Note 9—Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Common stock warrants. As of June 30, 2015 and December 31, 2014, we had 749,148 common stock warrants outstanding. We estimate the fair value of our outstanding common stock warrants using a Monte Carlo simulation analysis, which is considered to be a Level 3 fair value measurement. Significant inputs used in the Monte Carlo simulation analysis include:



	June 30, 2015	December 31, 2014
Stock price	$18.72	$16.25
Weighted average exercise price	$0.10	$0.10
Term (years)	7.17	7.67
Risk-free rate	2.09%	2.01%
Expected volatility	44.5%	50.2%

The expected volatility is based on the 10-year historical volatilities of comparable public companies. Based on the Monte Carlo simulation analysis, the estimated fair value of the common stock warrants was $18.46 and $16.17 per share as of June 30, 2015 and December 31, 2014, respectively. Since the common stock warrants were in the money upon issuance, we do not believe that changes in the inputs to the Monte Carlo simulation analysis will have a significant impact on the value of the common stock warrants other than changes in the value of our common stock. Increases in the value of our common stock will increase the value of the common stock warrants. Likewise, a decrease in the value of our common stock will result in a decrease in the value of the common stock warrants.

Contingent consideration. The cash consideration for our acquisition of HIE may be increased pursuant to an earn out provision. The liability is remeasured at the end of each reporting period using a Monte Carlo simulation analysis. Significant inputs used in the valuation model include estimated future gross margin, annual gross margin volatility and a present value factor. We consider this to be a Level 3 fair value measurement. Please read Note 10—Commitments and Contingencies for further discussion.

Derivative instruments. We utilize crude oil commodity derivative contracts to manage our price exposure to our inventory positions, future purchases of crude oil, and future sales of refined products. The derivative contracts that we execute to manage our price risk include exchange traded futures, options and over-the-counter (“OTC”) swaps. Our futures, options, and OTC swaps are marked-to-market and changes in the fair value of these contracts are recognized within Cost of revenues on our unaudited consolidated statements of operations.

We have entered into forward purchase contracts for crude oil and forward sales contracts of refined products. We elect the normal purchases normal sales (“NPNS”) exception for all forward contracts that meet the definition of a derivative and are not expected to net settle. Any gains and losses with respect to these forward contracts designated as NPNS are not reflected in earnings until the delivery occurs. During 2014, we entered into certain physical forward crude oil contracts that did not qualify for or for which we did not elect the normal NPNS exception. Changes in the fair value of those contracts were recorded in earnings. The fair value of our commodity derivatives were measured using the closing market price at the end of the reporting period obtained from the New York Mercantile Exchange and from third-party broker quotes and pricing providers.

We elect to offset fair value amounts recognized for derivative instruments executed with the same counterparty under a master netting agreement. Our consolidated unaudited balance sheets present derivative assets and liabilities on a net basis. Our cash margin that is required as collateral deposits cannot be offset against the fair value of open contracts except in the event of default.

Financial Statement Impact

Our assets and liabilities measured at fair value on a recurring basis as of June 30, 2015 and December 31, 2014 and their placement within our unaudited condensed consolidated balance sheets consist of the following (in thousands):



	Balance Sheet Location	June 30, 2015			December 31, 2014
		Asset (Liability)
Common stock warrants	Common stock warrants	$	(13,832	)	$	(12,123	)
Contingent consideration	Contingent consideration	(23,555		)	(9,131		)
Exchange traded futures⁽¹⁾	Other accrued liabilities	(1,229		)	—
Exchange traded futures	Prepaid and other current assets	—			1,015
Exchange traded options	Prepaid and other current assets	617			—
OTC swaps	Prepaid and other current assets	1,201			—

_________________________________________________________

⁽¹⁾ Does not include cash collateral of $4.2 million recorded in Prepaid and other current assets as of June 30, 2015.

The following table summarizes the pre-tax gains (losses) recognized in Net income (loss) on our unaudited condensed consolidated statement of operations resulting from changes in assets and liabilities valued at fair value (in thousands):



	Income Statement Classification	Three Months Ended June 30, 2015			Three Months Ended June 30, 2014			Six Months Ended June 30, 2015			Six Months Ended June 30, 2014
Common stock warrants	Change in value of common stock warrants	$	3,313		$	140		$	(1,709	)	$	1,717
Contingent consideration	Change in value of contingent consideration	(9,495		)	2,297			(14,424		)	4,762
Exchange traded futures	Cost of revenues	1,338			(340		)	762			(191		)
Commodities - physical forward contracts	Cost of revenues	—			(625		)	—			(1,141		)
Exchange traded options	Cost of revenues	1,763			—			609			—
OTC swaps	Cost of revenues	1,201			—			1,201			—

Our assets and liabilities measured at fair value on a recurring basis as of June 30, 2015 and December 31, 2014 and their level within the fair value hierarchy are as follows (in thousands):



	June 30, 2015
	Fair Value			Level 1			Level 2		Level 3
Common stock warrants	$	(13,832	)	$	—		$	—	$	(13,832	)
Contingent consideration	(23,555		)	—			—		(23,555		)
Commodity derivatives	589			(612		)	1,201		—



	December 31, 2014
	Fair Value			Level 1		Level 2		Level 3
Common stock warrants	$	(12,123	)	$	—	$	—	$	(12,123	)
Contingent consideration	(9,131		)	—		—		(9,131		)
Commodity derivatives	1,015			1,015		—		—

A roll forward of Level 3 derivative instruments measured at fair value on a recurring basis is as follows (in thousands):



	Three Months Ended June 30, 2015			Three Months Ended June 30, 2014			Six Months Ended June 30, 2015			Six Months Ended June 30, 2014
Balance, at beginning of period	$	(31,205	)	$	(25,274	)	$	(21,254	)	$	(29,316	)
Settlements	—			—			—			—
Acquired	—			—			—			—
Total unrealized income (loss) included in earnings	(6,182		)	2,437			(16,133		)	6,479
Balance, at end of period	$	(37,387	)	$	(22,837	)	$	(37,387	)	$	(22,837	)

The carrying value and fair value of long-term debt and other financial instruments as of June 30, 2015 and December 31, 2014 are as follows (in thousands):



	June 30, 2015
	Carrying Value		Fair Value ⁽¹⁾
Term Loan	$	93,521	$	100,514
HIE Retail Credit Agreement ⁽²⁾	28,928		28,928
Mid Pac Credit Agreement ⁽²⁾	48,958		48,958
Common stock warrants	13,832		13,832
Contingent consideration	23,555		23,555



	December 31, 2014
	Carrying Value		Fair Value ⁽¹⁾
Term Loan	$	87,360	$	87,068
HIE Retail Credit Agreement ⁽²⁾	22,750		22,750
Texadian Uncommitted Credit Agreement	26,500		26,500
Common stock warrants	12,123		12,123
Contingent consideration	9,131		9,131

_________________________________________________________

⁽¹⁾ The fair values of these instruments are considered Level 3 measurements in the fair value hierarchy.

⁽²⁾ Fair value approximates carrying value due to the floating rate interest which approximates a current market rate.

We estimate the fair value of our long-term debt using a discounted cash flow analysis and an estimate of the current yield of 11.36% and 14.11% as of June 30, 2015 and December 31, 2014, respectively, by reference to market interest rates for term debt of comparable companies.

The fair value of all non-derivative financial instruments included 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.