Fair Value of Financial Investments

9 Months Ended

Sep. 30, 2016

FAIR VALUE OF FINANCIAL INVESTMENTS

We have maintained investments in available-for-sale securities, equity method investments and a number of private equity funds, principally as part of our tax planning strategies, as any gains enhance the utilization of any current and future tax capital losses. Financial investments were as follows, in millions:



	September 30, 2016		December 31, 2015
Prepaid expenses and other:
Auction rate securities	$	12	$	—

Other assets:
Auction rate securities	—		22
Equity method investments	14		13
Private equity funds	7		10
Other investments	3		3
Total	$	36	$	48

E. FAIR VALUE OF FINANCIAL INVESTMENTS (Concluded)

Recurring Fair Value Measurements. Our auction rate securities are measured at fair value on a recurring basis, and have been estimated using a discounted cash flow model (Level 3 input). The significant inputs in the discounted cash flow model used to value the auction rate securities include: expected maturity of auction rate securities, discount rate used to determine the present value of expected cash flows and the assumptions for credit defaults, since the auction rate securities are backed by credit default swap agreements.

In the second quarter of 2016, $10 million of our auction rate securities were called by our counterparty and redeemed at a value that approximated our recorded basis. Our investments in auction rate securities had a recorded basis of $12 million and $22 million at September 30, 2016 and December 31, 2015, respectively, which included cost basis of $10 million and $19 million and pre-tax unrealized gains of $2 million and $3 million at each respective date.

Non-Recurring Fair Value Measurements. During the nine-month periods ended September 30, 2016 and 2015, we did not measure any financial investments at fair value on a non-recurring basis, as there was no other-than-temporary decline in the estimated value of these investments.

We did not have any transfers between Level 1 and Level 2 financial assets in the nine-month periods ended September 30, 2016 or 2015.

Realized Gains (Losses). Income from financial investments, net, included in other, net, within other income (expense), net, was as follows, in millions:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Realized gains from auction rate securities	$	—	$	—	$	1	$	—
Realized gains from private equity funds	1		1		2		5
Equity investment income, net	—		—		1		2
Total income from financial investments, net	$	1	$	1	$	4	$	7

Fair Value of Debt. The fair value of our short-term and long-term fixed-rate debt instruments is based principally upon modeled market prices for the same or similar issues or the current rates available to us for debt with similar terms and remaining maturities. The aggregate estimated market value of short-term and long-term debt at September 30, 2016 was approximately $3.3 billion, compared with the aggregate carrying value of $3.0 billion. The aggregate estimated market value of short-term and long-term debt at December 31, 2015 was approximately $3.6 billion, compared with the aggregate carrying value of $3.4 billion.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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