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.

The Company hedges commodity price risks using derivative financial instruments over a maximum of five years beyond its current fiscal year. The Company weights its hedge portfolio more heavily in the first year with declining coverage over the remaining periods.

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 2015, the Company unwound the notional amount of $275 million associated with the interest rate swaps on the 3.6% notes due 2022. As of December 31, 2015, there are no outstanding interest rate swap hedges. As of 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	December 31, 2015		December 31, 2014

Interest rate swap	Other noncurrent assets	$	—	$	5

Derivatives' Fair Value Hedging Relationships



	Twelve 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		December 31, 2015		December 31, 2014
Interest rate swaps	Net interest expense	$	13	$	6

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.

Foreign Currency Exchange Rate Hedging

The Company manufactures and sells its products in a number of countries throughout the world and, as a result, is exposed to changes in foreign currency exchange rates. To manage the volatility relating to these exposures, the Company nets the exposures on a consolidated basis to take advantage of natural offsets. To manage the remaining exposure, the Company enters into currency options and forwards from time to time to hedge probable anticipated, but not yet committed, export sales and purchase transactions expected within no longer than five years and denominated in foreign currencies (principally the euro and Japanese yen) and forward exchange contracts to hedge certain firm commitments denominated in foreign currencies. These contracts are designated as cash flow hedges. The MTM gains or losses on qualifying hedges are included in accumulated other comprehensive income (loss) to the extent effective, and reclassified into sales in the period during which the hedged transaction affects earnings.

Commodity Hedging

Certain raw material and energy sources used by the Company, as well as sales of certain commodity products by the Company, are subject to price volatility caused by weather, supply and demand conditions, economic variables and other unpredictable factors. These commodity and energy costs are primarily related to propane, ethane, natural gas, paraxylene, ethylene, and benzene. From time to time to mitigate expected fluctuations in market prices, the Company enters into option and forward contracts. These contracts are designated as cash flow hedges. The MTM gains or losses on qualifying hedges are included in accumulated other comprehensive income (loss) to the extent effective, and reclassified into cost of sales (for commodity purchases) and sales (for commodity sales) in the period during which the hedged transaction affects earnings.

Interest Rate Hedging

The Company's policy is to manage interest expense using a mix of fixed and variable rate debt. To manage this mix effectively, the Company from time to time enters into interest rate swaps in which the Company agrees to exchange the difference between fixed and variable interest amounts calculated by reference to an agreed upon notional principal amount. These swaps are designated as hedges of the fair value of the underlying debt obligations and the interest rate differential is reflected as an adjustment to interest expense over the life of the swaps. As these instruments are 100 percent effective, there is no impact on earnings due to hedge ineffectiveness.

From time to time, the Company also utilizes interest rate derivative instruments, primarily forward starting swaps and Treasury locks, to hedge the Company's exposure to movements in interest rates prior to anticipated debt offerings. These instruments are designated as cash flow hedges and are typically 100 percent effective. As a result, there is no current impact on earnings due to hedge ineffectiveness.

The MTM gains or losses on these hedges are included in accumulated other comprehensive income (loss) to the extent effective, and are reclassified into interest expense over the term of the related debt instruments.



Total notional amounts:		December 31, 2015	December 31, 2014

Foreign Exchange Forward and Option Contracts (in millions)
	EUR/USD (in EUR)	€618	€810
	EUR/USD (in approximate USD equivalent)	$689	$1,000
	JPY/USD (in JPY)	¥2,400	¥4,800
	JPY/USD (in approximate USD equivalent)	$20	$40
Commodity Forward and Collar Contracts
	Contract ethylene sales (in thousand metric tons)	—	14
	Feedstock (in million barrels)	22	33
	Feedstock (in thousand metric tons)	—	30
	Energy (in million million british thermal units)	32	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
Derivative Assets	Statement of Financial Position Location	December 31, 2015		December 31, 2014

Commodity contracts	Other current assets	$	—	$	2
Foreign exchange contracts	Other current assets	65		61
Foreign exchange contracts	Other noncurrent assets	79		71
		$	144	$	134



(Dollars in millions)		Fair Value Measurements
Derivative Liabilities	Statement of Financial Position Location	December 31, 2015		December 31, 2014

Commodity contracts	Payables and other current liabilities	$	194	$	193
Commodity contracts	Other long-term liabilities	242		289
Foreign exchange contracts	Payables and other current liabilities	—		10
Forward starting interest rate swap contracts	Other long-term liabilities	30		16
		$	466	$	508

Derivatives' Hedging Relationships



(Dollars in millions)	Change in amount of after tax 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	December 31, 2015			December 31, 2014				December 31, 2015			December 31, 2014
Commodity contracts	$	26		$	(312	)	Sales	$	4		$	1
							Cost of sales	(217		)	(7		)
Foreign exchange contracts	13			85			Sales	86			14
Forward starting interest rate swap contracts	(4		)	(3		)	Interest Expense	(7		)	(8		)
	$	35		$	(230	)		$	(134	)	$	—

Hedging Summary

At December 31, 2015 and 2014, pre-tax monetized positions and MTM gains and losses from raw materials and energy, currency, and certain interest rate hedges that were included in accumulated other comprehensive income totaled approximately $376 million in losses and $432 million in losses, respectively. If realized, approximately $135 million in pre-tax losses will be reclassified into earnings during the next 12 months. Ineffective portions of hedges are immediately recognized in cost of sales or other (income) charges, net. In 2014, the Company recognized $6 million in pre-tax losses for ineffectiveness on the commodity hedging portfolio.

The gains or losses on nonqualifying derivatives or derivatives that are not designated as hedges are marked to market in the line item "Other (income) charges, net" of the 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 approximately $28 million net loss and $3 million net loss on nonqualifying derivatives during 2015 and 2014, respectively. The Company had no nonqualifying derivatives or derivatives that are not designated as hedges as of December 31, 2015 and December 31, 2014.

Fair Value Measurements

For additional information on fair value measurement, see Note 1, "Significant Accounting Policies".

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



(Dollars in millions)				Fair Value Measurements at December 31, 2015
Description	December 31, 2015			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Derivative Assets	$	144		$	—	$	144		$	—
Derivative Liabilities	(466		)	—		(466		)	—
	$	(322	)	$	—	$	(322	)	$	—



(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.

From time to time, the Company holds Level 3 assets for commodity hedges. The fair values of Level 3 instruments are determined using pricing data similar to that used in Level 2 financial instruments described above, and reflect adjustments for less liquid markets or longer contractual terms. Level 3 hedges typically will mature within one year or less. The Company determines the fair value of Level 3 ethylene derivative forward contracts using an average of unadjusted forward ethylene prices provided by industry recognized experts to value its ethylene positions.

The table below presents a rollforward of activity for these assets for the period ended December 31, 2015 and December 31, 2014:



Fair Value Measurements Using Level 3 Inputs
Commodity Contracts	December 31,
(Dollars in millions)	2015			2014
Beginning balance at January 1	$	2		$	—
Realized gain (loss) in sales revenue	4			1
Change in unrealized gain (loss) in Other Comprehensive Income	(2		)	2
Purchases, sales and settlements	(4		)	(1		)
Transfers (out) in of Level 3	—			—
Ending balance at December 31	$	—		$	2

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. The Company has elected to present the derivative contracts on a gross basis in the 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 $144 million and a derivative in a net liability position of $466 million as of December 31, 2015. The Company does not have any cash collateral due under such agreements.