Fair value of financial instruments

6 Months Ended

Jun. 30, 2020

Fair value of financial instruments

Fair value of financial instruments

6. 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, 2020 and December 31, 2019. Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement.

	June 30, 2020
	Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	38.0	$	—	$	—	$	38.0
Restricted cash		0.5		—		—		0.5
Derivative instruments asset		—		—		—		—
Total	$	38.5	$	—	$	—	$	38.5
Liabilities:
Derivative instruments liability	$	—	$	26.2	$	5.2	$	31.4
Total	$	—	$	26.2	$	5.2	$	31.4

	December 31, 2019
	Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	74.9	$	—	$	—	$	74.9
Restricted cash		7.7		—		—		7.7
Derivative instruments asset		—		0.7		—		0.7
Total	$	82.6	$	0.7	$	—	$	83.3
Liabilities:
Derivative instruments liability	$	—	$	24.7	$	3.2	$	27.9
Total	$	—	$	24.7	$	3.2	$	27.9

The fair values of our interest rate swaps, foreign exchange forward contracts, natural gas swaps and gas purchase agreements 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, 2020, the credit valuation adjustments resulted in a $0.8 million net increase in fair value, which consists of a $0.1 million pre-tax gain in other comprehensive income and a $0.7 million gain in change in fair value of derivative instruments. As of December 31, 2019, the credit valuation adjustments resulted in a $1.1 million net increase in fair value, which consists of a $0.1 million pre-tax gain in other comprehensive income and a $1.0 million gain in change in fair value of derivative instruments.

The conversion option derivative for the Series E Debentures is classified within Level 3 of the fair value hierarchy. The significant unobservable inputs used in developing fair value include the volatility of our common shares and the fair value of the host contract, which is derived from recent similar convertible debenture offerings from peer companies. A discounted cash flow valuation technique is utilized to calculate the fair value of the conversion option derivative.

The following table reconciles, for the six months ended June 30, 2020 and 2019, the beginning and ending balances for the conversion option derivative that is recognized at fair value in the condensed consolidated financial statements, using significant unobservable inputs:

	Fair value Measurement Using Significant Unobservable Inputs (Level 3)
	Six Months Ended
	June 30, 2020
Beginning balance of liability at January 1, 2020	$	3.2
Total unrealized loss		2.0
Currency transaction loss		—
Ending balance of liability at June 30, 2020	$	5.2

	Fair value Measurement Using Significant Unobservable Inputs (Level 3)
	Six Months Ended
	June 30, 2019
Beginning balance of liability at January 1, 2019	$	1.2
Total unrealized loss		1.8
Currency transaction loss		0.2
Ending balance of liability at June 30, 2019	$	3.2

For cash and cash equivalents, accounts and other receivables, accounts payable and restricted cash, the carrying amount approximates fair value because of the short-term maturity of those instruments and is classified as Level 1 within the fair value hierarchy.