Quarterly report pursuant to Section 13 or 15(d)

9. Fair Value Measurements

v3.5.0.2
9. Fair Value Measurements
6 Months Ended
Jun. 30, 2016
Fair Value Disclosures [Abstract]  
Fair Value Measurements

The fair value hierarchy prioritizes the inputs used in valuation techniques into three levels, as follows:

 

· Level 1 – Observable inputs – unadjusted quoted prices in active markets for identical assets and liabilities;
     
· Level 2 – Observable inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data; and
     
· Level 3 – Unobservable inputs – includes amounts derived from valuation models where one or more significant inputs are unobservable. For fair value measurements using significant unobservable inputs, a description of the inputs and the information used to develop the inputs is required along with a reconciliation of Level 3 values from the prior reporting period.

 

The Company records its warrants, issued from 2010 through 2013, at fair value using Level 3 inputs.

 

Warrants – The Company’s warrants are valued using a Monte Carlo Binomial Lattice-Based valuation methodology, adjusted for marketability restrictions.

 

Significant assumptions used and related fair values for the warrants as of June 30, 2016 were as follows:

 

Original Issuance   Exercise Price     Volatility     Risk Free Interest Rate     Term (years)     Market Discount     Warrants Outstanding     Fair Value  
07/3/2012   $ 6.09       50.7%       0.45%       1.01       19.8%       211,000     $ 194,000  
12/13/2011   $ 8.43       51.9%       0.36%       0.45       13.8%       138,000       63,000  
                                                    $ 257,000  

 

Significant assumptions used and related fair values for the warrants as of December 31, 2015 were as follows:

 

Original Issuance   Exercise Price     Volatility     Risk Free Interest Rate     Term (years)     Market Discount     Warrants Outstanding     Fair Value  
07/3/2012   $ 6.09       49.1%       0.86%       1.51       22.9%       211,000     $ 200,000  
12/13/2011   $ 8.43       48.4%       0.65%       0.95       18.3%       138,000       73,000  
                                                    $ 273,000  

 

The estimated fair value of the warrants is affected by the above underlying inputs. Observable inputs include the values of exercise price, stock price, term and risk-free interest rate. As separate inputs, an increase (decrease) in either the term or risk free interest rate will result in an increase (decrease) in the estimated fair value of the warrant.

 

Unobservable inputs include volatility and market discount. An increase (decrease) in volatility will result in an increase (decrease) in the estimated warrant value and an increase (decrease) in the market discount will result in a decrease (increase) in the estimated warrant fair value.

 

The volatility utilized was a blended average of the Company’s historical volatility and implied volatilities derived from a selected peer group. The implied volatility component has remained relatively constant over time given that implied volatility is a forward-looking assumption based on observable trades in public option markets. Should the Company’s historical volatility increase (decrease) on a go-forward basis, the resulting value of the warrants would increase (decrease).

 

The market discount, or a discount for lack of marketability, is quantified using a Black-Scholes option pricing model, with a primary model input of assumed holding period restriction. As the assumed holding period increases (decreases), the market discount increases (decreases), conversely impacting the value of the warrant fair value.

 

Other Derivative Instruments – The Company’s other derivative instruments consist of commodity positions. The fair values of the commodity positions are based on quoted prices on the commodity exchanges and are designated as Level 1 inputs.

 

The following table summarizes recurring fair value measurements by level at June 30, 2016 (in thousands):

 

    Fair                    
    Value     Level 1     Level 2     Level 3  
Assets:                        
Derivative financial instruments (1)   $ 13,299     $ 13,299     $     $  
    $ 13,299     $ 13,299     $     $  
                                 
Liabilities:                                
Warrants (3)   $ (257 )   $     $     $ (257 )
Derivative financial instruments (4)     (12,166 )     (12,166 )            
    $ (12,423 )   $ (12,166 )   $     $ (257 )

 

The following table summarizes recurring fair value measurements by level at December 31, 2015 (in thousands):

 

  Fair                    
  Value     Level 1     Level 2     Level 3  
Assets:                                
Derivative financial instruments (1)   $ 2,081     $ 2,081     $     $  
Defined benefit plan assets (2)                                
   (pooled separate accounts):                                
Large U.S. Equity     3,662             3,662        
Small/Mid U.S. Equity     1,099             1,099        
International Equity     1,525             1,525        
Fixed Income     6,281             6,281        
    $ 14,648     $ 2,081     $ 12,567     $  
Liabilities:                                
Warrants (3)   $ (273 )   $     $     $ (273 )
Derivative financial instruments (4)     (1,848 )     (1,848 )            
    $ (2,121 )   $ (1,848 )   $     $ (273 )

__________

(1) Included in derivative instruments in the consolidated balance sheets.
(2) Fair values of plan assets are determined annually and therefore are not included as of June 30, 2016. For further descriptions of these assets see the Company’s Form 10-K for the year ended December 31, 2015.
(3) Included in warrant liabilities at fair value in the consolidated balance sheets.
(4) Included in derivative instruments in the consolidated balance sheets.

 

For fair value measurements using significant unobservable inputs (Level 3), a description of the inputs and the information used to develop the inputs is required along with a reconciliation of Level 3 values from the prior reporting period. The changes in the Company’s fair value of its Level 3 inputs with respect to its warrants were as follows (in thousands):

 

Balance, December 31, 2015   $ 273  
Adjustments to fair value for the period     (16 )
Balance, June 30, 2016   $ 257