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Derivative contracts
 9 Months Ended
Sep. 30, 2014
Derivative contracts

Note 13. Derivative contracts

Derivative contracts have been entered into primarily by our finance and financial products and our 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, 2014      December 31, 2013  
       Assets         Liabilities       Notional
Value		        Assets        Liabilities      Notional
Value		  

Equity index put options

     $ —         $   4,512        $ 30,567(1)        $ —         $  4,667       $ 32,095(1)   

Credit default

      —          155         7,792(2)         —          648         7,792(2)   

Other, principally interest rate and foreign currency

      —          —             —          16      
  

 

 

     

 

 

        

 

 

     

 

 

     
    $  —         $ 4,667           $  —         $ 5,331      
  

 

 

     

 

 

        

 

 

     

 

 

     

 

(1) 

Represents the aggregate undiscounted amount payable at the contract expiration dates assuming that the value of the related index is zero at each contract’s expiration date.

 

(2) 

Represents the maximum undiscounted future value of losses payable under the contracts, if all underlying issuers default and the residual value of the specified obligations is zero.

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  
     2014        2013        2014        2013  

Equity index put options

     $ 223          $  519          $  156          $  2,155   

Credit default

      35           (128 )        492           (43 )

Other, principally interest rate and foreign currency

      —            36           1           (18 )
  

 

 

       

 

 

       

 

 

       

 

 

  
    $  258          $ 427          $ 649          $ 2,094   
  

 

 

       

 

 

       

 

 

       

 

 

  

 

We have not written any equity index put option contracts since February 2008. The contracts currently outstanding are European style options written on four major stock indexes three of which are outside of the U.S. Future payments, if any, under any given contract will be required if the underlying index value is below the strike price on the contract expiration date. We received the premiums on these contracts in full at the contract inception dates and therefore have no counterparty credit risk.

The aggregate intrinsic value (which is the undiscounted liability assuming the contracts are settled based on the index values and foreign currency exchange rates as of the balance sheet date) of our equity index put option contracts was approximately $1.3 billion at September 30, 2014 and $1.7 billion at December 31, 2013. 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 6.2 years at September 30, 2014.

Our remaining credit default contract relates to approximately 500 municipal debt issues with maturities ranging from 2019 to 2054 and has an aggregate notional value of approximately $7.8 billion. The underlying debt issues have a weighted average maturity of approximately 17 years. Pursuant to the contract terms, future losses, if any, are not payable before the maturity dates of the underlying obligations. We have no counterparty credit risk under this contract because all premiums were received at the inception of the contract.

A limited number of our equity index put option contracts contain 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, 2014 and December 31, 2013, we did not have any collateral posting requirements. 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 prices of fuel required to generate electricity, wholesale electricity purchased and sold and natural gas supplied for customers. Derivative instruments, including forward purchases and sales, futures, swaps and options, are used to manage a portion of these price risks. Derivative contract assets are included in other assets of railroad, utilities and energy businesses and were $86 million and $87 million as of September 30, 2014 and December 31, 2013, respectively. Derivative contract liabilities are included in accounts payable, accruals and other liabilities of railroad, utilities and energy businesses and were $146 million and $208 million as of September 30, 2014 and December 31, 2013, respectively. 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 other comprehensive income or in net earnings, as appropriate.