PHILADELPHIA ENERGY SOLUTIONS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except unit and volume data)
amounts with the same counterparty or under a master netting agreement, which provides the Company with the legal right of offset. The Company does not offset derivative positions against the
fair value of collateral provided or received. Changes in the fair value of the derivative instruments are recognized in operations. On a regular basis, the Company enters into short-term commodity contracts with counterparties for crude oil and
various finished products with the intent to physically take delivery or deliver the products. The Company evaluates these contracts for qualification of the normal purchases normal sales scope exemption.
For all hedging relationships, the Company formally documents the hedging relationship and its risk management objective and strategy for
undertaking the hedge, the hedging instrument, the hedged transaction, the nature of the risk being hedged, how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a
description of the method used to measure ineffectiveness. The Company also formally assesses, both at the inception of the hedging relationship and on an ongoing basis, whether the derivatives that are used in hedging relationships are highly
effective in offsetting changes in cash flows of the hedged transactions. For derivative instruments that are designated and qualify as part of a cash flow hedging relationship, the effective portion of the gain or loss on the derivative is reported
as a component of other comprehensive income (OCI) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on derivatives representing hedge ineffectiveness are recognized
in earnings in the current period. The Company discontinues hedge accounting prospectively when it determines that the derivative is no longer effective in offsetting cash flows attributable to the hedged risk, the derivative expires or is sold,
terminated, or exercised, a forecasted transaction is not probable of occurring, or management decides to remove the designation of the cash flow hedge.
The embedded derivative transactions related to the intermediation agreement have been designated as fair value hedges of inventory. The gain
or loss on the derivative instrument designated and qualifying as a fair value hedge, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, is recognized in earnings in the same period.
Deferred Financing Costs
Deferred
financing costs are capitalized and amortized over the term of the related debt as a component of interest expense on a basis that approximates the effective interest method. Included in other long-term assets in the consolidated balance sheets at
December 31, 2015 and 2014 are unamortized deferred financing costs totaling $11,753 and $11,141, respectively.
Asset Retirement Obligations
Accruals are established for the fair value of legal obligations to perform asset retirement activities in which the timing and/or
method of settlement are conditional on a future event that may or may not be within the control of the entity, if the fair value can be reasonably estimated. Certain of the Company’s asset retirement obligations are based on its legal
obligation to perform cleaning and disposal activities at the Philadelphia refining complex when it permanently ceases operations of the long-lived assets. The Company, therefore, considers the settlement date of these obligations to be
indeterminable and, accordingly, cannot calculate an associated asset retirement liability for these obligations at this time.
When the
Company has a legal obligation to incur costs to retire the asset and a reasonable estimate of the fair value of the liability can be made, the fair value liability of these asset retirement obligations will be recognized when the settlement date is
determinable. The liability is subsequently adjusted for accretion expense and changes in the amount or timing of the estimated cash flows. The corresponding asset retirement costs are depreciated over the asset’s remaining useful life.
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