A. Fair value measurements
The following information is presented for assets and liabilities that are recorded in the consolidated balance sheet at fair value at December 31, 2013 and 2012, measured on a recurring and non-recurring basis. There were no significant transfers of assets and liabilities that are recorded at fair value between Level 1 and Level 2 during 2013 and 2012.
| In millions | December 31, 2013 | Level 1 (1) | Level 2 (2) | Level 3 (3) | ||||||||||||
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Recurring fair value measurements: |
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Derivatives-assets(a) |
$ | 2 | $ | 0 | $ | 2 | $ | 0 | ||||||||
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Derivatives-liabilities(a) |
(3 | ) | 0 | (3 | ) | 0 | ||||||||||
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Cash equivalents |
943 | 943 | 0 | 0 | ||||||||||||
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Pension plan assets: |
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Equity investments(b) |
$ | 511 | $ | 504 | $ | 7 | $ | 0 | ||||||||
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Preferred stock(b) |
4 | 3 | 1 | 0 | ||||||||||||
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Government securities(c) |
914 | 58 | 845 | 11 | ||||||||||||
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Corporate debt investments(d) |
894 | 0 | 890 | 4 | ||||||||||||
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Derivatives(e) |
0 | 0 | 0 | 0 | ||||||||||||
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Partnerships and joint ventures(g) |
223 | 0 | 0 | 223 | ||||||||||||
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Real estate(h) |
43 | 2 | 0 | 41 | ||||||||||||
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Common collective trust(f) |
1,003 | 0 | 1,003 | 0 | ||||||||||||
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Registered investment companies(f) |
73 | 4 | 69 | 0 | ||||||||||||
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103-12 investment entities(f) |
260 | 0 | 260 | 0 | ||||||||||||
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Other pension (payables) receivables(b) |
(11 | ) | (15 | ) | 1 | 3 | ||||||||||
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Total pension plan assets |
$ | 3,914 | $ | 556 | $ | 3,076 | $ | 282 | ||||||||
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Non-recurring fair value measurements: |
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Long-lived assets held for sale(i) |
$ | 12 | $ | 0 | $ | 0 | $ | 12 | ||||||||
| December 31, 2012 | Level 1 (1) | Level 2 (2) | Level 3 (3) | |||||||||||||
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Recurring fair value measurements: |
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Derivatives-assets(a) |
$ | 3 | $ | 0 | $ | 3 | $ | 0 | ||||||||
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Derivatives-liabilities(a) |
(8 | ) | 0 | (8 | ) | 0 | ||||||||||
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Cash equivalents |
564 | 564 | 0 | 0 | ||||||||||||
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Pension plan assets: |
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Equity investments(b) |
$ | 613 | $ | 601 | $ | 12 | $ | 0 | ||||||||
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Preferred stock(b) |
4 | 3 | 1 | 0 | ||||||||||||
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Government securities(c) |
1,034 | 89 | 940 | 5 | ||||||||||||
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Corporate debt investments(d) |
850 | 0 | 847 | 3 | ||||||||||||
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Derivatives(e) |
20 | 0 | 10 | 10 | ||||||||||||
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Partnerships and joint ventures(g) |
225 | 0 | 0 | 225 | ||||||||||||
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Real estate(h) |
46 | 5 | 0 | 41 | ||||||||||||
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Common collective trust(f) |
1,270 | 0 | 1,270 | 0 | ||||||||||||
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Registered investment companies(f) |
64 | 2 | 62 | 0 | ||||||||||||
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103-12 investment entities(f) |
251 | 0 | 251 | 0 | ||||||||||||
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Other pension (payables) receivables(b) |
(59 | ) | (61 | ) | 0 | 2 | ||||||||||
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Total pension plan assets |
$ | 4,318 | $ | 639 | $ | 3,393 | $ | 286 | ||||||||
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| (1) | Quoted prices in active markets for identical assets. |
| (2) | Quoted prices for similar assets and liabilities in active markets. |
| (3) | Significant unobservable inputs. |
| (a) | Derivative instruments consist of hedge contracts on natural gas and foreign currencies. Natural gas hedge instruments are valued using models with market inputs such as NYMEX natural gas futures contract pricings. Foreign currency forward contracts are valued using models with market inputs such as prices of instruments of a similar nature. |
| (b) | Equity investments, preferred stock, and other pension (payables) receivables are valued using quoted market prices multiplied by the number of shares owned. Dealer quotes are used for less liquid markets. Valuation models with market inputs are used for securities that do not trade in transparent markets. The other pension (payables) receivables that are classified as Level 3 investments are valued using contract value, which approximates fair value, and include unobservable inputs such as illiquidity. |
| (c) | Government securities include treasury and agency debt. The Level 2 investments are valued using a broker quote in an active market. The Level 3 investments include unobservable inputs that are valued using third-party pricing information without adjustments. |
| (d) | The corporate debt investments category is primarily comprised of U.S. dollar denominated investment grade and non-investment grade securities. It also includes investments in non-U.S. dollar denominated corporate debt securities issued in both developed and emerging markets. Corporate debt investments are valued utilizing a market approach that includes various valuation techniques and sources such as value generation models, broker quotes in active and inactive markets, benchmark yields and securities, reported trades, issuer spreads, and/or other applicable reference data. The Level 3 investments include unobservable inputs that are valued using third-party pricing information without adjustments. |
| (e) | The plan’s derivative investments are forward contracts on foreign currencies, interest rate swaps, swaptions, futures on Treasury bonds, and futures on euro dollars. These investments are traded in both over-the-counter markets and on futures exchanges. The Level 2 investments are valued using models with market inputs such as dealer quoted interest rates and exchange rates. The Level 3 investments are valued based on valuation models such as Black Scholes Option Pricing Model. |
| (f) | Common collective trusts, registered investment companies, and 103-12 investment entities are commingled funds for which there is no exchange quoted price. These commingled funds are valued at their net asset value per share multiplied by the number of shares held. The determination of net asset value for the commingled funds includes market pricing of the underlying assets as well as broker quotes and other valuation techniques. The funds invest mainly in liquid, transparent markets such as domestic and international equities, U.S. government bonds, and corporate bonds. |
| (g) | Partnerships and joint ventures are commingled investments. The plan owns interests in limited partnerships or funds rather than direct investments in the underlying asset classes such as real estate. Valuation is based on input from the general partner if no independent source is available. The valuation policies of the general partner are in compliance with accounting standards and the partnerships are audited by nationally recognized auditors. Various valuation techniques and inputs are considered in valuing private portfolio investments, including EBITDA multiples in other comparable third-party transactions, price to earnings ratios, market conditions, liquidity, current operating results, and other pertinent information. |
| (h) | Real estate investments are commingled investments. The fair values of the real estate partnerships are determined based on a combination of third party appraisals, discounted present value of estimated future cash flows, replacement cost, and comparable market prices. |
| (i) | The fair value of long-lived assets is determined using a combination of a market approach based on market participant inputs and an income approach based on estimates of future cash flows. |
While the company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value as of the reporting date.
The following information is presented for those assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at December 31, 2013 and 2012:
| In millions | Government securities |
Corporate debt investments |
Derivatives | Partnerships and joint ventures |
Real estate |
Other pension receivables and payables |
Total | |||||||||||||||||||||
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December 31, 2011 |
$ | 3 | $ | 6 | $ | 69 | $ | 209 | $ | 46 | $ | 22 | $ | 355 | ||||||||||||||
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Purchases |
1 | 1 | 12 | 51 | 27 | 0 | 92 | |||||||||||||||||||||
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Sales |
(2 | ) | (2 | ) | (68 | ) | (43 | ) | (35 | ) | 0 | (150 | ) | |||||||||||||||
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Realized gains |
0 | 0 | 57 | 1 | 0 | 0 | 58 | |||||||||||||||||||||
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Unrealized gains (losses) |
1 | 0 | (54 | ) | 7 | 3 | 0 | (43 | ) | |||||||||||||||||||
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Transfers (out) in of Level 3 |
2 | (2 | ) | (6 | ) | 0 | 0 | (20 | ) | (26 | ) | |||||||||||||||||
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December 31, 2012 |
$ | 5 | $ | 3 | $ | 10 | $ | 225 | $ | 41 | $ | 2 | $ | 286 | ||||||||||||||
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Purchases |
4 | 4 | 3 | 31 | 11 | 0 | 53 | |||||||||||||||||||||
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Sales |
(8 | ) | (3 | ) | (126 | ) | (64 | ) | (13 | ) | 0 | (214 | ) | |||||||||||||||
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Realized gains |
1 | 0 | 121 | 17 | 1 | 0 | 140 | |||||||||||||||||||||
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Unrealized (losses) gains |
0 | 0 | (8 | ) | 14 | 1 | 1 | 8 | ||||||||||||||||||||
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Transfers in (out) of Level 3 |
9 | 0 | 0 | 0 | 0 | 0 | 9 | |||||||||||||||||||||
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December 31, 2013 |
$ | 11 | $ | 4 | $ | 0 | $ | 223 | $ | 41 | $ | 3 | $ | 282 | ||||||||||||||
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Long-lived assets held for sale with a carrying value of $21 million were written down to their estimated fair value of $12 million, resulting in pre-tax impairment charges attributable to continuing operations of $9 million for the year ended December 31, 2013. Additionally, pre-tax impairment charges of $5 million were recorded for the year ended December 31, 2013 related to assets sold in the third quarter of 2013. These pre-tax impairment charges are included in cost of sales.
At December 31, 2013, the book value of financial instruments included in debt is $1.8 billion and the fair value is estimated to be $2.1 billion. The difference between book value and fair value is derived from the difference between the December 31, 2013 market interest rate and the stated rate for the company’s fixed-rate, long-term debt. The company has estimated the fair value of financial instruments based upon quoted market prices for the same or similar issues or on the current interest rates available to the company for debt of similar terms and maturities. This fair value measurement is classified as Level 2.