Financial Instruments

9 Months Ended

Sep. 30, 2014

Notes to Condensed Consolidated Financial Statements [Abstract]

Derivative Financial Instruments

Financial Instruments

We enter into derivative instruments for risk management purposes only, including derivatives designated as hedging instruments under the Derivatives and Hedging Topic of the FASB ASC and those utilized as economic hedges. We operate internationally and, in the normal course of business, are exposed to fluctuations in interest rates, foreign exchange rates and commodity prices. These fluctuations can increase the costs of financing, investing and operating the business. We have used derivative instruments, including swaps, forward contracts and options to manage certain foreign currency, interest rate and commodity price exposures.

The four quarter rolling average of the notional amount of foreign exchange contracts hedging foreign currency transactions was $13.0 billion and $12.3 billion at September 30, 2014 and December 31, 2013, respectively.

The following table summarizes the fair value of derivative instruments as of September 30, 2014 and December 31, 2013 which consist solely of foreign exchange contracts:

	Asset Derivatives				Liability Derivatives
(Dollars in millions)	September 30, 2014		December 31, 2013		September 30, 2014		December 31, 2013
Derivatives designated as hedging instruments	$	13	$	59	$	128	$	103
Derivatives not designated as hedging instruments	87		31		89		54

The impact from foreign exchange derivative instruments that qualified as cash flow hedges was as follows:

	Quarter Ended September 30,						Nine Months Ended September 30,
(Dollars in millions)	2014			2013			2014			2013
(Loss) gain recorded in Accumulated other comprehensive loss	$	(142	)	$	97		$	(120	)	$	(64	)
Loss reclassified from Accumulated other comprehensive loss (gain) into Product sales (effective portion)	$	24		$	(1	)	$	55		$	22

Assuming current market conditions continue, a $72 million pre-tax loss is expected to be reclassified from Accumulated other comprehensive loss into Product sales to reflect the fixed prices obtained from foreign exchange hedging within the next 12 months. At September 30, 2014, all derivative contracts accounted for as cash flow hedges will mature by September 2016.

The effect on the Condensed Consolidated Statement of Operations of foreign exchange contracts not designated as hedging instruments was as follows:

	Quarter Ended September 30,				Nine Months Ended September 30,
(Dollars in millions)	2014		2013		2014		2013
Gain recognized in Other income, net	$	10	$	10	$	22	$	33