Financial Instruments, Hedging Activities and Fair Value Measurements

Financial instruments include cash and cash equivalents, short-term investments, cash held in escrow, marketable equity securities, accounts receivable, company-owned life insurance, accounts payable, short-term and long-term debt instruments, and derivatives. The fair values of these financial instruments approximated their carrying values at December 31, 2014 and 2013, in the aggregate, except for long-term debt instruments.

Hedging Activities

The Company has exposure to market risk from changes in foreign currency rates, PPG's stock price, and interest rates. As a result, certain derivative financial instruments may be used when available on a cost effective basis to hedge the underlying economic exposure. Certain of these instruments qualify as cash flow, fair value and net investment hedges upon meeting the requisite criteria, including effectiveness of offsetting hedge exposures. Changes in the fair value of derivatives that do not qualify for hedge accounting are recognized in income from continuing operations in the period incurred.

PPG’s policies do not permit speculative use of derivative financial instruments. PPG enters into derivative financial instruments with high credit quality counterparties and diversifies its positions among such counterparties in order to reduce its exposure to credit losses. The Company did not realize a credit loss on derivatives during the three-year period ended December 31, 2014.

All of PPG's outstanding derivative instruments are subject to accelerated settlement in the event of PPG’s failure to meet its debt or payment obligations under the terms of the instruments’ contractual provisions. In addition, should the Company be acquired and its payment obligations under the derivative instruments’ contractual arrangements not be assumed by the acquirer, or should PPG enter into bankruptcy, receivership or reorganization proceedings, the instruments would also be subject to accelerated settlement.

During 2014, there was one derivative instrument initially designated as a net investment hedge that was undesignated as a hedging instrument during the year ended December 31, 2014. The impact of this undesignation was not significant to the results of operations or financial position of the Company. There were no derivative instruments undesignated or discontinued as a hedging instrument in either 2013 or 2012. There were no amounts deferred in AOCI reclassified to income from continuing operations during the three-year period ended December 31, 2014 related to hedges of anticipated transactions that were no longer expected to occur.

Fair Value Hedges:

PPG designates forward currency contracts as hedges against the Company’s exposure to future changes in fair value related to certain firm sales commitments denominated in foreign currencies. As of December 31, 2014 and 2013, the fair value of these contracts was insignificant.

Interest rate swaps have been used from time to time to manage the Company's exposure to changing interest rates. When outstanding, the interest rate swaps were designated as fair value hedges and were recorded at fair value. In prior years, PPG settled interest rate swaps and received cash. There were no interest rate swaps outstanding as of December 31, 2014 and 2013. However, the fair value adjustment of the debt at the time the interest rates swaps were settled is being amortized as a reduction to interest expense over the remaining term of the related debt. As a result of the completed debt refinancing, a $4 million gain was recognized related to the portion of the fair value adjustment for the debt that was retired in 2014.

PPG has entered into renewable equity forward arrangements to hedge the impact to PPG's income from continuing operations for changes in the fair value of 1,388,889 shares of PPG stock that are to be contributed to the asbestos settlement trust as discussed in Note 13, “Commitments and Contingent Liabilities.” This financial instrument is recorded at fair value as an asset or liability and changes in the fair value of this financial instrument are reflected in the “Asbestos settlement – net” caption of the accompanying consolidated statement of income. The total principal amount payable for these shares is $62 million. PPG will pay to the counterparty interest based on the principal amount and the counterparty will pay to PPG an amount equal to the dividends paid on these shares during the period this financial instrument is outstanding. The difference between the principal amount and any amounts related to unpaid interest or dividends and the current market price for these shares, adjusted for credit risk, represents the fair value of the financial instrument as well as the amount that PPG would pay or receive if the counterparty chose to net settle the financial instrument. Alternatively, the bank may, at its option, require PPG to purchase the shares covered by the arrangement at the principal amount adjusted for unpaid interest and dividends as of the date of settlement. As of December 31, 2014 and 2013, the fair value of this contract was an asset of $268 million and $207 million, respectively.

Cash Flow Hedges:

PPG designates certain forward currency contracts and forward starting swaps as cash flow hedges of the Company’s exposure to variability in exchange rates on intercompany and third party transactions denominated in foreign currencies and interest rates. As of December 31, 2014 and 2013, the fair value of the forward currency contracts was a net asset of $46 million and $8 million, respectively.

The Company entered into forward starting swaps in 2009 and 2010 to effectively lock-in a fixed interest rate for future debt refinancings with an anticipated term of ten years based on the ten year swap rate, to which was added a corporate spread. The swaps had a total notional amount of $400 million and were settled in July 2012, resulting in a cash payment of $121 million. As of December 31, 2013, the amount of loss recorded in AOCI was $104 million, which was being amortized to interest expense over the remaining term of the ten-year debt that was issued in July 2012. In the fourth quarter of 2014, in conjunction with the debt refinancing, the ten-year debt instrument was redeemed and a non-cash charge for the related remaining unamortized loss of $93 million was recognized. Refer to Note 8, "Borrowings and Lines of Credit" for more information on the Company's debt refinancing. There were no forward starting swaps outstanding as of December 31, 2014 and 2013.

Net Investment Hedges:

PPG uses cross currency swaps, foreign currency contracts and Euro-denominated debt to hedge a portion of its net investment in its European operations. As of January 1, 2012, U.S. dollar to euro cross currency swap contracts with a total notional amount of $1.16 billion outstanding, of which $600 million of contracts were settled in June 2012. The remaining outstanding contracts of $560 million are to expire in March 2018. On settlement of the remaining outstanding contracts, PPG will receive $560 million U.S. dollars and pay Euros to the counterparties to the contracts. During the term of these contracts, PPG receives semiannual payments in March and September of each year based on U.S. dollar, long-term fixed interest rates, and PPG makes annual payments in March of each year to the counterparties based on Euro, long-term fixed interest rates. As of December 31, 2014 and December 31, 2013, the fair value of these contracts was a net liability of $32 million and $120 million, respectively.

In November 2014, the Company entered into three Euro-denominated borrowings. Refer to Note 8, "Borrowings and Lines of Credit" for more information. The Company has designated these debt arrangements as hedges of a portion of its net investment in its European operations and, as a result, mark to spot rate adjustments of the outstanding debt balances have been and will be recorded as a component of "Other comprehensive income."

During 2014 and 2013, PPG continued to designate a €300 million Euro-denominated borrowing as a hedge of a portion of PPG’s net investment in the Company’s European operations.

During 2014, PPG used foreign currency forward contracts to hedge a portion of its net investment in its European operations. As of December 31, 2014, none of these contracts remained outstanding. PPG received cash proceeds of $49 million from the settlement of these contracts.

As of December 31, 2014 and 2013 the Company had accumulated pre-tax unrealized translation gains in AOCI of $169 million and losses of $35 million related to the Euro-denominated borrowings, foreign currency forward contracts, and the cross currency swaps.

The following tables provide details for the years ended December 31, 2014, 2013 and 2012 related to PPG's hedging activities. All dollar amounts are pre-tax.



	December 31, 2014
Hedge Type ($ in millions)		Gain Deferred in OCI		Gain (Loss) Recognized
Hedge Type ($ in millions)		Gain Deferred in OCI		Amount			Caption
Fair Value
	Foreign currency contracts	Not applicable		$	1		Sales
	Equity forward arrangements	Not applicable		60			Asbestos - net
	Total Fair Value			$	61
Cash Flow
	Forward starting swaps	$	—	$	(104	)	Interest expense and Other charges
	Foreign currency contracts^(a)	51		47			Other charges
	Total Cash Flow	$	51	$	(57	)
Net Investment
	Cross currency swaps	$	81				Other charges
	Foreign denominated debt	75					Other charges
	Foreign currency contracts	48					Other charges
	Total Net Investment	$	204

(a) The ineffective portion related to this item was $7 million of expense.



	December 31, 2013
Hedge Type ($ in millions)		Gain (Loss) Deferred in OCI			Gain (Loss) Recognized
Hedge Type ($ in millions)		Gain (Loss) Deferred in OCI			Amount			Caption
Fair Value
	Foreign currency contracts	Not applicable			$	1		Sales
	Equity forward arrangements	Not applicable			77			Asbestos - net
	Total Fair Value				$	78
Cash Flow
	Forward starting swaps	$	—		$	(12	)	Interest expense
	Foreign currency contracts^(a)	33			33			Other charges
	Total Cash Flow	$	33		$	21
Net Investment
	Cross currency swaps	$	(28	)				Other charges
	Foreign denominated debt	(16		)				Other charges
	Total Net Investment	$	(44	)


(a)	The ineffective portion related to this item was $8 million of expense.



	December 31, 2012
Hedge Type ($ in millions)		Gain (Loss) Deferred in OCI			Gain (Loss) Recognized
Hedge Type ($ in millions)		Gain (Loss) Deferred in OCI			Amount			Caption
Fair Value
	Foreign currency contracts	Not applicable			$	1		Sales
	Equity forward arrangements	Not applicable			74			Asbestos - net
	Total Fair Value				$	75
Cash Flow
	Natural gas swaps	$	(2	)	$	(11	)	Cost of sales and Income from Discontinued operations, net of tax
	Interest rate swaps	(1		)	(2		)	Income from Discontinued operations, net of tax
	Forward starting swaps^(a)	(26		)	(5		)	Interest expense
	Foreign currency contracts^(b)	(9		)	(9		)	Other charges
	Total Cash Flow	$	(38	)	$	(27	)
Net Investment
	Cross currency swaps	$	3					Other charges
	Foreign denominated debt	(7		)				Other charges
	Total Net Investment	$	(4	)

(a) The ineffective portion related to this item was $4 million of expense.

(b) The ineffective portion related to this item was $8 million of expense.

Fair Value Measurements

The Company follows a fair value measurement hierarchy to measure its assets and liabilities. The Company's financial assets and liabilities are measured using inputs from the following three levels.

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets and liabilities that the Company has the ability to access at the measurement date. Level 1 inputs are considered to be the most reliable evidence of fair value as they are based on unadjusted quoted market prices from various financial information service providers and securities exchanges.

Level 2 inputs are directly or indirectly observable prices that are not quoted on active exchanges, which include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means. The fair values of these derivative instruments reflect the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including forward curves.

Level 3 inputs are unobservable inputs employed for measuring the fair value of assets or liabilities. The Company does not have any recurring financial assets or liabilities that are recorded in its consolidated balance sheets as of December 31, 2014 and 2013 that are classified as Level 3 inputs.

Assets and liabilities reported at fair value on a recurring basis:



		December 31, 2014
($ in millions)		Level 1	Level 2	Level 3
Assets:
Other current assets:
	Marketable equity securities	5	—	—
	Foreign currency contracts	—	52	—
	Equity forward arrangement	—	268	—
Investments:
	Marketable equity securities	74	—	—
Other assets:
	Foreign currency contracts	—	16	—

Liabilities:
Accounts payable and accrued liabilities:
	Foreign currency contracts	—	23	—
Other liabilities:
	Cross currency swaps	—	32	—



		December 31, 2013
($ in millions)		Level 1		Level 2		Level 3
Assets:
Short-term investments:
	Commercial paper and certificates of deposit	$	—	$	50	$	—
Other current assets:
	Marketable equity securities	5		—		—
	Foreign currency contracts	—		25		—
	Equity forward arrangement	—		207		—
Investments:
	Marketable equity securities	70		—		—
Other assets:
	Foreign currency contracts	—		2		—

Liabilities:
Accounts payable and accrued liabilities:
	Foreign currency contracts	—		7		—
Other liabilities:
	Cross currency swaps	—		120		—
	Foreign currency contracts	—		11		—

Long-Term Debt:

PPG's long-term debt (excluding capital lease obligations), had carrying and fair values totaling $3,877 million and $4,164 million, respectively, as of December 31, 2014. Long-term debt (excluding capital lease obligations), had carrying and fair values totaling $3,346 million and $3,683 million, respectively, as of December 31, 2013. The fair values of the debt instruments were based on discounted cash flows and interest rates then currently available to the Company for instruments of the same remaining maturities and were measured using level 2 inputs.

Assets and liabilities reported at fair value on a nonrecurring basis:

There were no significant adjustments to the fair value of nonmonetary assets or liabilities during the years ended December 31, 2014, 2013 or 2012.