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 March 31, 2017 and December 31, 2016, in the aggregate, except for long-term debt instruments.

Hedging Activities

The Company has exposure to market risk from changes in foreign currency exchange rates and interest rates. Prior to the settlement of the Asbestos Settlement Trust described in Note 15, "Commitments and Contingent Liabilities," the Company had exposure to changes in PPG's stock price. As a result, financial instruments, including derivatives, may be (or had been) 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 month periods ended March 31, 2017 and 2016.

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.

There were no derivative instruments de-designated or discontinued as hedging instruments during the three month periods ended March 31, 2017 and 2016 and there were no gains or losses deferred in AOCI that were reclassified to income from continuing operations during the three month periods ended March 31, 2017 and 2016 related to hedges of anticipated transactions there were no longer expected to occur.

Fair Value Hedges

During the first quarter 2016, PPG designated 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 currency. As of March 31, 2017 and December 31, 2016, there were no outstanding foreign currency forward contracts designated as hedges against future changes in the fair value of certain firm sales commitments.

During the three months ended March 31, 2016, PPG held outstanding renewable equity forward arrangements to hedge the impact to PPG's income from continuing operations for changes in the fair value of 2,777,778 shares of PPG stock that were contributed to the asbestos settlement trust as discussed in Note 15, “Commitments and Contingent Liabilities.” These financial instruments were recorded at fair value as assets or liabilities and changes in the fair value of these financial instruments were reflected in the “Asbestos settlement – net” caption of the accompanying condensed consolidated statement of income. In conjunction with the funding of the Asbestos Settlement Trust in June 2016, the equity forward arrangements were settled. At settlement, these equity forward arrangements had a fair value of $258 million.

The company has used interest rate swaps from time to time to manage the its exposure to changing interest rates. When outstanding, the interest rate swaps were designated as fair value hedges of certain outstanding debt obligations and were recorded at fair value. There were no interest rate swaps outstanding as of March 31, 2017 and December 31, 2016. 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, which matures in 2021. The impact of the amortization is insignificant.

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 March 31, 2017 and December 31, 2016, the fair value of all foreign currency forward contracts designated as cash flow hedges was a net liability of $7 million and a net asset of $13 million, respectively.

Net Investment Hedges

PPG uses cross currency swaps and Euro-denominated debt to hedge a portion of its net investment in its European operations.

As of March 31, 2017, 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 receives 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 makes 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 March 31, 2017 and December 31, 2016, the fair value of these contracts was a net asset of $77 million and $65 million, respectively.

As of March 31, 2017 and December 31, 2016, PPG had designated €2.8 billion 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 as of March 31, 2017 and December 31, 2016 was $3.0 billion and $2.9 billion, respectively.

Gains/Losses Deferred in AOCI

As of March 31, 2017 and December 31, 2016, the Company had accumulated pre-tax unrealized net translation gains in AOCI related to the Euro-denominated borrowings, foreign currency forward contracts and the cross currency swaps of $438 million and $482 million, respectively.

The following tables summarize the location within the financial statements and amount of gains (losses) related to derivative financial instruments for the three months ended March 31, 2017 and 2016. All dollar amounts are shown on a pre-tax basis.



($ in millions)	March 31, 2017
Hedge Type	Loss Deferred in OCI			Gain Recognized
Hedge Type	Loss Deferred in OCI			Amount		Caption
Cash Flow
Foreign currency forward contracts ^(a)	$	(15	)	$	4	Other charges and Cost of Sales
Total Cash Flow	$	(15	)	$	4
Net Investment
Cross currency swaps	$	(4	)
Foreign denominated debt	(38		)
Total Net Investment	$	(42	)

(a) The ineffective portion related to this item was $2 million of expense.



($ in millions)	March 31, 2016
Hedge Type	Loss Deferred in OCI			Gain (Loss) Recognized
Hedge Type	Loss Deferred in OCI			Amount			Caption
Fair Value
Equity forward arrangements	Not applicable			36			Asbestos settlement - net
Total Fair Value				$	36
Cash Flow
Foreign currency forward contracts ^(a)	(15		)	(3		)	Other charges and Cost of Sales
Total Cash Flow	$	(15	)	$	(3	)
Net Investment
Cross currency swaps	$	(22	)
Foreign denominated debt	(95		)
Total Net Investment	$	(117	)

(a) The ineffective portion related to this item was $3 million of income.

Fair Value Measurements

The Company follows a fair value measurement hierarchy to measure its assets and liabilities. As of March 31, 2017 and December 31, 2016, 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 Note 12, "Employee Benefit Plans" under Item 8 in the Company's Annual Report on Form 10-K for the year ended December 31, 2016 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, 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 March 31, 2017 and December 31, 2016 that are classified as Level 3 inputs.

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



	March 31, 2017
($ in millions)	Level 1		Level 2		Level 3
Assets:
Other current assets:
Marketable equity securities	$	4	$	—	$	—
Cross currency swaps	—		77		—
Foreign currency forward contracts	—		20		—
Investments:
Marketable equity securities	73		—		—
Liabilities:
Accounts payable and accrued liabilities:
Foreign currency forward contracts	—		12		—

	December 31, 2016
($ in millions)	Level 1		Level 2		Level 3
Assets:
Other current assets:
Marketable equity securities	$	4	$	—	$	—
Foreign currency forward contracts	—		22		—
Investments:
Marketable equity securities	78		—		—
Other assets:
Cross currency swaps	—		65		—
Liabilities:
Accounts payable and accrued liabilities:
Foreign currency forward contracts	—		9		—

Long-Term Debt



($ in millions)	March 31, 2017 ^(a)		December 31, 2016 ^(b)
Long-term debt - carrying value	$	4,336	$	4,299
Long-term debt - fair value	$	4,520	$	4,502

(a) Excluding capital lease obligations of $18 million and short term borrowings of $67 million as of March 31, 2017.

(b) Excluding capital lease obligations of $18 million and short term borrowings of $99 million as of December 31, 2016.

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 for the three months ended March 31, 2017. For the year ended December 31, 2016, in conjunction with the 2016 restructuring actions, certain nonmonetary assets were written down to their fair value. Refer to Note 6, “Business Restructuring” for further details associated with these actions.