v2.4.0.6
Fair value of financial instruments
 3 Months Ended
Mar. 31, 2013
Fair value of financial instruments  
Fair value of financial instruments

5. 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 March 31, 2013 and December 31, 2012. Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement.

 
   March 31, 2013  
(in millions)
   Level 1   Level 2   Level 3   Total  

Assets:

                          

Cash and cash equivalents

   $ 85.7   $ —   $ —   $ 85.7  

Restricted cash

     43.5     —     —     43.5  

Derivative instruments asset

     —     14.8     —     14.8  
                   

Total

   $ 129.2   $ 14.8   $ —   $ 144.0  
                   

Liabilities:

                          

Derivative instruments liability

   $ —   $ 136.1   $ —   $ 136.1  
                   

Total

   $ —   $ 136.1   $ —   $ 136.1  
                   

 

 
   December 31, 2012  
 
   Level 1   Level 2   Level 3   Total  

Assets:

                          

Cash and cash equivalents

   $ 60.2   $ —   $ —   $ 60.2  

Restricted cash

     28.6     —     —     28.6  

Derivative instruments asset

     —     20.6     —     20.6  
                   

Total

   $ 88.8   $ 20.6   $ —   $ 109.4  
                   

Liabilities:

                          

Derivative instruments liability

   $ —   $ 151.1   $ —   $ 151.1  
                   

Total

   $ —   $ 151.1   $ —   $ 151.1  
                   

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

        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 March 31, 2013, the credit valuation adjustments resulted in a $16.7 million net increase in fair value, which consists of a $0.9 million pre-tax gain in other comprehensive income and a $15.8 million gain in change in fair value of derivative instruments. As of December 31, 2012, the credit valuation adjustments resulted in an $18.4 million net increase in fair value, which consists of a $1.1 million pre-tax gain in other comprehensive income and a $13.8 million gain in change in fair value of derivative instruments, offset by a $3.6 million related to interest rate swaps assumed in the acquisition of Ridgeline.