Note 13—Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Purchase Price Allocation of Wyoming Refining

The preliminary fair values of the assets acquired and liabilities assumed as a result of the Wyoming Refining acquisition were estimated as of July 14, 2016, the date of the acquisition, using valuation techniques described in notes (1) through (5) described below.



				Valuation
	Fair Value			Technique
	(in thousands)
Net working capital	$	(11,590	)	(1)
Property, plant and equipment	254,367			(2)
Goodwill	64,994			(3)
Long-term debt	(68,136		)	(4)
Other non-current liabilities	(30,269		)	(5)
Total	$	209,366


(1)	Current assets acquired and liabilities assumed were recorded at their net realizable value.

(2)

The fair value of property, plant and equipment was estimated using the cost approach. Under the cost approach, the total replacement cost of the property is determined based on industry sources with adjustments for regional factors. The total cost is then adjusted for depreciation based on the physical age of the assets and obsolescence. The fair value of the land was estimated using the sales comparison approach. Under this approach, the sales prices of similar properties are adjusted to account for differences in land characteristics. We consider this to be a Level 3 fair value measurement.


(3)	The excess of the purchase price paid over the fair value of the identifiable assets acquired and liabilities assumed is allocated to goodwill.


(4)	Long-term debt was recorded at carrying value. The carrying value of long-term debt approximates fair value due to its floating interest rate.

(5)

Other non-current liabilities include environmental liabilities and the underfunded status of the Wyoming Refining defined benefit plan. The underfunded status of the defined benefit plan represents the difference between the fair value of the plan's assets and the projected benefit obligations. Environmental liabilities are based on management’s best estimates of probable future costs using current available information. We consider this to be a Level 3 fair value measurement.

Purchase Price Allocation of Mid Pac

The fair values of the assets acquired and liabilities assumed as a result of the Mid Pac acquisition were estimated as of April 1, 2015, the date of the acquisition, using valuation techniques described in notes (1) through (7) described below.



				Valuation
	Fair Value			Technique
	(in thousands)
Net working capital	$	15,989		(1)
Property, plant and equipment	40,997			(2)
Land	34,800			(3)
Goodwill	26,942			(4)
Intangible assets	33,647			(5)
Other non-current assets	1,228			(7)
Deferred tax liability	(16,759		)	(6)
Other non-current liabilities	(7,235		)	(7)
Total	$	129,609


(1)	Current assets acquired and liabilities assumed were recorded at their net realizable value.

(2)

The fair value of the property, plant and equipment was estimated using the cost approach. Under the cost approach, the total replacement cost of the property is determined based on industry sources with adjustments for regional factors. The total cost is then adjusted for depreciation based on the physical age of the assets and obsolescence. We consider this to be a Level 3 fair value measurement.


(3)	The fair value of the land was estimated using the sales comparison approach. Under this approach, the sales prices of similar properties are adjusted to account for differences in land characteristics. We consider this to be a Level 3 fair value measurement.


(4)	The excess of the purchase price paid over the fair value of the identifiable assets acquired and liabilities assumed is allocated to goodwill.

(5)

The fair value of customer relationships was estimated using the Excess Earnings Method. Significant inputs used in this model include estimated revenue attributable to the customer relationship and estimated attrition rates. The fair value of the trade names and trademarks was estimated using the Relief from Royalty Method. Significant inputs used in this model include estimated revenue attributable to the trade names and trademarks and a royalty rate. We consider this to be a Level 3 fair value measurement.


(6)	The deferred tax liability was determined based on the differences between the tax bases of the assets acquired and liabilities assumed and the values of those assets and liabilities recognized on our consolidated balance sheets as of the date of acquisition.


(7)	Other non-current assets and liabilities were recorded at their estimated net present value. We consider this to be a Level 3 fair value measurement.

Investment in Laramie Energy

At December 31, 2015, we conducted an impairment test related to our equity investment in Laramie Energy. As a result of the decline in commodity prices during 2015, we concluded that our equity investment in Laramie Energy was impaired and recognized an other-than-temporary impairment charge of $41.1 million on our consolidated statement of operations for the year ended December 31, 2015. We primarily used a market approach to determine the fair value of our equity investment in Laramie Energy as of December 31, 2015. We used the income approach to corroborate our fair value measurement of Laramie Energy under the market approach. We consider this to be a Level 2 fair value measurement. During 2016, there was no impairment recorded in connection with our investment in Laramie Energy.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Common stock warrants

As of December 31, 2016 and 2015, we had approximately 354,350 and 345,135 common stock warrants outstanding, respectively. Beginning with the first quarter 2016, we estimate the fair value of our outstanding common stock warrants using the difference between the strike price of the warrant and the market price of our common stock, which is a Level 3 fair value measurement. As of December 31, 2016, the warrants had a weighted-average exercise price of $0.10 and a remaining term of 5.67 years. Previously, we estimated the fair value of our outstanding common stock warrants using a simulation model, which is considered to be a Level 3 fair value measurement. Significant inputs used in the simulation model as of December 31, 2015 included:



	December 31,
	2015
Stock price	$	23.54
Weighted-average exercise price	$	0.10
Term (years)	6.67
Risk-free interest rate	2.04		%
Expected volatility	43.0		%

The expected volatility was based on the 7-year historical volatilities of comparable public companies. The estimated fair value of the common stock warrants was $14.49 and $23.47 per share as of December 31, 2016 and 2015, respectively. Since the common stock warrants were in the money upon issuance, we do not believe that changes in the inputs to the simulation models will have a significant impact to 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, decreases in the value of our common stock will result in a decrease in the value of the common stock warrants.

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. We utilize interest rate swaps to manage our interest rate risk. Please read Note 12—Derivatives for further information on derivatives.

We are obligated to repurchase the crude oil and refined products from J. Aron at the termination of the Supply and Offtake Agreements. We have determined that this obligation contains an embedded derivative, similar to forward purchase contracts of crude oil and refined products. As such, we have accounted for this embedded derivative at fair value with changes in the fair value recorded in Cost of revenues (excluding depreciation) on our consolidated statements of operations.

Upon redemption of our 5.00% Convertible Senior Notes on or after June 20, 2019 at our election, we are obligated to pay a make-whole premium equal to the present value of the remaining scheduled payments of interest on the 5% Convertible Senior Notes to be redeemed from the relevant redemption date to the maturity date of June 15, 2021. We have determined that the redemption option and the related make-whole premium represent an embedded derivative that is not clearly and closely related to the 5.00% Convertible Senior Notes. As of December 31, 2016, this embedded derivative was deemed to have a de minimis fair value.

We classify financial assets and liabilities according to the fair value hierarchy. Financial assets and liabilities classified as Level 1 instruments are valued using quoted prices in active markets for identical assets and liabilities. These include our exchange traded futures. Level 2 instruments are valued using quoted prices for similar assets and liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability. Our Level 2 instruments include OTC swaps and options. These commodity derivatives are valued using market quotations from independent price reporting agencies and commodity exchange price curves that are corroborated with market data. Level 3 instruments are valued using significant unobservable inputs that are not supported by sufficient market activity. The valuation of our J. Aron repurchase obligation derivative requires that we make estimates of the prices and differentials assuming settlement at the end of the reporting period; therefore it is classified as level 3. We do not have other commodity derivatives classified as Level 3 at December 31, 2016 or 2015. Please read Note 12—Derivatives for further information on derivatives.

Contingent consideration

The cash consideration for our acquisition of PHR may be adjusted pursuant to an earnout provision. The liability is remeasured at the end of each reporting period using an estimate based on actual results to date and a Monte Carlo simulation analysis for future periods. Significant inputs used in the valuation model include estimated future gross margin, annual gross margin volatility and a present value factor. As of December 31, 2016, the earn-out measurement period is complete and our estimated liability no longer relies on forecasts and simulations. We consider this to be a Level 3 fair value measurement. See Note 14—Commitments and Contingencies for further discussion.

Financial Statement Impact

Fair value amounts by hierarchy level as of December 31, 2016 and 2015 are presented gross in the tables below (in thousands):



	December 31, 2016
	Level 1			Level 2			Level 3			Gross Fair Value			Effect of Counter-party Netting			Net Carrying Value on Balance Sheet (1)
Assets
Commodity derivatives	$	190		$	26,095		$	—		$	26,285		$	(23,537	)	$	2,748
Interest rate derivatives	—			3,602			—			3,602			(64		)	3,538
Total	$	190		$	29,697		$	—		$	29,887		$	(23,601	)	$	6,286

Liabilities
Common stock warrants	$	—		$	—		$	(5,134	)	$	(5,134	)	$	—		$	(5,134	)
Contingent consideration	—			—			—			—			—			—
Commodity derivatives	(54		)	(24,078		)	—			(24,132		)	23,537			(595		)
J. Aron repurchase obligation derivative	—			—			(20,000		)	(20,000		)	—			(20,000		)
Interest rate derivatives	—			(158		)	—			(158		)	64			(94		)
Total	$	(54	)	$	(24,236	)	$	(25,134	)	$	(49,424	)	$	23,601		$	(25,823	)



	December 31, 2015
	Level 1			Level 2			Level 3			Gross Fair Value			Effect of Counter-party Netting			Net Carrying Value on Balance Sheet (1)
Assets
Commodity derivatives	$	429		$	33,797		$	—		$	34,226		$	(29,649	)	$	4,577
J.Aron repurchase obligation derivative	—			—			9,810			9,810			(9,810		)	—
Total	$	429		$	33,797		$	9,810		$	44,036		$	(39,459	)	$	4,577

Liabilities
Common stock warrants	$	—		$	—		$	(8,096	)	$	(8,096	)	$	—		$	(8,096	)
Contingent consideration	—			—			(27,581		)	(27,581		)	—			(27,581		)
Commodity derivatives	(396		)	(43,712		)	—			(44,108		)	29,649			(14,459		)
J.Aron repurchase obligation derivative	—			—			—			—			9,810			9,810
Total	$	(396	)	$	(43,712	)	$	(35,677	)	$	(79,785	)	$	39,459		$	(40,326	)

_________________________________________________________


(1)	Does not include cash collateral of $9.7 million and $28.0 million as of December 31, 2016 and 2015, respectively included on our consolidated balance sheets.

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



	Year Ended December 31,
	2016			2015			2014
Beginning balance	$	(25,867	)	$	(21,254	)	$	(29,316	)
Settlements	16,810			7,691			780
Acquired	—			(2,844		)	—
Total unrealized income (loss) included in earnings	(16,077		)	(9,460		)	7,282
Ending balance	$	(25,134	)	$	(25,867	)	$	(21,254	)

The carrying value and fair value of long-term debt and other financial instruments as of December 31, 2016 and 2015 is as follows (in thousands):



	Carrying Value		Fair Value (1)
December 31, 2016
Hawaii Retail Credit Agreement (2)	$	93,853	$	93,853
5% Convertible Senior Notes due 2021 (3)	91,029		122,229
Term Loan	57,426		62,367
Par Wyoming Holdings Term Loan (2)	65,908		65,908
Wyoming Refining Senior Secured Term Loan (2)	55,480		55,480
Wyoming Refining Senior Secured Revolver (2)	6,700		6,700
Common stock warrants	5,134		5,134



December 31, 2015
Hawaii Retail Credit Agreement (2)	$	110,000	$	110,000
Term Loan	60,119		62,037
Common stock warrants	8,096		8,096
Contingent consideration	27,581		27,581

_________________________________________________________


(1)	The fair values of these instruments are considered Level 3 measurements in the fair value hierarchy with the exception of the fair value measurement of the 5.00% Convertible Senior Notes which is considered a Level 2 measurement as discussed below.


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


(3)	The carrying value of the 5.00% Convertible Senior Notes excludes the fair value of the equity component, which was classified as equity upon issuance.

We estimate the fair value of the Term Loan using a discounted cash flow analysis and an estimate of the current yield of 11.06% and 9.63% as of December 31, 2016 and 2015, respectively, by reference to market interest rates for term debt of comparable companies.

The fair value of the 5.00% Convertible Senior Notes was determined by aggregating the fair value of the liability and equity components of the notes. The fair value of the liability component of the 5.00% Convertible Senior Notes was determined using a discounted cash flow analysis in which the projected interest and principal payments were discounted at an estimated market yield for a similar debt instrument without the conversion feature. The equity component was estimated based on the Black-Scholes model for a call option with strike price equal to the conversion price, a term matching the remaining life of the 5.00% Convertible Senior Notes and an implied volatility based on market values of options outstanding as of December 31, 2016. The fair value of the 5.00% Convertible Senior Notes is considered a Level 2 measurement in the fair value hierarchy.

The fair value of all non-derivative financial instruments included in current assets, including cash and cash equivalents, restricted cash and trade accounts receivable, current liabilities and accounts payable approximate their carrying value due to their short term nature.