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| 1 | DENTSPLY INTERNATIONAL INC /DE/ | NOTE 10 – FINANCIAL INSTRUMENTS AND DERIVATIVES On January 1, 2009, the Company adopted the new accounting guidance for expanded disclosures about derivative instruments and hedging activities. As a result the Company has expanded its disclosures about its strategies, objectives and risks for using derivative instruments. In addition, the Company has disclosed the fair value of derivative instruments and their gains and losses in tabular format as required. The adoption of this new guidance did not have a material impact on the Company’s financial statements. Derivative Instruments and Hedging Activities The Company's activities expose it to a variety of market risks, which primarily include the risks related to the effects of changes in foreign currency exchange rates, interest rates and commodity prices. These financial exposures are monitored and managed by the Company as part of its overall risk management program. The objective of this risk management program is to reduce the volatility that these market risks may have on the Company's operating results and equity. Certain of the Company's inventory purchases are denominated in foreign currencies, which expose the Company to market risk associated with exchange rate movements. The Company's policy generally is to hedge major foreign currency transaction exposures through foreign exchange forward contracts. These contracts are entered into with major financial institutions thereby minimizing the risk of credit loss. In addition, the Company's investments in foreign subsidiaries are denominated in foreign currencies, which create exposures to changes in exchange rates. The Company uses debt and derivatives denominated in the applicable foreign currency as a means of hedging a portion of this risk. With the Company’s significant level of variable interest rate long-term debt and net investment hedges, changes in the interest rate environment can have a major impact on the Company’s earnings, depending upon its interest rate exposure. As a result, the Company manages its interest rate exposure with the use of interest rate swaps, when appropriate, based upon market conditions. The manufacturing of some of the Company’s products requires the use of commodities, which are subject to market fluctuations. In order to limit the unanticipated impact on earnings from such market fluctuations, the Company selectively enters into commodity swaps for certain materials used in the production of its products. Additionally, the Company uses non-derivative methods, such as the precious metal consignment agreements to effectively hedge commodity risks. Cash Flow Hedges The Company uses interest rate swaps to convert a portion of its variable interest rate debt to fixed interest rate debt. As of September 30, 2009, the Company has three groups of significant variable interest rate to fixed rate interest rate swaps. One of the groups of swaps has notional amounts totaling 12.6 billion Japanese yen, and effectively converts the underlying variable interest rates to an average fixed interest rate of 1.6% for a term of ten years, ending in September 2012. Another swap has a notional amount of 65.0 million Swiss francs, and effectively converts the underlying variable interest rates to a fixed interest rate of 4.2% for a term of seven years, ending in September 2012. A third group of swaps has a notional amount of $150.0 million, and effectively converts the underlying variable interest rates to a fixed interest rate of 3.9% for a term of two years, ending March 2010. The Company enters into interest rate swap contracts infrequently as they are only used to manage interest rate risk on long-term debt instruments and not for speculative purposes. The Company selectively enters into commodity swaps to effectively fix certain variable raw material costs. At September 30, 2009, the Company had swaps in place to purchase 948 troy ounces of platinum bullion for use in the production of its impression material products. The average fixed rate of this agreement is $1,240 per troy ounce. In addition, the Company had swaps in place to purchase 85,428 troy ounces of silver bullion for use in the production of its amalgam products at an average fixed rate of $14 per troy ounce. The Company enters into forward exchange contracts to hedge the foreign currency exposure of its anticipated purchases of certain inventory. In addition, exchange contracts are used by certain of the Company's subsidiaries to hedge intercompany inventory purchases, which are denominated in non-local currencies. The forward contracts that are used in these programs typically mature in twelve months or less. For these derivatives which qualify as hedges of future anticipated cash flows, the effective portion of changes in fair value is temporarily deferred in AOCI and then recognized in earnings when the hedged item affects earnings. Hedges of Net Investments in Foreign Operations The Company has numerous investments in foreign subsidiaries. The net assets of these subsidiaries are exposed to volatility in currency exchange rates. Currently, the Company uses non-derivative financial instruments, including foreign currency denominated debt held at the parent company level and derivative financial instruments to hedge some of this exposure. Translation gains and losses related to the net assets of the foreign subsidiaries are offset by gains and losses in the non-derivative and derivative financial instruments designated as hedges of net investments. In the first quarter of 2005, the Company entered into cross currency interest rate swaps with a notional principal value of Swiss francs 457.5 million paying three month Swiss franc London Inter-Bank Offered Rate (“LIBOR”) and receiving three month U.S. dollar LIBOR on $384.4 million. In the first quarter of 2006, the Company entered into additional cross currency interest rate swaps with a notional principal value of Swiss francs 55.5 million paying three month Swiss franc LIBOR and receiving three month U.S. dollar LIBOR on $42.0 million. In the fourth quarter of 2006, the Company entered into additional cross currency interest rate swaps with a notional principal value of Swiss francs 80.4 million paying three month Swiss franc LIBOR and receiving three month U.S. dollar LIBOR on $64.4 million. In the first quarter of 2007, the Company entered into additional cross currency interest rate swaps with a notional principal value of Swiss francs 56.6 million paying three month Swiss franc LIBOR and receiving three month U.S. dollar LIBOR on $46.3 million. Additionally, in the fourth quarter of 2005, the Company entered into cross currency interest rate swaps with a notional principal value of Euro 358.0 million paying three month Euro LIBOR and receiving three month U.S. dollar LIBOR on $419.7 million. In the first quarter of 2009, the Company terminated Swiss francs 57.5 million cross currency swap at a fair value of zero. In the second and third quarters of 2009, the Company amended certain of its Swiss franc and Euro cross currency interest rate swaps to extend their maturity dates for an additional three years. Specifically, a total of Swiss francs 300 million have been extended to March and April of 2013 and a total of Euro 250 million have been extended to December 2013. The Swiss franc and Euro cross currency interest rate swaps are designated as net investment hedges of the Swiss and Euro denominated net assets. The interest rate differential is recognized in the earnings as interest income or interest expense as it is accrued, the foreign currency revaluation is recorded in AOCI, net of tax effects. The fair value of these cross currency interest rate swap agreements is the estimated amount the Company would (pay)/ receive at the reporting date, taking into account the effective interest rates and foreign exchange rates. As of September 30, 2009, the estimated net fair values of the swap agreements were negative $186.8 million, which are recorded in AOCI, net of tax effects, and as other noncurrent liabilities and other noncurrent assets. At September 30, 2009, the Company had Euro-denominated, Swiss franc-denominated, and Japanese yen-denominated debt and cross currency interest rate swaps (at the parent company level) to hedge the currency exposure related to a designated portion of the net assets of its European, Swiss and Japanese subsidiaries. At September 30, 2009 and 2008, the accumulated translation gains on investments in foreign subsidiaries, primarily denominated in Euros, Swiss francs and Japanese yen, net of these net investment hedges, were $130.8 million and $101.4 million, respectively, which are included in AOCI, net of tax effects. The following tables summarize the fair value of the Company’s derivatives at September 30, 2009.
As of September 30, 2009, $3.9 million of deferred net losses on derivative instruments recorded in AOCI are expected to be reclassified to current earnings during the next twelve months. This reclassification is primarily due to the sale of inventory that includes previously hedged purchases and interest rate swaps. The maximum term over which the Company is hedging exposures to variability of cash flows (for all forecasted transactions, excluding interest payments on variable interest rate debt) is eighteen months. Overall, the derivatives designated as cash flow hedges are highly effective. Any cash flows associated with these instruments are included in cash from operations in accordance with the Company’s policy of classifying the cash flows from these instruments in the same category as the cash flows from the items being hedged. The following tables summarize the fair value and balance sheet location of the Company’s derivatives:
The following table summarizes the income statement impact of the Company’s cash flow hedges for the three and nine months ended September 30, 2009:
(c) Amount of gain or (loss) recognized in income, ineffective portion and amount excluded from effectiveness testing. The following tables summarize the statement of operations impact of the Company’s hedges of net investment for the three and nine months end September 30, 2009:
The following tables summarize the statement of operations impact of the Company’s hedges not designated as hedging for the three and nine months end September 30, 2009:
(a) Amount of loss reported in AOCI, effective portion.
Amounts recorded in AOCI related to cash flow hedging instruments follow:
Amounts recorded in AOCI related to hedges of net investments in foreign operations follow:
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| 2 | Liberty Media Corporation and Subsidiaries | (8) Financial Instruments
The Company's financial instruments are summarized as follows:
(1) Represents the Company's Sprint equity collars at September 30, 2009. The Company has made borrowings against substantially all of the future cash proceeds to be received by the Company upon expiration of these equity collars. See note 10.
Realized and Unrealized Gains (Losses) on Financial Instruments Realized and unrealized gains (losses) on financial instruments are comprised of changes in the fair value of the following:
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| 3 | M&T BANK CORP |
9. Derivative financial instruments
As part of managing interest rate risk, the Company enters into interest rate swap agreements to
modify the repricing characteristics of certain portions of the Company’s portfolios of earning
assets and interest-bearing liabilities. The Company designates interest rate swap agreements
utilized in the management of interest rate risk as either fair value hedges or cash flow hedges.
Interest rate swap agreements are generally entered into with counterparties that meet established
credit standards and most contain master netting and collateral provisions protecting the at-risk
party. Based on adherence to the Company’s credit standards and the presence of the netting and
collateral provisions, the Company believes that the credit risk inherent in these contracts is not
significant as of September 30, 2009.
The net effect of interest rate swap agreements was to increase net interest income by $10
million and $5 million for the three months ended September 30, 2009 and 2008, respectively, and
$27 million and $11 million for the nine months ended September 30, 2009 and 2008, respectively.
Information about interest rate swap agreements entered into for interest rate risk management
purposes summarized by type of financial instrument the swap agreements were intended to hedge
follows:
The Company utilizes commitments to sell residential and commercial real estate loans to hedge
the exposure to changes in the fair value of real estate loans held for sale. Such commitments
have generally been designated as fair value hedges. The Company also utilizes commitments to sell
real estate loans to offset the exposure to changes in fair value of certain commitments to
originate real estate loans for sale.
For derivatives designated and qualifying as fair value hedges, the fair values of the
derivatives and changes in the fair values of the hedged items are recorded in the Company’s
consolidated balance sheet with the corresponding gain or loss recognized in current earnings. The
difference between changes in the fair values of the interest rate swap agreements and the hedged
items represents hedge ineffectiveness and is recorded in “other revenues from operations” in the
consolidated statement of income. In a cash flow hedge, the effective portion of the derivative’s
unrealized gain or loss is initially recorded as a component of other comprehensive income and
subsequently reclassified into earnings when the forecasted transaction affects earnings. The
ineffective portion of the unrealized gain or loss is reported in “other revenues from operations”
immediately. The amount of hedge ineffectiveness recognized in the three- and nine month periods
ended September 2009 and 2008 was not material to the Company’s results of operations.
Derivative financial instruments used for trading purposes included interest rate contracts,
foreign exchange and other option contracts, foreign exchange forward and spot contracts, and
financial futures. Interest rate contracts entered into for trading purposes had notional values of
$14.7 billion and $14.6 billion at September 30, 2009 and December 31, 2008, respectively. The
notional amounts of foreign currency and other option and futures contracts entered into for
trading purposes aggregated $809 million and $713 million at September 30, 2009 and December 31,
2008, respectively.
Information about the fair values of derivative instruments in the Company’s
consolidated balance sheet and consolidated statement of income follows:
In addition, the Company also has commitments to sell and commitments to originate residential
and commercial real estate loans, which are considered derivatives. The Company designates certain
of the commitments to sell real estate loans as fair value hedges of real estate loans held for
sale. Changes in unrealized gains and losses are included in mortgage banking revenues and, in
general, are realized in subsequent periods as the related loans are sold and commitments
satisfied. Those unrealized gains and losses reflect both changes in the value of loans and commitments as well as changes in volume of the loans and commitments outstanding as of each respective period-end date. For the three months ended September 30, 2009, net unrealized pre-tax losses of
$22,672,000 related to commitments to sell real estate loans, net unrealized pre-tax gains of
$4,244,000 related to commitments to originate real estate loans and net unrealized pre-tax gains
of $8,308,000 related to hedged real estate loans held for sale were recognized in the consolidated
statement of income. For the three months ended September 30, 2008, net unrealized pre-tax gains
of $4,505,000 related to commitments to sell real estate loans, net unrealized pre-tax losses of
$5,834,000 related to commitments to originate real estate loans and net unrealized pre-tax gains
of $1,048,000 related to hedged real estate loans held for sale were recognized in the consolidated
statement of income. For the nine months ended September 30, 2009, net unrealized pre-tax gains of
$2,939,000 related to commitments to sell real estate loans, net unrealized pre-tax gains of
$5,654,000 related to commitments to originate real estate loans and net unrealized pre-tax losses
of $3,302,000 related to hedged real estate loans held for sale were recognized in the consolidated
statement of income. For the nine months ended September 30, 2008, net unrealized pre-tax gains of
$11,430,000 related to commitments to sell real estate loans, net unrealized pre-tax losses of
$4,952,000 related to commitments to originate real estate loans and net unrealized pre-tax losses
of $6,606,000 related to hedged real estate loans held for sale were recognized in the consolidated
statement of income.
The aggregate fair value of derivative financial instruments in a net liability position at
September 30, 2009 for which the Company was required to post collateral was $266 million. The
fair value of collateral posted for such instruments was $260 million.
The Company’s credit exposure with respect to the
estimated fair value as of September 30, 2009 of interest rate swap agreements used for managing interest rate risk has been substantially
mitigated through master netting arrangements with trading account interest rate contracts with the same counterparties as well as
counterparty postings of $54 million of collateral with the Company.
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| 4 | MARRIOTT INTERNATIONAL INC /MD/ |
We adopted FAS No. 161 on January 3, 2009, the first day of our 2009 fiscal year. FAS No. 161 enhances the current disclosure framework for derivative instruments and hedging activities. In this initial year of adoption, we have elected not to present earlier periods for comparative purposes. The designation of a derivative instrument as a hedge and its ability to meet the FAS No. 133 hedge accounting criteria determine how the change in fair value of the derivative instrument will be reflected in the Condensed Consolidated Financial Statements. A derivative qualifies for hedge accounting if, at inception, the derivative is expected to be highly effective in offsetting the underlying hedged cash flows or fair value and the documentation standards of FAS No. 133 are fulfilled at the time we enter into the derivative contract. A hedge is designated as a cash flow hedge, fair value hedge, or a net investment in foreign operations hedge based on the exposure being hedged. The asset or liability value of the derivative will change in tandem with its fair value. Changes in fair value, for the effective portion of qualifying hedges, are recorded in other comprehensive income (“OCI”). The derivative’s gain or loss is released from OCI to match the timing of the underlying hedged cash flows effect on earnings. We review the effectiveness of our hedging instruments on a quarterly basis, recognize current period hedge ineffectiveness immediately in earnings, and discontinue hedge accounting for any hedge that we no longer consider to be highly effective. We recognize changes in fair value for derivatives not designated as hedges or those not qualifying for hedge accounting in current period earnings. Upon termination of cash flow hedges, we release gains and losses from OCI based on the timing of the underlying cash flows, unless the termination results from the failure of the intended transaction to occur in the expected timeframe. Such untimely transactions require us to immediately recognize in earnings gains and losses previously recorded in OCI. Changes in interest rates, foreign exchange rates, and equity securities expose us to market risk. We manage our exposure to these risks by monitoring available financing alternatives, as well as through development and application of credit granting policies. We also use derivative instruments, including cash flow hedges, net investment in foreign operations hedges, fair value hedges, and other derivative instruments, as part of our overall strategy to manage our exposure to market risks associated with fluctuations in interest rates and foreign currency exchange rates. As a matter of policy, we only enter into transactions that we believe will be highly effective at offsetting the underlying risk, and we do not use derivatives for trading or speculative purposes. Our use of derivative instruments to manage market risks exposes us to the risk that a counterparty could default on a derivative contract. Our financial instrument counterparties are high-quality investment or commercial banks with significant experience with such instruments. We manage our exposure to counterparty risk by requiring specific minimum credit standards for our counterparties and by spreading our derivative contracts among diverse counterparties. As of September 11, 2009, we had derivative contracts outstanding with seven investment grade counterparties.
In the event that we were to default under a derivative contract or similar obligation, our derivative counterparty would generally have the right, but not the obligation, to require immediate settlement of some or all open derivative contracts at their then-current fair value. Although the netting terms of our derivative contracts vary by agreement, in a settlement following a default, the liability positions under some of these contracts would be netted against the asset positions with the same counterparty. At September 11, 2009, we had open derivative contracts in a liability or net liability position with a total fair value of $10 million. During the first three quarters of 2009, we used the following derivative instruments to mitigate our interest rate and foreign currency exchange rate risks: Cash Flow Hedges During 2008, we entered into interest rate swaps to manage interest rate risk associated with forecasted timeshare note sales. During 2008, eleven swaps were designated as cash flow hedges under FAS No. 133. We terminated nine of the eleven swaps in 2008 and recognized a $6 million loss in “Timeshare sales and services” revenue in our 2008 full-year income statement. The remaining two swaps became ineffective in the fourth quarter of 2008. We recognized a $12 million loss in “Timeshare sales and services” revenue in our full-year 2008 income statement and no longer accounted for them as cash flow hedges under FAS No. 133. We terminated these swaps in the first quarter of 2009 and recognized no additional gain or loss. During 2009 and fiscal years 2008 and 2007, we entered into forward foreign exchange contracts to hedge the risk associated with forecasted transactions for contracts and fees denominated in foreign currencies. These contracts have terms of less than three years. During the 2009 third quarter, we entered into foreign exchange option contracts to hedge the risk associated with forecasted transactions for contracts and fees denominated in foreign currencies. These contracts have terms of less than one year. Net Investment Hedges During 2009, we entered into forward foreign exchange contracts to manage our risk of currency exchange rate volatility associated with certain of our investments in foreign operations. The contracts offset the gains and losses associated with translation adjustments for various investments in foreign operations. Fair Value Hedges In 2003, we entered into an interest rate swap to address interest rate risk. Under this agreement, which has an aggregate notional amount of $92 million and matures in 2010, we receive a floating rate of interest and pay a fixed rate of interest. The swap modifies our interest rate exposure by effectively converting a note receivable with a fixed rate to a floating rate. We classify this swap as a fair value hedge under FAS No. 133 and we recognize the change in the fair value of the swap, as well as the change in the fair value of the underlying note receivable, in interest income. Due to the structure of the swap, the change in its fair value moves in tandem with the change in fair value of the underlying note receivable. The hedge is highly effective and, therefore, we reported no net gain or loss during the first three quarters of 2009. Derivatives not Designated as Hedging Instruments Under FAS No. 133 In certain note sale transactions, we use interest rate swaps to limit the variability in the value of the excess spread (or the difference between the loan portfolio average fixed coupon rate and the variable rate expected by the note investors) due to changing interest rates. Although we expect to receive the excess spread, we provide interest rate swaps for the benefit of the investors in the event the underlying notes do not perform as expected. The interest rate swaps used in some conduit note sale transactions move inversely to the movement in the excess spread and thus provide a natural hedge in the transaction. We use multiple interest rate swaps, including differential swaps, in some of the term asset backed securities transactions that largely offset one another to the extent that the sold notes prepay within expectations. Given the natural hedges provided by both of these types of transactions, we did not apply FAS No. 133 hedge accounting to these interest rate swaps. In certain deals, we sell a portfolio of fixed-coupon consumer loans to investors who require a variable rate of return. If unhedged, an increase in the variable rate of those deals would compress the excess spread; therefore, we enter into these interest rate swaps to preserve the excess spread at the level expected by the investors. At the end of the 2009 third quarter, we had six such swap agreements with expiration dates ranging from 2013 to 2022. Due to market conditions, we were required to enter into a differential swap, representing two of our six outstanding swaps, related to our retained interests for our 2009 first quarter note sale. We do not apply the standards of FAS No. 133 to some of our foreign exchange contracts because there is no material timing difference between the recognition of the gain or loss on the underlying asset or liability and the gain or loss on the derivative instrument. During the first three quarters of 2009 and for fiscal year 2008, we entered into these forward contracts to hedge foreign currency denominated net monetary assets and/or liabilities. We anticipate entering into similar contracts when these contracts expire in the fourth quarter of 2009. Examples of monetary assets and liabilities that we hedge include, but are not limited to, cash, receivables, payables, and debt. Pursuant to FAS No. 52, “Foreign Currency Translation,” the gains or losses on such forward contracts are computed by multiplying the foreign currency amount of the forward contract by the difference between the spot rate at the balance sheet date and the spot rate at the date of inception of the forward contract (or the spot rate last used to measure a gain or loss on that contract for an earlier period). The following tables summarize the fair value of our derivative instruments, and the effect of derivative instruments on our Condensed Consolidated Statements of Income and “Comprehensive income.” Fair Value of Derivative Instruments
The Effect of Derivative Instruments on the Condensed Consolidated Statement of Income
The Effect of Derivative Instruments on the Statement of Comprehensive Income (1), (2)
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| 5 | MICROCHIP TECHNOLOGY INC | (12) Derivative Instruments The Company has international operations and is thus subject to foreign currency rate fluctuations. To manage the risk of changes in foreign currency rates, the Company periodically enters into derivative contracts comprised of foreign currency forward contracts to hedge its asset and liability foreign currency exposure and a portion of its foreign currency operating expenses. Approximately 99% of the Company's sales are U.S. Dollar denominated. To date, the exposure related to foreign exchange rate volatility has not been material to the Company's operating results. As of September 30, 2009 and March 31, 2009, the Company had no foreign currency derivatives outstanding. The Company recognized an immaterial amount of net realized gains on foreign currency derivatives in the six months ended September 30, 2009. |
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| 6 | NEWMONT MINING CORP /DE/ |
NOTE 16 DERIVATIVE INSTRUMENTS
The Company is exposed to certain financial and market risks relating to its ongoing business
operations. The primary risks managed by using derivative instruments are foreign currency exchange
risk, diesel price risk, and interest rate risk. In accordance with hedge accounting guidance, the
Company designated currency fixed forward and option contracts as cash flow hedges, diesel forward
contracts as cash flow hedges, treasury rate lock contracts as cash flow hedges of proceeds
realized from debt issuances, and interest rate swap contracts as fair value hedges of a fixed-rate
borrowing. All of the derivative instruments were transacted for risk management purposes and
qualify as hedging instruments. The maximum period over which hedged forecasted transactions are
expected to occur is three years.
Cash Flow Hedges
Foreign Currency Contracts
Newmont utilizes foreign currency contracts to reduce the variability of the US dollar amount
of forecasted foreign currency expenditures caused by changes in currency rates. Newmont hedges up
to 80% of the Company’s IDR denominated operating expenditures which results in a blended IDR/$
rate realized each period. The hedging instruments are forward purchase contracts with expiration
dates ranging up to one year from the date of issue. The principal hedging objective is reduction
in the volatility of realized period-on-period IDR/$ rates. For the three months ended September
30, 2009 and 2008, the IDR/$ forward purchase contracts reduced Batu Hijau Costs applicable to
sales by $1. For the nine months ended September 30, 2009 and 2008, the IDR/$ forward purchase
contracts increased Batu Hijau Costs applicable to sales by $1 and reduced Batu Hijau Costs
applicable to sales by $2, respectively. At September 30, 2009, the Company has hedged 20% of its
expected remaining 2009 IDR operating expenditures.
The Company hedges up to 85% of the Company’s A$ denominated operating expenditures with
forward contracts that have expiration dates ranging up to three years from the date of issue. The
principal hedging objective is reduction in the volatility of realized period-on-period $/A$ rates.
Each month, fixed forward contracts are obtained to hedge 1/36th of the forecasted
monthly A$ operating cost exposure in the rolling three-year hedge period resulting in a blended
$/A$ rate realized. For the three months ended September 30, 2009 and 2008, the A$ operating
hedging instruments reduced Australia/New Zealand Costs applicable to sales by $4 and $nil,
respectively. For the nine months ended September 30, 2009 and 2008, the A$ operating hedging
instruments increased Australia/New Zealand Costs applicable to sales by $21 and reduced
Australia/New Zealand Costs applicable to sales by $5, respectively. At September 30, 2009, the
Company has hedged 78% of its expected remaining 2009 A$ operating expenditures, and 53%, 30% and
9% of its expected 2010, 2011 and 2012 A$ operating expenditures, respectively.
The Company hedges up to 75% of the Company’s NZ$ denominated operating expenditures with
forward contracts that have expiration dates ranging up to two years from the date of issue. The
principal hedging objective is reduction in the volatility of realized period-on-period $/NZ$
rates. Each month, fixed forward contracts are obtained to hedge 1/24th of the
forecasted monthly NZ$ operating cost exposure in the rolling two-year hedge period resulting in a
blended $/NZ$ rate realized. For the three months ended September 30, 2009 and 2008, the NZ$
operating hedging instruments reduced Australia/New Zealand Costs applicable to sales by $nil. For
the nine months ended September 30, 2009 and 2008, the NZ$ operating hedging instruments increased
Australia/New Zealand Costs applicable to sales by $3 and $nil, respectively. At September 30,
2009, the Company has hedged 68% of its expected remaining 2009 NZ$ operating expenditures, and 42%
and 9% of its expected 2010 and 2011 NZ$ operating expenditures, respectively.
The Company hedges up to 95% of the Company’s A$ denominated capital expenditures related to
the construction of Boddington. The hedging instruments consist of a series of fixed forward
contracts with expiration dates ranging up to one year from the date of issue. The realized gains
and losses associated with the capital expenditure hedge program will impact Amortization during
future periods in which the Boddington assets are placed into service. At September 30, 2009, the
Company has hedged 33% of its expected remaining A$ denominated Boddington capital expenditures.
All of the foreign currency contracts were designated as cash flow hedges, and as such, the
effective portion of unrealized changes in market value have been recorded in Accumulated other
comprehensive income (loss) and are recorded in earnings during the period in which the hedged
transaction affects earnings. Gains and losses on the derivative representing hedge ineffectiveness
are recognized in current earnings.
Newmont had the following foreign currency derivative contracts outstanding at September 30,
2009:
Diesel Fixed Forward Contracts
Newmont hedges up to 66% of its operating cost exposure related to diesel prices of fuel
consumed at its Nevada operations to reduce the variability in realized diesel prices. The hedging
instruments consist of a series of financially settled fixed forward contracts with expiration
dates of up to two years from the date of issue. For the three months ended September 30, 2009 and
2008, the Nevada diesel hedge program increased Nevada Costs applicable to sales by $2 and $nil,
respectively. For the nine months ended September 30, 2009 and 2008, the Nevada diesel hedge
program increased Nevada Costs applicable to sales by $13 and $nil, respectively. The contracts
have been designated as cash flow hedges of future diesel purchases, and as such, the effective
portion of unrealized changes in the market value have been recorded in Accumulated other
comprehensive income (loss) and are recorded in earnings during the period in which the hedged
transaction affects earnings. Gains and losses from hedge ineffectiveness are recognized in current
earnings. At September 30, 2009, the Company has hedged 64% of its expected remaining 2009 Nevada
diesel expenditures, and 43% and 14% of its expected 2010 and 2011 Nevada diesel expenditures,
respectively.
Newmont had the following diesel derivative contracts outstanding at September 30, 2009:
Treasury Rate Lock Contracts
In connection with the 2019 and 2039 notes issued in September 2009, Newmont acquired treasury
rate lock contracts to reduce the variability of the proceeds realized from the bond issuances. The
treasury rate locks resulted in $6 and $5 unrealized gains for the 2019 and 2039 notes,
respectively. The Company previously acquired treasury rate locks in connection with the issuance
of the 2035 notes that resulted in a $10 unrealized loss. The gains/losses from these contracts
will be recognized over the terms of the respective notes.
Fair Value Hedges
Interest Rate Swap Contracts
At September 30, 2009, Newmont had $100 fixed to floating swap contracts designated as a hedge
against a portion of its 8 5/8% debentures due 2011. The interest rate swap contracts provide
balance to the Company’s mix of fixed and floating rate debt. Under the hedge contract terms, the
Company receives fixed-rate interest payments at 8.625% and pays floating-rate interest amounts
based on periodic London Interbank Offered Rate (“LIBOR”) settings plus a spread, ranging from
2.60% to 3.49%. The interest rate swap contracts were designated as fair value hedges, and as such,
changes in fair value have been recorded in income in each period, consistent with recording
changes to the mark-to-market value of the underlying hedged liability in income. Changes in the
mark-to-market value of the effective portion of the interest rate swap contracts are recognized as
a component of Interest expense, net. The hedge contracts decreased Interest expense, net by $1 and
$nil for the three months ended September 30, 2009 and 2008, respectively, and decreased Interest
expense, net by $3 and $1 for the nine months ended September 30, 2009 and 2008, respectively. For
the three months ended September 30, 2009 and 2008, losses of $1 and $nil were included in Other
income, net for the ineffective portion of derivative instruments designated as fair value hedges,
respectively. For the nine months ended September 30, 2009 and 2008, losses of $2 and $nil,
respectively, were included in Other income, net for the ineffective portion of derivative
instruments designated as fair value hedges.
Derivative Instrument Fair Values
Newmont had the following derivative instruments designated as hedges with fair values at
September 30, 2009 and December 31, 2008:
The following tables show the location and amount of gains (losses) reported in the
Company’s Condensed Consolidated Financial Statements related to the Company’s cash flow and fair
value hedges and the gains (losses) recorded for the hedged item related to the fair value hedges.
The amount to be reclassified from Accumulated other comprehensive income (loss), net of
tax to income for derivative instruments during the next 12 months is a gain of approximately $56.
Provisional Copper and Gold Sales
LME copper prices averaged $2.65 per pound during the three months ended September 30, 2009,
compared with the Company’s recorded average provisional price of $2.73 per pound before
mark-to-market gains and treatment and refining charges. LME copper prices averaged $2.12 per pound
during the nine months ended September 30, 2009, compared with the Company’s recorded average
provisional price of $2.23 per pound before mark-to-market gains and treatment and refining
charges. The applicable forward copper price at the end of the quarter was $2.79 per pound. During
the three months ended September 30, 2009, increasing copper prices resulted in a provisional
pricing mark-to-market gain of $48 ($0.34 per pound). During the nine months ended September 30,
2009, changes in copper prices resulted in a provisional pricing mark-to-market gain of $112 ($0.33
per pound). At September 30, 2009, the Company
had copper sales of 140 million pounds priced at an average of $2.79 per pound, subject to
final pricing over the next several months.
The average London P.M. gold fix was $960 per ounce during the three months ended September
30, 2009, compared with the Company’s recorded average provisional gold price of $961 per ounce
before mark-to-market gains and treatment and refining charges. The average London P.M. gold fix
was $931 per ounce during the nine months ended September 30, 2009, compared with the Company’s
recorded average provisional gold price of $930 per ounce before mark-to-market gains and treatment
and refining charges. The applicable forward gold price at the end of the quarter was $996 per
ounce. During the three months ended September 30, 2009, changes in gold prices resulted in a
provisional pricing mark-to-market gain of $5 ($3 per ounce). During the nine months ended
September 30, 2009, changes in gold prices resulted in a provisional pricing mark-to-market gain of
$6 ($1 per ounce). At September 30, 2009, the Company had gold sales of 96,000 ounces priced at an
average of $996 per ounce, subject to final pricing over the next several months.
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| 7 | OWENS ILLINOIS INC /DE/ |
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| 8 | PLAINS EXPLORATION & PRODUCTION CO | Note 3—Derivative Instruments General We are exposed to various market risks, including volatility in oil and gas commodity prices, interest rates and foreign currency exchange rates. The level of derivative activity we engage in depends on our view of market conditions, available derivative prices and operating strategy. A variety of derivative instruments, such as swaps, collars, puts, calls and various combinations of these instruments, may be utilized to manage our exposure to the volatility of oil and gas commodity prices. Currently, we do not use derivatives to manage our interest rate or foreign currency risk. The interest rate on our senior revolving credit facility is variable, while our senior notes are fixed interest rates, thereby mitigating our interest rate risk exposure. Our foreign currency risk in Vietnam has been minimal due to the size of our operations. All derivative instruments are recorded on the balance sheet at fair value. If a derivative does not qualify as a hedge or is not designated as a hedge, the changes in fair value, both realized and unrealized, are recognized in our income statement as a gain or loss on mark-to-market derivative contracts. Cash flows are only impacted to the extent the actual settlements under the contracts result in making a payment to or receiving a payment from the counterparty. We do not currently use hedge accounting for our derivative instruments. Cash settlements with respect to derivatives, which contain a significant financing element, are reflected as financing activities in the Statement of Cash Flows. Cash settlements with respect to derivatives that are not accounted for under hedge accounting and do not have a significant financing element are reflected as investing activities in the Statement of Cash Flows. For put options, we pay a premium to the counterparty in exchange for the sale of a put option. If the index price is below the strike price of the put option, we receive the difference between the strike price and the index price multiplied by the contract volumes less the premium. If the market price settles at or above the strike price of the put option, we pay only the option premium. In a typical collar transaction, if the floating price based on a market index is below the floor price in the derivative contract, we receive from the counterparty an amount equal to this difference multiplied by the specified volume. If the floating price exceeds the floor price and is less than the ceiling price, no payment is required by either party. If the floating price exceeds the ceiling price, we must pay the counterparty an amount equal to the difference multiplied by the specified quantity. We may pay a premium to the counterparty in exchange for a certain floor or ceiling. Any premium reduces amounts we would receive under the floor or increases amounts we would pay above the ceiling. If the floating price exceeds the floor price or is less than the ceiling price, then no payment, other than the premium, is required. If we have less production than the volumes specified under the collar transaction when the floating price exceeds the ceiling price, we must make payments against which there are no offsetting revenues from production.
In the first quarter of 2009, we monetized our 2009 and 2010 crude oil put option contracts on 40,000 BOPD with weighted average strike prices of $106.16 per barrel and $111.49 per barrel, respectively. In addition, we terminated our crude oil swaps on 20,000 BOPD in 2009. As a result of this monetization, we received approximately $1.1 billion in net proceeds, which we used to reduce the outstanding balance on our senior revolving credit facility and for other general corporate purposes. See Note 4 – Fair Value Measurements of Assets and Liabilities, for additional discussion on the fair value measurement of our derivative contracts. As of September 30, 2009, we had the following outstanding commodity derivative contracts, all of which settle monthly, and none of which were designated as hedging instruments:
Balance Sheet At September 30, 2009 and December 31, 2008, we had the following outstanding commodity derivative contracts, none of which were designated as hedging instruments, recorded in our consolidated balance sheets (in thousands):
The following table provides supplemental information to reconcile the fair value of our derivative assets to our consolidated balance sheets at September 30, 2009 and December 31, 2008, considering the deferred premiums and accrued interest and related settlement (payable) receivable amounts which are not included in the fair value amounts disclosed in the table above (in thousands):
We present the fair value of our derivative contracts on a net basis where the right of offset is provided for in our counterparty agreements. Income Statement During the three and nine months ended September 30, 2009 and 2008, pre-tax amounts recognized in our consolidated statements of income were as follows (in thousands):
Cash Payments and Receipts During the nine months ended September 30, 2009 and 2008, cash receipts (payments) for derivative contracts were as follows (in thousands):
Credit Risk We do not require collateral or other security to support derivative instruments subject to credit risk. However, the agreements with each of the counterparties to our derivative instruments contain netting provisions within the agreements. If a default occurs under the agreements, the non-defaulting party can offset the amount payable to the defaulting party under the derivative contracts with the amount due from the defaulting party under the derivative contracts. As a result of the netting provisions under the agreements, our maximum amount of loss due to credit risk is limited to the net amounts due to and from the counterparties under the derivative contracts. The maximum amount of loss due to credit risk that we would have incurred if all the counterparties to our derivative contracts failed to perform according to the terms of the derivative contracts at September 30, 2009 was $37.8 million. Contingent Features The counterparties to our commodity derivative contracts consist of eight financial institutions. Our counterparties or their affiliates are generally also lenders under our senior revolving credit facility. As a result, the counterparties to our derivative agreements share in the collateral supporting our senior revolving credit facility. Therefore, we are not generally required to post additional collateral under our derivative agreements. Certain of our derivative agreements contain provisions that require cross defaults and acceleration of those instruments to any material debt. If we were to default on any of our material debt agreements, it would be a violation of these provisions, and the counterparties to the derivative instruments could request immediate payment on derivative instruments that are in a net liability position at that time. As of September 30, 2009, we were in a net liability position with three of the counterparties to our derivative instruments, totaling $24.4 million. |
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