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 June 30, 2015 and December 31, 2014, 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, financial instruments, including derivatives, may be used to hedge these underlying economic exposures. Certain of these instruments qualify as cash flow, fair value and net investment hedges upon meeting the requisite criteria, including effectiveness of offsetting hedged or underlying 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 and six month periods ended June 30, 2015 and 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.

Fair Value Hedges

PPG designates certain foreign currency forward contracts as hedges against the Company’s exposure to future changes in fair value of certain firm sales commitments denominated in foreign currencies. As of June 30, 2015 and 2014, 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 hedges of certain outstanding debt obligations of the Company and were recorded at fair value. There were no interest rate swaps outstanding as of June 30, 2015 and December 31, 2014. However, in prior years, PPG settled interest rate swaps and received cash. The fair value adjustment of the debt at the time the interest rate swaps were settled is still being amortized as a reduction to interest expense over the remaining term of the related debt.

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 (before giving effect to the 2-for-1 stock split) that are to be contributed to the asbestos settlement trust as discussed in Note 15, “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 condensed 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 June 30, 2015 and December 31, 2014, the fair value of this contract was an asset of $267 million and $268 million, respectively.

Cash Flow Hedges

PPG designates certain foreign currency forward contracts as cash flow hedges of the Company’s exposure to variability in exchange rates on intercompany and third party transactions denominated in foreign currencies. As of June 30, 2015 and December 31, 2014, the fair value of all foreign currency forward contracts designated as cash flow hedges was a net asset of $30 million and $46 million, respectively.

Net Investment Hedges

PPG uses cross currency swaps, foreign currency forward contracts and Euro-denominated debt to hedge a portion of its net investment in its European operations. As of June 30, 2015, U.S. dollar to Euro cross currency swap contracts with a total notional amount of $560 million were outstanding and are scheduled to expire in March 2018. On settlement of the outstanding contracts, PPG will receive $560 million U.S. dollars and pay Euros to the counterparties. During the term of these contracts, PPG will receive semiannual payments in March and September of each year based on a U.S. dollar, long-term interest rate fixed as of the contract inception date, and PPG will make annual payments in March of each year to the counterparties based on a Euro, long-term interest rate fixed as of the contract inception date. As of June 30, 2015 and December 31, 2014, the fair value of these contracts was a net asset of $45 million and a net liability of $32 million, respectively.

At June 30, 2015 and December 31, 2014, PPG had designated €1.9 billion and €1 billion, respectively, of euro-denominated borrowings as hedges of a portion of its net investment in the Company's European operations. The carrying value of these instruments at June 30, 2015 and December 31, 2014 was $2.1 billion and $1.2 billion, respectively.

In March 2015, the Company issued two Euro-denominated notes with an aggregate principal amount of €1.2 billion. Refer to Note 7, "Borrowings" for more information. The Company has designated these notes as hedges of a portion of its net investment in its European operations and, as a result, mark to market rate adjustments of the outstanding debt balances have been and will be recorded as a component of "Other comprehensive income."

Also, in March 2015, PPG de-designated €300 million of Euro-denominated borrowings originally issued in June 2005 and designated as a net investment hedge of a portion of PPG's net investment in the Company's European operations. There was no financial statement impact as a result of the de-designation. This borrowing matured and was repaid in June 2015.

Gains/Losses Deferred in AOCI

As of June 30, 2015 and December 31, 2014, the Company had accumulated pretax unrealized translation gains in AOCI related to the euro-denominated borrowings, foreign currency forward contracts and the cross currency swaps of $282 million and $169 million, respectively.

The following table summarizes the location and amount of gains (losses) related to derivative financial instruments for the six months ended June 30, 2015. All dollar amounts are shown on a pretax basis.



($ in millions)	June 30, 2015
Hedge Type	Gain Deferred in OCI		Gain (Loss) Recognized
Hedge Type	Gain Deferred in OCI		Amount			Caption
Fair Value
Equity forward arrangements	Not applicable		(1		)	Asbestos - net
Total Fair Value			$	(1	)
Cash Flow
Foreign currency forward contracts ^(a)	$	39	$	34		Other charges
Total Cash Flow	$	39	$	34
Net Investment
Cross currency swaps	$	61
Foreign currency forward contracts	19
Foreign denominated debt	33
Total Net Investment	$	113
Economic
Foreign currency forward contracts			$	18		Other charges

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

The following table summarizes the location and amount of gains (losses) related to derivative financial instruments for the six months ended June 30, 2014. All amounts are shown on a pretax basis:



($ in millions)	June 30, 2014
Hedge Type	Gain (Loss) Deferred in OCI			Gain (Loss) Recognized
Hedge Type	Gain (Loss) Deferred in OCI			Amount			Caption
Fair Value
Interest rate swaps	Not applicable			$	4		Interest expense
Foreign currency forward contracts	Not applicable			1			Sales
Equity forward arrangements	Not applicable			29			Asbestos - net
Total Fair Value				$	34
Cash Flow
Forward starting swaps	$	—		$	(6	)	Interest expense
Foreign currency forward contracts ^(a)	(12		)	(5		)	Other charges
Total Cash Flow	$	(12	)	$	(11	)
Net Investment
Cross currency swaps	$	(6	)
Foreign currency forward contracts	5
Foreign denominated debt	2
Total Net Investment	$	1

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

Fair Value Measurements

The Company follows a fair value measurement hierarchy to measure its assets and liabilities. As of June 30, 2015 and December 31, 2014, the assets and liabilities measured at fair value on a recurring basis were cash equivalents, equity securities and derivatives. In addition, the Company measures its pension plan assets at fair value (see Item 8. Financial Statements and Supplementary Data - Note 12, "Employee Benefit Plans" in the Company's 2014 Annual Report on Form 10-K for further details). 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 the derivative instruments reflect the instruments' 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 June 30, 2015 and December 31, 2014 that are classified as Level 3 inputs.

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



	June 30, 2015
($ in millions)	Level 1		Level 2		Level 3
Assets:
Other current assets:
Marketable equity securities	$	5	$	—	$	—
Foreign currency forward contracts	—		37		—
Equity forward arrangement	—		267		—
Investments:
Marketable equity securities	77		—		—
Other Assets:
Cross currency swaps	—		45		—
Liabilities:
Accounts payable and accrued liabilities:
Foreign currency forward contracts	—		7		—

	December 31, 2014
($ in millions)	Level 1		Level 2		Level 3
Assets:
Other current assets:
Marketable equity securities	$	5	$	—	$	—
Foreign currency forward contracts	—		52		—
Equity forward arrangement	—		268		—
Investments:
Marketable equity securities	74		—		—
Other assets:
Foreign currency forward contracts	—		16		—
Liabilities:
Accounts payable and accrued liabilities:
Foreign currency forward contracts	—		23		—
Other liabilities:
Cross currency swaps	—		32		—

Long-Term Debt

PPG's long-term debt (excluding capital lease obligations) had carrying and fair values totaling $4,449 million and $4,564 million, respectively, as of June 30, 2015. 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. 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:

In conjunction with the restructuring actions approved in the second quarter of 2015, certain nonmonetary assets were written down to their fair value. Refer to Note 6, "Business Restructuring."

There were no significant adjustments to the fair value of nonmonetary assets or liabilities for the year ended December 31, 2014.