Derivative Instruments

3 Months Ended

Mar. 31, 2017

Derivative Instruments

Derivative Instruments

4.  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 several regions, 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.  In North America, the majority of its customer contracts contain provisions that pass the price of natural gas to its customers.  In certain of these contracts, the customer has the option of fixing the natural gas price component for a specified period of time.  To limit the effects of fluctuations in cash flows resulting from these customer contracts, the Company enters into commodity forward contracts related to forecasted natural gas requirements.  In Asia Pacific, the Company implemented a hedging program in the first quarter of 2016, which included the execution of commodity forward contracts for certain contracted natural gas requirements.  At March 31, 2017 and 2016, the Company had entered into commodity forward contracts covering approximately 11,200,000 MM BTUs and 12,600,000 MM BTUs, respectively.

The Company accounts for the above forward contracts as cash flow hedges at March 31, 2017 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 $1 million at March 31, 2017, an unrecognized gain of $6 million at December 31, 2016 and an unrecognized loss of $4 million at March 31, 2016 related to the commodity forward contracts was included in Accumulated OCI, and will be reclassified into earnings in the period when the commodity forward contracts expire.  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 three months ended March 31, 2017 and 2016 was not material.

The effect of the commodity forward contracts on the results of operations for the three months ended March 31, 2017 and 2016 is as follows:

				Amount of Gain 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)
2017		2016		2017		2016
$	6	$	(4)	$	—	$	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 foreign 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 foreign exchange agreements on the balance sheet at fair value and changes in the fair value are recognized in current earnings.

At March 31, 2017 and 2016, the Company had outstanding foreign exchange and option agreements denominated in various currencies covering the equivalent of approximately $340 million and $660 million, respectively, related primarily to intercompany transactions and loans.

The effect of the foreign exchange derivative contracts on the results of operations for the three months ended March 31, 2017 and 2016 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	2017		2016
Other expense	$	—	$	5

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 at March 31, 2017, December 31, 2016 and March 31, 2016:

	Fair Value
	Balance Sheet	March 31,		December 31,		March 31,
	Location	2017		2016		2016
Asset derivatives:
Derivatives designated as hedging instruments:
Commodity futures contracts	a	$	2	$	6	$	—
Derivatives not designated as hedging instruments:
Foreign exchange derivative contracts	a		5		9		15
Total asset derivatives		$	7	$	15	$	15
Liability derivatives:
Derivatives designated as hedging instruments:
Commodity futures contracts	c	$	1	$	—	$	4
Derivatives not designated as hedging instruments:
Foreign exchange derivative contracts	c		2		5		2
Total liability derivatives		$	3	$	5	$	6