Derivative contracts

9 Months Ended

Sep. 30, 2012

Derivative contracts

Note 12. Derivative contracts

As of September 30, 2012, derivative contracts are used primarily in our finance and financial products and energy businesses. Substantially all of the derivative contracts of our finance and financial products businesses are not designated as hedges for financial reporting purposes. Changes in the fair values of such contracts are reported in earnings as derivative gains/losses. We entered into these contracts with the expectation that the premiums received would exceed the amounts ultimately paid to counterparties. A summary of derivative contracts of our finance and financial products businesses follows (in millions).

	September 30, 2012									December 31, 2011
	Assets (3)			Liabilities			Notional Value			Assets (3)			Liabilities			Notional Value
Equity index put options	$	—		$	9,517		$	34,028	(1)	$	—		$	8,499		$	34,014	(1)
Credit default contracts		54			492			14,615	(2)		55			1,527			24,194	(2)
Other		324			124						268			156
Counterparty netting		(68	)		(43	)					(67	)		(43	)
	$	310		$	10,090					$	256		$	10,139

⁽¹⁾  Represents the aggregate undiscounted amount payable at the contract expiration dates assuming that the value of each index is zero at the contract expiration date.

⁽²⁾  Represents the maximum undiscounted future value of losses payable under the contracts. The number of losses required to exhaust contract limits under substantially all of the contracts is dependent on the loss recovery rate related to the specific obligor at the time of a default.

⁽³⁾ Included in other assets of finance and financial products businesses.

Derivative gains/losses of our finance and financial products businesses included in our Consolidated Statements of Earnings were as follows (in millions).

	Third Quarter						First Nine Months
	2012			2011			2012			2011
Equity index put options	$	(534	)	$	(2,089	)	$	(1,018	)	$	(2,137	)
Credit default obligations		316			(247	)		827			(35	)
Other		100			(107	)		7			(184	)
	$	(118	)	$	(2,443	)	$	(184	)	$	(2,356	)

The equity index put option contracts are European style options written on four major equity indexes. Future payments, if any, under these contracts will be required if the underlying index value is below the strike price at the contract expiration dates. We received the premiums on these contracts in full at the contract inception dates and therefore have no counterparty credit risk. We have written no new contracts since February 2008.

At September 30, 2012, the aggregate intrinsic value (which is the undiscounted liability assuming the contracts are settled on their future expiration dates based on the September 30, 2012 index values and foreign currency exchange rates) was approximately $5.4 billion. At December 31, 2011, the aggregate intrinsic value of these contracts, assuming the contracts were settled on that date, was approximately $6.2 billion. However, these contracts may not be unilaterally terminated or fully settled before the expiration dates which occur between June 2018 and January 2026. Therefore, the ultimate amount of cash basis gains or losses on these contracts will not be determined for many years. The remaining weighted average life of all contracts was approximately 8.2 years at September 30, 2012.

Our credit default contracts were written on various indexes of non-investment grade (or “high yield”) corporate issuers, as well as investment grade corporate and state/municipal debt issuers. These contracts cover the loss in value of specified debt obligations of the issuers arising from default events, which are usually from their failure to make payments or bankruptcy. Loss amounts are subject to aggregate contract limits. We have written no new contracts since February 2009.

State/municipality credit contract exposures as of September 30, 2012 relate to more than 500 debt issues with maturities ranging from 2019 to 2054 and having a weighted average term of 19 years. Pursuant to the contract terms, future loss payments, if any, cannot be settled before the maturity dates of the underlying obligations. In August 2012, contracts with notional values of $8.25 billion were terminated. We have no further obligations with respect to the terminated contracts.

All individual investment grade and high-yield corporate contracts in-force as of September 30, 2012 expire between December 2012 and December 2013, including $6.1 billion of notional value under contracts expiring by September 30, 2013. Future losses, if any, under substantially all of the high yield index contracts currently in-force are subject to sizable aggregate deductibles that must be satisfied before we have any payment obligations.

Premiums under individual corporate credit default contracts are, generally, due from counterparties on a quarterly basis over the terms of the contracts. Otherwise, we have no counterparty credit risk under our credit default contracts because all premiums were received at the inception of the contracts.

With limited exceptions, our equity index put option and credit default contracts contain no collateral posting requirements with respect to changes in the fair value or intrinsic value of the contracts and/or a downgrade of Berkshire’s credit ratings. As of September 30, 2012, our collateral posting requirement under contracts with collateral provisions was $150 million compared to $238 million at December 31, 2011. If Berkshire’s credit ratings (currently AA+ from Standard & Poor’s and Aa2 from Moody’s) are downgraded below either A- by Standard & Poor’s or A3 by Moody’s, additional collateral of up to $1.1 billion could be required to be posted.

Our regulated utility subsidiaries are exposed to variations in the market prices in the purchases and sales of natural gas and electricity and in the purchases of fuel. Derivative instruments, including forward purchases and sales, futures, swaps and options, are used to manage a portion of these price risks. Unrealized gains and losses under the contracts of our regulated utilities that are probable of recovery through rates are recorded as regulatory assets or liabilities. Unrealized gains or losses on contracts accounted for as cash flow or fair value hedges are recorded in accumulated other comprehensive income or in net earnings, as appropriate. Derivative contract assets are included in other assets of railroad, utilities and energy businesses and were $33 million and $71 million as of September 30, 2012 and December 31, 2011, respectively. Derivative contract liabilities are included in accounts payable, accruals and other liabilities of railroad, utilities and energy businesses and were $230 million and $336 million as of September 30, 2012 and December 31, 2011, respectively.