Derivative Instruments

12 Months Ended

Dec. 31, 2016

Derivative Instruments

Derivative Instruments

7.  Derivative Instruments

The Company has certain derivative assets and liabilities which consist of natural gas forwards and foreign exchange option and forward contracts.  The Company uses an income approach to value these contracts.  Natural gas forward rates and foreign exchange rates are the significant inputs into the valuation models.  These inputs are observable in active markets over the terms of the instruments the Company holds, and accordingly, the Company classifies its derivative assets and liabilities as Level 2 in the hierarchy.  The Company also evaluates counterparty risk in determining fair values.

Commodity Forward Contracts Designated as Cash Flow Hedges

In North America, the Company enters into commodity forward contracts related to forecasted natural gas requirements, the objectives of which are to limit the effects of fluctuations in the future market price paid for natural gas and the related volatility in cash flows. The Company continually evaluates the natural gas market and related price risk and periodically enters into commodity forward contracts in order to hedge a portion of its usage requirements. The majority of the sales volume in North America is tied to customer contracts that contain provisions that pass the price of natural gas to the customer.  In certain of these contracts, the customer has the option of fixing the natural gas price component for a specified period of time.  At December 31, 2016 and 2015, the Company had entered into commodity forward contracts covering approximately 12,300,000 MM BTUs and 7,300,000 MM BTUs, respectively, primarily related to customer requests to lock the price of natural gas.

The Company accounts for the above forward contracts as cash flow hedges at December 31, 2016 and recognizes them on the balance sheet at fair value. The effective portion of changes in the fair value of a derivative that is designated as, and meets the required criteria for, a cash flow hedge is recorded in the Accumulated Other Comprehensive Income component of share owners’ equity (“OCI”) and reclassified into earnings in the same period or periods during which the underlying hedged item affects earnings. An unrecognized gain of $6 million at December 31, 2016 and an unrecognized loss of $4 million at December 31, 2015 related to the commodity forward contracts were included in Accumulated OCI, and will be reclassified into earnings over the next twelve to twenty-four months.  Any material portion of the change in the fair value of a derivative designated as a cash flow hedge that is deemed to be ineffective is recognized in current earnings.  The ineffectiveness related to these natural gas hedges for the year ended December 31, 2016 and 2015 was not material.

The effect of the commodity forward contracts on the results of operations for the years ended December 31, 2016, 2015 and 2014 is as follows:

						Amount of gain (loss) Reclassified from
Amount of gain (loss) Recognized in OCI on						Accumulated OCI into Income
Commodity Forward Contracts						(reported in cost of goods sold)
(Effective Portion)						(Effective Portion)
2016		2015		2014		2016		2015		2014
$	7	$	(4)	$	3	$	—	$	(1)	$	2

Foreign Exchange Derivative Contracts and not Designated as Hedging Instruments

The Company may enter into short-term forward exchange or option agreements to purchase foreign currencies at set rates in the future. These agreements are used to limit exposure to fluctuations in foreign currency exchange rates for significant planned purchases of fixed assets or commodities that are denominated in currencies other than the subsidiaries’ functional currency. The Company may also use forward exchange agreements to offset the foreign currency risk for receivables and payables, including intercompany receivables, payables and loans, not denominated in, or indexed to, their functional currencies. The Company records these short-term forward exchange agreements on the balance sheet at fair value and changes in the fair value are recognized in current earnings.

At December 31, 2016 and 2015, the Company had outstanding forward exchange and option agreements denominated in various currencies covering the equivalent of approximately $490 million and $790 million, respectively, related primarily to intercompany transactions and loans.

The effect of the foreign exchange derivative contracts on the results of operations for the years ended December 31, 2016, 2015 and 2014 is as follows:

	Amount of Gain (Loss)
Location of Gain (Loss)	Recognized in Income on
Recognized in Income on	Foreign Exchange Contracts
Foreign Exchange Contracts	2016		2015		2014
Other expense, net	$	6	$	10	$	(8)

Balance Sheet Classification

The Company records the fair values of derivative financial instruments on the balance sheet as follows: (a) receivables if the instrument has a positive fair value and maturity within one year, (b) deposits, receivables, and other assets if the instrument has a positive fair value and maturity after one year, and (c) other accrued liabilities or other liabilities (current) if the instrument has a negative fair value and maturity within one year. 

The following table shows the amount and classification (as noted above) of the Company’s derivatives as of December 31, 2016 and 2015:

	Fair Value
	Balance Sheet
	Location	2016		2015
Asset Derivatives:
Derivatives designated as hedging instruments:
Commodity futures contracts	b	$	6	$	—
Derivatives not designated as hedging instruments:
Foreign exchange derivative contracts	a	$	9	$	14
Total asset derivatives		$	15	$	14
Liability Derivatives:
Derivatives designated as hedging instruments:
Commodity futures contracts	c	$	—	$	3
Derivatives not designated as hedging instruments:
Foreign exchange derivative contracts	c		5		2
Total liability derivatives		$	5	$	5