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DERIVATIVE AND NON-DERIVATIVE FINANCIAL INSTRUMENTS | 9 Months Ended
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Sep. 30, 2017
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
DERIVATIVES | DERIVATIVE AND NON-DERIVATIVE FINANCIAL INSTRUMENTS Overview of 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 transactions and investments in foreign subsidiaries, the Company uses various derivative and non-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 Company does not enter into derivative transactions for speculative purposes. For further information on hedging programs, see Note 10, "Derivative and Non-Derivative Financial Instruments", to the consolidated financial statements in Part II, Item 8 of the Company's 2016 Annual Report on Form 10-K. Cash Flow Hedges Cash flow hedges are derivative instruments designated and used to hedge the exposure to variability in expected future cash flows that are attributable to a particular risk. The derivative instruments that are designated and qualify as a cash flow hedge are reported on the balance sheet at fair value and 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 net of the change in the hedge instrument and item being hedged for qualifying cash flow hedges is reported as a component of "Accumulated other comprehensive income (loss)" ("AOCI") located in the Unaudited Consolidated Statements of Financial Position 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. Fair Value Hedges Fair value hedges are defined as derivative or non-derivative instruments designated 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. The derivative instruments that are designated and qualify as fair value hedges are reported on the balance sheet at fair value and 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 net of the change in the hedge instrument and item being hedged for qualifying fair value hedges is reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivatives representing hedge ineffectiveness are recognized in current earnings. In second quarter 2016, the Company entered into a fixed-to-floating interest rate swap on a portion of the 3.8% notes due March 2025 to manage the Company's mix of fixed and variable rate debt. Net Investment Hedges Net investment hedges are defined as derivative or non-derivative instruments designated and used to hedge the foreign currency exposure of net investments in certain foreign operations. The net of the change in the hedge instrument and item being hedged for qualifying net investment hedges is reported as a component of "Change in cumulative translation adjustment" within AOCI located in the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings. Gains and losses representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. The foreign currency-denominated borrowings designated as net investment hedges are included as part of "Long-term borrowings'" within the Unaudited Consolidated Statements of Financial Position. The Company designated the euro-denominated 1.50% notes due May 2023 in the principal amounts of €200 million ($213 million) in fourth quarter 2016 and €550 million ($614 million) in second quarter 2016 and the euro-denominated 1.875% notes due November 2026 in the principal amount of €500 million ($534 million) in fourth quarter 2016 as non-derivative net investment hedges of a portion of the Company's net investments in euro functional currency-denominated subsidiaries to offset foreign currency fluctuations. Summary of Financial Position and Financial Performance of Hedging Instruments The following table shows the notional amounts outstanding at September 30, 2017 and December 31, 2016 associated with the Company's hedging programs.
Notional Outstanding |  | September 30, 2017 |  | December 31, 2016
Derivatives designated as cash flow hedges: |  |  |  |
Foreign Exchange Forward and Option Contracts (in millions) |  |  |  |
| EUR/USD (in EUR) |  | €396 |  | €378
| EUR/USD (in approximate USD equivalent) |  | $468 |  | $398
| JPY/USD (in JPY) |  | ¥450 |  | ¥1,800
| JPY/USD (in approximate USD equivalent) |  | $4 |  | $15
Commodity Forward and Collar Contracts |  |  |  |
| Feedstock (in million barrels) |  | 9 |  |  | 11 |
| Energy (in million million british thermal units) |  | 21 |  |  | 23 |
Derivatives designated as fair value hedges: |  |  |  |
Fixed-for-floating interest rate swaps (in millions) |  | $75 |  | $75
Non-derivatives designated as net investment hedges: |  |  |  |
Foreign Currency Net Investment Hedges (in millions) |  |  |  |
| EUR/USD (in EUR) |  | €1,240 |  | €1,238
Fair Value Measurements All the Company's derivative assets and liabilities are currently classified as Level 2 with fair values 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. The Company diversifies its positions among such counterparties to reduce its exposure to counterparty risk and credit losses and monitors the creditworthiness of its counterparties on an on-going basis. The Company had no credit losses during third quarter and first nine months 2017 and 2016. For additional fair value measurement information, see Note 1, "Significant Accounting Policies", and Note 10, "Derivative and Non-Derivative Financial Instruments", to the consolidated financial statements in Part II, Item 8 of the Company's 2016 Annual Report on Form 10-K. The following table shows the financial assets and liabilities valued on a gross basis as of September 30, 2017 and December 31, 2016. Additionally, the table below indicates where the derivatives are reported on the Unaudited Consolidated Statements of Financial Position. During the periods presented, there were no transfers between fair value hierarchy levels.
The Financial Position and Fair Value Measurements of Hedging Instruments on a Gross Basis
(Dollars in millions) |  |  |  |  |  |
Derivative Type |  | Statements of Financial Position Classification |  | September 30, 2017 Level 2 |  | December 31, 2016 Level 2
Derivatives designated as cash flow hedges: |  |  |  |  |  |
Commodity contracts |  | Other current assets |  | $ | 9 |  |  | $ | 5 |
Commodity contracts |  | Other noncurrent assets |  | 1 |  |  | 2 |
Foreign exchange contracts |  | Other current assets |  | 27 |  |  | 49 |
Foreign exchange contracts |  | Other noncurrent assets |  | 8 |  |  | 47 |
Derivatives designated as fair value hedges: |  |  |  |  |  |
Fixed-for-floating interest rate swap |  | Other current assets |  | — |  |  | 1 |
Total Derivative Assets |  |  |  | $ | 45 |  |  | $ | 104 |
Derivatives designated as cash flow hedges: |  |  |  |  |  |
Commodity contracts |  | Payables and other current liabilities |  | $ | 38 |  |  | $ | 62 |
Commodity contracts |  | Other long-term liabilities |  | 28 |  |  | 69 |
Foreign exchange contracts |  | Payables and other current liabilities |  | 4 |  |  | — |
Foreign exchange contracts |  | Other long-term liabilities |  | 2 |  |  | — |
Derivatives designated as fair value hedges: |  |  |  |  |  |
Fixed-for-floating interest rate swap |  | Long-term borrowings |  | 3 |  |  | 4 |
Total Derivative Liabilities |  |  |  | $ | 75 |  |  | $ | 135 |
Total Net Derivative Liabilities |  |  |  | $ | 30 |  |  | $ | 31 |
In addition to the fair value associated with derivative instruments designated as cash flow hedges and fair value hedges noted in the table above, the Company had a carrying value of $1.5 billion and $1.3 billion associated with non-derivative instruments designated as foreign currency net investment hedges at September 30, 2017 and December 31, 2016, respectively. The designated foreign currency-denominated borrowings are included in the "Long-term borrowings" line item of the Unaudited Consolidated Statements of Financial Position. All 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 Unaudited Consolidated Statements of Financial Position. If the Company presented the derivatives contracts on a net basis, there would be no material difference in asset and liability positions. The Company does not have any cash collateral due under such agreements. The tables below present the effect of hedging instruments on OCI and the financial performance for third quarter and first nine months 2017 and 2016:
(Dollars in millions) |  | Change in amount of after tax gain/(loss) recognized in OCI on derivatives (effective portion) |  | Pre-tax amount of gain/(loss) reclassified from AOCI into income (effective portion) |  | Additional pre-tax gain/(loss) recognized in earnings (effective portion) |  |
|  | Third Quarter |  | Third Quarter |  | Third Quarter |  |
Hedging Relationships |  | 2017 |  | 2016 |  | 2017 |  | 2016 |  | 2017 |  | 2016 |  | Income Statement Classification
Derivatives in cash flow hedging relationships: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commodity contracts |  | $ | 49 |  |  | $ | 23 |  |  | $ | (15 | ) |  | $ | (46 | ) |  | $ | — |  |  | $ | — |  |  | Cost of sales
Foreign exchange contracts |  | (12 | ) |  | (13 | ) |  | 6 |  |  | 15 |  |  | — |  |  | — |  |  | Sales
Forward starting interest rate and treasury lock swap contracts |  | — |  |  | 2 |  |  | (2 | ) |  | (1 | ) |  | — |  |  | — |  |  | Net interest expense
Derivatives in fair value hedging relationships: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed-for-floating interest rate swaps |  | — |  |  | — |  |  | — |  |  | — |  |  | 1 |  |  | 2 |  |  | Net interest expense
Non-derivatives in net investment hedging relationships: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net investment hedges (pre-tax) |  | (49 | ) |  | (3 | ) |  | — |  |  | — |  |  | — |  |  | — |  |  | N/A
Derivatives not designated as hedges: (1) |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign Exchange Contracts |  | — |  |  | — |  |  | — |  |  | — |  |  | (2 | ) |  | — |  |  | Other (income) charges, net
|  | First Nine Months |  | First Nine Months |  | First Nine Months |  |
Hedging Relationships |  | 2017 |  | 2016 |  | 2017 |  | 2016 |  | 2017 |  | 2016 |  | Income Statement Classification
Derivatives in cash flow hedging relationships: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commodity contracts |  | $ | 42 |  |  | $ | 132 |  |  | $ | (42 | ) |  | $ | (131 | ) |  | $ | — |  |  | $ | — |  |  | Cost of sales
Foreign exchange contracts |  | (42 | ) |  | (38 | ) |  | 28 |  |  | 45 |  |  | — |  |  | — |  |  | Sales
Forward starting interest rate and treasury lock swap contracts |  | 2 |  |  | (25 | ) |  | (4 | ) |  | (5 | ) |  | — |  |  | — |  |  | Net interest expense
Derivatives in fair value hedging relationships: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed-for-floating interest rate swaps |  | — |  |  | — |  |  | — |  |  | — |  |  | 3 |  |  | 9 |  |  | Net interest expense
Non-derivatives in net investment hedging relationships: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net investment hedges (pre-tax) |  | (158 | ) |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | N/A
Derivatives not designated as hedges: (1) |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign Exchange Contracts |  | — |  |  | — |  |  | — |  |  | — |  |  | 2 |  |  | (14 | ) |  | Other (income) charges, net
(1) | The gains or losses on derivatives that are not designated as hedges are marked-to-market and represent foreign exchange derivatives denominated in multiple currencies and are transacted and settled in the same quarter.
Pre-tax monetized positions and mark-to-market gains and losses from raw materials and energy, currency, and certain interest rate hedges that were included in AOCI included losses of $210 million at September 30, 2017 and losses of $57 million at December 31, 2016. Losses in AOCI increased September 30, 2017 compared to December 31, 2016 primarily as a result of an increase in foreign currency exchange rates, particularly the euro, partially offset by an increase in commodity prices, particularly propane. If realized, approximately $5 million in pre-tax losses, as of September 30, 2017, would be reclassified into earnings during the next 12 months. The Company had no material ineffectiveness from the hedging programs during third quarter and first nine months 2017 and 2016.

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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