17. Financial Instruments and Risk Management

The company employs established risk management policies and procedures, which seek to reduce the company’s commercial risk exposure to fluctuations in commodity prices, interest rates, currency exchange rates and prices of the company’s common stock with regard to common share repurchases and the company’s deferred compensation stock plan. However, there can be no assurance these policies and procedures will be successful. Although the instruments utilized involve varying degrees of credit, market and interest risk, the counterparties to the agreements are expected to perform fully under the terms of the agreements. The company monitors counterparty credit risk, including lenders, on a regular basis, but Ball cannot be certain that all risks will be discerned or that its risk management policies and procedures will always be effective. Additionally, in the event of default under the company’s master derivative agreements, the non-defaulting party has the option to offset any amounts owed with regard to open derivative positions.

Commodity Price Risk

Aluminum

The company manages commodity price risk in connection with market price fluctuations of aluminum ingot through two different methods. First, the company enters into container sales contracts that include aluminum ingot-based pricing terms that generally reflect the same price fluctuations under commercial purchase contracts for aluminum sheet. The terms include fixed, floating or pass-through aluminum ingot component pricing. Second, the company uses certain derivative instruments such as option and forward contracts as economic and cash flow hedges of commodity price risk where there are material differences between sales and purchase contracted pricing and volume.

At September 30, 2016, the company had aluminum contracts limiting its aluminum exposure with notional amounts of approximately $708 million, of which approximately $681 million received hedge accounting treatment. The aluminum contracts, which are recorded at fair value, include economic derivative instruments that are undesignated, as well as cash flow hedges that offset sales and purchase contracts of various terms and lengths. Cash flow hedges relate to forecasted transactions that will occur within the next three years. Included in shareholders’ equity at September 30, 2016, within accumulated other comprehensive earnings (loss), is a net after-tax gain of $2 million associated with these contracts. A net after-tax gain of $2 million is expected to be recognized in the consolidated statement of earnings during the next 12 months, the majority of which will be offset by pricing changes in sales and purchase contracts, thus resulting in little or no earnings impact to Ball.

Steel

Most sales contracts involving our steel products either include provisions permitting the company to pass through some or all steel cost changes incurred, or they incorporate annually negotiated steel prices.

Interest Rate Risk

The company’s objective in managing exposure to interest rate changes is to minimize the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, the company may use a variety of interest rate swaps, collars and options to manage our mix of floating and fixed-rate debt. Interest rate instruments held by the company at September 30, 2016, included pay-fixed interest rate swaps with notional amounts of approximately $750 million, which effectively convert variable rate obligations to fixed-rate instruments. The after-tax gain included in shareholders’ equity at September 30, 2016, within accumulated other comprehensive earnings (loss) was $1 million, which is expected to be recognized in the consolidated statement of earnings during the next 12 months.

Interest Rate Risk - Rexam Acquisition

The company entered into interest rate swaps to hedge against rising U.S. and European interest rates to minimize its interest rate exposure associated with debt issuances in connection with the acquisition of Rexam. In the second quarter of 2016, the company terminated interest rate swaps and interest rate option contracts with an aggregate notional amount of $200 million and €1.6 billion, respectively. In the first quarter of 2016, the company terminated interest rate swap contracts with an aggregate notional amount of $923 million (€850 million). None of these contracts were designated as hedges; therefore, changes in the fair value of these interest swap and option contracts were recognized in the unaudited condensed consolidated statements of earnings in debt refinancing and other costs, a component of total interest expense (see Note 12).

Currency Exchange Rate Risk

The company’s objective in managing exposure to currency fluctuations is to limit the exposure of cash flows and earnings from changes associated with currency exchange rate changes through the use of various derivative contracts. In addition, at times the company manages earnings translation volatility through the use of currency option strategies, and the change in the fair value of those options is recorded in the company’s net earnings. The company’s currency translation risk results from the currencies in which we transact business. The company faces currency exposures in our global operations as a result of various factors including intercompany currency denominated loans, selling our products in various currencies, purchasing raw materials and equipment in various currencies and tax exposures not denominated in the functional currency. Sales contracts are negotiated with customers to reflect cost changes and, where there is not an exchange pass-through arrangement, the company uses forward and option contracts to manage currency exposures. At September 30, 2016, the company had outstanding exchange forward contracts and option contracts with notional amounts totaling approximately $1.9 billion. Approximately $3 million of net after-tax loss related to these contracts is included in accumulated other comprehensive earnings at September 30, 2016, of which a net loss of $3 million is expected to be recognized in the unaudited condensed consolidated statement of earnings during the next 12 months. The contracts outstanding at September 30, 2016, expire within the next two years.

Additionally, the company entered into a $1 billion cross-currency swap contract to partially mitigate the risk on foreign currency denominated intercompany debt in the second quarter of 2016. Approximately, $9 million of net after-tax loss related to this contract is included in accumulated other comprehensive earnings at September 30, 2016, none of which is expected to be recognized in the unaudited condensed consolidated statement of earnings during the next 12 months. The contract expires within the next five years.

Currency Exchange Rate Risk – Rexam Acquisition

In connection with the acquisition of Rexam, the company entered into collar and option contracts to partially mitigate its currency exchange rate risk from February 19, 2015, through the expected closing date of the acquisition. In the second quarter of 2016, the company terminated outstanding collar and option contracts with notional amounts that totaled approximately £1.4 billion ($1.8 billion). These contracts were not designated as hedges; therefore, changes in the fair value of these contracts were recognized in the unaudited condensed consolidated statement of earnings in business consolidation and other activities (see Note 5).

In connection with the December 2015 issuance of $1 billion of U.S. dollar senior notes due 2020, the company executed cross-currency swaps to convert the fixed-rate U.S. dollar issuance to a fixed-rate euro issuance for the life of the notes to more effectively match the future cash flows of our business. The cross-currency swaps with a notional amount of $1 billion were terminated in the second quarter of 2016. Additionally, the company terminated existing cross-currency swaps acquired from the Rexam acquisition amounting to $705 million in the second quarter of 2016. These contracts were not designated as hedges; therefore, changes in the fair value of these contracts were recognized as business consolidation and other activities (see Note 5).

In connection with the December 2015 issuance of €1.1 billion of senior notes (€400 million due 2020 and €700 million due 2023), the company subsequently converted the net euro proceeds to British pounds using currency derivative positions. The company elected to restrict the funds in escrow accounts invested in British money market mutual funds denominated in pounds. Changes in the U.S. dollar to British pound exchange rate result in gains or losses to the escrow accounts and are recognized as business consolidation and other activities (see Note 5). The British pound escrow accounts were used to pay the cash component of the acquisition price of Rexam in July, 2016.

Common Stock Price Risk

The company’s deferred compensation stock program is subject to variable plan accounting and, accordingly, is marked to fair value using the company’s closing stock price at the end of the related reporting period. The company entered into total return swaps to reduce the company’s earnings exposure to these fair value fluctuations that will be outstanding until March 2017 and August 2017 and that have a combined notional value of 1.3 million shares. Based on current levels in the program, each $1 change in the company’s stock price has an impact, net of derivatives utilized, of less than $1 million on pretax earnings.

Collateral Calls

The company’s agreements with its financial counterparties require the company to post collateral in certain circumstances when the negative mark to fair value of the derivative contracts exceeds specified levels. Additionally, the company has collateral posting arrangements with certain customers on these derivative contracts. The cash flows of the margin calls are shown within the investing section of the company’s consolidated statements of cash flows. As of September 30, 2016, and December 31, 2015, the aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position were $4 million and $69 million, respectively, and no collateral was required to be posted.

Fair Value Measurements

The company has classified all applicable financial derivative assets and liabilities as Level 2 within the fair value hierarchy and presented those values in the tables below. The company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. The fair values of the company’s derivative instruments were as follows:


	September 30, 2016						December 31, 2015
($ in millions)	Derivatives Designated as Hedging Instruments		Derivatives not Designated as Hedging Instruments		Total		Derivatives Designated as Hedging Instruments		Derivatives not Designated as Hedging Instruments		Total

Assets:
Commodity contracts	$	10	$	4	$	14	$	6	$	4	$	10
Foreign currency contracts		3		6		9		2		6		8
Interest rate and other contracts		—		4		4		—		3		3
Total current derivative contracts	$	13	$	14	$	27	$	8	$	13	$	21

Commodity contracts	$	4	$	—	$	4	$	1	$	—	$	1
Interest rate and other contracts		—		—		—		—		2		2
Total noncurrent derivative contracts	$	4	$	—	$	4	$	1	$	2	$	3

Liabilities:
Commodity contracts	$	6	$	3	$	9	$	12	$	5	$	17
Foreign currency contracts		—		5		5		—		33		33
Total current derivative contracts	$	6	$	8	$	14	$	12	$	38	$	50

Commodity contracts	$	—	$	—	$	—	$	8	$	—	$	8
Interest rate and other contracts		29		—		29		—		23		23
Total noncurrent derivative contracts	$	29	$	—	$	29	$	8	$	23	$	31

The company uses closing spot and forward market prices as published by the London Metal Exchange, the Chicago Mercantile Exchange, Reuters and Bloomberg to determine the fair value of any outstanding aluminum, currency, energy, inflation and interest rate spot and forward contracts. Option contracts are valued using a Black-Scholes model with observable market inputs for aluminum, currency and interest rates. We value each of our financial instruments either internally using a single valuation technique or from a reliable observable market source. The company does not adjust the value of its financial instruments except in determining the fair value of a trade that settles in the future by discounting the value to its present value using 12-month LIBOR as the discount factor. Ball performs validations of our internally derived fair values reported for our financial instruments on a quarterly basis utilizing counterparty valuation statements. The company additionally evaluates counterparty creditworthiness and, as of September 30, 2016, has not identified any circumstances requiring the reported values of our financial instruments be adjusted.

Impact on Earnings from Derivative Instruments


		Three Months Ended September 30,
		2016				2015
($ in millions)	Location of Gain (Loss) Recognized in Earnings on Derivatives	Cash Flow Hedge - Reclassified Amount from Accumulated Other Comprehensive Earnings (Loss)		Gain (Loss) on Derivatives not Designated as Hedge Instruments		Cash Flow Hedge - Reclassified Amount from Accumulated Other Comprehensive Earnings (Loss)		Gain (Loss) on Derivatives not Designated as Hedge Instruments

Commodity contracts - manage exposure to customer pricing	Net sales	$	(1)	$	—	$	1	$	—
Commodity contracts - manage exposure to supplier pricing	Cost of sales		2		(4)		(8)		(2)
Interest rate contracts - manage exposure for outstanding debt	Interest expense		(1)		—		—		—
Interest rate contracts - manage exposure for forecasted Rexam financing	Debt refinancing and other costs		—		—		—		(15)
Foreign currency contracts - manage general exposure with the business	Selling, general and administrative		5		(18)		—		17
Foreign currency contracts - manage exposure for proposed acquisition of Rexam	Business consolidation and other activities		—		(12)		—		(105)
Foreign currency contracts - manage exposure to sales of products	Cost of sales		—		—		—		2
Cross-currency swaps - manage intercompany currency exposure within the business	Selling, general and administrative		(7)		—		—		—
Equity and inflation contracts	Selling, general and administrative		—		10		—		(8)
Total		$	(2)	$	(24)	$	(7)	$	(111)


		Nine Months Ended September 30,
		2016				2015
($ in millions)	Location of Gain (Loss) Recognized in Earnings on Derivatives	Cash Flow Hedge - Reclassified Amount from Accumulated Other Comprehensive Earnings (Loss)		Gain (Loss) on Derivatives not Designated as Hedge Instruments		Cash Flow Hedge - Reclassified Amount from Accumulated Other Comprehensive Earnings (Loss)		Gain (Loss) on Derivatives not Designated as Hedge Instruments

Commodity contracts - manage exposure to customer pricing	Net sales	$	2	$	—	$	2	$	1
Commodity contracts - manage exposure to supplier pricing	Cost of sales		(8)		(4)		(11)		(5)
Interest rate contracts - manage exposure for outstanding debt	Interest expense		(1)		—		—		—
Interest rate contracts - manage exposure for forecasted Rexam financing	Debt refinancing and other costs		—		(20)		—		(10)
Foreign currency contracts - manage exposure to sales of products	Cost of sales		—		—		—		2
Foreign currency contracts - manage general exposure with the business	Selling, general and administrative		3		18		—		(4)
Foreign currency contracts - manage exposure for acquisition of Rexam	Business consolidation and other activities		—		(191)		—		(36)
Cross-currency swaps - manage exposure for acquisition of Rexam	Business consolidation and other activities		—		(4)		—		—
Cross-currency swaps - manage intercompany currency exposure within the business	Selling, general and administrative		(6)		—		—		—
Commodity contracts and currency exchange contracts - attributed to the divestment business	Business consolidation and other activities		(4)		—		—		—
Equity contracts	Selling, general and administrative		—		9		—		(7)
Total		$	(14)	$	(192)	$	(9)	$	(59)

The changes in accumulated other comprehensive earnings (loss) for effective derivatives were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in millions)	2016		2015		2016		2015

Amounts reclassified into earnings:
Commodity contracts	$	(1)	$	7	$	6	$	8
Cross currency swap contracts		7		—		6		—
Interest rate contracts		1				1
Commodity and currency exchange contracts attributed to the divestment business		—		—		4		—
Currency exchange contracts		(5)		—		(3)		—
Change in fair value of cash flow hedges:
Commodity contracts		1		(12)		7		(23)
Interest rate contracts		—		—		(1)		—
Cross currency swap contracts		(23)		—		(28)		—
Currency exchange contracts		3		4		3		(1)
Foreign currency and tax impacts		9		(1)		7		2
	$	(8)	$	(2)	$	2	$	(14)