Fair value of financial instruments

9 Months Ended

Sep. 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 September 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.


		September 30, 2020
		Level 1			Level 2			Level 3			Total
Assets:
Cash and cash equivalents		$	30.3		$	—		$	—		$	30.3
Restricted cash			2.6			—			—			2.6
Derivative instruments asset			—			—			—			—
Total		$	32.9		$	—		$	—		$	32.9
Liabilities:
Derivative instruments liability		$	—		$	18.2		$	1.5		$	19.7
Total		$	—		$	18.2		$	1.5		$	19.7


		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 September 30, 2020, the credit valuation adjustments resulted in a $0.5 million net increase in fair value, which consists of a $0.1 million pre-tax gain in other comprehensive income and a $0.4 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 nine months ended September 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)
		Nine Months Ended
		September 30, 2020

Beginning balance of liability at January 1, 2020		$	3.2
Total unrealized gain			(1.8)
Currency transaction loss			0.1
Ending balance of liability at September 30, 2020		$	1.5


		Fair value Measurement Using Significant Unobservable Inputs (Level 3)
		Nine Months Ended
		September 30, 2019

Beginning balance of liability at January 1, 2019		$	1.2
Total unrealized loss			1.5
Currency transaction loss			0.1
Ending balance of liability at September 30, 2019		$	2.8

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.

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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