Hedging

9 Months Ended

Sep. 30, 2011

Hedging [Abstract]

Hedging

Note 5 – Hedging

Derivative instruments are carried at fair value in the Condensed Consolidated Balance Sheets. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gains or losses is deferred as a component of "Accumulated other comprehensive income (loss)" and reclassified into net income in the same period during which the hedged transaction affects net income. Gains and losses on derivatives representing hedge ineffectiveness are recognized in net income currently. See further information regarding fair value measurements and balances of derivatives in Note 6.

To manage its exposure to exchange rates on the conversion of euro-based revenue into U.S. dollars, the company uses average rate euro put options, and in short-term periods also uses average rate euro call options and average rate euro forward contracts. Average rate euro put options require an upfront premium payment and can reduce the risk of a decline in the value of the euro without limiting the benefit of an increase in the value of the euro. Average rate euro call options reduce the company's net option premium expense, but limit the benefit from an increase in the value of the euro. Average rate forward contracts lock in the value of the euro and do not require an upfront premium. At September 30, 2011, the amount of unrealized net gains on the company's currency hedging portfolio which would be reclassified to net income, if realized, in the next twelve months, is $5 million; these net gains were deferred in "Accumulated other comprehensive income (loss)."

Most of the company's foreign operations use the U.S. dollar as their functional currency. As a result, balance sheet translation adjustments due to currency fluctuations are recognized currently in "Cost of sales" in the Condensed Consolidated Statements of Income. To minimize the resulting volatility, the company also enters into 30-day euro forward contracts each month to economically hedge the net monetary assets exposed to euro exchange rates. These 30-day euro forward contracts are not designated as hedging instruments, and gains and losses on these forward contracts are recognized currently in "Cost of sales" in the Condensed Consolidated Statements of Income. In the third quarter of 2011, the company recognized $9 million of gains on 30-day euro forward contracts, and $13 million of losses from fluctuations in the value of the net monetary assets exposed to euro exchange rates. In the

third quarter of 2010, the company recognized $14 million of losses on 30-day euro forward contracts, and $19 million of income from fluctuations in the value of the net monetary assets exposed to euro exchange rates. For the nine months ended September 30, 2011, the company recognized $1 million of loss on 30-day euro forward contracts, and $1 million of losses from fluctuations in the value of the net monetary assets exposed to euro exchange rates. For the nine months ended September 30, 2010, the company recognized $6 million of gains on 30-day euro forward contracts, and $8 million of expense from fluctuations in the value of the net monetary assets exposed to euro exchange rates.

The company also enters into bunker fuel forward contracts for its shipping operations, which permit it to lock in fuel purchase prices for up to three years and thereby minimize the volatility that changes in fuel prices could have on its operating results. These bunker fuel forward contracts are designated as cash flow hedging instruments. In the third quarter 2011, the company implemented a new shipping configuration, the first change of such magnitude in several years. These changes are expected to reduce the company's total bunker fuel consumption and change the ports where bunker fuel will be purchased. As a result of these changes, accounting standards required the company to recognize $12 million of unrealized gains on bunker fuel forward contracts in "Cost of sales" in the Condensed Consolidated Statements of Income in the third quarter of 2011 originally intended to hedge bunker fuel purchases in future periods. These unrealized gains, previously deferred in "Accumulated other comprehensive income (loss)" were recognized because the forecasted hedged bunker fuel purchases, as documented by the company, became probable not to occur. Cash flow hedging relationships of many of the affected bunker fuel forward contracts were reapplied to other bunker fuel purchases, however, accounting standards require these to be based on the market prices at the date the new hedging relationships were established, even though there is no change in the hedging instrument (see "Hedged Average Rate/Price" column in the table below). Bunker fuel forward contracts that were in excess of our expected core fuel demand were sold and gains of $2 million were realized. At September 30, 2011, unrealized net gains of $9 million on the company's bunker fuel forward contracts were deferred in "Accumulated other comprehensive income (loss)," including net gains of $11 million which would be reclassified to net income, if realized, in the next twelve months.

At September 30, 2011 the company's portfolio of derivatives consisted of the following:

	Notional Amount		Contract Average Rate/Price		Hedged Average Rate/Price1		Settlement Period
Derivatives designated as hedging instruments:
Currency derivatives:
Purchased euro put options	€	52 million	$	1.42/€	$	1.42/€		2011
Sold euro call options	€	52 million	$	1.49/€	$	1.49/€		2011
Average rate forward contracts	€	25 million	$	1.44/€	$	1.44/€		2011
Fuel derivatives:
3.5% Rotterdam Barge/Singapore 180:
Bunker fuel forward contracts		40,249 mt	$	399/mt	$	618/mt		2011
Bunker fuel forward contracts		129,680 mt	$	459/mt	$	589/mt		2012
Bunker fuel forward contracts		111,153 mt	$	493/mt	$	585/mt		2013
Bunker fuel forward contracts		74,096 mt	$	581/mt	$	593/mt		2014
Derivatives not designated as hedging instruments:
30-day euro forward contracts	€	80 million	$	1.36/€	$	1.36/€		Oct. 2011

¹  As described in the paragraph above, new cash flow hedge relationships were established for certain bunker fuel forward contracts in the third quarter of 2011. These changes result in hedge rates for accounting purposes that are different from those in the hedge contract terms.

Activity related to the company's derivative assets and liabilities designated as hedging instruments is as follows:

	2011						2010
(In thousands)	Currency Hedge Portfolio			Bunker Fuel Forward Contracts			Currency Hedge Portfolio			Bunker Fuel Forward Contracts
Balance at beginning of year	$	293		$	27,314		$	6,527		$	6,257
Realized (gains) losses included in net income		1,586			(5,428	)		(1,200	)		(2,170	)
Purchases (sales), net 1		5,013			0			0			0
Changes in fair value		(2,688	)		37,938			4,055			1,183
Balance at March 31	$	4,204		$	59,824		$	9,382		$	5,270
Realized (gains) losses included in net income		1,386			(12,240	)		(8,044	)		2,652
Purchases (sales), net 1		0			0			1,680			0
Changes in fair value		(5,203	)		6,406			12,639			(17,579	)
Balance at June 30	$	387		$	53,990		$	15,657		$	(9,657	)
Realized (gains) losses included in net income		445			(10,475	)		3,767			4,323
Purchases (sales), net 1		0			(3,288	)		2,292			0
Changes in fair value		6,000			(18,933	)		(23,193	)		16,506
Balance at September 30	$	6,832		$	21,294		$	(1,477	)	$	11,172

¹  Purchases (sales) represent the cash premiums paid upon the purchase of euro put options or received upon the sale of euro call options and sales of bunker fuel forward contracts prior to their expiration. Bunker fuel forward contracts require no up-front cash payment and have an initial fair value of zero.

The following table summarizes the effect of the company's derivatives designated as cash flow hedging instruments on OCI and earnings:

	Quarter Ended September 30, 2011								Quarter Ended September 30, 2010
(In thousands)	Currency Hedge Portfolio		Bunker Fuel Forward Contracts			Total			Currency Hedge Portfolio			Bunker Fuel Forward Contracts			Total
Gain (loss) recognized in OCI on derivative (effective portion)	$	9,075	$	(32,022	)	$	(22,947	)	$	(9,444	)	$	15,818		$	6,374
Gain (loss) reclassified from accumulated OCI into income (effective portion)1		1,093		10,475			11,568			(553	)		(4,322	)		(4,875	)
Gain (loss) recognized in income on derivative (ineffective portion)1		0		13,089			13,089			0			688			688

	Nine Months Ended September 30, 2011						Nine Months Ended September 30, 2010
(In thousands)	Currency Hedge Portfolio		Bunker Fuel Forward Contracts		Total		Currency Hedge Portfolio		Bunker Fuel Forward Contracts			Total
Gain (loss) recognized in OCI on derivative (effective portion)	$	7,921	$	12,572	$	20,493	$	12,980	$	64		$	13,044
Gain (loss) reclassified from accumulated OCI into income (effective portion)1		1,886		28,143		30,029		14,530		(4,804	)		9,726
Gain (loss) recognized in income on derivative (ineffective portion)1		0		12,839		12,839		0		46			46

¹ Both the gain (loss) reclassified from accumulated OCI into income (effective portion) and the gain (loss) recognized in income on derivative (ineffective portion), if any, are included in "Net sales" for purchased euro put options and sold euro call options and "Cost of sales" for bunker fuel forward contracts.