| Note 23 – Derivative Financial Instruments |
| Derivative and Hedging Activities
As adopted January 1, 2001, the Company accounts for derivatives pursuant to SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities,
as amended. This standard requires that all derivative instruments be recognized
in the financial statements and measured at fair value regardless of the purpose
or intent for holding them. |
| The Company is exposed to a variety
of market risks, including the effects of changes in interest rates, foreign currency
exchange rates, and commodity prices. These exposures are managed, in part, with
the use of derivatives. The following is a summary of the Company’s risk
management strategies and the effect of these strategies on the consolidated financial
statements. |
| Fair Value Hedges
For derivatives designated as hedges of the exposure to changes in the fair value
of a recognized asset or liability or a firm commitment (referred to as fair value
hedges), the gain or loss is recognized in earnings in the period of change together
with the offsetting loss or gain on the hedged item attributable to the risk being
hedged. The effect of that accounting is to reflect in earnings the extent to
which the hedge is not effective in achieving offsetting changes in fair value.
Ineffectiveness was insignificant for the year ended December 31, 2001. |
| Interest rate swap contracts under which the Company agrees to pay variable
rates of interest are generally designated as fair value hedges of fixed-rate
debt obligations. The Company uses interest rate swaps to adjust the amount of
total debt that is subject to variable and fixed interest rates. |
| In addition, the Company holds forward-starting interest rate swap agreements
to fix the cost of funding a firmly committed lease for which payment terms are
determined in advance of funding. This hedge relationship mitigates the changes
in fair value of the hedged portion of the firm commitment caused by changes in
interest rates. The net change in fair value of the swap and the hedged portion
of the firm commitment is reported in earnings. |
| For the year
ended December 31, 2001, $1 of gain related to the basis adjustment of certain
terminated interest rate swaps was recorded in other income. |
| Cash
Flow Hedges For derivatives designated as hedges of the exposure to
variable cash flows of a forecasted transaction (referred to as cash flow hedges),
the effective portion of the derivative’s gain or loss is initially reported
in shareholders’ equity (as a component of accumulated other comprehensive
income) and subsequently reclassified into earnings when the forecasted transaction
affects earnings. The ineffective portion of the gain or loss is reported in earnings
immediately. Cash flow hedges used by the Company include certain interest rate
swaps, foreign currency forward contracts, and commodity purchase contracts. |
| Interest rate swap contracts under which the Company agrees to pay fixed
rates of interest are generally designated as cash flow hedges of variable-rate
debt obligations. The Company uses interest rate swaps to adjust the amount of
total debt that is subject to variable and fixed interest rates. |
| The Company uses foreign currency forward contracts to manage currency risk
associated with certain forecasted transactions, specifically sales and purchase
commitments made in foreign currencies. The Company’s foreign currency forward
contracts hedge forecasted transactions principally occurring up to five years
in the future. |
| Commodity derivatives, such as fixed-price purchase
commitments, are used by the Company to hedge against potentially unfavorable
price changes for items used in production. In 2001, the Company entered into
certain commitments to purchase electricity and natural gas at fixed prices over
the next three years, a portion of which qualify for cash flow hedge treatment.
Portions that do not qualify for cash flow hedge treatment resulted in a loss
of $1 recorded as a reduction of other income for the year ended December 31,
2001. |
| At December 31, 2001, a net unrecognized loss of $172
($108 net of tax) was recorded in accumulated other comprehensive income associated
with the Company’s cash flow hedging transactions for the year then ended.
Of this amount, a net unrecognized loss of $27 ($17 net of tax) was due to the
Company’s transition adjustment upon implementation of SFAS No. 133, at January
1, 2001. |
