In Petro Stopping Center's fair value measurement, what characterizes Level 3 inputs?
Petro_Stopping_Center Franchise · 2025 FDDAnswer from 2025 FDD Document
In some cases the fair values of derivatives are estimated using internal models due to the absence of quoted prices or other observable, marketcorroborated data. This primarily applies to the Company's longer-term derivative contracts. The majority of these contracts are valued using models with inputs that include price curves for each of the different products that are built up from available active market pricing data (including volatility and correlation) and modelled using the maximum available external information. Additionally, where limited data exists for certain products, prices are determined using historical and long-term pricing relationships. The use of alternative assumptions or valuation methodologies may result in significantly different values for these derivatives. A reasonably possible change in the price assumptions used in the models relating to index price would not have a material impact on net assets and the Company's income statement primarily as a result of offsetting movements between derivative assets and liabilities.
For more information, including the carrying amounts of level 3 derivatives, see Note 25.
Source: Item 23 — RECEIPTS **RECEIPTS (FDD pages 87–131)
What This Means (2025 FDD)
Based on the 2025 FDD, Petro Stopping Center estimates the fair values of derivatives using internal models when quoted prices or observable market data are unavailable. This approach is mainly for longer-term derivative contracts. These contracts are valued using models that incorporate price curves for different products, which are derived from active market pricing data, including volatility and correlation. The models also use the maximum available external information. Where data is limited for certain products, prices are determined using historical and long-term pricing relationships. These valuation techniques fall under Level 3 inputs.
The FDD emphasizes that using alternative assumptions or valuation methodologies could significantly change the values of these derivatives. However, a reasonably possible change in the price assumptions used in the models relating to index price would not have a material impact on net assets and the company's income statement primarily as a result of offsetting movements between derivative assets and liabilities.
For a potential Petro Stopping Center franchisee, this means that the company's financial performance is subject to the accuracy of these internal models and the assumptions used within them. While the FDD states that changes in price assumptions would not have a material impact, it is important to understand the potential risks associated with these Level 3 valuations and how they could affect the overall financial health of the company. Further details on the carrying amounts of Level 3 derivatives can be found in Note 25 of the FDD.