Fair value of financial instruments

6 Months Ended

Jun. 30, 2016

7. Fair value of financial instruments

The following represents the recurring measurements of fair value hierarchy of our financial assets and liabilities that were recognized at fair value as of June 30, 2016 and December 31, 2015. Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement.


	June 30, 2016
	Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	154.2	$	—	$	—	$	154.2
Restricted cash		14.3		—		—		14.3
Derivative instruments asset		—		2.7		—		2.7
Total	$	168.5	$	2.7	$	—	$	171.2
Liabilities:
Derivative instruments liability	$	—	$	52.1	$	—	$	52.1
Total	$	—	$	52.1	$	—	$	52.1


	December 31, 2015
	Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	72.4	$	—	$	—	$	72.4
Restricted cash		15.2		—		—		15.2
Derivative instruments asset		—		0.3		—		0.3
Total	$	87.6	$	0.3	$	—	$	87.9
Liabilities:
Derivative instruments liability	$	—	$	57.5	$	—	$	57.5
Total	$	—	$	57.5	$	—	$	57.5

The fair values of our derivative instruments are based upon trades in liquid markets. Valuation model inputs can generally be verified and valuation techniques do not involve significant judgment. The fair values of such financial instruments are classified within Level 2 of the fair value hierarchy. We use our best estimates to determine the fair value of commodity and derivative contracts we hold. These estimates consider various factors including closing exchange prices, time value, volatility factors and credit exposure. The fair value of each contract is discounted using a risk free interest rate.

We also adjust the fair value of financial assets and liabilities to reflect credit risk, which is calculated based on our credit rating and the credit rating of our counterparties. As of June 30, 2016, the credit valuation adjustments resulted in a $5.3 million net increase in fair value, which consists of a $0.6 million pre‑tax gain in other comprehensive income and a $4.7 million gain in change in fair value of derivative instruments. As of December 31, 2015, the credit valuation adjustments resulted in a $3.8 million net increase in fair value, which consists of a $0.4 million pre‑tax gain in other comprehensive income and a $3.4 million gain in change in fair value of derivative instruments.

The carrying amounts for cash and cash equivalents and restricted cash approximate fair value due to their short-term nature.

- 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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