these ATBs at the expiry of their time charters. Based on tests performed, the sum of the undiscounted cash flows for seven of the eight rebuilt ATBs were less than their September 30, 2016 carrying values. Accordingly, the Company recorded an impairment charge of $97,782 (including $3,873 recorded as a reduction in deferred drydock costs) to write down the carrying values of the seven ATBs to their estimated fair values as of September 30, 2016, using estimates of discounted future cash flows for each of the vessels (income approach) since the secondhand sale and purchase market for the type of vessels owned by OSG is not considered to be robust.

During the fourth quarter of 2016, the Company gave consideration as to whether events or changes in circumstances had occurred since September 30, 2016 that could indicate that the carrying amounts of the vessels in the Company’s fleet may not be recoverable. The Company concluded that the decline in previously forecasted cash flows on one of the seven ATBs discussed above, due to a change in its expected deployment, constituted an impairment trigger event as of December 31, 2016. Based on the tests performed, an additional impairment charge of $6,623 was recorded in December 2016.

During the third quarter of 2015, in evaluating whether or not certain events or circumstances existing at that time resulted in a triggering event for impairment testing of the fleet, management gave consideration to various indicators of a weakening of the Jones Act crude oil transportation market that began to materialize during the period. Based on tests performed, the sum of the undiscounted cash flows for each of the six rebuilt ATBs were in excess of their September 30, 2015 carrying values and no impairment was therefore recorded at that date. As of December 31, 2015, management determined that there had been no significant changes in the facts and circumstances that existed at the end of September 30, 2015 that would warrant a change to the assumptions utilized in the undiscounted cash flows analysis on the six rebuilt ATBs prepared at that date. Accordingly, no further analysis was performed as of December 31, 2015.

The principal assumptions used in the Company's cash flow projections of our vessels mentioned above for the three years ended December 31, 2017 are considered to be Level 3 inputs.

Valuation of Intangible Assets

The Company’s intangible assets at December 31, 2017 and 2016 consisted of long-term customer relationships acquired as part of the 2006 purchase of Maritrans, Inc. The long-term customer relationships are being amortized on a straight-line basis over 20 years.

In 2017 and 2016, the factors that were determined to be impairment triggering events for the Company's vessels discussed above, were also considered impairment triggering events for the carrying value of the Company's intangible asset. The Company reduced its estimates of undiscounted future cash flows to reflect consideration of the impairment triggering events. Based on the results of the recoverability test performed, no intangible asset impairment was recorded in 2017 or 2016 as the net undiscounted cash flows from the asset group, attributable to these relationships, were in excess of the carrying value of the asset group. The principal assumptions used in the undiscounted future cash flows for our intangible assets, which were similar to those used in our cash flow projections of our vessels, are considered Level 3 inputs.