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Derivative Instruments | 6 Months Ended
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Jun. 30, 2018
Derivative Instruments |
Derivative Instruments | 4. Derivative Instruments The Company has certain derivative assets and liabilities which consist of natural gas forwards and foreign exchange option and forward contracts. The Company uses an income approach to value these contracts. 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. Commodity Forward Contracts Designated as Cash Flow Hedges In several regions, the Company enters into commodity forward 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. In the Americas, some of its customer contracts contain provisions that pass the price of natural gas to its customers. In certain of these contracts, the customer has the option of fixing the natural gas price component for a specified period of time. To limit the effects of fluctuations in cash flows resulting from these customer contracts, the Company enters into commodity forward contracts related to forecasted natural gas requirements. In Asia Pacific, the Company implemented a hedging program that included the execution of commodity forward contracts for certain contracted natural gas requirements. The Company had entered into commodity forward contracts covering approximately 8,000,000 MM BTUs at June 30, 2018, 8,800,000 MM BTUs at December 31, 2017 and 9,800,000 MM BTUs at June 30, 2017, respectively. The Company accounts for the above forward contracts as cash flow hedges at June 30, 2018 and recognizes them on the Condensed Consolidated 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. An unrecognized gain of $7 million at June 30, 2018, an unrecognized gain of $3 million at December 31, 2017 and an unrecognized loss of $1 million at June 30, 2017 related to the commodity forward contracts was included in Accumulated OCI, and will be reclassified into earnings in the period when the commodity forward contracts expire. 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 six months ended June 30, 2018 and 2017 was not material. The effect of the commodity forward contracts on the results of operations for the three months ended June 30, 2018 and June 30, 2017 is as follows:
|  | Amount of gain (loss) Reclassified from |
Amount of gain (loss) Recognized in OCI on |  | Accumulated OCI into Income |
Commodity Forward Contracts |  | (reported in cost of goods sold) |
(Effective Portion) |  | (Effective Portion) |
2018 |  | 2017 |  | 2018 |  | 2017 |
$ |  | 4 |  | $ | (2) |  | $ | — |  | $ | — |
The effect of the commodity forward contracts on the results of operations for the six months ended June 30, 2018 and June 30, 2017 is as follows:
|  | Amount of Gain (Loss) Reclassified from |
Amount of Gain Recognized in OCI on |  | Accumulated OCI into Income |
Commodity Forward Contracts |  | (reported in cost of goods sold) |
(Effective Portion) |  | (Effective Portion) |
2018 |  | 2017 |  | 2018 |  | 2017 |
$ |  | 5 |  | $ | 4 |  | $ | (1) |  | $ | — |
Foreign Exchange Derivative Contracts and not Designated as Hedging Instruments The Company 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. The Company may also use foreign exchange agreements to offset the foreign currency risk for receivables and payables, including intercompany receivables, payables, and loans, not denominated in, or indexed to, their functional currencies. The Company records these short-term foreign exchange agreements on the balance sheet at fair value and changes in the fair value are recognized in current earnings. At June 30, 2018 and 2017, the Company had outstanding foreign exchange and option agreements denominated in various currencies covering the equivalent of approximately $380 million and $340 million, respectively, related primarily to intercompany transactions and loans. The effect of the foreign exchange derivative contracts on the results of operations for the three and six months ended June 30, 2018 and June 30, 2017 is as follows:
|  | Amount of Gain (Loss) |
Location of Gain (Loss) |  | Recognized in Income on |
Recognized in Income on |  | Foreign Exchange Contracts |
Foreign Exchange Contracts |  | 2018 |  | 2017 |
Other expense, net |  | $ | — |  | $ | 4 |
|  | Amount of Gain |
Location of Gain |  | Recognized in Income on |
Recognized in Income on |  | Foreign Exchange Contracts |
Foreign Exchange Contracts |  | 2018 |  | 2017 |
Other expense |  | $ | — |  | $ | 6 |
Hedges of Multiple Risks The Company has variable-interest rate borrowings denominated in currencies other than the functional currency of the borrowing subsidiaries. As a result, the Company is exposed to fluctuations in both the underlying variable interest rate and the currency of the borrowing against the subsidiaries’ functional currency. The Company uses derivatives to manage these exposures and designates these derivatives as cash flow hedges of both interest rate and foreign exchange risks. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges of both interest rate risk and foreign exchange risk is recorded in Accumulated OCI and is subsequently reclassified into earnings in the period for which the hedged forecasted transaction affects earnings. If there is an ineffective portion of the change in fair value of the derivative it is recognized directly in earnings. During the fourth quarter of 2017, one of the Company’s Euro-functional subsidiaries entered into a series of cross-currency interest rate swaps to manage its exposure to fluctuations in the Euro-U.S. dollar exchange rate arising from a U.S. dollar denominated borrowing. These swaps involve exchanging fixed rate Euro interest payments for fixed rate U.S. dollar interest receipts, both of which will occur at the forward exchange rates in effect upon entering into the instrument. An unrecognized loss of $8 million at June 30, 2018 and an unrecognized loss of less than $1 million at December 31, 2017, related to these cross-currency interest rate swaps, were included in Accumulated OCI, and will be reclassified into earnings within the next twelve months. These instruments, in the aggregate, have a pay fixed notional amount of €263 million and a receive notional amount of $310 million. They reach final maturity in 2023. There was no ineffectiveness related to these cross-currency interest rate swaps for the three and six months ended June 30, 2018. During the second quarter of 2018, two of the Company’s subsidiaries, a New Zealand dollar (“NZD”) functional currency subsidiary and an Australian dollar (“AUD”) functional currency subsidiary, entered into a series of cross-currency interest rate swaps to manage its exposure to fluctuations in the NZD-U.S. dollar exchange rate and the AUD-U.S. dollar exchange rate arising from U.S. dollar denominated borrowings. These swaps involve exchanging floating rate U.S. dollar interest receipts for fixed rate NZD and AUD interest payments, both of which will occur at the forward exchange rates in effect upon entering into the instrument. An unrecognized loss of $3 million at June 30, 2018 related to these cross-currency interest rate swaps, was included in Accumulated OCI, and will be reclassified into earnings within the next twelve months. The NZD to U.S. dollar instruments, in the aggregate, have a pay fixed notional amount of NZD $161 million and a receive notional amount of $110 million. They reach final maturity in 2022. The AUD to U.S. dollar instruments, in the aggregate, have a pay fixed notional amount of AUD $231 million and a receive notional amount of $170 million. They reach final maturity in 2022. There was no ineffectiveness related to these cross-currency interest rate swaps for the three and six months ended June 30, 2018. The effect of the cross-currency interest rate swaps on the results of operations for the three months ended June 30, 2018 is as follows:
|  | Amount of gain (loss) Reclassified from
Amount of gain (loss) Recognized in OCI on |  | Accumulated OCI into Income
Hedges of Multiple Risks |  | (reported in Other expense, net)
(Effective Portion) |  | (Effective Portion)
$ |  | 14 |  | $ | 18
The effect of the cross-currency interest rate swaps on the results of operations for the six months ended June 30, 2018 is as follows:
|  | Amount of gain (loss) Reclassified from
Amount of gain (loss) Recognized in OCI on |  | Accumulated OCI into Income
Hedges of Multiple Risks |  | (reported in Other expense, net)
(Effective Portion) |  | (Effective Portion)
$ |  | 1 |  | $ | 10
Interest Rate Swaps Designated as Fair Value Hedges During 2017, the Company entered into a series of interest rate swap agreements with a total notional amount of €725 million that reach final maturity in 2024. The swaps were executed in order to maintain a capital structure containing appropriate amounts of fixed and floating-rate debt. The Company’s fixed-to-variable interest rate swaps were accounted for as fair value hedges. The relevant terms of the swap agreements match the corresponding terms of the notes and therefore there is no hedge ineffectiveness. The Company recorded the net of the fair market values of the swaps as a long-term liability and short-term asset along with a corresponding net decrease in the carrying value of the hedged debt. Under the swaps, the Company receives fixed rate interest amounts (equal to the interest on the corresponding hedged note) and pays interest at a six-month Euribor rate (set in arrears) plus a margin spread (see table below). The interest rate differential on each swap is recognized as an adjustment of interest expense during each six-month period over the term of the agreement. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The Company has determined that the majority of the inputs used to value these derivatives fall within Level 2 of the fair value hierarchy. The following selected information relates to fair value swaps at June 30, 2018:
| Amount Hedged |  |  | Receive Rate |  |  | Average Spread |
Senior Notes due 2024 | € | 725 |  |  | 3.125 | % |  |  | 2.6 | % |
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 accrued liabilities or 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 at June 30, 2018, December 31, 2017 and June 30, 2017:
|  | Fair Value |  |
|  | Current Balance |  | June 30, |  |  | December 31, |  |  | June 30, |  |
|  | Sheet Location |  | 2018 |  |  | 2017 |  |  | 2017 |  |
Asset Derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commodity futures contracts |  | b |  | $ | 7 |  |  | $ | 3 |  |  | $ | — |  |
Interest rate swaps designated as fair value hedges |  | a |  |  | 6 |  |  |  | 6 |  |  |  |  |  |
Hedges of multiple risks designated as cash flow hedges |  | a |  |  | 5 |  |  |  | 4 |  |  |  |  |  |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange derivative contracts |  | a |  |  | 2 |  |  |  | 4 |  |  |  | 2 |  |
Total asset derivatives |  |  |  | $ | 20 |  |  | $ | 17 |  |  | $ | 2 |  |
Liability Derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commodity futures contracts |  | c |  | $ | — |  |  | $ | — |  |  | $ | 1 |  |
Interest rate swaps designated as fair value hedges |  | d |  |  | 8 |  |  |  | 13 |  |  |  |  |  |
Hedges of multiple risks designated as cash flow hedges |  | d |  |  | 12 |  |  |  | 10 |  |  |  | 3 |  |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange derivative contracts |  | c |  |  | 2 |  |  |  | 1 |  |  |  | 3 |  |
Total liability derivatives |  |  |  | $ | 22 |  |  | $ | 24 |  |  | $ | 7 |  |

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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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