Derivative Instruments

We use derivative instruments to manage selected commodity price and foreign currency exposures as described below. We do not use derivative instruments for speculative trading purposes, and we typically do not hedge beyond six years. Cash flows from derivative instruments are included in operating activities in our condensed consolidated statements of cash flows. Gains and losses on contracts designated as cash flow hedges are reclassified into earnings when the underlying forecasted transactions affect earnings. For contracts designated as cash flow hedges, we reassess the probability of the underlying forecasted transactions occurring on a quarterly basis.



Derivative Instruments	Type	Hedged Item	Aggregate Notional Amount	Contracts Maturing Through
Commodity	Natural gas swaps	Purchases of natural gas	36 million mmBTUs*	December 31, 2022
Foreign Exchange	Forward contracts	Purchases of products and services denominated in a foreign currency	$115 million	December 31, 2018

* - millions of British Thermal Units

COUNTERPARTY RISK, MASTER NETTING ARRANGEMENTS AND BALANCE SHEET OFFSETTING

We are exposed to credit losses in the event of nonperformance by the counterparties to our derivative instruments. As of September 30, 2017, our derivatives were in a $13 million net liability position. All of our counterparties have investment grade credit ratings; accordingly, we anticipate that they will be able to fully satisfy their obligations under the contracts.

All of our derivative contracts are governed by master netting agreements negotiated between us and the counterparties that reduce our counterparty credit exposure. The agreements outline the conditions (such as credit ratings and net derivative fair values) upon which we, or the counterparties, are required to post collateral. As required by certain of our agreements, we had $6 million of collateral posted with our counterparties related to our derivatives as of September 30, 2017. Amounts paid as cash collateral are included in "Receivables" on our accompanying condensed consolidated balance sheets.

We have not adopted an accounting policy to offset fair value amounts related to derivative contracts under our master netting arrangements; therefore, individual derivative contracts are reflected on a gross basis, as either assets or liabilities, on our accompanying condensed consolidated balance sheets, based on their fair value as of the balance sheet date.

FINANCIAL STATEMENT INFORMATION

The following are the pretax effects of derivative instruments on the condensed consolidated statements of income for the three months ended September 30, 2017 and 2016.



	Amount of Gain or (Loss) Recognized in Other Comprehensive Income on Derivatives (Effective Portion)						Location of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)	Amount of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)
(millions)	2017			2016				2017			2016
Derivatives in Cash Flow Hedging Relationships
Commodity contracts	$	(2	)	$	(4	)	Cost of products sold	$	(1	)	$	(3	)
Foreign exchange contracts	(3		)	1			Cost of products sold	—			—
Total	$	(5	)	$	(3	)		$	(1	)	$	(3	)



	Location of Gain or (Loss) Recognized in Income on Derivatives	Amount of Gain or (Loss) Recognized in Income on Derivatives
(millions)		2017		2016
Derivatives Not Designated as Hedging Instruments
Commodity contracts	Cost of products sold	$	—	$	—
Total		$	—	$	—

The following are the pretax effects of derivative instruments on the condensed consolidated statements of income for the nine months ended September 30, 2017 and 2016.



	Amount of Gain or (Loss) Recognized in Other Comprehensive Income on Derivatives (Effective Portion)						Location of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)	Amount of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)
(millions)	2017			2016				2017			2016
Derivatives in Cash Flow Hedging Relationships
Commodity contracts	$	(12	)	$	(2	)	Cost of products sold	$	(2	)	$	(13	)
Foreign exchange contracts	(6		)	(5		)	Cost of products sold	—			4
Total	$	(18	)	$	(7	)		$	(2	)	$	(9	)



	Location of Gain or (Loss) Recognized in Income on Derivatives	Amount of Gain or (Loss) Recognized in Income on Derivatives
(millions)		2017			2016
Derivatives Not Designated as Hedging Instruments
Commodity contracts	Cost of products sold	$	(1	)	$	—
Total		$	(1	)	$	—

For both commodity contracts and foreign exchange contracts, no ineffectiveness was recorded in the three and nine months ended September 30, 2017 and 2016.

The following are the fair values of derivative instruments and the location on our accompanying condensed consolidated balance sheets as of September 30, 2017 and December 31, 2016.



	Balance Sheet Location	Fair Value				Balance Sheet Location	Fair Value
	Balance Sheet Location	Fair Value				Balance Sheet Location	Fair Value
(millions)		9/30/17		12/31/16			9/30/17		12/31/16
Derivatives in Cash Flow Hedging Relationships
Commodity contracts	Other current assets	$	2	$	8	Accrued expenses	$	4	$	4
Commodity contracts	Other assets	1		3		Other liabilities	7		5
Foreign exchange contracts	Other current assets	—		1		Accrued expenses	4		1
Foreign exchange contracts	Other assets	—		—		Other liabilities	1		—
Total derivatives in cash flow hedging relationships		$	3	$	12		$	16	$	10



Derivatives Not Designated as Hedging Instruments
Commodity contracts	Other current assets	$	—	$	1	Accrued expenses	$	—	$	—
Total derivatives not designated as hedging instruments		$	—	$	1		$	—	$	—
Total derivatives	Total assets	$	3	$	13	Total liabilities	$	16	$	10

As of September 30, 2017, we had no derivatives designated as fair value hedges or net investment hedges.