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, 2017 and 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 and had exposure to PPG’s stock price changes. As a result, financial instruments, including derivatives, have 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-year period ended December 31, 2017.

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.

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

Fair Value Hedges

In prior years, 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 currencies.

Prior to June 2016, PPG entered into 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 14, “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 are reflected in the “Asbestos settlement – net” caption of the accompanying consolidated statement of income. The total principal amount paid for these shares was approximately $60 million. During the terms of these equity forward arrangements, PPG paid to the counterparty interest based on the principal amount and the counterparty paid to PPG an amount equal to the dividends paid on these shares which reduced the transaction price by approximately $10 million, net. The difference between the principal amount and any amounts related to unpaid interest or dividends and the market price for these shares, adjusted for credit risk, represented the fair value of these financial instruments as well as the amount that PPG received when the counterparty chose to settle these financial instruments. In conjunction with the funding of the asbestos settlement trust, the equity forward arrangements were settled. At settlement, in June 2016, the fair value of the equity forward arrangement was an asset of $258 million.

The Company has used interest rate swaps from time to time to manage it’s exposure to changing interest rates. When outstanding, the interest rate swaps were designated as fair value hedges of certain outstanding debt obligations of the Company and were recorded at fair value. There were no interest rate swaps outstanding as of December 31, 2017 and 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, the impact of which 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 December 31, 2017 and 2016, the fair value of all foreign currency forward contracts designated as cash flow hedges was a net asset of $3 million and $13 million, respectively.

Net Investment Hedges

PPG uses cross currency swaps, foreign currency forward contracts and euro-denominated debt to hedge a significant portion of its net investment in its European operations, as follows:

As of December 31, 2017 and 2016, 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 remaining 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 December 31, 2017 and 2016, the fair value of these contracts was an asset of $2 million and $65 million, respectively.

At December 31, 2017 and 2016, PPG had designated €2.3 billion and €2.8 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 December 31, 2017 and 2016 was $2.7 billion and $2.9 billion, respectively.

During 2017, 2016 and 2015, PPG used foreign currency forward contracts to hedge a portion of its net investment in its European operations. Changes in the fair value of these derivative instruments were recorded in AOCI as gains or losses. As of December 31, 2017, 2016 and 2015, none of these contracts remained outstanding. The Company paid $3 million to settle a foreign currency forward contract in 2017. In 2016, no cash proceeds were received from the settlement of these contracts and, in 2015, PPG received cash proceeds of $19 million from the settlement of these contracts.

Other Financial Instruments

PPG uses foreign currency forward contracts to manage net transaction exposures that do not qualify for hedge accounting; therefore, the change in the fair value of these instruments is recorded in “Other charges” in the accompanying consolidated statement of income in the period of change. As of December 31, 2017 and 2016, the fair value of these contracts were a liability of $20 million and an asset of $2 million, respectively.

Gains/Losses Deferred in AOCI

As of December 31, 2017 and 2016, the Company had accumulated pre-tax unrealized translation gains in AOCI related to the euro-denominated borrowings, foreign currency forward contracts, and the cross currency swaps of $16 million and $482 million, respectively.

The following tables summarize the location and amount of gains (losses) related to derivative and debt financial instruments for the years ended December 31, 2017, 2016 and 2015. All dollar amounts are shown on a pre-tax basis.



	2017					2016						2015					Caption in Consolidated Statement of Income
($ in millions)	Loss Deferred in OCI			Gain Recognized		Gain (Loss) Deferred in OCI			(Loss)/Gain Recognized			Gain Deferred in OCI		(Loss)/Gain Recognized			Caption in Consolidated Statement of Income
Fair Value
Foreign currency forward contracts	—			—		—			—			—			($2	)	Sales
Equity forward arrangements	—			—		—			—			—		(44		)	Asbestos - net
Total Fair Value	—			—		—			—			—			($46	)
Cash Flow
Foreign currency forward contracts ^(a)		($7	)		$9		$1			($5	)		$57		$50		Other charges and Cost of sales
Total Cash Flow		($7	)		$9		$1			($5	)		$57		$50
Net Investment
Cross currency swaps		($61	)				$25						$77
Foreign denominated debt	(403		)			122						85
Foreign currency forward contracts	—					(14		)				19
Total Net Investment		($464	)				$133						$181
Economic
Foreign currency forward contracts					$14					$14					$18		Other charges


(a)	The ineffective portion related to this item was $7 million, $9 million and $7 million of expense for the years ended December 31, 2017, 2016 and 2015, respectively.

Fair Value Measurements

The Company follows a fair value measurement hierarchy to measure its assets and liabilities. As of December 31, 2017 and 2016, respectively, 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 13, “Employee Benefit Plans” 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 December 31, 2017 and 2016 that are classified as Level 3 inputs.

Assets and liabilities reported at fair value on a recurring basis



	December 31, 2017					December 31, 2016
($ in millions)	Level 1		Level 2		Level 3	Level 1		Level 2		Level 3
Assets:
Other current assets:
Marketable equity securities		$4		$—	—		$4		$—	—
Foreign currency forward contracts	—		6		—	—		22		—
Cross currency swaps	—		2		—	—		—		—
Other assets:
Cross currency swaps	—		—		—	—			$65	—
Investments:
Marketable equity securities		$79	—		—		$78	—		—

Liabilities:
Accounts payable and accrued liabilities:
Foreign currency forward contracts	—			$23	—	—			$9	—

Long-Term Debt



($ in millions)	December 31, 2017^(a)	December 31, 2016^(b)
Long-term debt - carrying value	$4,123	$4,299
Long-term debt - fair value	$4,341	$4,502


(a)	Excluding capital lease obligations of $15 million and short term borrowings of $8 million as of December 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 during the year ended December 31, 2017. In conjunction with the 2016 restructuring actions, certain nonmonetary assets were written down to their fair value. Refer to Note 8, “Business Restructuring” for further details associated with these actions.”

Call and put option on noncontrolling interest

PPG owns a majority interest in a coatings business whose financial results are included in PPG’s consolidated financial statements. PPG has recorded the noncontrolling interest in this consolidated affiliate as a liability instead of equity in its consolidated balance sheets due to call and put option provisions associated with the noncontrolling interest, which have similar terms. This liability was $44 million and $38 million at December 31, 2017 and 2016, respectively.