Fair Value
The fair values of our financial instruments are separated into three broad levels (Levels 1, 2 and 3) based on our assessment of the availability of observable market data and the significance of non-observable data used to determine fair value. Each fair value measurement must be assigned to a level corresponding to the lowest level input that is significant to the fair value measurement in its entirety.
The three broad levels of inputs defined by the fair value hierarchy are as follows:
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• | Level 1 Inputs—quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date; |
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• | Level 2 Inputs—inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability; and |
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• | Level 3 Inputs—unobservable inputs for the asset or liability. These unobservable inputs reflect the entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances (which might include the reporting entity’s own data). |
Fair Value of Derivative Contracts
The following two tables summarize the fair value measurements of our (i) energy commodity derivative contracts; (ii) interest rate swap agreements; and (iii) cross-currency swap agreements, based on the three levels established by the Codification (in millions). The tables also identify the impact of derivative contracts which we have elected to present on our accompanying consolidated balance sheets on a gross basis that are eligible for netting under master netting agreements.
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| Balance sheet asset fair value measurements by level | | | | |
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Level 1 | |
Level 2 | |
Level 3 | | Gross amount | | Contracts available for netting | | Cash collateral held(b) | | Net amount |
As of December 31, 2015 | | | | | | | | | | | | | |
Energy commodity derivative contracts(a) | $ | 48 |
| | $ | 589 |
| | $ | 2 |
| | $ | 639 |
| | $ | (12 | ) | | $ | (37 | ) | | $ | 590 |
|
Interest rate swap agreements | $ | — |
| | $ | 385 |
| | $ | — |
| | $ | 385 |
| | $ | (8 | ) | | $ | — |
| | $ | 377 |
|
Cross-currency swap agreements | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
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As of December 31, 2014 | |
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| | |
| | | | | | | | |
Energy commodity derivative contracts(a) | $ | 49 |
| | $ | 533 |
| | $ | 12 |
| | $ | 594 |
| | $ | (46 | ) | | $ | (13 | ) | | $ | 535 |
|
Interest rate swap agreements | $ | — |
| | $ | 403 |
| | $ | — |
| | $ | 403 |
| | $ | (44 | ) | | $ | — |
| | $ | 359 |
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| Balance sheet liability fair value measurements by level | | | | |
| Level 1 | | Level 2 | | Level 3 | | Gross amount | | Contracts available for netting | | Collateral posted(c) | | Net amount |
As of December 31, 2015 | | | | | | | | | | | | | |
Energy commodity derivative contracts(a) | $ | (4 | ) | | $ | (10 | ) | | $ | (17 | ) | | $ | (31 | ) | | $ | 12 |
| | $ | — |
| | $ | (19 | ) |
Interest rate swap agreements | $ | — |
| | $ | (25 | ) | | $ | — |
| | $ | (25 | ) | | $ | 8 |
| | $ | — |
| | $ | (17 | ) |
Cross-currency swap agreements | $ | — |
| | $ | (52 | ) | | $ | — |
| | $ | (52 | ) | | $ | — |
| | $ | — |
| | $ | (52 | ) |
As of December 31, 2014 | | | | | | | | | | | | | |
Energy commodity derivative contracts(a) | $ | (25 | ) | | $ | (11 | ) | | $ | (73 | ) | | $ | (109 | ) | | $ | 46 |
| | $ | 47 |
| | $ | (16 | ) |
Interest rate swap agreements | $ | — |
| | $ | (53 | ) | | $ | — |
| | $ | (53 | ) | | $ | 44 |
| | $ | — |
| | $ | (9 | ) |
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(a) | Level 1 consists primarily of NYMEX natural gas futures. Level 2 consists primarily of OTC WTI swaps and options. Level 3 consists primarily of power derivative contracts. |
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(b) | Cash margin deposits held by us associated with our energy commodity contract positions and OTC swap agreements and reported within “Other current liabilities” on our accompanying consolidated balance sheets. |
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(c) | Cash margin deposits posted by us associated with our energy commodity contract positions and OTC swap agreements and reported within “Other current assets” on our accompanying consolidated balance sheets. |
The table below provides a summary of changes in the fair value of our Level 3 energy commodity derivative contracts (in millions):
Significant unobservable inputs (Level 3) |
| | | | | | | |
| Year Ended December 31, |
| 2015 | | 2014 |
Derivatives-net asset (liability) | | | |
Beginning of period | $ | (61 | ) | | $ | (110 | ) |
Transfers out(a) | — |
| | (88 | ) |
Total gains or (losses) | |
| | |
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Included in earnings | (13 | ) | | 22 |
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Included in other comprehensive loss | — |
| | 78 |
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Settlements | 59 |
| | 37 |
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End of period | $ | (15 | ) | | $ | (61 | ) |
The amount of total gains or (losses) for the period included in earnings attributable to the change in unrealized gains or (losses) relating to assets held at the reporting date | $ | — |
| | $ | 1 |
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(a) On December 31, 2014, we transferred WTI options from Level 3 to Level 2 due to increased observability of significant inputs in their valuations.
As of December 31, 2015, our Level 3 derivative assets and liabilities consisted primarily of power derivative contracts, where a significant portion of fair value is calculated from underlying market data that is not readily observable. The derived values use industry standard methodologies that may consider the historical relationships among various commodities, modeled market prices, time value, volatility factors and other relevant economic measures. The use of these inputs results in management’s best estimate of fair value.
Fair Value of Financial Instruments
The estimated fair value of our outstanding debt balances is disclosed below (in millions):
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| December 31, 2015 | | December 31, 2014 |
| Carrying value | | Estimated fair value | | Carrying value | | Estimated fair value |
Total debt | $ | 43,227 |
| | $ | 37,481 |
| | $ | 42,814 |
| | $ | 43,761 |
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We used Level 2 input values to measure the estimated fair value of our outstanding debt balance as of both December 31, 2015 and 2014.