Financial Instruments

3 Months Ended

Mar. 31, 2012

Financial Instruments [Abstract]

Financial Instruments

4. Financial Instruments

In its normal operations, Praxair is exposed to market risks relating to fluctuations in interest rates, foreign currency exchange rates, energy costs and to a lesser extent precious metal prices. The objective of financial risk management at Praxair is to minimize the negative impact of such fluctuations on the company's earningsand cash flows. To manage these risks, among other strategies, Praxair routinely enters into various derivative financial instruments (“derivatives”) including interest-rate swap and treasury rate lock agreements, currency-swap agreements, forward contracts, currency options, and commodity-swap agreements. These instruments are not entered into for trading purposes and Praxair only uses commonly traded and non-leveraged instruments.

There are two types of derivatives that the company enters into: (i) those relating to fair-value exposures, and (ii) those relating to cash-flow exposures. Fair-value exposures relate to recognized assets or liabilities, and firm commitments; while cash-flow exposures relate to the variability of future cash flows associated with recognized assets or liabilities, or forecasted transactions.

When a derivative is executed and hedge accounting is appropriate, it is designated as either a fair-value hedge or a cash-flow hedge. Currently, Praxair designates all interest-rate and treasury-rate locks as hedges for accounting purposes; however, currency contracts are generally not designated as hedges for accounting purposes unless they are related to forecasted transactions. Whether designated as hedges for accounting purposes or not, all derivatives are linked to an appropriate underlying exposure. On an ongoing basis, the company assesses the hedge effectiveness of all derivatives designated as hedges for accounting purposes to determine if they continue to be highly effective in offsetting changes in fair values or cash flows of the underlying hedged items. If it is determined that the hedge is not highly effective, then hedge accounting will be discontinued prospectively.

Counterparties to Praxair's derivatives are major banking institutions with credit ratings of investment grade or better and no collateral is required, and there are no significant risk concentrations. Management believes the risk of incurring losses on derivative contracts related to credit risk is remote and any losses would be immaterial.

The following table is a summary of the notional amount and fair value of derivatives outstanding at March 31,2012 and December 31, 2011:

				Fair Value
(Millions of dollars)		Notional Amounts		Assets		Liabilities
		March 31, 2012	December 31, 2011	March 31, 2012	December 31, 2011	March 31, 2012	December 31, 2011
Derivatives Not Designated as Hedging Instruments:
Currency contracts:
	Balance sheet items (a)	$ 1,873	$ 1,541	$ 1	$ 2	$ 1	$ 2
Derivatives Designated as Hedging Instruments:
Currency contracts:
	Forecasted purchases (a)	$ 35	$ 59	$ -	$ -	$ -	$ 2
Interest rate contracts:
	Interest rate swaps (b)	400	400	31	35	-	-
	Total	$ 435	$ 459	$ 31	$ 35	$ -	$ 2
	Total Derivatives	$ 2,308	$ 2,000	$ 32	$ 37	$ 1	$ 4
(a) Assets are recorded in prepaid and other current assets, and liabilities are recorded in other current liabilities.
(b) Assets are recorded in long term assets.

Currency Contracts

Balance Sheet Items

Foreign currency contracts related to balance sheet items consist of forward contracts entered into to manage the exposure to fluctuations in foreign-currency exchange rates on recorded balance sheet assets and liabilities denominated in currencies other than the functional currency of the related operating unit. The fair value adjustments on these contracts are offset by the fair value adjustments recorded on the hedged assets and liabilities.

Anticipated Net Income

Historically Praxair has entered into anticipated net income hedge contracts consisting of foreign currency options and forwards related primarily to anticipated net income in Brazil, Europe and Canada.Although such derivatives were outstanding during the respective quarters, there were anticipated net income hedges outstanding as of March 31, 2012 and December 31, 2011. Over the term of the contracts, the fair value adjustments from net-income hedging contracts are largely offset by the impacts on reported net income resulting from the currency translation process. The accounting rules pertaining to derivatives and hedging do not allow hedges of anticipated net income to be designated as hedging instruments.

Forecasted Purchases

Foreign currency contracts related to forecasted purchases consist of forward contracts entered into to manage the exposure to fluctuations in foreign-currency exchange rates on forecasted purchases of capital-related equipment and services denominated in currencies other than the functional currency of the related operating units. These forward contracts were designated and accounted for as cash flow hedges.

Interest Rate Contracts

Outstanding Interest Rate Swaps

At March 31, 2012, Praxair had an interest-rate swap agreement outstanding related to the $400 million 3.25% fixed-rate notes that mature in 2015 which effectively convert fixed-rate interest to variable-rate interest. This swap agreement was designated as a fair value hedge with the resulting fair value adjustments recognized in earnings along with an equally offsetting charge / benefit to earnings for the changes in the fair value of the underlying debt instrument. At March 31, 2012, $31 million was recognized as an increase in the fair value of this note ($35 million at December 31,2011).

Terminated Interest Rate Swaps

The following table summarizes information related to terminated interest rate swap contracts:

				Amount of Gain Recognized in Earnings (a)		Unrecognized Gain (a)
		Year	Original	March 31,	March 31,	March 31,	December 31,
(Millions of Dollars)		Terminated	Gain	2012	2011	2012	2011
Interest Rate Swaps
Underlying debt instrument (b):
	$500 million 2.125% fixed-rate notes that mature in 2013	2011	$ 18	$ 2	$ -	$ 11	$ 13
	$400 million 1.75% fixed-rate notes that mature in 2012	2010	13	2	1	3	5
	$500 million 6.375% fixed-rate notes that mature in 2012	2002	47	1	1	-	1
	Total		$ 78	$ 5	$ 2	$ 14	$ 19
(a) The unrecognized gain for terminated interest rate swaps is shown as an increase to long-term debt and will be recognized on a straight line basis to interest expense - net over the term of the underlying debt agreements. Upon settlement of the underlying interest rate contract, the cash received is reflected within the Noncontrolling interest transactions and other in the financing section of the consolidated statement of cash flows.
(b) The notional amounts of the interest rate contracts are equal to the underlying debt instruments.

Terminated Treasury Rate Locks
The following table summarizes the unrecognized gains (losses) related to terminated treasury rate lock contracts:
					Unrecognized Gain / (Loss) (a)
			Year	Original	March 31,	December 31,
(Millions of Dollars)			Terminated	Gain / (Loss)	2012	2011
Treasury Rate Locks
Underlying debt instrument:
	$500 million 3.000% fixed-rate notes that mature in 2021 (b)		2011	$ (11)	$ (11)	$ (11)
	$600 million 4.50% fixed-rate notes that mature in 2019 (b)		2009	16	12	12
	$500 million 4.625% fixed-rate notes that mature in 2015 (b)		2008	(7)	(3)	(3)
	Total - pre-tax				$ (2)	$ (2)
		Less: income taxes			1	1
	After- tax amounts				$ (1)	$ (1)
(a) The unrecognized gains / (losses) for the treasury rate locks are shown in accumulated other comprehensive income ("AOCI") and will be recognized on a straight line basis to interest expense – net over the term of the underlying debt agreements. Upon settlement of the treasury rate lock contracts, the cash received or paid is reflected within the noncontrolling interest transactions and other in the financing section of the consolidated statement of cash flows. Refer to the table below summarizing the impact of the company's consolidated statements of income and AOCI for current period gain (loss) recognition.
(b) The notional amount of the treasury rate lock contracts are equal to the underlying debt instrument with the exception of the treasury rate lock contract entered into to hedge the $600 million 4.50% fixed-rate notes that mature in 2019. The notional amount of this contract was $500 million.

The following table summarizes the impacts of the company's derivatives on the condensed consolidated statements of income and AOCI:
			Amount of Pre-Tax Gain (Loss) Recognized in Earnings (a)
(Millions of dollars)			Quarter Ended March 31,
			2012	2011
Derivatives Not Designated as Hedging Instruments
Currency contracts:
	Balance sheet items
		Debt-related	$ 37	$ (6)
		Other balance sheet items	(2)	3
	Anticipated net income		(4)	(4)
		Total	$ 31	$ (7)

(millions of dollars)		Amount of Gain (Loss) Recognized in AOCI (b)		Amount of Gain (Loss) Reclassified from AOCI to the Consolidated Statement of Income (c)		Net Change in AOCI
		March 31,	March 31,	March 31,	March 31,	March 31,	March 31,
		2012	2011	2012	2011	2012	2011
Derivatives Designated as Hedging Instruments
Currency contracts:
	Forecasted purchases (b)	$ 2	$ -	$ -	$ -	$ 2	$ -
	Less: income taxes	(1)	-	-	-	(1)	-
	Total - Net of Taxes	$ 1	$ -	$ -	$ -	$ 1	$ -

(a) The gains (losses) on balance sheet items are offset by gains (losses) recorded on the underlying hedged assets and liabilities. The gains (losses) for the derivatives and the underlying hedged assets and liabilities related to debt items are recorded in the consolidated statements of income as interest expense-net. Other balance sheet items and anticipated net income gains (losses) are recorded in the consolidated statements of income as other income (expenses)-net.

(b) The gains (losses) on forecasted purchase and treasury rate locks are recorded as a component of AOCI within derivative instruments in the consolidated statements of equity. There was no ineffectiveness for these instruments during 2012 or 2011.

(c) The gains (losses) on forecasted purchases are reclassified to the depreciation and amortization expense on a straight-line basis consistent with the useful life of the underlying asset. The gains (losses) for interest rate contracts are reclassified to earnings as interest expense –net on a straight-line basis over the remaining maturity of the underlying debt. Net gains (losses) of $1 million are expected to be reclassified to earning during the next twelve months.