The Company uses interest rate swaps, currency swaps, commodity price swaps, and forward and option contracts to manage risks generally associated with foreign exchange rate, interest rate and commodity price fluctuations. The information that follows explains the various types of derivatives and financial instruments used by 3M, how and why 3M uses such instruments, how such instruments are accounted for, and how such instruments impact 3M's financial position and performance.

Additional information with respect to the impacts on other comprehensive income of nonderivative hedging and derivative instruments is included in Note 4. Additional information with respect to the fair value of derivative instruments is included in Note 10. References to information regarding derivatives and/or hedging instruments associated with the Company's long-term debt are also made in Note 9 in 3M's 2014 Annual Report on Form 10-K.

Types of Derivatives/Hedging Instruments and Inclusion in Income/Other Comprehensive Income

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.

Cash Flow Hedging - Foreign Currency Forward and Option Contracts: The Company enters into foreign exchange forward and option contracts to hedge against the effect of exchange rate fluctuations on cash flows denominated in foreign currencies. These transactions are designated as cash flow hedges. The settlement or extension of these derivatives will result in reclassifications (from accumulated other comprehensive income) to earnings in the period during which the hedged transactions affect earnings. 3M may dedesignate these cash flow hedge relationships in advance of the occurrence of the forecasted transaction. The portion of gains or losses on the derivative instrument previously accumulated in other comprehensive income for dedesignated hedges remains in accumulated other comprehensive income until the forecasted transaction affects earnings. Changes in the value of derivative instruments after dedesignation are recorded in earnings and are included in the Derivatives Not Designated as Hedging Instruments section below. Hedge ineffectiveness and the amount excluded from effectiveness testing recognized in income on cash flow hedges were not material for the three and six months ended June 30, 2015 and 2014. Beginning in the second quarter of 2014 3M began extending the maximum length of time over which it hedges its exposure to the variability in future cash flows of the forecasted transactions from a previous term of 12 months to a longer term of 24 months, with certain currencies being extended further to 36 months starting in the first quarter of 2015. The dollar equivalent gross notional amount of the Company's foreign exchange forward and option contracts designated as cash flow hedges at June 30, 2015 was approximately $2.9 billion.

Cash Flow Hedging - Commodity Price Management: The Company manages commodity price risks through negotiated supply contracts, price protection agreements and forward contracts. 3M discontinued the use of commodity price swaps as cash flow hedges of forecasted commodity transactions in the first quarter of 2015. The Company used commodity price swaps as cash flow hedges of forecasted commodity transactions to manage price volatility. The related mark-to-market gain or loss on qualifying hedges was included in other comprehensive income to the extent effective, and reclassified into cost of sales in the period during which the hedged transaction affected earnings.

Cash Flow Hedging – Interest Rate Contracts: In August 2011, in anticipation of the September 2011 issuance of $1 billion in five-year fixed rate notes, 3M executed a pre-issuance cash flow hedge on a notional amount of $400 million by entering into a forward-starting five-year floating-to-fixed interest rate swap. Upon debt issuance in September 2011, 3M terminated the floating-to-fixed interest rate swap. The termination of the swap resulted in a $7 million pre-tax loss ($4 million after-tax) that will be amortized over the five-year life of the note.

In the third and fourth quarters of 2014, the Company entered into forward starting interest rate swaps with notional amounts totaling 500 million Euros as a hedge against interest rate volatility associated with the forecasted issuance of fixed rate debt. Upon issuance in November 2014 of 750 million Euros aggregate principal amount of twelve-year fixed rate notes, 3M terminated these interest rate swaps. The termination resulted in an $8 million pre-tax ($5 million after-tax) loss within accumulated other comprehensive income that will be amortized over the twelve-year life of the notes.

The amortization of losses referenced in the two preceding paragraphs is included in the tables below as part of the loss recognized in income on the effective portion of derivatives as a result of reclassification from accumulated other comprehensive income.

As of June 30, 2015, the Company had a balance of $137 million (as shown in Note 4) associated with the after-tax net unrealized gain associated with cash flow hedging instruments recorded in accumulated other comprehensive income. This includes a remaining balance of $6 million (loss) related to the forward starting interest rate swaps (discussed in the preceding paragraphs), which will be amortized over the respective lives of the notes. Based on exchange rates as of June 30, 2015, 3M expects to reclassify approximately $65 million of the after-tax net unrealized foreign exchange cash flow hedging gains to earnings over the remainder of 2015, approximately $65 million of the after-tax net unrealized foreign exchange cash flow hedging gains to earnings in 2016, and approximately $7 million of the after-tax net unrealized foreign exchange cash flow hedging gains to earnings after 2016. 3M expects to reclassify approximately $103 million of the after-tax net unrealized foreign exchange cash flow hedging gains to earnings over the next 12 months.

The location in the consolidated statements of income and comprehensive income and amounts of gains and losses related to derivative instruments designated as cash flow hedges are provided in the following table. Reclassifications of amounts from accumulated other comprehensive income into income include accumulated gains (losses) on dedesignated hedges at the time earnings are impacted by the forecasted transaction.

Three months ended June 30, 2015

(Millions)

Pretax Gain (Loss) Recognized in Other Comprehensive Income on Effective Portion of Derivative

Pretax Gain (Loss) Recognized in Income on Effective Portion of Derivative as a Result of Reclassification from Accumulated Other Comprehensive Income

Ineffective Portion of Gain (Loss) on Derivative and Amount Excluded from Effectiveness Testing Recognized in Income

Derivatives in Cash Flow Hedging Relationships

Amount

Location

Amount

Location

Amount

Foreign currency forward/option contracts

(16)

Cost of sales

―

Interest rate swap contracts

―

Interest expense

(1)

Interest expense

―

Total

(16)

―

Six months ended June 30, 2015

(Millions)

Pretax Gain (Loss) Recognized in Other Comprehensive Income on Effective Portion of Derivative

Pretax Gain (Loss) Recognized in Income on Effective Portion of Derivative as a Result of Reclassification from Accumulated Other Comprehensive Income

Ineffective Portion of Gain (Loss) on Derivative and Amount Excluded from Effectiveness Testing Recognized in Income

Derivatives in Cash Flow Hedging Relationships

Amount

Location

Amount

Location

Amount

Foreign currency forward/option contracts

120

Cost of sales

―

Commodity price swap contracts

―

Cost of sales

(2)

Cost of sales

―

Interest rate swap contracts

―

Interest expense

(2)

Interest expense

―

Total

120

―

Three months ended June 30, 2014

(Millions)

Pretax Gain (Loss) Recognized in Other Comprehensive Income on Effective Portion of Derivative

Pretax Gain (Loss) Recognized in Income on Effective Portion of Derivative as a Result of Reclassification from Accumulated Other Comprehensive Income

Ineffective Portion of Gain (Loss) on Derivative and Amount Excluded from Effectiveness Testing Recognized in Income

Derivatives in Cash Flow Hedging Relationships

Amount

Location

Amount

Location

Amount

Foreign currency forward/option contracts

(20)

Cost of sales

(6)

Cost of sales

―

Commodity price swap contracts

(1)

Cost of sales

―

Total

(21)

(5)

―

Six months ended June 30, 2014

(Millions)

Pretax Gain (Loss) Recognized in Other Comprehensive Income on Effective Portion of Derivative

Pretax Gain (Loss) Recognized in Income on Effective Portion of Derivative as a Result of Reclassification from Accumulated Other Comprehensive Income

Ineffective Portion of Gain (Loss) on Derivative and Amount Excluded from Effectiveness Testing Recognized in Income

Derivatives in Cash Flow Hedging Relationships

Amount

Location

Amount

Location

Amount

Foreign currency forward/option contracts

(13)

Cost of sales

(2)

Cost of sales

―

Commodity price swap contracts

Cost of sales

―

Total

(12)

―

For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivatives as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings.

Fair Value Hedging - Interest Rate Swaps: The Company manages interest expense using a mix of fixed and floating rate debt. To help manage borrowing costs, the Company may enter into interest rate swaps. Under these arrangements, the Company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount. The mark-to-market of these fair value hedges is recorded as gains or losses in interest expense and is offset by the gain or loss of the underlying debt instrument, which also is recorded in interest expense. These fair value hedges are highly effective and, thus, there is no impact on earnings due to hedge ineffectiveness. The dollar equivalent (based on inception date foreign currency exchange rates) gross notional amount of the Company's interest rate swaps at June 30, 2015 was $1 billion.

At June 30, 2015, the Company had interest rate swaps designated as fair value hedges of underlying fixed rate obligations. In July 2007, in connection with the issuance of a seven-year Eurobond for an amount of 750 million Euros, the Company completed a fixed-to-floating interest rate swap on a notional amount of 400 million Euros as a fair value hedge of a portion of the fixed interest rate Eurobond obligation. In August 2010, the Company terminated 150 million Euros of the notional amount of this swap. As a result, a gain of 18 million Euros, recorded as part of the balance of the underlying debt, was amortized as an offset to interest expense over this debt's remaining life. Prior to termination of the applicable portion of the interest rate swap, the mark-to-market of the hedge instrument was recorded as gains or losses in interest expense and was offset by the gain or loss on carrying value of the underlying debt instrument. Consequently, the subsequent amortization of the 18 million Euros recorded as part of the underlying debt balance was not part of gains on hedged items recognized in income in the tables below. The remaining interest rate swap of 250 million Euros (notional amount) matured in July 2014.

In November 2013, 3M issued an eight-year 1.875% fixed rate Eurobond for a face amount of 600 million Euros. Upon debt issuance, 3M completed a fixed-to-floating interest rate swap on a notional amount of 300 million Euros as a fair value hedge of a portion of the fixed interest rate Eurobond obligation.

In June 2014, 3M issued a five-year 1.625% fixed rate medium-term note for a face amount of $625 million. Upon debt issuance, 3M completed a fixed-to-floating interest rate swap on a notional amount of $600 million as a fair value hedge of a portion of the fixed interest rate medium-term note obligation.

The location in the consolidated statements of income and amounts of gains and losses related to derivative instruments designated as fair value hedges and similar information relative to the hedged items are as follows:

Three months ended June 30, 2015	Gain (Loss) on Derivative			Gain (Loss) on Hedged Item
(Millions)	Recognized in Income			Recognized in Income
Derivatives in Fair Value Hedging Relationships	Location	Amount		Location	Amount
Interest rate swap contracts	Interest expense	$	(11)	Interest expense	$	11
Total		$	(11)		$	11

Six months ended June 30, 2015	Gain (Loss) on Derivative			Gain (Loss) on Hedged Item
(Millions)	Recognized in Income			Recognized in Income
Derivatives in Fair Value Hedging Relationships	Location	Amount		Location	Amount
Interest rate swap contracts	Interest expense	$	(5)	Interest expense	$	5
Total		$	(5)		$	5

Three months ended June 30, 2014	Gain (Loss) on Derivative			Gain (Loss) on Hedged Item
(Millions)	Recognized in Income			Recognized in Income
Derivatives in Fair Value Hedging Relationships	Location	Amount		Location	Amount
Interest rate swap contracts	Interest expense	$	6	Interest expense	$	(6)
Total		$	6		$	(6)

Six months ended June 30, 2014	Gain (Loss) on Derivative			Gain (Loss) on Hedged Item
(Millions)	Recognized in Income			Recognized in Income
Derivatives in Fair Value Hedging Relationships	Location	Amount		Location	Amount
Interest rate swap contracts	Interest expense	$	13	Interest expense	$	(13)
Total		$	13		$	(13)

The Company may use non-derivative (foreign currency denominated debt) and derivative (foreign exchange forward contracts) instruments to hedge portions of the Company's investment in foreign subsidiaries and manage foreign exchange risk. The extent of 3M's use of forward contracts may depend on the volume of foreign currency denominated debt already designated in net investment hedges. For instruments that are designated and qualify as hedges of net investments in foreign operations and that meet the effectiveness requirements, the net gains or losses attributable to changes in spot exchange rates are recorded in cumulative translation within other comprehensive income. The remainder of the change in value of such instruments is recorded in earnings. Recognition in earnings of amounts previously recorded in cumulative translation is limited to circumstances such as complete or substantially complete liquidation of the net investment in the hedged foreign operation. To the extent foreign currency denominated debt is not designated in or is dedesignated from a net investment hedge relationship, changes in value of that portion of foreign currency denominated debt due to exchange rate changes are recorded in earnings through their maturity date.

3M's use of foreign exchange forward contracts designated in hedges of the Company's net investment in European subsidiaries can vary by time period depending on when foreign currency denominated debt balances designated in such relationships are dedesignated, matured, or are newly issued and designated. Additionally, variation can occur in connection with the extent of the Company's desired exchange risk coverage.

3M also began using foreign exchange forward contracts designated in hedges of the Company's net investment in Korean subsidiaries during the first quarter of 2015.

At June 30, 2015, the total notional amount of foreign exchange forward contracts designated in net investment hedges was 974 million Euros and approximately 440 billion South Korean Won along with a principal amount of long-term debt instruments designated in net investment hedges totaling 3.6 billion Euros (as discussed in both Note 9 in 3M's 2014 Annual Report on Form 10-K, specifically items C, D1, D2, and H, with additional discussion within Note 7 of this report for the May 2015 debt issuances that were designated in net investment hedges). The maturity dates of these derivative and nonderivative instruments designated in net investment hedges range from 2015 to 2030.

The Company revised amounts previously presented in the tables below for the pretax gain (loss) recognized as cumulative translation within other comprehensive income on effective portion of instrument (“Gain Recognized as CTA”) for the three and six months ended June 30, 2014 relative to foreign currency denominated debt and in total. These immaterial corrections increased the previously presented amounts of the Gain recognized as CTA in the disclosure tables below by $36 million and $54 million for the three and six months ended June 30, 2014, respectively. The revisions had no impact on the Company's consolidated results of operations, financial condition, or cash flows.

The location in the consolidated statements of income and comprehensive income and amounts of gains and losses related to derivative and nonderivative instruments designated as net investment hedges are as follows. There were no reclassifications of the effective portion of net investment hedges out of accumulated other comprehensive income into income for the periods presented in the table below.

Three months ended June 30, 2015
Derivative and Nonderivative Instruments in Net Investment Hedging Relationships	Pretax Gain (Loss) Recognized as Cumulative Translation within Other Comprehensive Income on Effective Portion of Instrument		Ineffective Portion of Gain (Loss) on Instrument and Amount Excluded from Effectiveness Testing Recognized in Income
(Millions)	Amount		Location	Amount
Foreign currency denominated debt	$	(55)	N/A	$	―
Foreign currency forward contracts		(55)	Cost of Sales		4
Total	$	(110)		$	4

Six months ended June 30, 2015
Derivative and Nonderivative Instruments in Net Investment Hedging Relationships	Pretax Gain (Loss) Recognized as Cumulative Translation within Other Comprehensive Income on Effective Portion of Instrument		Ineffective Portion of Gain (Loss) on Instrument and Amount Excluded from Effectiveness Testing Recognized in Income
(Millions)	Amount		Location	Amount
Foreign currency denominated debt	$	185	N/A	$	―
Foreign currency forward contracts		102	Cost of Sales		4
Total	$	287		$	4

Three months ended June 30, 2014
Derivative and Nonderivative Instruments in Net Investment Hedging Relationships	Pretax Gain (Loss) Recognized as Cumulative Translation within Other Comprehensive Income on Effective Portion of Instrument		Ineffective Portion of Gain (Loss) on Instrument and Amount Excluded from Effectiveness Testing Recognized in Income
(Millions)	Amount		Location	Amount
Foreign currency denominated debt	$	18	N/A	$	―
Foreign currency forward contracts		1	Cost of Sales		―
Total	$	19		$	―

Six months ended June 30, 2014
Derivative and Nonderivative Instruments in Net Investment Hedging Relationships	Pretax Gain (Loss) Recognized as Cumulative Translation within Other Comprehensive Income on Effective Portion of Instrument		Ineffective Portion of Gain (Loss) on Instrument and Amount Excluded from Effectiveness Testing Recognized in Income
(Millions)	Amount		Location	Amount
Foreign currency denominated debt	$	27	N/A	$	―
Foreign currency forward contracts		1	Cost of Sales		―
Total	$	28		$	―

Derivatives not designated as hedging instruments include dedesignated foreign currency forward and option contracts that formerly were designated in cash flow hedging relationships (as referenced in the Cash Flow Hedges section above), dedesignated foreign exchange forward contracts that formerly were designated in net investment hedging relationships, and forward and option contracts entered into, in part, as offsetting trades to such dedesignated items. In addition, 3M enters into foreign currency forward contracts to offset, in part, the impacts of certain intercompany activities (primarily associated with intercompany licensing arrangements) and enters into commodity price swaps to offset, in part, fluctuations in costs associated with the use of certain commodities and precious metals. These derivative instruments are not designated in hedging relationships; therefore, fair value gains and losses on these contracts are recorded in earnings. The dollar equivalent gross notional amount of these forward, option and swap contracts not designated as hedging instruments totaled $8.7 billion as of June 30, 2015. The Company does not hold or issue derivative financial instruments for trading purposes.

The location in the consolidated statements of income and amounts of gains and losses related to derivative instruments not designated as hedging instruments are as follows:

Derivatives Not Designated as Hedging Instruments	Three months ended June 30, 2015			Six months ended June 30, 2015
Derivatives Not Designated as Hedging Instruments	Gain (Loss) on Derivative Recognized in Income			Gain (Loss) on Derivative Recognized in Income
(Millions)	Location	Amount		Location	Amount
Foreign currency forward/option contracts	Cost of sales	$	1	Cost of sales	$	5
Foreign currency forward contracts	Interest expense		(61)	Interest expense		28
Commodity price swap contracts	Cost of sales		―	Cost of sales		(4)
Total		$	(60)		$	29

Derivatives Not Designated as Hedging Instruments	Three months ended June 30, 2014			Six months ended June 30, 2014
Derivatives Not Designated as Hedging Instruments	Gain (Loss) on Derivative Recognized in Income			Gain (Loss) on Derivative Recognized in Income
(Millions)	Location	Amount		Location	Amount
Foreign currency forward/option contracts	Cost of sales	$	(2)	Cost of sales	$	(3)
Foreign currency forward contracts	Interest expense		35	Interest expense		68
Total		$	33		$	65

The following tables summarize the fair value of 3M's derivative instruments, excluding nonderivative instruments used as hedging instruments, and their location in the consolidated balance sheet. Additional information with respect to the fair value of derivative instruments is included in Note 10.

June 30, 2015
(Millions)		Assets			Liabilities
Fair Value of Derivative Instruments		Location	Amount		Location	Amount
Derivatives designated as hedging instruments
Foreign currency forward/option contracts		Other current assets	$	179	Other current liabilities	$	4
Foreign currency forward/option contracts		Other assets		73	Other liabilities		3
Interest rate swap contracts		Other assets		20	Other liabilities		―
Total derivatives designated as
	hedging instruments		$	272		$	7

Derivatives not designated as hedging instruments
Foreign currency forward/option contracts		Other current assets	$	92	Other current liabilities	$	71
Foreign currency forward/option contracts		Other assets		1	Other liabilities		1
Commodity price swap contracts		Other current assets		―	Other current liabilities		2
Total derivatives not designated as
	hedging instruments		$	93		$	74

Total derivative instruments			$	365		$	81

December 31, 2014
(Millions)		Assets			Liabilities
Fair Value of Derivative Instruments		Location	Amount		Location	Amount
Derivatives designated as hedging instruments
Foreign currency forward/option contracts		Other current assets	$	116	Other current liabilities	$	2
Foreign currency forward/option contracts		Other assets		47	Other liabilities		1
Commodity price swap contracts		Other current assets		―	Other current liabilities		4
Interest rate swap contracts		Other assets		27	Other liabilities		3
Total derivatives designated as
	hedging instruments		$	190		$	10

Derivatives not designated as hedging instruments
Foreign currency forward/option contracts		Other current assets	$	66	Other current liabilities	$	33
Total derivatives not designated as
	hedging instruments		$	66		$	33

Total derivative instruments			$	256		$	43

The Company is exposed to credit loss in the event of nonperformance by counterparties in interest rate swaps, currency swaps, commodity price swaps, and forward and option contracts. However, the Company's risk is limited to the fair value of the instruments. The Company actively monitors its exposure to credit risk through the use of credit approvals and credit limits, and by selecting major international banks and financial institutions as counterparties. 3M enters into master netting arrangements with counterparties when possible to mitigate credit risk in derivative transactions. A master netting arrangement may allow each counterparty to net settle amounts owed between a 3M entity and the counterparty as a result of multiple, separate derivative transactions. As of June 30, 2015, 3M has International Swaps and Derivatives Association (ISDA) agreements with 16 applicable banks and financial institutions which contain netting provisions. In addition to a master agreement with 3M supported by a primary counterparty's parent guarantee, 3M also has associated credit support agreements in place with 15 of its primary derivative counterparties which, among other things, provide the circumstances under which either party is required to post eligible collateral (when the market value of transactions covered by these agreements exceeds specified thresholds or if a counterparty's credit rating has been downgraded to a predetermined rating). The Company does not anticipate nonperformance by any of these counterparties.

3M has elected to present the fair value of derivative assets and liabilities within the Company's consolidated balance sheet on a gross basis even when derivative transactions are subject to master netting arrangements and may otherwise qualify for net presentation. However, the following tables provide information as if the Company had elected to offset the asset and liability balances of derivative instruments, netted in accordance with various criteria in the event of default or termination as stipulated by the terms of netting arrangements with each of the counterparties. For each counterparty, if netted, the Company would offset the asset and liability balances of all derivatives at the end of the reporting period based on the 3M entity that is a party to the transactions. Derivatives not subject to master netting agreements are not eligible for net presentation. As of the applicable dates presented below, no collateral had been received or pledged related to these derivative instruments.

Offsetting of Financial Assets/Liabilities under Master Netting Agreements with Derivative Counterparties
June 30, 2015
					Gross Amounts not Offset in the Consolidated Balance Sheet that are Subject to Master Netting Agreements
(Millions)			Gross Amount of Derivative Assets Presented in the Consolidated Balance Sheet		Gross Amount of Eligible Offsetting Recognized Derivative Liabilities		Cash Collateral Received		Net Amount of Derivative Assets
Derivatives subject to master
	netting agreements	$	365	$	57	$	―	$	308
Derivatives not subject to master
	netting agreements		―						―
Total		$	365					$	308

3M estimates that year-on-year currency effects, including hedging impacts, decreased pre-tax income by approximately $110 million for the three months ended June 30, 2015 and decreased pre-tax income by approximately $200 million for the six months ended June 30, 2015. This estimate includes the effect of translating profits from local currencies into U.S. dollars; the impact of currency fluctuations on the transfer of goods between 3M operations in the United States and abroad; and transaction gains and losses, including derivative instruments designed to reduce foreign currency exchange rate risks. 3M estimates that year-on-year derivative and other transaction gains and losses increased pre-tax income by approximately $40 million for three months ended June 30, 2015 and increased pre-tax income by approximately $80 million for the six months ended June 30, 2015.