Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v3.5.0.2
Fair Value Measurements
6 Months Ended
Jun. 30, 2016
Fair Value Disclosures [Abstract]  
Fair Value Measurements
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 for 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 June 30, 2016 and December 31, 2015, only our residual assets (described in Note 5), financing receivables held-for-sale, interest rate swaps and investments available-for-sale, if any, were carried at fair value on the condensed 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.

Unless otherwise discussed below, fair value is measured using a discounted cash flow model, contractual terms and Level 3 unobservable 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 unobservable inputs would result in a lower fair value and a decline would result in a higher fair value. The financing receivables held for sale are carried at the lower of cost or market.

 

     As of June 30, 2016  
     Fair Value      Carrying
Value
     Level  
     (dollars in millions)         

Assets

        

Financing receivables

   $ 875       $ 804         Level 3   

Financing receivables held-for-sale

     42         42         Level 3   

Investments available-for-sale(1)

     48         48         Level 3   

Liabilities

        

Credit facility

   $ 246       $ 246         Level 3   

Nonrecourse debt(2)

     668         638         Level 3   

Derivative liabilities

     7         7         Level 2   

 

(1) The amortized cost of our investments available-for-sale as of June 30, 2016, was $48 million.
(2) Fair value and carrying value of nonrecourse debt excludes unamortized debt issuance costs.

 

     As of December 31, 2015  
     Fair Value      Carrying
Value
     Level  
     (dollars in millions)         

Assets

        

Financing receivables

   $ 806       $ 784         Level 3   

Financing receivables held-for-sale

     61         60         Level 3   

Investments available-for-sale(1)

     29         29         Level 3   

Liabilities

        

Credit facility

   $ 247       $ 247         Level 3   

Nonrecourse debt(2)

     690         680         Level 3   

Derivative liabilities

     1         1         Level 2   

 

(1) The amortized cost of our investments available-for-sale as of December 31, 2015, was $31 million.
(2) Fair value and carrying value of nonrecourse debt excludes unamortized debt issuance costs.

Investments

We carry our investments in debt securities at fair value on our balance sheet as investments available-for-sale. 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 three months
ended June 30,
     For the six months
ended June 30,
 
     2016      2015      2016      2015  
     (dollars in millions)  

Balance, beginning of period

   $ 37       $ 23       $ 29       $ 27   

Purchases of investments available-for-sale

     10         15         32         20   

Payments on investments available-for-sale

     —           (1      (1      (8

Sale of investments available-for-sale

     —           (9      (14      (11

Gains on investments available-for-sale recorded in earnings

     —           1         1         1   

Gains (losses) on investments available-for-sale recorded in OCI(1)

     1         (1      1         (1
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance, end of period

   $ 48       $ 28       $ 48       $ 28   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) As of June 30, 2016, approximately $10 million of investment grade rated debt that we held for more than 12 months was in an unrealized loss position due to interest rate movements. As of June 30, 2016, we held no other securities in an unrealized loss position.

For investments held at fair value, we used a range of interest rate spreads of approximately 1% to 5% based upon comparable transactions.

As of December 31, 2015, we held a $13 million senior secured debt investment, along with a large financial institution which held the remaining approximately $45 million in outstanding debt securities, in an operating wind project that was being foreclosed upon and expected to be sold. The foreclosure and sale was completed in 2016 and we recovered the full value of our debt investment and recognized a gain of $0.8 million.

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 June 30, 2016 and December 31, 2015, 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. See Note 8 for the estimated fair value of our derivative financial instruments. The fair values of the derivative financial instruments are included in the accounts payable, accrued expenses and other line item in the condensed 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

Financing 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:

 


     June 30, 2016      December 31,
2015
 
     (dollars in millions)  

Cash deposits

   $ 19       $ 43   

Restricted cash deposits (included in Other assets)

     25         36   
  

 

 

    

 

 

 

Total cash deposits

   $ 44       $ 79   
  

 

 

    

 

 

 

Amount of cash deposits in excess of amounts federally insured

   $ 40       $ 75