DERIVATIVE FINANCIAL INSTRUMENTS

The Company is exposed to, among other risks, the impact of changes in commodity prices, foreign currency exchange rates, and interest rates in the normal course of business. The Company’s risk management program is designed to manage the exposure and volatility arising from these risks, and utilizes derivative financial instruments to offset a portion of these risks. The Company uses derivative financial instruments only to the extent necessary to hedge identified business risks, and does not enter into such transactions for trading purposes.

The Company generally does not require collateral or other security with counterparties to these financial instruments and is therefore subject to credit risk in the event of nonperformance; however, the Company monitors credit risk and currently does not anticipate nonperformance by other parties. Contracts with counterparties generally contain right of offset provisions. These provisions effectively reduce the Company’s exposure to credit risk in situations where the Company has gain and loss positions outstanding with a single counterparty. It is the Company’s policy to offset on the Consolidated Balance Sheets the amounts recognized for derivative instruments with any cash collateral arising from derivative instruments executed with the same counterparty under a master netting agreement. As of June 30, 2017 and December 31, 2016, the Company did not have any amounts on deposit with any of its counterparties, nor did any of its counterparties have any amounts on deposit with the Company.

The following table presents the fair value of derivatives and hedging instruments and the respective location on the Consolidated Balance Sheets (in millions):



		Fair Value at
	Location	June 30, 2017		December 31, 2016
Derivative assets designated as hedging instruments:
Net investment hedges:
Cross currency swaps	Other current assets	$	4	$	4
Cross currency swaps	Other non-current assets	$	—	$	6
Amount of gain recognized in OCI (effective portion)	OCI	$	3	$	18
Cash flow hedges:
Natural gas forward swaps	Other current assets	$	—	$	4
Amount of gain recognized in OCI (effective portion)	OCI	$	—	$	4
Derivative liabilities designated as hedging instruments:
Net investment hedges:
Cross currency swaps	Other liabilities	$	10	$	—
Cash flow hedges:
Natural gas forward swaps	Accounts payable and accrued liabilities	$	1	$	—
Amount of loss recognized in OCI related to natural gas forward swaps (effective portion)	OCI	$	1	$	—
Amount of loss recognized in OCI related to treasury interest rate lock (effective portion)	OCI	$	1	$	1
Derivative assets not designated as hedging instruments:
Natural gas forward swaps	Other current assets	$	—	$	1
Foreign exchange contracts	Other current assets	$	—	$	1
Derivative liabilities not designated as hedging instruments:
Foreign exchange contracts	Accounts payable and accrued liabilities	$	2	$	2

The following table presents the notional amount of derivatives and hedging instruments on the Consolidated Balance Sheet (in millions):



		Notional Amount
	Unit of Measure	June 30, 2017
Net investment hedges:
Cross currency swaps	U.S. Dollars	$	250
Cash flow hedges:
Natural gas forward swaps U.S. indices	MMBtu	8
Natural gas forward swaps European indices	MMBtu (equivalent)	2

The Company had notional amounts of $81 million for derivative financial instruments related to non-designated foreign currency exposures in U.S. Dollars primarily related to Brazilian Real, Chinese Yuan, Indian Rupee, Japanese Yen, and South Korean Won. In addition, the Company had notional amounts of $36 million for derivative financial instruments related to non-designated foreign currency exposures in European Euro primarily related to Russian Rubles. Please refer to the Other Derivatives section below for more detail on these instruments.

The following table presents the impact and respective location of derivative activities on the Consolidated Statements of Earnings (in millions):



		Three Months Ended June 30,					Six Months Ended June 30,
	Location	2017			2016		2017			2016
Derivative activity designated as hedging instruments:
Natural gas:
Amount of (gain)/loss reclassified from OCI into earnings (effective portion)	Cost of sales	$	(1	)	$	3	$	(2	)	$	6
Foreign currency:
Amount of loss reclassified from OCI into earnings (effective portion)	Other expenses, net	$	—		$	—	$	—		$	1
Interest rate:
Amount of loss recognized in earnings	Interest expense, net	$	1		$	—	$	1		$	1
Derivative activity not designated as hedging instruments:
Natural gas:
Amount of loss/(gain) recognized in earnings	Other expenses, net	$	1		$	—	$	1		$	(1	)
Foreign currency:
Amount of loss recognized in earnings (a)	Other expenses, net	$	4		$	3	$	4		$	6


(a)	Losses related to foreign currency derivatives were substantially offset by net revaluation impacts on foreign currency denominated balance sheet exposures, which were also recorded in Other expenses, net.

Cash Flow Hedges

The Company uses a combination of derivative financial instruments, which qualify as cash flow hedges, and physical contracts to manage forecasted exposure to electricity and natural gas prices. The Company's policy for electricity exposure is to hedge up to 75% of its total forecasted exposure for the current calendar year and up to 65% of its total forecasted exposure for the first calendar year forward. The Company’s policy for natural gas exposure is to hedge up to 75% of its total forecasted exposure for the next two months, up to 60% of its total forecasted exposure for the following four months, and lesser amounts for the remaining periods. Based on market conditions, approved variation from these standard policies may occur. Currently, the Company is managing risk associated with electricity prices only through physical contracts and has natural gas derivatives designated as hedging instruments that mature within 15 months.

The Company performs an analysis for effectiveness of its derivatives designated as hedging instruments at the end of each quarter based on the terms of the contracts and the underlying items being hedged. The effective portion of the change in the fair value of cash flow hedges is deferred in accumulated OCI and is subsequently recognized in Cost of sales on the Consolidated Statements of Earnings for commodity hedges, when the hedged item impacts earnings. Changes in the fair value of derivative assets and liabilities designated as hedging instruments are shown in the Other non-cash line within operating activities on the Consolidated Statements of Cash Flows. Any portion of the change in fair value of derivatives designated as hedging instruments that is determined to be ineffective is recorded in Other expenses, net on the Consolidated Statements of Earnings.

In June and July 2016, the Company entered into a total of $300 million of forward U.S. Treasury rate lock agreements to manage the U.S. Treasury portion of its interest rate risk associated with the anticipated issuance of 10-year fixed rate senior notes in 2016. The Company designated these forward U.S. Treasury rate lock agreements as cash flow hedges, and paid $1 million to settle these agreements in August 2016 upon issuance of its 2026 senior notes. The $1 million fair value of these agreements will be amortized over the remaining life of the 2026 senior notes as a component of interest expense. Hedge ineffectiveness for these agreements was less than $1 million. Please refer to Note 10 of the Consolidated Financial Statements for further information on the Company's 2026 senior notes.

As of June 30, 2017, $1 million of losses included in accumulated OCI on the Consolidated Balance Sheets relate to natural gas contracts that are expected to impact earnings during the next 12 months. Transactions and events that are expected to occur over the next 12 months that will necessitate recognizing these deferred amounts include the recognition of the hedged item through earnings.

Net Investment Hedges

The Company uses cross currency forward contracts to hedge a portion of the net investment in foreign subsidiaries against fluctuations in foreign exchange rates (primarily the European Euro). For derivative instruments that are designated and qualify as hedges of net investments in foreign operations, settlements and changes in fair values of the derivative instruments are recognized in Currency translation adjustment, a component of Accumulated OCI, to offset the changes in the values of the net investments being hedged. Any portion of net investment hedges that is determined to be ineffective is recorded in Other expenses, net on the Consolidated Statements of Earnings. Cash settlements are included in Other investing activities in the Consolidated Statements of Cash Flows.

Other Derivatives

The Company uses forward currency exchange contracts to manage existing exposures to foreign exchange risk related to assets and liabilities recorded on the Consolidated Balance Sheets. Gains and losses resulting from the changes in fair value of these instruments are recorded in Other expenses, net on the Consolidated Statements of Earnings.