18. Fair Value Measurements

Assets and Liabilities Accounted for at Fair Value

Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When measuring assets and liabilities that are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 — Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.

We use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. In measuring the fair value of our assets and liabilities, we use market data or assumptions that we believe market participants would use in pricing an asset or liability, including assumptions about risk when appropriate. Our assets and liabilities that are measured at fair value on a recurring basis include the following (in millions):


			Fair Value Measurements at December 31, 2014 Using
	Total		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money market funds	$	1,335	$	1,335	$	—	$	—
Fixed-income securities		38		—		38		—
Redeemable preferred stock		44		—		—		44
Foreign currency derivatives		28		—		28		—

Total assets	$	1,445	$	1,335	$	66	$	44


			Fair Value Measurements at December 31, 2013 Using
	Total		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money market funds	$	99	$	99	$	—	$	—
Fixed-income securities		36		—		36		—
Redeemable preferred stock		25		—		—		25
Foreign currency derivatives		2		—		2		—

Total assets	$	162	$	99	$	38	$	25

Liabilities:
Interest rate derivatives	$	28	$	—	$	28	$	—
Electricity commodity derivatives(a)		3		—		3		—

Total liabilities	$	31	$	—	$	31	$	—

a)	Our electricity commodity derivatives were associated with our Wheelabrator business and were divested in conjunction with the sale of that business in December 2014.

Money Market Funds

We invest portions of our “Cash and cash equivalents” and restricted trust and escrow account balances in money market funds. We measure the fair value of these investments using quoted prices in active markets for identical assets. The fair value of our money market funds approximates our cost basis in the investments. The increase in the fair value at December 31, 2014 compared to December 31, 2013 is primarily attributable to cash proceeds received from the sale of our Wheelabrator business.

Fixed-Income Securities

We invest a portion of our restricted trust and escrow balances in fixed-income securities, including U.S. Treasury securities, U.S. agency securities, municipal securities and mortgage- and asset-backed securities. We measure the fair value of these securities using quoted prices for identical or similar assets in inactive markets. The fair value of our fixed-income securities approximates our cost basis in these investments.

Redeemable Preferred Stock

In 2011, we made a noncontrolling investment in redeemable preferred stock of an unconsolidated entity. The fair value of this investment increased by $4 million during 2014 due to an increase in the price per share established in a recent stock issuance. In addition, we received $15 million of redeemable preferred stock in conjunction with the sale of our Puerto Rico operations and certain other collection and landfill assets in the second quarter of 2014, as discussed in Note 19.

Such preferred stock is included in “Investments in unconsolidated entities” in our Consolidated Balance Sheet. The fair values of these investments have been measured based on third-party investors’ recent or pending transactions in these securities, which are considered the best evidence of fair value currently available. When this evidence is not available, we use other valuation techniques as appropriate and available. These valuation methodologies may include transactions in similar instruments, discounted cash flow techniques, third-party appraisals or industry multiples and public comparables.

Foreign Currency Derivatives

Our foreign currency derivatives are valued using a third-party pricing model that incorporates information about forward Canadian dollar rates, or observable market data, as of the reporting date. The third-party pricing model used to value our foreign currency derivatives also incorporates Company and counterparty credit valuation adjustments, as appropriate. Counterparties to these contracts are financial institutions who participate in our $2.25 billion revolving credit facility. Valuations may fluctuate significantly from period-to-period due to volatility in the Canadian dollar to U.S. dollar exchange rate.

Interest Rate Derivatives

As of December 31, 2013, we were party to forward-starting interest rate swaps that were designated as cash flow hedges of anticipated interest payments for future fixed-rate debt issuances. Our forward-starting interest rate swaps were LIBOR-based instruments. Accordingly, these derivatives were valued using a third-party pricing model that incorporated information about LIBOR yield curves, which is considered observable market data, for each instrument’s respective term. The third-party pricing model used to value our interest rate derivatives also incorporated Company and counterparty credit valuation adjustments, as appropriate. Counterparties to our interest rate contracts are financial institutions who participate in our $2.25 billion revolving credit facility. During the first quarter of 2014, our forward-starting interest rate swaps matured.

Refer to Notes 8 and 14 for additional information regarding our derivative instruments discussed above.

Fair Value of Debt

At December 31, 2014 the carrying value of our debt was approximately $9.4 billion compared with approximately $10.2 billion at December 31, 2013. The carrying value of our debt includes adjustments associated with fair value hedge accounting related to our interest rate swaps as discussed in Note 8.

The estimated fair value of our debt was approximately $10.6 billion at December 31, 2014 and approximately $11.0 billion at December 31, 2013. The estimated fair value of our senior notes is based on quoted market prices. The carrying value of remarketable debt and borrowings under our revolving credit facilities approximates fair value due to the short-term nature of the interest rates. The fair value of our other debt is estimated using discounted cash flow analysis, based on current market rates for similar types of instruments. The decrease in the fair value of our debt when comparing December 31, 2014 with December 31, 2013 is primarily related to $751 million of net repayments during 2014, partially offset by increases in the fair value attributable to an increase in market prices for fixed-rate corporate debt securities as a result of recent decreases in long-term interest rates.

Although we have determined the estimated fair value amounts using available market information and commonly accepted valuation methodologies, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, our estimates are not necessarily indicative of the amounts that we, or holders of the instruments, could realize in a current market exchange. The use of different assumptions and/or estimation methodologies could have a material effect on the estimated fair values. The fair value estimates are based on Level 2 inputs of the fair value hierarchy available as of December 31, 2014 and 2013. These amounts have not been revalued since those dates, and current estimates of fair value could differ significantly from the amounts presented.