NOTE 15 - DERIVATIVES AND HEDGING ACTIVITIES

As a multinational company we are exposed to market risks, such as changes in interest rates, currency exchanges rates and commodity prices.

For detailed information regarding the Company’s hedging activities and related accounting, refer to Note 14 in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

The notional amounts of qualifying and non-qualifying financial instruments used in hedging transactions were as follows:



In millions	September 30, 2017		December 31, 2016
Derivatives in Cash Flow Hedging Relationships:
Foreign exchange contracts (a)	$	348	$	275
Derivatives Not Designated as Hedging Instruments:
Electricity contract	12		6
Foreign exchange contracts	11		24


(a)	These contracts had maturities of two years or less as of September 30, 2017.

The following table shows gains or losses recognized in AOCI, net of tax, related to derivative instruments:



	Gain (Loss) Recognized in AOCI on Derivatives (Effective Portion)
	Three Months Ended September 30,				Nine Months Ended September 30,
In millions	2017		2016		2017		2016
Foreign exchange contracts	$	1	$	5	$	9	$	6
Interest rate contracts	—		—		—		(11		)
Total	$	1	$	5	$	9	$	(5	)

During the next 12 months, the amount of the September 30, 2017 AOCI balance, after tax, that is expected to be reclassified to earnings is a gain of $2 million.

The amounts of gains and losses recognized in the statement of operations on qualifying and non-qualifying financial instruments used in hedging transactions were as follows:



	Gain (Loss) Reclassified from AOCI (Effective Portion)								Location of Gain (Loss) Reclassified from AOCI (Effective Portion)
	Three Months Ended September 30,				Nine Months Ended September 30,
In millions	2017		2016		2017		2016
Derivatives in Cash Flow Hedging Relationships:
Foreign exchange contracts	$	2	$	3	$	6	$	7	Cost of products sold
Total	$	2	$	3	$	6	$	7



	Gain (Loss) Recognized										Location of Gain (Loss) In Statement of Operations
	Three Months Ended September 30,					Nine Months Ended September 30,
In millions	2017			2016		2017			2016
Derivatives Not Designated as Hedging Instruments:
Electricity contract	$	(8	)	$	—	$	(10	)	$	—	Cost of products sold
Foreign exchange contracts	—			—		—			—		Cost of products sold
Interest rate contracts	—			2		—			5		Interest expense, net
Total	$	(8	)	$	2	$	(10	)	$	5

The following activity is related to fully effective interest rate swaps designated as fair value hedges:



			2017						2016
In millions	Issued		Terminated		Undesignated		Issued		Terminated		Undesignated
Third Quarter	$	—	$	—	$	—	$	—	$	—	$	—
Second Quarter	—		—		—		—		—		—
First Quarter	—		—		—		—		55		—
Total	$	—	$	—	$	—	$	—	$	55	$	—

Fair Value Measurements

For a discussion of the Company’s fair value measurement policies under the fair value hierarchy, refer to Note 14 in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

The Company has not changed its valuation techniques for measuring the fair value of any financial assets or liabilities during the year. Transfers between levels, if any, are recognized at the end of the reporting period.

The following table provides a summary of the impact of our derivative instruments in the balance sheet:

Fair Value Measurements

Level 2 – Significant Other Observable Inputs



	Assets						Liabilities
In millions	September 30, 2017			December 31, 2016			September 30, 2017			December 31, 2016
Derivatives designated as hedging instruments
Foreign exchange contracts – cash flow	$	9	(a)	$	3	(b)	$	3	(c)	$	4	(e)
Total derivatives designated as hedging instruments	9			3			3			4
Derivatives not designated as hedging instruments
Electricity contract	—			—			8		(d)	2		(e)
Total derivatives not designated as hedging instruments	—			—			8			2
Total derivatives	$	9		$	3		$	11		$	6


(a)	Includes $8 million recorded in Other current assets and $1 million recorded in Deferred charges and other assets in the accompanying balance sheet.


(b)	Included in Other current assets in the accompanying balance sheet.


(c)	Includes $2 million recorded in Other accrued liabilities and $1 million recorded in Other liabilities in the accompanying consolidated balance sheet.


(d)	Includes $4 million recorded in Other accrued liabilities and $4 million recorded in Other liabilities in the accompanying consolidated balance sheet.


(e)	Included in Other accrued liabilities in the accompanying balance sheet.

The above contracts are subject to enforceable master netting arrangements that provide rights of offset with each counterparty when amounts are payable on the same date in the same currency or in the case of certain specified defaults. Management has made an accounting policy election to not offset the fair value of recognized derivative assets and derivative liabilities in the balance sheet. The amounts owed to the counterparties and owed to the Company are considered immaterial with respect to each counterparty and in the aggregate with all counterparties.

Credit-Risk-Related Contingent Features

Certain of the Company’s financial instruments used in hedging transactions are governed by standard credit support arrangements with counterparties. If the lower of the Company’s credit rating by Moody’s or S&P were to drop below investment grade, the Company would be required to post collateral for all of its derivatives in a net liability position, although no derivatives would terminate. The fair values of derivative instruments containing credit risk-related contingent features in a net liability position were $2 million and $3 million as of September 30, 2017 and December 31, 2016, respectively. The Company was not required to post any collateral as of September 30, 2017 or December 31, 2016. For more information on credit-risk-related contingent features, refer to Note 14 in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.