|
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. |
Warrants
– The Company’s warrants were valued using a Monte Carlo Binomial Lattice-Based valuation methodology, adjusted
for marketability restrictions. The Company recorded its warrants issued in 2012 at fair value and designated them as Level 3
on their issuance dates.
Significant assumptions
used and related fair values for the warrants as of March 31, 2017 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 |
38.2% |
0.76% |
0.26 |
7.6% |
211,000 |
$196,000 |
Significant assumptions
used and related fair values for the warrants as of December 31, 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 |
40.9% |
0.62% |
0.50 |
11.3% |
211,000 |
$651,000 |
The estimated fair values of the warrants
are 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 warrants.
Unobservable inputs include volatility
and market discount. An increase (decrease) in volatility will result in an increase (decrease) in the estimated fair value of
the warrants and an increase (decrease) in the market discount will result in a decrease (increase) in the estimated fair value
of the warrants.
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 fair 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 fair value of the warrants.
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 March 31, 2017 (in thousands):
| |
|
Fair |
|
|
|
|
|
|
|
|
|
|
| |
|
Value |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
| Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Derivative
instruments |
|
$ |
594 |
|
|
$ |
594 |
|
|
$ |
– |
|
|
$ |
– |
|
| |
|
$ |
594 |
|
|
$ |
594 |
|
|
$ |
– |
|
|
$ |
– |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Warrants |
|
$ |
(196 |
) |
|
$ |
– |
|
|
$ |
– |
|
|
$ |
(196 |
) |
| Derivative instruments |
|
|
(1,171 |
) |
|
|
(1,171 |
) |
|
|
– |
|
|
|
– |
|
| |
|
$ |
(1,367 |
) |
|
$ |
(1,171 |
) |
|
$ |
– |
|
|
$ |
(196 |
) |
The following
table summarizes recurring fair value measurements by level at December 31, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit Plan |
|
|
|
Fair |
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
|
Value |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Allocation |
|
| Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Derivative instruments |
|
$ |
978 |
|
|
$ |
978 |
|
|
$ |
– |
|
|
$ |
– |
|
|
|
|
|
| Defined benefit plan assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (pooled separate accounts): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Large U.S. Equity(1) |
|
|
3,134 |
|
|
|
– |
|
|
|
3,134 |
|
|
|
– |
|
|
|
25% |
|
| Small/Mid U.S. Equity(2) |
|
|
1,802 |
|
|
|
– |
|
|
|
1,802 |
|
|
|
– |
|
|
|
15% |
|
| International Equity(3) |
|
|
2,006 |
|
|
|
– |
|
|
|
2,006 |
|
|
|
– |
|
|
|
16% |
|
| Fixed Income(4) |
|
|
5,481 |
|
|
|
– |
|
|
|
5,481 |
|
|
|
– |
|
|
|
44% |
|
| |
|
$ |
13,401 |
|
|
$ |
978 |
|
|
$ |
12,423 |
|
|
$ |
– |
|
|
|
|
|
| Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Warrants |
|
$ |
(651 |
) |
|
$ |
– |
|
|
$ |
– |
|
|
$ |
(651 |
) |
|
|
|
|
| Derivative instruments |
|
|
(4,115 |
) |
|
|
(4,115 |
) |
|
|
– |
|
|
|
– |
|
|
|
|
|
| |
|
$ |
(4,766 |
) |
|
$ |
(4,115 |
) |
|
$ |
– |
|
|
$ |
(651 |
) |
|
|
|
|
__________
| (1) |
This
category includes investments in funds comprised of equity securities of large U.S. companies.
The funds are valued using the net asset value method in which an average of the market
prices for the underlying investments is used to value the fund. |
| (2) |
This
category includes investments in funds comprised of equity securities of small- and medium-sized
U.S. companies. The funds are valued using the net asset value method in which an average
of the market prices for the underlying investments is used to value the fund. |
| (3) |
This
category includes investments in funds comprised of equity securities of foreign companies
including emerging markets. The funds are valued using the net asset value method in
which an average of the market prices for the underlying investments is used to value
the fund. |
| (4) |
This
category includes investments in funds comprised of U.S. and foreign investment-grade
fixed income securities, high-yield fixed income securities that are rated below investment-grade,
U.S. treasury securities, mortgage-backed securities, and other asset-backed securities.
The funds are valued using the net asset value method in which an average of the market
prices for the underlying investments is used to value the fund. |
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, 2016 |
|
$ |
651 |
|
| Adjustments
to fair value for the period |
|
|
(455 |
) |
| Balance, March 31, 2017 |
|
$ |
196 |
|
|