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Derivatives, Hedges, Financial Instruments and Carbon Credits | 9 Months Ended
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Sep. 30, 2018
Derivative Instruments And Hedging Activities Disclosure [Abstract] |
Derivatives, Hedges, Financial Instruments and Carbon Credits | Note 8: Derivatives, Hedges, Financial Instruments and Carbon Credits For the periods presented, the following significant instruments are accounted for on a fair value basis: Carbon Credits and Associated Contractual Obligation Periodically, we are issued climate reserve tonnes (“carbon credits”) by the Climate Action Reserve in relation to a greenhouse gas reduction project (“Project”) performed at the Baytown Facility. Pursuant to the terms of the agreement with Covestro, a certain portion of the carbon credits are to be sold and the proceeds given to Covestro to recover the costs of the Project, and any balance thereafter to be allocated between Covestro and EDN. We have no obligation to reimburse Covestro for their costs associated with the Project, except through the transfer or sale of the carbon credits when such credits are issued to us. The assets for carbon credits are accounted for on a fair value basis and the contractual obligations associated with these carbon credits are also accounted for on a fair value basis (unless we enter into a sales commitment to sell the carbon credits). At September 30, 2018 we had approximately 488,000 carbon credits (none at December 31, 2017), all of which were subject to contractual obligations. Embedded Derivative Certain embedded features (“embedded derivative”) relating to the redemption of the Series E Redeemable Preferred, which includes certain contingent redemption features and the participation rights value have been bifurcated from the Series E Redeemable Preferred and recorded as a liability. As the result of the financing transaction relating to the Senior Secured Notes and the letter agreement relating to the Series E Redeemable Preferred as discussed in Notes 6 and 10, we estimate that the contingent redemption features have fair value at September 30, 2018 since we estimate that it is probable that a portion of the shares of this preferred stock would be redeemed prior to October 25, 2023. For certain other embedded features, we estimate no fair value at September 30, 2018 based on our assessment that there is a remote probability that these features will be exercised. At September 30, 2018, the fair value of the embedded derivative was valued using discounted cash flow models and primarily based on the difference in the present value of estimated future cash flows with no redemptions prior to October 25, 2023 compared to certain redemptions deemed probable during the same period and applying the effective dividend rate of the Series E Redeemable Preferred (At December 31, 2017, we estimated that contingent redemption features had no fair value based on a remote probability of redeeming any shares of this preferred stock prior to previous put date). In addition, at September 30, 2018 and December 31, 2017, the fair value of the embedded derivative included the valuation of the participation rights, which was based on the equivalent of 303,646 shares of our common stock at $9.78 and $8.76 per share, respectively. The following is a summary of the classifications of valuations of fair value: Level 1 - The valuations of contracts classified as Level 1 are based on quoted prices in active markets for identical contracts. At September 30, 2018 and December 31, 2017, we did not have any contracts classified as Level 1. Level 2 - The valuations of contracts classified as Level 2 are based on quoted prices for similar contracts and valuation inputs other than quoted prices that are observable for these contracts. At September 30, 2018 and December 31, 2017, we did not have any significant contracts classified as Level 2. Level 3 - The valuations of assets and liabilities classified as Level 3 are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. At September 30, 2018, the valuation ($2.35 per carbon credit) of the carbon credits and the contractual obligations associated with these carbon credits is classified as Level 3 and is based on the most recent sales transaction and reevaluated for market changes, if any, and on the range of ask/bid prices obtained from a broker adjusted for minimal market volume activity. At December 31, 2017, we did not have any carbon credits or related contractual obligations associated with carbon credits. The valuation is using undiscounted cash flows based on management’s assumption that the carbon credits would be sold, and the associated contractual obligations would be extinguished in the near term. At September 30, 2018 and December 31, 2017, the valuations of the embedded derivative are classified as Level 3. This derivative is valued using market information, management’s redemption assumptions, the underlying number of shares as defined in the terms of the Series E Redeemable Preferred, and the market price of our common stock. In addition, no valuation input adjustments were considered necessary relating to nonperformance risk for the embedded derivative. Note 8: Derivatives, Hedges, Financial Instruments and Carbon Credits (continued) The following details our assets and liabilities that are measured at fair value on a recurring basis at September 30, 2018 and December 31, 2017:
|  |  |  |  |  | Fair Value Measurements at September 30, 2018 Using |  |  |  |  |
Description |  | Total Fair Value at September 30, 2018 |  |  | Quoted Prices in Active Markets for Identical Contracts (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |  |  | Total Fair Value at December 31, 2017 |
|  | (In Thousands) |
Assets - Supplies, prepaid items and other: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Carbon credits |  | $ | 1,147 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,147 |  |  | $ | — |
Total |  | $ | 1,147 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,147 |  |  | $ | — |
Liabilities - Current and noncurrent accrued and other liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Contractual obligations - carbon credits |  | $ | (1,147 | ) |  | $ | — |  |  | $ | — |  |  | $ | (1,147 | ) |  | $ | — |
Embedded derivative |  | $ | (2,970 | ) |  | $ | — |  |  | $ | — |  |  | $ | (2,970 | ) |  | $ | (2,660 | )
Total |  | $ | (4,117 | ) |  | $ | — |  |  | $ | — |  |  | $ | (4,117 | ) |  | $ | (2,660 | )
The following is a reconciliation of the beginning and ending balances for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
|  | Assets |  |  | Liabilities |  |  | Assets |  |  | Liabilities |
|  | Three Months Ended |  |  | Three Months Ended |  |  | Nine Months Ended |  |  | Nine Months Ended |
|  | September 30, |  |  | September 30, |  |  | September 30, |  |  | September 30, |
|  | 2018 |  |  | 2017 |  |  | 2018 |  |  | 2017 |  |  | 2018 |  |  | 2017 |  |  | 2018 |  |  | 2017 |
|  | (In Thousands) |
Beginning balance |  | $ | — |  |  | $ | — |  |  | $ | (1,838 | ) |  | $ | (3,137 | ) |  | $ | — |  |  | $ | — |  |  | $ | (2,660 | ) |  | $ | (2,557 | )
Transfers into Level 3 |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Transfers out of Level 3 |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total realized and unrealized gains (losses) included in operating results |  |  | 1,147 |  |  |  | 1,164 |  |  |  | (2,279 | ) |  |  | (438 | ) |  |  | 1,681 |  |  |  | 2,031 |  |  |  | (1,656 | ) |  |  | (1,705 | )
Purchases |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Issuances |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (229 | ) |  |  | — |
Sales |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (534 | ) |  |  | (867 | ) |  |  | — |  |  |  | — |
Settlements |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 428 |  |  |  | 687 |
Ending balance |  | $ | 1,147 |  |  | $ | 1,164 |  |  | $ | (4,117 | ) |  | $ | (3,575 | ) |  | $ | 1,147 |  |  | $ | 1,164 |  |  | $ | (4,117 | ) |  | $ | (3,575 | )
Total gains (losses) for the period included in operating results attributed to the change in unrealized gains or losses on assets and liabilities still held at the reporting date |  | $ | 1,147 |  |  | $ | 1,164 |  |  | $ | (2,278 | ) |  | $ | (438 | ) |  | $ | 1,147 |  |  | $ | 1,164 |  |  | $ | (1,227 | ) |  | $ | (1,018 | )
Note 8: Derivatives, Hedges, Financial Instruments and Carbon Credits (continued) Net gains (losses) included in operating results and the statement of operations classifications are as follows:
|  | Three Months Ended |  |  | Nine Months Ended |
|  | September 30, |  |  | September 30, |
|  | 2018 |  |  | 2017 |  |  | 2018 |  |  | 2017 |
|  | (In Thousands) |
Total net gains (losses) included in operating results: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Other income - Carbon credits |  | $ | 1,147 |  |  | $ | 1,164 |  |  | $ | 1,681 |  |  | $ | 2,031 |
Other expense - Contractual obligations relating to carbon credits |  |  | (1,147 | ) |  |  | (1,164 | ) |  |  | (1,575 | ) |  |  | (1,851 | )
Non-operating other income (expense) - embedded derivative |  |  | (1,132 | ) |  |  | 726 |  |  |  | (81 | ) |  |  | 146 |
Total net gains (losses) included in operating results |  | $ | (1,132 | ) |  | $ | 726 |  |  | $ | 25 |  |  | $ | 326 |
At September 30, 2018 and December 31, 2017, we did not have any financial instruments with fair values significantly different from their carrying amounts (excluding issuance costs, if applicable), except for the Senior Secured Notes as shown below.
|  | September 30, 2018 |
|  | Carrying |  |  | Estimated |
|  | Amount |  |  | Fair Value |
|  | (In Millions) |
Senior Secured Notes (1) |  | $ | 400 |  |  | $ | 421 |
(1) | Based on a quoted price of 105.25 at September 30, 2018. These Senior Secured Notes were issued on April 25, 2018.
The Senior Secured Notes valuations are classified as Level 2. The valuations of our other long-term debt agreements are classified as Level 3 and are based on valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. The fair value measurements of our other long-term debt agreements are valued using a discounted cash flow model that calculates the present value of future cash flows pursuant to the terms of the debt agreements and applies estimated current market interest rates. The estimated current market interest rates are based primarily on interest rates currently being offered on borrowings of similar amounts and terms. In addition, no valuation input adjustments were considered necessary relating to nonperformance risk for our debt agreements. The fair value of financial instruments is not indicative of the overall fair value of our assets and liabilities since financial instruments do not include all assets, including intangibles, and all liabilities.

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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