Berkshire Hathaway 2015 Annual Report Download - page 58

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Notes to Consolidated Financial Statements (Continued)
(12) Derivative contracts (Continued)
The derivative contracts of our finance and financial products businesses are recorded at fair value and the changes in the
fair values of such contracts are reported in earnings as derivative gains/losses. We entered into these contracts with the
expectation that the premiums received would exceed the amounts ultimately paid to counterparties. A summary of the
derivative gains/losses included in our Consolidated Statements of Earnings in each of the three years ending December 31,
2015 follows (in millions).
2015 2014 2013
Equity index put options ............................................................ $1,008 $ 108 $2,843
Credit default ..................................................................... (34) 397 (213)
Other, principally interest rate and foreign currency ....................................... — 1 (22)
$ 974 $ 506 $2,608
The equity index put option contracts were written between 2004 and 2008. These contracts are European style options
written on four major equity indexes and will expire between June 2018 and January 2026. Future payments, if any, under any
given contract will be required if the underlying index value is below the strike price at the contract expiration date. We
received the premiums on these contracts in full at the contract inception dates and therefore have no counterparty credit risk.
The aggregate intrinsic value (which is the undiscounted liability assuming the contracts are settled based on the index
values and foreign currency exchange rates as of the balance sheet date) of our equity index put option contracts was
approximately $1.1 billion at December 31, 2015 and $1.4 billion at December 31, 2014. However, these contracts may not be
unilaterally terminated or fully settled before the expiration dates. Therefore, the ultimate amount of cash basis gains or losses
on these contracts will not be determined for several years. The remaining weighted average life of all contracts was
approximately five years at December 31, 2015.
Our remaining credit default contract was written in 2008 and relates to approximately 500 zero-coupon municipal debt
issues with maturities ranging from 2019 to 2054. The underlying debt issues have a weighted average maturity of
approximately 15.75 years. Pursuant to the contract terms, future loss payments would be required in the event of non-payment
by the issuer and non-performance by the primary financial guarantee insurers under their contracts. Payments under our
contract, if any, are not required prior to the maturity dates of the underlying obligations. Our premium under this contract was
received at the inception of this contract and therefore we have no counterparty credit risk.
A limited number of our equity index put option contracts contain collateral posting requirements with respect to changes
in the fair value or intrinsic value of the contracts and/or a downgrade of Berkshire’s credit ratings. As of December 31, 2015,
we did not have any collateral posting requirements. If Berkshire’s credit ratings (currently AA from Standard & Poor’s and
Aa2 from Moody’s) are downgraded below either A- by Standard & Poor’s or A3 by Moody’s, collateral of up to $1.1 billion
could be required to be posted.
Our regulated utility subsidiaries are exposed to variations in the prices of fuel required to generate electricity, wholesale
electricity purchased and sold and natural gas supplied for customers. Derivative instruments, including forward purchases and
sales, futures, swaps and options, are used to manage a portion of these price risks. Derivative contract assets are included in
other assets and were $103 million as of December 31, 2015 and $108 million as of December 31, 2014. Derivative contract
liabilities are included in accounts payable, accruals and other liabilities and were $237 million as of December 31, 2015 and
$230 million as of December 31, 2014. Net derivative contract assets or liabilities of our regulated utilities that are probable of
recovery through rates, are offset by regulatory liabilities or assets. Unrealized gains or losses on contracts accounted for as cash
flow or fair value hedges are recorded in other comprehensive income or in net earnings, as appropriate.
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