DERIVATIVES

Hedging Programs

The Company is exposed to market risks, such as changes in foreign currency exchange rates, commodity prices, and interest rates. To mitigate these market risks and their effects on the cash flows of the underlying transaction, the Company uses various derivative financial instruments when appropriate in accordance with the Company's hedging strategy and policies. Designation is performed on a specific exposure basis to support hedge accounting. The changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the anticipated cash flows of the underlying exposures being hedged. The Company does not enter into derivative transactions for speculative purposes.

For further information on hedging programs, see Note 10, "Derivatives", to the consolidated financial statements in Part II, Item 8 of the Company's 2014 Annual Report on Form 10-K.

Fair Value Hedges

Fair value hedges are defined as derivative or non-derivative instruments designated as and used to hedge the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk. For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings. In 2014, the Company entered into interest rate swaps to hedge the interest rate risk on the 3.6% notes due 2022. As of September 30, 2015 and December 31, 2014, the total notional amount of the Company's interest rate swaps was $275 million.

Fair Value Measurement of Derivatives Designated as Fair Value Hedging Instruments



(Dollars in millions)		Fair Value Measurement
Derivative Assets	Statement of Financial Position Location	September 30, 2015		December 31, 2014
Interest rate swap	Other noncurrent assets	$	12	$	5

Derivatives' Fair Value Hedging Relationships



	Third quarter
(Dollars in millions)	Consolidated Statement of Earnings Location of Gain/(Loss) Recognized in Income on Derivatives	Amount of Gain/ (Loss) Recognized in Income on Derivatives
Derivatives in Fair Value Hedging Relationships		September 30, 2015		September 30, 2014
Interest rate swaps	Net interest expense	$	3	$	2



	Nine Months Ended
(Dollars in millions)	Consolidated Statement of Earnings Location of Gain/(Loss) Recognized in Income on Derivatives	Amount of Gain/ (Loss) Recognized in Income on Derivatives
Derivatives in Fair Value Hedging Relationships		September 30, 2015		September 30, 2014
Interest rate swaps	Net interest expense	$	10	$	3

Cash Flow Hedges

Cash flow hedges are derivative instruments designated as and used to hedge the exposure to variability in expected future cash flows that is attributable to a particular risk. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income, net of income taxes and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivatives representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.



Total notional amounts		September 30, 2015	December 31, 2014

Foreign Exchange Forward and Option Contracts (in millions)
	EUR/USD (in EUR)	€696	€810
	EUR/USD (in approximate USD equivalent)	$795	$1,000
	JPY/USD (in JPY)	¥3,000	¥4,800
	JPY/USD (in approximate USD equivalent)	$25	$40
Commodity Forward and Collar Contracts
	Contract ethylene sales (in thousand metric tons)	0	14
	Feedstock (in million barrels)	25	33
	Feedstock (in thousand metric tons)	8	30
	Energy (in million million british thermal units)	28	25
Interest rate swaps for the future issuance of debt (in millions)		$500	$500

Fair Value Measurement of Derivatives Designated as Cash Flow Hedging Instruments



(Dollars in millions)		Fair Value Measurements Significant Other Observable Inputs
Derivative Assets	Statement of Financial Position Location	September 30, 2015		December 31, 2014
Cash Flow Hedges
Commodity contracts	Other current assets	$	—	$	2
Foreign exchange contracts	Other current assets	66		61
Foreign exchange contracts	Other noncurrent assets	84		71
		$	150	$	134



(Dollars in millions)		Fair Value Measurements Significant Other Observable Inputs
Derivative Liabilities	Statement of Financial Position Location	September 30, 2015		December 31, 2014
Cash Flow Hedges
Commodity contracts	Payables and other current liabilities	$	177	$	193
Commodity contracts	Other long-term liabilities	250		289
Foreign exchange contracts	Payables and other current liabilities	2		10
Forward starting interest rate swap contracts	Other long-term liabilities	34		16
		$	463	$	508

Derivatives' Hedging Relationships



	Third Quarter
(Dollars in millions)	Change in amount after tax of gain/(loss) recognized in Other Comprehensive Income on derivatives (effective portion)						Location of gain/(loss) reclassified from Accumulated Other Comprehensive Income into income (effective portion)	Pre-tax amount of gain/(loss) reclassified from Accumulated Other Comprehensive Income into income (effective portion)
Derivatives' Cash Flow Hedging Relationships	September 30, 2015			September 30, 2014				September 30, 2015			September 30, 2014
Commodity contracts	$	(6	)	$	(22	)	Sales	$	1		$	—
							Cost of Sales	(74		)	(1		)
Foreign exchange contracts	(11		)	57			Sales	20			4
Forward starting interest rate swap contracts	(15		)	1			Net interest expense	(1		)	(2		)
	$	(32	)	$	36			$	(54	)	$	1

	First Nine Months
(Dollars in millions)	Change in amount after tax of gain/(loss) recognized in Other Comprehensive Income on derivatives (effective portion)						Location of gain/(loss) reclassified from Accumulated Other Comprehensive Income into income (effective portion)	Pre-tax amount of gain/(loss) reclassified from Accumulated Other Comprehensive Income into income (effective portion)
Derivatives' Cash Flow Hedging Relationships	September 30, 2015			September 30, 2014				September 30, 2015			September 30, 2014
Commodity contracts	$	21		$	(27	)	Sales	$	4		$	—
							Cost of sales	(152		)	18
Foreign exchange contracts	16			59			Sales	63			3
Forward starting interest rate swap contracts	(8		)	1			Net interest expense	(5		)	(6		)
	$	29		$	33			$	(90	)	$	15

Hedging Summary

Monetized positions and mark-to-market gains and losses from raw materials and energy, currency, and certain interest rate hedges that were included in accumulated other comprehensive income before taxes totaled losses of $386 million at September 30, 2015 and $8 million at September 30, 2014. Losses reclassified from Accumulated Other Comprehensive Income increased in 2015 compared to 2014 as a result of a sharp decline in commodity prices, particularly propane, partially offset by increased gains resulting from a weaker Euro and Japanese Yen relative to the U.S. Dollar. If realized, $142 million net losses as of September 30, 2015 will be reclassified into earnings during the next 12 months. Ineffective portions of hedges are immediately recognized in cost of sales or other charges (income), net.

The gains or losses on nonqualifying derivatives or derivatives that are not designated as hedges are marked to market and reported in the line item "Other (income) charges, net" of the Unaudited Consolidated Statements of Earnings, and, in all periods presented, represent foreign exchange derivatives denominated in multiple currencies and are transacted and settled in the same quarter. The Company recognized $11 million net losses during third quarter 2015 and $1 million net gains during third quarter 2014 on nonqualifying derivatives. The Company recognized approximately $23 million net losses and $4 million net gains on nonqualifying derivatives during the first nine months of 2015 and 2014, respectively.

Fair Value Measurements

For additional information on fair value measurement, see Note 1, "Significant Accounting Policies", to the consolidated financial statements in Part II, Item 8 of the Company's 2014 Annual Report on Form 10-K.

The following chart shows the gross financial assets and liabilities valued on a recurring basis.



(Dollars in millions)				Fair Value Measurements at September 30, 2015
Description	September 30, 2015			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Derivative Assets	$	162		$	—	$	162		$	—
Derivative Liabilities	(463		)	—		(463		)	—
	$	(301	)	$	—	$	(301	)	$	—



(Dollars in millions)				Fair Value Measurements at December 31, 2014
Description	December 31, 2014			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Derivative Assets	$	139		$	—	$	137		$	2
Derivative Liabilities	(508		)	—		(508		)	—
	$	(369	)	$	—	$	(371	)	$	2

The majority of the Company's derivative assets are classified as Level 2. Level 2 fair value is based on estimates using standard pricing models. These standard pricing models use inputs which are derived from or corroborated by observable market data such as interest rate yield curves and currency spot and forward rates. The fair value of commodity contracts is derived using forward curves supplied by an industry recognized and unrelated third party. In addition, on an ongoing basis, the Company tests a subset of its valuations against valuations received from the transaction's counterparty to validate the accuracy of its standard pricing models. Counterparties to these derivative contracts are highly rated financial institutions which the Company believes carry minimal risk of nonperformance.

All of the Company's derivative contracts are subject to master netting arrangements, or similar agreements, which provide for the option to settle contracts on a net basis when they settle on the same day and in the same currency. In addition, these arrangements provide for a net settlement of all contracts with a given counterparty in the event that the arrangement is terminated due to the occurrence of default or a termination event. Management has elected to present the derivative contracts on a gross basis in the Unaudited Consolidated Statements of Financial Position. Had it chosen to present the derivatives contracts on a net basis, it would have a derivative in a net asset position of $160 million and a derivative in a net liability position of $461 million as of September 30, 2015. The Company does not have any cash collateral due under such agreements.