Derivative Instruments

9 Months Ended

Sep. 30, 2014

Derivative Instruments

Derivative Instruments

5.  Derivative Instruments

The Company has certain derivative assets and liabilities which consist of natural gas forwards and foreign exchange option and forward contracts.  The Company uses an income approach to valuing these contracts.  Natural gas forward rates and foreign exchange rates are the significant inputs into the valuation models.  These inputs are observable in active markets over the terms of the instruments the Company holds, and accordingly, the Company classifies its derivative assets and liabilities as Level 2 in the hierarchy.  The Company also evaluates counterparty risk in determining fair values.

Commodity Futures Contracts Designated as Cash Flow Hedges

The significant majority of the Company’s sales volume in North America is tied to customer contracts that contain provisions that pass the price of natural gas to the customer.  In certain of these contracts, the customer has the option of fixing the natural gas price component for a specified period of time.  When the customer exercises that option the Company enters into commodity futures contracts for the related natural gas requirements, in order to limit the effects of fluctuation in the future market price paid for natural gas and the related volatility in cash flows.  At September 30, 2014 and 2013, the Company had entered into commodity futures contracts covering approximately 1,800,000 MM BTUs and 6,600,000 MM BTUs, respectively, primarily related to customer requests to lock the price of natural gas.

The Company accounts for these futures contracts as cash flow hedges at September 30, 2014 and recognizes them on the balance sheet at fair value.  The effective portion of changes in the fair value of a derivative that is designated as, and meets the required criteria for, a cash flow hedge is recorded in the Accumulated Other Comprehensive Income component of share owners’ equity (“OCI”) and reclassified into earnings in the same period or periods during which the underlying hedged item affects earnings.  An immaterial unrecognized loss and an unrecognized loss of $1 million at September 30, 2014 and 2013 related to the commodity futures contracts was included in Accumulated OCI.  The immaterial unrecognized loss at September 30, 2014 will be reclassified into earnings over the next fifteen months.  Any material portion of the change in the fair value of a derivative designated as a cash flow hedge that is deemed to be ineffective is recognized in current earnings.  The ineffectiveness related to these natural gas hedges for the three and nine months ended September 30, 2014 and 2013 was not material.

The effect of the commodity futures contracts on the results of operations for the three months ended September 30, 2014 and 2013 is as follows:

				Amount of Gain (Loss)
Amount of Gain (Loss)				Reclassified from
Recognized in OCI on				Accumulated OCI into Income
Commodity Futures Contracts				(reported in cost of goods sold)
(Effective Portion)				(Effective Portion)
2014		2013		2014		2013
$	1	$	—	$	—	$	—

The effect of the commodity futures contracts on the results of operations for the nine months ended September 30, 2014 and 2013 is as follows:

				Amount of Gain (Loss)
Amount of Gain (Loss)				Reclassified from
Recognized in OCI on				Accumulated OCI into Income
Commodity Futures Contracts				(reported in cost of goods sold)
(Effective Portion)				(Effective Portion)
2014		2013		2014		2013
$	3	$	—	$	2	$	—

Forward Exchange Contracts not Designated as Hedging Instruments

The Company’s subsidiaries may enter into short-term forward exchange or option agreements to purchase foreign currencies at set rates in the future.  These agreements are used to limit exposure to fluctuations in foreign currency exchange rates for significant planned purchases of fixed assets or commodities that are denominated in currencies other than the subsidiaries’ functional currency.  Subsidiaries may also use forward exchange agreements to offset the foreign currency risk for receivables and payables, including intercompany receivables and payables, not denominated in, or indexed to, their functional currencies.  The Company records these short-term forward exchange agreements on the balance sheet at fair value and changes in the fair value are recognized in current earnings.

At September 30, 2014 and 2013, various subsidiaries of the Company had outstanding forward exchange and option agreements denominated in various currencies covering the equivalent of approximately $520 million and $740 million, respectively, related primarily to intercompany transactions and loans.

The effect of the forward exchange contracts on the results of operations for the three months ended September 30, 2014 and 2013 is as follows:

	Amount of Gain (Loss)
Location of Loss	Recognized in Income on
Recognized in Income on	Forward Exchange Contracts
Forward Exchange Contracts	2014		2013
Other expense	$	1	$	(7	)

The effect of the forward exchange contracts on the results of operations for the nine months ended September 30, 2014 and 2013 is as follows:

	Amount of Gain (Loss)
Location of Gain (Loss)	Recognized in Income on
Recognized in Income on	Forward Exchange Contracts
Forward Exchange Contracts	2014		2013
Other expense	$	—	$	(19	)

Balance Sheet Classification

The Company records the fair values of derivative financial instruments on the balance sheet as follows: (a) receivables if the instrument has a positive fair value and maturity within one year, (b) other assets if the instrument has a positive fair value and maturity after one year, (c) other liabilities (current) if the instrument has a negative fair value and maturity within one year, and (d) other long-term liabilities if the instrument has a negative fair value and maturity after one year.  The following table shows the amount and classification (as noted above) of the Company’s derivatives:

	Balance	Fair Value
	Sheet Location	September 30, 2014		December 31, 2013		September 30, 2013
Asset Derivatives:
Derivatives designated as hedging instruments:
Commodity futures contracts	a	$	—	$	1	$	—
Derivatives not designated as hedging instruments:
Forward exchange contracts	a		10		3		4
Total asset derivatives		$	10	$	4	$	4
Liability Derivatives:
Derivatives designated as hedging instruments:
Commodity futures contracts	c	$	—	$	—	$	1
Derivatives not designated as hedging instruments:
Forward exchange contracts	c	6		7		12
Total liability derivatives		$	6	$	7	$	13