13. DERIVATIVES AND HEDGING

Cash Flow Hedges

The Company is exposed to fluctuations in interest rates under the Syndicated Credit Facility. On April 5, 2018, the Company entered in to several interest rate swap agreements in order to fix the base interest rate to be paid over an aggregate amount of $1.0 billion of the Company’s variable rate long-term debt, at an average rate of 2.56% (excluding the margin specified in the Syndicated Credit Facility).

The Company is also exposed to foreign exchange risks on sales contracts, purchase contracts, debt denominated in foreign currencies, and net investments in foreign operations. The Company enters into foreign exchange forward contracts to hedge the significant majority of the exposure arising from expected foreign currency denominated cash flows.


	As of December 31, 2018
Derivative instrument	Notional amount	Maximum Contract term
Interest rate swaps	1,000	3.3 years
Foreign exchange forward contracts	—	—
Purchase contracts settled in Canadian dollars:
U.S. dollar	70	1.8 years
Euro	10	2.3 years
GBP	3	0.5 years
Sales contracts settled in Canadian dollars:
Euro	194	3.8 years
Japanese Yen	35	2.6 years
GBP	1	0.6 years
Purchase contracts settled in U.S. dollars:
Euro	10	0.3 years
Japanese Yen	177	0.2 years
Sales contracts settled in Canadian dollars:
Euro	20	0.5 years
Japanese Yen	177	0.2 years


	As of December 31, 2017
Derivative instrument	Notional amount	Maximum Contract term
Interest rate swaps	—	—
Foreign exchange forward contracts	—	—
Purchase contracts settled in Canadian dollars:
U.S. dollar	165	2.8 years
Euro	16	2.7 years
GBP	2	1.0 years
Sales contracts settled in Canadian dollars:
Euro	312	3.0 years
Japanese Yen	26	3.1 years
GBP	2	1.0 years
Purchase contracts settled in U.S. dollars:
Euro	32	1.3 years
Japanese Yen	2,231	1.2 years
Sales contracts settled in Canadian dollars:
Euro	58	1.3 years
Japanese Yen	1,116	1.2 years

The effect of derivative instruments on earnings and other comprehensive income are as follows:


	For the year ended December 31, 2018
	Effective portion of gains and losses included in other comprehensive income		Effective portion of gains and losses reclassified to earnings		Gains and loss included in earnings1
Cash flow hedges:
Foreign exchange forward contracts	$	(6)	$	—	$	(2)
Interest rate swaps		(4)		—		—
Embedded derivatives		—		—		—

Derivatives not qualified for hedging accounting:
Foreign exchange forward contracts		—		—		—
Interest rate swaps		—		—		—
Embedded derivatives		—		—		1


	For the year ended December 31, 2017
	Effective portion of gains and losses included in other comprehensive income		Effective portion of gains and losses reclassified to earnings		Gains and loss included in earnings1
Cash flow hedges:
Foreign exchange forward contracts	$	(3)	$	—	$	(1)
Interest rate swaps		—		—		—
Embedded derivatives		—		—		—

Derivatives not qualified for hedging accounting:
Foreign exchange forward contracts		—		—		5
Interest rate swaps		—		—		—
Embedded derivatives		—		—		(2)


	For the year ended December 31, 2016
	Effective portion of gains and losses included in other comprehensive income		Effective portion of gains and losses reclassified to earnings		Gains and loss included in earnings1
Cash flow hedges:
Foreign exchange forward contracts	$	(8)	$	(1)	$	(5)
Interest rate swaps		—		—		—
Embedded derivatives		—		—		—

Derivatives not qualified for hedging accounting:
Foreign exchange forward contracts		—		—		1
Interest rate swaps		—		—		—
Embedded derivatives		—		—		(3)

1Includes gains and losses related to the ineffective portion of the Company’s cash flow hedges, and derivatives not qualified for hedge accounting.

In implementing all its derivative financial instruments, the Company deals with counterparties and is therefore exposed to credit related losses in the event of non-performance by these counterparties. However, the Company deals with counterparties that are major financial institutions, and does not expect any of the counterparties to fail to meet their obligations.

Net Investment Hedge

As of December 31, 2018 and 2017, the Company had designated $271 million of its $2.0 billion Term Loan B as a hedge of its investment in certain U.S. subsidiaries. Foreign exchange gains and losses arising from the translation of the designated portion of the Term Loan B are recognized in other comprehensive income to the extent that the hedges are effective and are recognized in the Consolidated Statements of Operations to the extent that the hedges are ineffective. The fair value of the designated portion of Term Loan B was $256 million and $298 million as of December 31, 2018 and 2017, respectively. As a result of the Company’s U.S. Domestication on January 1, 2019, and the associated change from a Canadian parent company to a U.S. parent company, the Company’s Syndicated Credit Facility is now in a USD functional currency entity. Due to this change, the net investment hedge is no longer necessary from the domestication date onwards.