FINANCIAL INSTRUMENTS

Fuel Hedges

We have entered into multiple swap agreements designated as cash flow hedges to mitigate some of our exposure related to changes in diesel fuel prices. These swaps qualified for, and were designated as, effective hedges of changes in the prices of forecasted diesel fuel purchases (fuel hedges).

The following table summarizes our outstanding fuel hedges as of June 30, 2018:



Year	Gallons Hedged	Weighted Average Contract Price per Gallon
2018	3,750,000	$2.59

If the national U.S. on-highway average price for a gallon of diesel fuel as published by the Department of Energy exceeds the contract price per gallon, we receive the difference between the average price and the contract price (multiplied by the notional gallons) from the counterparty. If the average price is less than the contract price per gallon, we pay the difference to the counterparty.

The fair values of our fuel hedges are determined using standard option valuation models with assumptions about commodity prices based on those observed in underlying markets (Level 2 in the fair value hierarchy). The aggregate fair values of our outstanding fuel hedges as of June 30, 2018 were current assets of $2.6 million, which have been recorded in other current assets in our consolidated balance sheets. As of December 31, 2017, the aggregate fair values of our outstanding fuel hedges were current assets of $3.0 million, which are included in other current assets in our consolidated balance sheets. No amounts were recognized in other income, net in our unaudited consolidated statements of income for the ineffectiveness portion of the changes in fair values for each of the three or six months ended June 30, 2018 and 2017.

For the three and six months ended June 30, 2018, a gain of $0.1 million was recognized in other comprehensive income, net of tax, for fuel hedges (the effective portion), and no gain (loss) was recognized in other comprehensive income, net of tax, for fuel hedges (the effective portion) for the three and six months ended June 30, 2017. We classify cash inflows and outflows from our fuel hedges within operating activities in the unaudited consolidated statements of cash flows.

Recyclable Commodity Hedges

Revenue from the sale of recycled commodities is primarily from sales of old corrugated containers ("OCC") and old newsprint. From time to time we use derivative instruments such as swaps and costless collars designated as cash flow hedges to manage our exposure to changes in prices of these commodities. During 2017, we entered into multiple agreements related to the forecasted OCC sales. The agreements qualified for, and were designated as, effective hedges of changes in the prices of certain forecasted recyclable commodity sales (commodity hedges).

We entered into costless collar agreements on forecasted sales of OCC. The agreements involve combining a purchased put option giving us the right to sell OCC at an established floor strike price with a written call option obligating us to deliver OCC at an established cap strike price. The puts and calls have the same settlement dates, are net settled in cash on such dates and have the same terms to expiration. The contemporaneous combination of options resulted in no net premium for us and represents costless collars. Under these agreements, we will neither make or receive payments as long as the settlement price is between the floor price and cap price; however, if the settlement price is above the cap, we will pay the counterparty an amount equal to the excess of the settlement price over the cap times the monthly volumes hedged. If the settlement price is below the floor, the counterparty will pay us the deficit of the settlement price below the floor times the monthly volumes hedged. The objective of these agreements is to reduce variability of cash flows for forecasted sales of OCC between two designated strike prices.

As of June 30, 2018, we had outstanding costless collar hedges for OCC totaling 60,000 tons with a weighted average floor strike price of $81.50 per ton and a weighted average cap strike price of $120.00 per ton, all of which will be settled in 2018. Costless collar hedges are recorded in our consolidated balance sheets at fair value. Fair values of costless collars are determined using standard option valuation models with assumptions about commodity prices based upon forward commodity price curves in underlying markets (Level 2 in the fair value hierarchy).

The aggregate fair values of the outstanding recyclable commodity hedges as of June 30, 2018 were current assets of $0.8 million, which are included in prepaid expenses and other current assets in our consolidated balance sheets. As of December 31, 2017, the aggregate fair values of the outstanding recyclable commodity hedges were current liabilities of $0.2 million, which are included in other accrued liabilities in our consolidated balance sheets. No amounts were recognized in other income, net in our unaudited consolidated statements of income for the ineffectiveness portion of the changes in fair values during the three and six months ended June 30, 2018 and 2017.

Total gains (losses) recognized in other comprehensive income for recyclable commodity hedges (the effective portion) was $0.3 million and $0.7 million, net of tax, for the three and six months ended June 30, 2018, respectively, and $(0.6) million and $(1.2) million, net of tax, for the same periods in 2017, respectively.

Fair Value Measurements

In measuring the fair values of assets and liabilities, we use valuation techniques that maximize the use of observable inputs (Level 1) and minimize the use of unobservable inputs (Level 3). We also use market data or assumptions that we believe market participants would use in pricing an asset or liability, including assumptions about risk when appropriate.

The carrying value for certain of our financial instruments, including cash, accounts receivable, accounts payable and certain other accrued liabilities, approximates fair value because of their short-term nature.

As of June 30, 2018 and December 31, 2017, our assets and liabilities that are measured at fair value on a recurring basis include the following:



			Fair Value Measurements Using
	Carrying Amount		Total as of June 30, 2018		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money market mutual funds	$	42.8	$	42.8	$	42.8	$	—	$	—
Bonds - restricted cash and marketable securities and other assets	53.0		53.0		—		53.0		—
Fuel hedges - other current assets	2.6		2.6		—		2.6		—
Commodity hedges - other current assets	0.8		0.8		—		0.8		—
Interest rate locks - other assets	23.9		23.9		—		23.9		—
Total assets	$	123.1	$	123.1	$	42.8	$	80.3	$	—
Liabilities:
Interest rate swaps - other long-term liabilities	$	1.5	$	1.5	$	—	$	1.5	$	—
Contingent consideration - other long-term liabilities	72.7		72.7		—		—		72.7
Total liabilities	$	74.2	$	74.2	$	—	$	1.5	$	72.7



			Fair Value Measurements Using
	Carrying Amount		Total as of December 31, 2017		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money market mutual funds	$	30.3	$	30.3	$	30.3	$	—	$	—
Bonds - restricted cash and marketable securities and other assets	92.1		92.1		—		92.1		—
Fuel hedges - other current assets	3.0		3.0		—		3.0		—
Interest rate swaps - other assets	8.0		8.0		—		8.0		—
Interest rate locks - other assets	19.1		19.1		—		19.1		—
Total assets	$	152.5	$	152.5	$	30.3	$	122.2	$	—
Liabilities:
Commodity hedges - other accrued liabilities	$	0.2	$	0.2	$	—	$	0.2	$	—
Contingent consideration- other long-term liabilities	73.3		73.3		—		—		73.3
Total liabilities	$	73.5	$	73.5	$	—	$	0.2	$	73.3

Total Debt

As of June 30, 2018 and December 31, 2017, the carrying value of our total debt was $8.3 billion and $8.2 billion, respectively, and the fair value of our total debt was $8.6 billion and $8.8 billion, respectively. The estimated fair value of our fixed rate senior notes and debentures is based on quoted market prices. The fair value of our remaining notes payable, tax-exempt financings and borrowings under our credit facilities approximates the carrying value because the interest rates are variable. The fair value estimates are based on Level 2 inputs of the fair value hierarchy as of June 30, 2018 and December 31, 2017, respectively. See Note 7, Debt, for further information related to our debt.

Contingent Consideration

In April 2015, we entered into a waste management contract with Sonoma County, California to operate the county's waste management facilities. As of June 30, 2018, we recognized $67.6 million of contingent consideration which represents the fair value of amounts payable to Sonoma County based on the achievement of future annual tonnage targets through the expected remaining capacity of the landfill. We estimate the remaining life of the landfill to be approximately 30 years. The potential undiscounted amount of all future contingent payments that we could be required to make under the waste management contract is estimated to be between approximately $82 million and $171 million.

The fair value of the contingent consideration was determined using probability assessments of the expected future payments over the remaining useful life of the landfill, and applying a discount rate of 4.0%. The future payments are based on significant inputs that are not observable in the market. Key assumptions include annual volume of tons disposed at the landfill, the price paid per ton and the discount rate that represent the best estimates of management, which are subject to remeasurement at each reporting date.

In 2017, we recognized additional contingent consideration associated with the acquisition of a landfill. As of June 30, 2018, the contingent consideration of $5.1 million represents the fair value of amounts payable to the seller based on annual volume of tons disposed at the landfill. The fair value of the contingent consideration was determined using probability assessments of the expected future payments over the remaining useful life of the landfill, and applying a discount rate of 4.3%. The future payments are based on significant inputs that are not observable in the market. Key assumptions include annual volume of tons disposed at the landfill, which are subject to remeasurement at each reporting date. The contingent consideration liabilities are classified within Level 3 of the fair value hierarchy.