3. Fair Value Measurements

Fair value is defined as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The fair value accounting guidance provides a three-level hierarchy for classifying financial instruments. The levels of inputs used to determine the fair value of our financial assets and liabilities carried on the balance sheet at fair value and for those which only disclosure of fair value is required are characterized in accordance with the fair value hierarchy established by ASC 820, Fair Value Measurements. Where inputs for a financial asset or liability fall in more than one level in the fair value hierarchy, the financial asset or liability is classified in its entirety based on the lowest level input that is significant to the fair value measurement of that financial asset or liability. We use our judgment and consider factors specific to the financial assets and liabilities in determining the significance of an input to the fair value measurements. As of December 31, 2017 and December 31, 2016, only our residual assets, interest rate swaps and investments, if any, were carried at fair value on the consolidated balance sheets on a recurring basis. The three levels of the fair value hierarchy are described below:

 

•

Level 1—Quoted prices (unadjusted) in active markets that are accessible at the measurement date.

 

•

Level 2—Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

 

•

Level 3—Unobservable inputs are used when little or no market data is available.

 

The tables below illustrate the estimated fair value of our financial instruments on our balance sheet. Unless otherwise discussed below, fair value for our Level 2 and Level 3 measurements is measured using a discounted cash flow model, contractual terms and inputs which consist of base interest rates and spreads over base rates which are based upon market observation and recent comparable transactions. An increase in these inputs would result in a lower fair value and a decline would result in a higher fair value. Our convertible notes are valued using a market based approach and observable prices. The receivables held-for-sale, if any, are carried at the lower of cost or fair value.

 

		As of December 31, 2017
		Fair Value				Carrying Value				Level
		(in millions)
Assets
Government receivables		$	519			$	519				Level 3
Commercial receivables			464				473				Level 3
Receivables held-for-sale			20				19				Level 3
Investments (1)			151				151				Level 3
Securitization residual assets (2)			45				45				Level 3
Liabilities
Credit facility		$	70			$	70				Level 3
Non-recourse debt (3)			1,239				1,238				Level 3
Convertible notes (3)			156				152				Level 2

 

(1)	The amortized cost of our investments as of December 31, 2017, was $153 million.

(2)	Included in other assets on the consolidated balance sheet.

(3)	Fair value and carrying value excludes unamortized debt issuance costs.

 

		As of December 31, 2016
		Fair Value				Carrying Value				Level
		(in millions)
Assets
Government receivables (1)		$	517			$	526				Level 3
Commercial receivables (1)			500				516				Level 3
Investments (2)			58				58				Level 3
Securitization residual assets(3)			19				19				Level 3
Derivative assets			1				1				Level 2
Liabilities
Credit facility		$	283			$	283				Level 3
Non-recourse debt (4)			718				709				Level 3

 

(1)	There were no receivables held-for-sale as of December 31, 2016.

(2)	The amortized cost of our investments as of December 31, 2016, was $61 million.

(3)	Included in other assets on the consolidated balance sheet.

(4)	Fair value and carrying value excludes unamortized debt issuance costs.

 

Investments

The following table reconciles the beginning and ending balances for our Level 3 investments that are carried at fair value on a recurring basis:

 

		For the year ended December 31,
		2017				2016
		(in millions)
Balance, beginning of period		$	58			$	29
Purchases of investments			78				45
Payments on investments			(3	)			(1	)
Transfers to investments (1)			17				—
Sale of investments			—				(14	)
Gains on investments recorded in earnings			—				1
Unrealized gains (losses) on investments recorded in OCI (2)			1				(2	)
Balance, end of Period		$	151			$	58

 

(1)	In 2017, certain receivables on our balance sheet became securities and thus we classify them as investments available for sale.

(2)

As of December 31, 2017 and 2016, approximately $46 million and $10 million of investments that we held for more than 12 months was in an unrealized loss position of approximately $2 million and $1 million, respectively, due to interest rate movements. We have the intent and ability to hold these investments until a recovery of fair value.

For investments held at fair value, we used a range of interest rate spreads of approximately 1% to 4% based upon comparable transactions.

Interest Rate Swap Agreements

The fair values of the derivative financial instruments are determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. We have determined that the significant inputs, such as interest yield curves and discount rates, used to value our derivatives fall within Level 2 of the fair value hierarchy and that the credit valuation adjustments associated with our counterparties and our own credit risk utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of our or our counterparties default. As of December 31, 2017, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and determined that the credit valuation adjustments were not significant to the overall valuation of our derivatives. As a result, we determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. The fair values of the derivative financial instruments are included in other assets (if in an unrealized gain position) or accounts payable, accrued expenses and other (if in an unrealized loss position) in the consolidated balance sheets.

Non-recurring Fair Value Measurements

Our financial statements may include non-recurring fair value measurements related to acquisitions and non-monetary transactions, if any. Assets acquired in a business combination are recorded at their fair value. We may use third party valuation firms to assist us with developing our estimates of fair value.

 

Concentration of Credit Risk

Government and commercial receivables, investments and leases consist primarily of U.S. federal government-backed receivables, investment grade state and local government receivables and receivables from various sustainable infrastructure projects and do not, in our view, represent a significant concentration of credit risk. See Note 6 for an analysis by type of obligor. As described above, we do not believe we have a significant credit exposure to our interest rate swap providers. We had cash deposits that are subject to credit risk as shown below:

 

		December 31,
		2017				2016
		(in millions)
Cash deposits		$	57			$	29
Restricted cash deposits (included in other assets)			61				30
Total cash deposits		$	118			$	59
Amount of cash deposits in excess of amounts federally insured		$	116			$	57