Financial Instruments, Risk Management and Fair Value Measurements

Financial Instruments and Risk Management

Ingevity’s operations are exposed to market risks, such as changes in foreign currency exchange rates and commodity prices due to transactions denominated in a variety of foreign currencies and purchases of certain commoditized raw materials and inputs. Changes in these rates and prices may have an impact on Ingevity’s future cash flow and earnings. To mitigate these market risks and their effects, we enter into derivative financial instruments which are governed by policies, procedures and internal processes set forth by our Board of Directors.

Our risk management program also addresses counterparty credit risk by selecting only major financial institutions with investment grade ratings. Once the derivative financial instrument is entered into, we continuously monitor the financial institutions’ credit ratings and our credit risk exposure held by the financial institution. When appropriate, we reallocate exposures across multiple financial institutions to limit credit risk. If a counterparty fails to fulfill its performance obligations under the derivative financial instrument, then Ingevity is exposed to credit risk equal to the fair value of the financial instrument. Derivative assets and liabilities are reported on a net basis by counterparty, to the extent governed by master netting agreements, in the consolidated balance sheets. Due to our proactive mitigation of these potential credit risk we anticipate performance by our counterparties to these contracts and therefore no material loss is expected.

Foreign Currency Exchange Risk Management

We manufacture and sell our products in several countries throughout the world and, thus, we are exposed to changes in foreign currency exchange rates. To manage the volatility relating to these exposures, we net the exposures on a consolidated basis to take advantage of natural offsets. To manage the remaining exposure, from time to time, we utilize forward currency exchange contracts and zero cost collar option contracts to minimize the volatility to earnings and cash flows resulting from the effect of fluctuating foreign currency exchange rates on export sales denominated in foreign currencies (principally the euro). These contracts are generally designated as cash flow hedges. We began our foreign currency exchange risk hedging program in July 2017 and therefore prior to this date we had no derivative financial instruments designated to foreign currency exchange risk. As of December 31, 2017 we had no forward currency exchange contracts or zero cost collar option contracts outstanding.

Commodity Price Risk Management

Certain energy sources used by the Company, are subject to price volatility caused by weather, supply and demand conditions, economic variables and other unpredictable factors. This volatility is primarily related to the market pricing of natural gas. To mitigate expected fluctuations in market prices and the volatility to earnings and cash flow resulting from changes to pricing of natural gas purchases, from time to time, we will enter into swap contracts and zero cost collar option contracts and designate these contracts as cash flow hedges. We began our commodity price risk hedging program in December 2017 and therefore prior to this date we had no derivative financial instruments designated to hedge commodity price risk. As of December 31, 2017, we had 1.4 million and 1.4 million mmBTUS (millions of British Thermal Units) in aggregate notional volume of outstanding natural gas commodity swap contracts and zero cost collar option contracts, respectively, designated as cash flow hedges. As of December 31, 2017, open commodity contracts hedge forecasted transactions until December 31, 2018. The fair value of the outstanding designated natural gas commodity hedge contracts as of December 31, 2017 was less than $0.1 million.

Fair-Value Measurements

We have categorized our assets and liabilities that are recorded at fair value, based on the priority of the inputs to the valuation technique, into a three-level fair-value hierarchy. The fair-value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the assets and liabilities fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair-value measurement of the instrument.

The following information is presented for assets and liabilities that are recorded in the consolidated balance sheets at fair value measured on a recurring basis. There were no assets recorded at fair value measured on a recurring basis as of December 31, 2016. There were no significant transfers of assets and liabilities that are recorded at fair value between Level 1 and Level 2 during the period reported.



In millions	Level 1⁽¹⁾		Level 2⁽²⁾		Level 3⁽³⁾		Total
December 31, 2017
Assets:
Equity securities ⁽⁴⁾	$	1.8	$	—	$	—	$	1.8
Total assets	$	1.8	$	—	$	—	1.8
Liabilities:							—
Deferred compensation arrangement ⁽⁵⁾	$	2.0	$	—	$	—	$	2.0
Separation-related Reimbursement Awards ⁽⁶⁾⁽⁷⁾	0.9		—		—		0.9
Total liabilities	$	2.9	$	—	$	—	$	2.9



In millions	Level 1⁽¹⁾		Level 2⁽²⁾		Level 3⁽³⁾		Total
December 31, 2016
Liabilities:							—
Deferred compensation arrangement ⁽⁵⁾	$	0.7	$	—	$	—	$	0.7
Separation-related Reimbursement Awards ⁽⁶⁾⁽⁷⁾	2.1		—		—		2.1
Total liabilities	$	2.8	$	—	$	—	$	2.8

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(1)	Quoted prices in active markets for identical assets.


(2)	Quoted prices for similar assets and liabilities in active markets.


(3)	Significant unobservable inputs.


(4)	Included within "Prepaid and other current assets" on the consolidated balance sheet.


(5)	Included within "Other liabilities" on the consolidated balance sheet.


(6)	Included within "Accrued expenses" on the consolidated balance sheet.

(7)

This amount represents an amount due to WestRock associated with WestRock equity awards held by Ingevity employees post Separation. In accordance with the Employee Matters Agreement between Ingevity and WestRock entered into in connection with the Separation, we are required to reimburse WestRock the fair market value of awards on the day Ingevity employees exercise their awards. The expense recognized during the years ended December 31, 2017 and 2016 was $0.3 million and $1.6 million, respectively.

At December 31, 2017 and 2016, the book value of capital lease obligations was $80.0 million and $80.0 million, respectively, and the fair value was $92.9 million and $91.6 million, respectively. The fair value of our capital lease obligations is based on the period-end quoted market prices for the obligations, using Level 1 inputs.

The carrying amount of our long-term debt was $365.6 million and $404.4 million as of December 31, 2017 and 2016, respectively. The carrying value is a reasonable estimate of the fair value of our outstanding debt as our outstanding debt is variable interest rate debt.

At December 31, 2017 and 2016, the book value of our restricted investment was $71.3 million and $69.7 million, respectively, and the fair value was $69.6 million and $67.1 million, respectively, based on Level 1 inputs.

The carrying value of our financial instruments: cash and cash equivalents, accounts receivable, other receivables, other payables and accrued liabilities approximate their fair values due to the short-term nature of these financial instruments.