8. FAIR VALUE

Fair Value Hierarchy

Fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, the Company utilizes the U.S. GAAP fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumption about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

The inputs used to measure fair value are classified into the following fair value hierarchy:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Level 3 includes values determined using pricing models, discounted cash flow methodologies, or similar techniques reflecting the Company’s own assumptions.

In instances where the determination of the fair value hierarchy measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment of factors specific to the asset or liability. Transfers between levels within the fair value hierarchy are recognized by the Company on the date of the change in circumstances that requires such transfer. There were no transfers between levels during the three-month periods ended March 31, 2020 or March 31, 2019.

The following table sets forth, by level within the fair value hierarchy, the financial assets and liabilities recorded at fair value on a recurring basis as of March 31, 2020 and December 31, 2019 (in millions):



	March 31, 2020		Level 1		Level 2		Level 3
Investments in equity securities	$	114	$	114	$	-	$	-
Available-for-sale debt securities		103		-		103		-
Trading securities		12		-		12		-
Total assets	$	229	$	114	$	115	$	-

Fair value of interest rate swap agreement	$	2	$	-	$	2	$	-
Total liabilities	$	2	$	-	$	2	$	-

	December 31, 2019		Level 1		Level 2		Level 3
Investments in equity securities	$	141	$	141	$	-	$	-
Available-for-sale debt securities		101		-		101		-
Trading securities		12		-		12		-
Total assets	$	254	$	141	$	113	$	-


Fair value of interest rate swap agreement	$	2	$	-	$	2	$	-
Total liabilities	$	2	$	-	$	2	$	-

Investments in Equity Securities, Available-for-Sale Debt Securities and Trading Securities

Investments in equity securities and trading securities classified as Level 1 are measured using quoted market prices. Level 2 available-for-sale debt securities and trading securities primarily consisted of bonds and notes issued by the United States government and its agencies and domestic and foreign corporations. The estimated fair values of these securities are determined using various valuation techniques, including a multi-dimensional relational model that incorporates standard observable inputs and assumptions such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids/offers and other pertinent reference data.

As of March 31, 2020 and December 31, 2019, available-for-sale debt securities with aggregate estimated fair values of approximately $35 million and $51 million, respectively, generated gross unrealized losses of $2 million and $1 million, respectively. A by-security impairment assessment was performed as of March 31, 2020 wherein it was determined that COVID-19 related changes in interest rates and market liquidity resulted in incremental unrealized losses compared to December 31, 2019. No material impairment resulted from credit loss or other factors.

Fair Value of Interest Rate Swap Agreement

The valuation of the Company’s interest rate swap agreement is determined using market valuation techniques, including discounted cash flow analysis on the expected cash flows of each agreement. This analysis reflects the contractual terms of the agreement, including the period to maturity, and uses observable market-based inputs, including forward interest rate curves. The fair value of interest rate swap agreement is determined by netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on the expectation of future interest rates based on observable market forward interest rate curves and the notional amount being hedged.

The Company incorporates CVAs to appropriately reflect both its own nonperformance or credit risk and the respective counterparty’s nonperformance or credit risk in the fair value measurement. In adjusting the fair value of its interest rate swap agreements for the effect of nonperformance or credit risk, the Company has considered the impact of any netting features included in the agreement. The CVA on the Company’s interest rate swap agreement had an immaterial effect on the fair value of the related liability at March 31, 2020 and December 31, 2019.

The majority of the inputs used to value the Company’s interest rate swap agreement, including the forward interest rate curves and market perceptions of the Company’s credit risk used in the CVAs, are observable inputs available to a market participant. As a result, the Company has determined that the interest rate swap valuation is classified in Level 2 of the fair value hierarchy.