International Paper 2014 Annual Report Download - page 107

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71
INTEREST RATE RISK MANAGEMENT
Our policy is to manage interest cost using a mixture of
fixed-rate and variable-rate debt. To manage this risk
in a cost-efficient manner, we enter into interest rate
swaps whereby we agree to exchange with the
counterparty, at specified intervals, the difference
between fixed and variable interest amounts calculated
by reference to a notional amount.
Interest rate swaps that meet specific accounting
criteria are accounted for as fair value or cash flow
hedges. For fair value hedges, the changes in the fair
value of both the hedging instruments and the
underlying debt obligations are immediately recognized
in interest expense. For cash flow hedges, the effective
portion of the changes in the fair value of the hedging
instrument is reported in Accumulated other
comprehensive income (“AOCI”) and reclassified into
interest expense over the life of the underlying debt.
The ineffective portion for both cash flow and fair value
hedges, which is not material for any year presented,
is immediately recognized in earnings.
FOREIGN CURRENCY RISK MANAGEMENT
We manufacture and sell our products and finance
operations in a number of countries throughout the
world and, as a result, are exposed to movements in
foreign currency exchange rates. The purpose of our
foreign currency hedging program is to manage the
volatility associated with the changes in exchange
rates.
To manage this exchange rate risk, we have historically
utilized a combination of forward contracts, options and
currency swaps. Contracts that qualify are designated
as cash flow hedges of certain forecasted transactions
denominated in foreign currencies. The effective
portion of the changes in fair value of these instruments
is reported in AOCI and reclassified into earnings in the
same financial statement line item and in the same
period or periods during which the related hedged
transactions affect earnings. The ineffective portion,
which is not material for any year presented, is
immediately recognized in earnings.
The change in value of certain non-qualifying
instruments used to manage foreign exchange
exposure of intercompany financing transactions and
certain balance sheet items subject to revaluation is
immediately recognized in earnings, substantially
offsetting the foreign currency mark-to-market impact
of the related exposure.
COMMODITY RISK MANAGEMENT
Certain raw materials used in our production processes
are subject to price volatility caused by weather, supply
conditions, political and economic variables and other
unpredictable factors. To manage the volatility in
earnings due to price fluctuations, we may utilize swap
contracts. These contracts are designated as cash flow
hedges of forecasted commodity purchases. The
effective portion of the changes in fair value for these
instruments is reported in AOCI and reclassified into
earnings in the same financial statement line item and
in the same period or periods during which the hedged
transactions affect earnings. The ineffective and non-
qualifying portions, which are not material for any year
presented, are immediately recognized in earnings.
The notional amounts of qualifying and non-qualifying
instruments used in hedging transactions were as
follows:
In millions
December
31, 2014
December
31, 2013
Derivatives in Cash Flow
Hedging Relationships:
Foreign exchange contracts
(Sell / Buy; denominated in
sell notional): (a)
Brazilian real / U.S. dollar -
Forward 166 502
British pounds / Brazilian
real - Forward 517
European euro / Brazilian
real - Forward 927
European euro / Polish zloty
- Forward 280 252
U.S. dollar / Brazilian real -
Forward 125 290
U.S. dollar / Brazilian real -
Zero-cost collar —18
Derivatives in Fair Value
Hedging Relationships:
Interest rate contracts (in
USD) 230 175
Derivatives Not Designated as
Hedging Instruments:
Foreign exchange contracts
(Sell / Buy; denominated in
sell notional):
Indian rupee / U.S. dollar 43 157
Mexican peso / U.S. dollar 187 —
U.S. dollar / Brazilian real 11 —
(a) These contracts had maturities of three years or less as of
December 31, 2014.
The following table shows gains or losses recognized
in AOCI, net of tax, related to derivative instruments:
Gain (Loss)
Recognized in AOCI on Derivatives
(Effective Portion)
In millions 2014 2013 2012
Foreign exchange
contracts $10$—$16
Natural gas contracts ——(1)
Total $10$—$15