Financial Instruments and Fair Value Measurements

9 Months Ended

Sep. 30, 2020

Investments, Debt and Equity Securities [Abstract]

FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Fair Value of Financial Instruments

We use an independent pricing source to determine the fair value of our securities. The independent pricing source utilizes various pricing models for each asset class; including the market approach. The inputs and assumptions for the pricing models are market observable inputs including trades of comparable securities, dealer quotes, credit spreads, yield curves and other market-related data.

We have not adjusted the prices obtained from the independent pricing service and we believe the prices received from the independent pricing service are representative of the prices that would be received to sell the assets at the measurement date (exit price).

The carrying value of the Company's cash equivalents and restricted cash equivalents approximate their fair values due to their short-term maturities.

We did not have any Level 3 financial instruments recognized in our balance sheet as of September 30, 2020 and December 31, 2019. There were no transfers between levels as of September 30, 2020 and December 31, 2019.

Fair Value Measurements on a Recurring Basis

The following tables summarizes our financial instruments by significant categories and fair value measurement on a recurring basis as of September 30, 2020 and December 31, 2019.


(in millions)	Level 1		Level 2		Total
September 30, 2020
Cash equivalents:
Money market mutual funds	$	7	$	—	7

Total cash equivalents	7		—		7
Investments:
Asset-backed securities	—		22		22
Corporate bonds	—		90		90
U.S. government agencies and government-sponsored agencies	—		6		6
U.S. treasuries	—		77		77
Other debt securities	—		7		7
Total investments	—		202		202
Restricted cash equivalents:
Money market mutual funds	84		—		84

Commercial paper	13		—		13
Total restricted cash equivalents	97		—		97
Restricted investments:
Corporate bonds	—		31		31
U.S. government agencies and government-sponsored agencies	—		14		14

U.S. treasuries	—		213		213

Total restricted investments	—		258		258
Total cash equivalents and investments and restricted cash equivalents and investments	$	104	$	460	$	564


(in millions)	Level 1		Level 2		Total
December 31, 2019
Cash equivalents
Money market mutual funds	$	89	$	—	$	89
U.S. treasuries	—		3		3
Total cash equivalents	89		3		92
Investments
Asset-backed securities	—		30		30
Corporate bonds	—		96		96
U.S. government agencies and government-sponsored agencies	—		5		5
U.S. treasuries	—		53		53
Other debt securities	—		10		10
Total investments	—		194		194
Restricted cash equivalents:
Money market mutual funds	42		—		42
U.S. treasuries	—		12		12
Certificate of deposit	—		2		2
Commercial paper	14		—		14
Total restricted cash equivalents	56		14		70
Restricted investments:
Corporate bonds	—		28		28
U.S. government agencies and government-sponsored agencies	—		9		9
U.S. treasuries	—		110		110
Certificate of deposit	—		1		1
Total restricted investments	—		148		148
Total investments and restricted cash equivalents and investments	$	145	$	359	$	504

Fair Value of Financial Instruments Disclosure

Long-Term Debt and Revolving Credit Agreement Borrowings

Our long-term debt and revolving credit agreement borrowings are floating rate debt. At September 30, 2020 and December 31, 2019, the fair value of our floating rate long-term debt approximated its carrying value (exclusive of issuance costs). The fair value of our floating rate debt is estimated based on a discounted cash flow, which incorporates credit spreads, market interest rates and contractual maturities to estimate the fair value and is considered Level 3 in the hierarchy for fair value measurement.

Derivative Instruments

In June 2019, we entered into an interest rate collar derivative transaction with no upfront premium to mitigate the risk of changes in interest rates on the interest payments on a portion of our floating rate debt. If short-term interest rates increase, we will incur higher interest expense on any future outstanding balances of floating rate debt. We use this derivative as part of our interest rate risk management strategy and designated it as a cash flow hedge. If interest rates rise above the cap strike rate on the contract, we will receive variable-rate amounts and if interest rates fall below the floor strike rate on the contract, we will pay variable-rate amounts.

The following table summarizes the fair value of our derivative instruments at September 30, 2020:


					Fair Market Value
					September 30, 2020						December 31, 2019
(in millions)	Hedge type	Final settlement date	Notional amount		Other current assets		Accounts payable and other current liabilities		Other current assets		Accounts payable and other current liabilities
Derivatives designated as hedging instruments
Collar - LIBOR	Cash flow	May 2022	$	213	$	—	$	1	$	—	$	—

The pre-tax effect of derivative instruments for the nine months ended September 30, 2020 is insignificant and we estimate approximately $1 million of net derivative losses included in other comprehensive income will be reclassified into earnings within the following 12 months. There were insignificant cash flows associated with the derivative for the nine months ended September 30, 2020 and for the year ended December 31, 2019.

As of September 30, 2020 and December 31, 2019, we do not hold, nor have we posted, any collateral related to the above derivative instrument.

The interest rate collar derivative is classified as Level 2 in the fair value hierarchy as its value is determined using observable inputs such as forward LIBOR curves.