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Derivative Instruments | 9 Months Ended
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Sep. 30, 2011
Derivative Instruments |
Derivative Instruments |
10. Derivative Instruments The Company has certain derivative assets and liabilities which consist of interest rate swaps, natural gas forwards, and foreign exchange option and forward contracts. The Company uses an income approach to valuing these contracts. Interest rate yield curves, natural gas forward rates, and foreign exchange rates are the significant inputs into the valuation models. These inputs are observable in active markets over the terms of the instruments the Company holds, and accordingly, the Company classifies its derivative assets and liabilities as Level 2 in the hierarchy. The Company also evaluates counterparty risk in determining fair values. Interest Rate Swaps Designated as Fair Value Hedges In the fourth quarter of 2003 and the first quarter of 2004, the Company entered into a series of interest rate swap agreements with a total notional amount of $700 million that were to mature in 2010 and 2013. The swaps were executed in order to: (i) convert a portion of the senior notes and senior debentures fixed-rate debt into floating-rate debt; (ii) maintain a capital structure containing appropriate amounts of fixed and floating-rate debt; and (iii) reduce net interest payments and expense in the near-term. The Company’s fixed-to-floating interest rate swaps were accounted for as fair value hedges. Because the relevant terms of the swap agreements matched the corresponding terms of the notes, there was no hedge ineffectiveness. Accordingly, the Company recorded the net of the fair market values of the swaps as a long-term asset (liability) along with a corresponding net increase (decrease) in the carrying value of the hedged debt. For derivative instruments that are designated and qualify as fair value hedges, the change in the fair value of the derivative instrument related to the future cash flows (gain or loss on the derivative) as well as the offsetting change in the fair value of the hedged item attributable to the hedged risk are recognized in current earnings. The Company includes the gain or loss on the hedged items (i.e. long-term debt) in the same line item (interest expense) as the offsetting loss or gain on the related interest rate swaps. During the second quarter of 2009, the Company completed a tender offer for its $250 million senior debentures due 2010. As a result of the tender offer, the Company extinguished $222 million of the senior debentures and terminated the related interest rate swap agreements for proceeds of $5 million. The Company recognized $4 million of the proceeds as a reduction to interest expense upon the termination of the interest rate swap agreements, while the remaining proceeds were recognized as a reduction to interest expense over the remaining life of the outstanding senior debentures, which matured in May 2010. During the second quarter of 2009, the Company’s interest rate swaps related to the $450 million senior notes due 2013 were terminated. The Company received proceeds of $12 million which were recorded as an adjustment to debt and were to be recognized as a reduction to interest expense over the remaining life of the senior notes due 2013. During the second quarter of 2010, a subsidiary of the Company redeemed the senior notes due 2013. Accordingly, the remaining unamortized proceeds from the terminated interest rate swaps were recognized in the second quarter as a reduction to interest expense. The amortization of the proceeds from the terminated interest rate swaps reduced interest expense $11 million for the nine months ended September 30, 2010. Commodity Futures Contracts Designated as Cash Flow Hedges In North America, the Company enters into commodity futures contracts related to forecasted natural gas requirements, the objectives of which are to limit the effects of fluctuations in the future market price paid for natural gas and the related volatility in cash flows. The Company continually evaluates the natural gas market and related price risk and periodically enters into commodity futures contracts in order to hedge a portion of its usage requirements. The majority of the sales volume in North America is tied to customer contracts that contain provisions that pass the price of natural gas to the customer. In certain of these contracts, the customer has the option of fixing the natural gas price component for a specified period of time. At September 30, 2011 and 2010, the Company had entered into commodity futures contracts covering approximately 5,100,000 MM BTUs and 8,100,000 MM BTUs, respectively, primarily related to customer requests to lock the price of natural gas. The Company accounts for the above futures contracts as cash flow hedges at September 30, 2011 and recognizes them on the balance sheet at fair value. The effective portion of changes in the fair value of a derivative that is designated as, and meets the required criteria for, a cash flow hedge is recorded in the Accumulated Other Comprehensive Income component of share owners’ equity (“OCI”) and reclassified into earnings in the same period or periods during which the underlying hedged item affects earnings. At September 30, 2011 and 2010, an unrecognized loss of $4 million and $6 million, respectively, related to the commodity futures contracts was included in Accumulated OCI, and will be reclassified into earnings over the next twelve to twenty-four months. Any material portion of the change in the fair value of a derivative designated as a cash flow hedge that is deemed to be ineffective is recognized in current earnings. The ineffectiveness related to these natural gas hedges for the three and nine months ended September 30, 2011 and 2010 was not material. The effect of the commodity futures contracts on the results of operations for the three months ended September 30, 2011 and 2010 is as follows:
|  |  |  | Amount of Loss |
|  |  |  | Reclassified from |
Amount of Loss |  | Accumulated OCI into |
Recognized in OCI on |  | Income (reported in |
Commodity Futures Contracts |  | manufacturing, shipping, and |
(Effective Portion) |  | delivery) (Effective Portion) |
2011 |  | 2010 |  | 2011 |  | 2010 |
$ | (3 | ) | $ | (6 | ) | $ | (1 | ) | $ | (2 | )
The effect of the commodity futures contracts on the results of operations for the nine months ended September 30, 2011 and 2010 is as follows:
|  |  |  | Amount of Loss |
|  |  |  | Reclassified from |
Amount of Loss |  | Accumulated OCI into |
Recognized in OCI on |  | Income (reported in |
Commodity Futures Contracts |  | manufacturing, shipping, and |
(Effective Portion) |  | delivery) (Effective Portion) |
2011 |  | 2010 |  | 2011 |  | 2010 |
$ | (5 | ) | $ | (12 | ) | $ | (4 | ) | $ | (7 | )
Senior Notes Designated as Net Investment Hedge During December 2004, a U.S. subsidiary of the Company issued senior notes totaling €225 million. These notes were designated by the Company’s subsidiary as a hedge of a portion of its net investment in a non-U.S. subsidiary with a Euro functional currency. Because the amount of the senior notes matched the hedged portion of the net investment, there was no hedge ineffectiveness. Accordingly, the Company recorded the impact of changes in the foreign currency exchange rate on the Euro-denominated notes in OCI. During the second quarter of 2011, the senior notes designated as the net investment hedge were redeemed by a subsidiary of the Company. The amount recorded in OCI related to this net investment hedge will be reclassified into earnings when the Company sells or liquidates its net investment in the non-U.S. subsidiary. The effect of the net investment hedge on the results of operations for the three and nine months ended September 30, 2011 and 2010 is as follows:
Amount of Gain (Loss) Recognized in OCI |
Three Months Ended September 30, |  | Nine Months Ended September 30, |
2011 |  | 2010 |  | 2011 |  | 2010 |
$ | — |  | $ | (32 | ) | $ | (25 | ) | $ | 19 |
Forward Exchange Contracts not Designated as Hedging Instruments The Company’s subsidiaries may enter into short-term forward exchange or option agreements to purchase foreign currencies at set rates in the future. These agreements are used to limit exposure to fluctuations in foreign currency exchange rates for significant planned purchases of fixed assets or commodities that are denominated in currencies other than the subsidiaries’ functional currency. Subsidiaries may also use forward exchange agreements to offset the foreign currency risk for receivables and payables, including intercompany receivables and payables, not denominated in, or indexed to, their functional currencies. The Company records these short-term forward exchange agreements on the balance sheet at fair value and changes in the fair value are recognized in current earnings. At September 30, 2011 and 2010, various subsidiaries of the Company had outstanding forward exchange and option agreements denominated in various currencies covering the equivalent of approximately $740 million and $1.7 billion, respectively, related primarily to intercompany transactions and loans. The effect of the forward exchange contracts on the results of operations for the three months ended September 30, 2011 and 2010 is as follows:
|  | Amount of Gain (Loss) |
Location of Gain (Loss) |  | Recognized in Income on |
Recognized in Income on |  | Forward Exchange Contracts |
Forward Exchange Contracts |  | 2011 |  | 2010 |
Other expense |  | $ | 10 |  | $ | 8 |
The effect of the forward exchange contracts on the results of operations for the nine months ended September 30, 2011 and 2010 is as follows:
|  | Amount of Gain (Loss) |
Location of Gain (Loss) |  | Recognized in Income on |
Recognized in Income on |  | Forward Exchange Contracts |
Forward Exchange Contracts |  | 2011 |  | 2010 |
Other expense |  | $ | (14 | ) | $ | 49 |
Balance Sheet Classification The Company records the fair values of derivative financial instruments on the balance sheet as follows: (a) receivables if the instrument has a positive fair value and maturity within one year, (b) deposits, receivables, and other assets if the instrument has a positive fair value and maturity after one year, (c) other accrued liabilities or other liabilities (current) if the instrument has a negative fair value and maturity within one year, and (d) other liabilities if the instrument has a negative fair value and maturity after one year. The following table shows the amount and classification (as noted above) of the Company’s derivatives:
|  | Balance |  | Fair Value |
|  | Sheet Location |  | September 30, 2011 |  | December 31, 2010 |  | September 30, 2010 |
Asset Derivatives: |  |  |  |  |  |  |  |  |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |
Foreign exchange contracts |  | a |  | $ | 19 |  | $ | 5 |  | $ | 32 |
Foreign exchange contracts |  | b |  |  |  | 2 |  |  |
Foreign exchange contracts |  | c |  | 3 |  | 1 |  |  |
Total derivatives not designated as hedging instruments |  |  |  | 22 |  | 8 |  | 32 |
Total asset derivatives |  |  |  | $ | 22 |  | $ | 8 |  | $ | 32 |
Liability Derivatives: |  |  |  |  |  |  |  |  |
Derivatives designated as hedging instruments: |  |  |  |  |  |  |  |  |
Commodity futures contracts |  | c |  | $ | 4 |  | $ | 3 |  | $ | 6 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |
Foreign exchange contracts |  | c |  | 8 |  | 21 |  | 18 |
Foreign exchange contracts |  | d |  |  |  |  |  | 6 |
Total derivatives not designated as hedging instruments |  |  |  | 8 |  | 21 |  | 24 |
Total liability derivatives |  |  |  | $ | 12 |  | $ | 24 |  | $ | 30

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- Definition The entire disclosure for the entity's entire derivative instruments and hedging activities. Describes an entity's risk management strategies, derivatives in hedging activities and non-hedging derivative instruments, the assets, obligations, liabilities, revenues and expenses arising therefrom, and the amounts of and methodologies and assumptions used in determining the amounts of such items. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 133 -Paragraph 44 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. 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