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8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
ÌýÌýÌýÌýÌýÌýÌýÌýWe are exposed to market risks, such as changes in interest rates, foreign exchange rates and commodity pricing risks. From time to time, we enter into transactions, including transactions involving derivative instruments, to manage certain of these exposures.
ÌýÌýÌýÌýÌýÌýÌýÌýAll derivatives, whether designated in hedging relationships or not, are recorded on our balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and the hedged items are recognized in earnings. If the derivative is designated as a cash flow hedge, changes in the fair value of the derivative are recorded in accumulated other comprehensive (loss) income, to the extent effective, and will be recognized in the income statement when the hedged item affects earnings. To the extent applicable, we perform effectiveness assessments in order to use hedge accounting at each reporting period. For a derivative that does not qualify as a hedge, changes in fair value are recognized in earnings.
ÌýÌýÌýÌýÌýÌýÌýÌýWe also hedge our net investment in certain European operations. Changes in the fair value of the hedge in the net investment of certain European operations are recorded in accumulated other comprehensive (loss) income.
ÌýÌýÌýÌýÌýÌýÌýÌýOur cash flows and earnings are subject to fluctuations due to exchange rate variation. Our revenues and expenses are denominated in various foreign currencies. From time to time, we may enter into foreign currency derivative instruments to minimize the short-term impact of movements in foreign currency rates. Where practicable, we generally net multicurrency cash balances among our subsidiaries to help reduce exposure to foreign currency exchange rates. Certain other exposures may be managed from time to time through financial market transactions, principally through the purchase of spot or forward foreign exchange contracts (generally with maturities of one year or less). We do not hedge our foreign currency exposures in a manner that would eliminate the effect of changes in exchange rates on our cash flows and earnings. As of SeptemberÌý30, 2011, we had approximately $275Ìýmillion in notional amount (in U.S. dollar equivalents) outstanding in forward foreign currency contracts.
ÌýÌýÌýÌýÌýÌýÌýÌýOn DecemberÌý9, 2009, we entered into a five-year interest rate contract to hedge the variability caused by monthly changes in cash flow due to associated changes in LIBOR under our Senior Credit Facilities. The notional value of the contract is $50Ìýmillion and was designated as a cash flow hedge. The effective portion of the changes in the fair value of the swap was recorded in other comprehensive loss. We will pay a fixed 2.6% on the hedge and receive the one-month LIBOR rate. As of SeptemberÌý30, 2011, the fair value of the hedge was $3Ìýmillion and was recorded in other noncurrent liabilities.
ÌýÌýÌýÌýÌýÌýÌýÌýOn JanuaryÌý19, 2010, we entered into a five-year interest rate contract to hedge the variability caused by monthly changes in cash flow due to associated changes in LIBOR under our Senior Credit Facilities. The notional value of the contract is $50Ìýmillion and was designated as a cash flow hedge. The effective portion of the changes in the fair value of the swap was recorded in other comprehensive loss. We will pay a fixed 2.8% on the hedge and receive the one-month LIBOR rate. As of SeptemberÌý30, 2011, the fair value of the hedge was $3Ìýmillion and was recorded in other noncurrent liabilities.
ÌýÌýÌýÌýÌýÌýÌýÌýOn SeptemberÌý1, 2011, we entered into a $50Ìýmillion forward interest rate contract that will begin in December 2014 with maturity in April 2017 and a $50Ìýmillion forward interest rate contract that will begin in January 2015 with maturity in April 2017. These two forward contracts are to hedge the variability caused by monthly changes in cash flow due to associated changes in LIBOR under our Senior Credit Facilities once our existing interest rate hedges mature. These swaps are designated as a cash flow hedges and the effective portion of the changes in the fair value of the swaps were recorded in other comprehensive income. Both interest rate contracts will pay a fixed 2.5% on the hedge and receive the one-month LIBOR rate once the contracts begin in 2014 and 2015, respectively. As of SeptemberÌý30, 2011, the combined fair value of these two hedges was $1Ìýmillion and was recorded in other noncurrent liabilities on the accompanying condensed consolidated balance sheets (unaudited).
ÌýÌýÌýÌýÌýÌýÌýÌýBeginning in 2009, Arabian Amines Company entered into a 12Ìýyear floating to fixed interest rate contract providing to Arabian Amines Company LIBOR interest payments for a fixed payment of 5.02%. In connection with the consolidation of Arabian Amines Company as of JulyÌý1, 2010, the interest rate contract is now consolidated by ÀÖÌìÌÃfun88(ÖйúÇø)¹Ù·½ÍøÕ¾ International. See "NoteÌý5. Variable Interest Entities." The notional amount of the hedge as of SeptemberÌý30, 2011 was $40Ìýmillion and the interest rate contract was not designated as a cash flow hedge. As of SeptemberÌý30, 2011, the fair value of the hedge was $6Ìýmillion and was recorded in other noncurrent liabilities on the accompanying condensed consolidated balance sheets (unaudited). For the three and nine months ended SeptemberÌý30, 2011, we recorded interest expense of $2Ìýmillion each.
ÌýÌýÌýÌýÌýÌýÌýÌýIn 2009, Sasol-ÀÖÌìÌÃfun88(ÖйúÇø)¹Ù·½ÍøÕ¾ entered into derivative transactions to hedge the variable interest rate associated with its local credit facility. These derivative rate hedges include a floating to fixed interest rate contract providing Sasol-ÀÖÌìÌÃfun88(ÖйúÇø)¹Ù·½ÍøÕ¾ with EURIBOR interest payments for a fixed payment of 3.62% and a cap for future periods with a strike price of 3.62%. In connection with the consolidation of Sasol-ÀÖÌìÌÃfun88(ÖйúÇø)¹Ù·½ÍøÕ¾ as of AprilÌý1, 2011, the interest rate contract is now included in our consolidated results. See "NoteÌý5. Variable Interest Entities." The notional amount of the hedge as of SeptemberÌý30, 2011 was €54Ìýmillion (approximately $74Ìýmillion) and the derivative transactions do not qualify for hedge accounting. As of SeptemberÌý30, 2011, the fair value of this hedge was €1Ìýmillion (approximately $2Ìýmillion) and was recorded in other noncurrent liabilities on the accompanying condensed consolidated balance sheets (unaudited).
ÌýÌýÌýÌýÌýÌýÌýÌýIn conjunction with the issuance of $350Ìýmillion of 8.625% senior subordinated notes due 2020, we entered into cross-currency interest rate contracts with three counterparties. On MarchÌý17, 2010, we paid $350Ìýmillion to these counterparties and received €255Ìýmillion from these counterparties and at maturity on MarchÌý15, 2015 we are required to pay €255Ìýmillion and will receive $350Ìýmillion. On MarchÌý15 and SeptemberÌý15 of each year, we will receive U.S. dollar interest payments of approximately $15Ìýmillion (equivalent to an annual rate of 8.625%) and make interest payments of approximately €11Ìýmillion (equivalent to an annual rate of approximately 8.41%). This swap is designated as a hedge of net investment for financial reporting purposes. As of SeptemberÌý30, 2011, the fair value of this swap was $19Ìýmillion and was recorded in noncurrent assets in our condensed consolidated balance sheets (unaudited). For the three months and nine months ended SeptemberÌý30, 2011, the effective portion of the changes in the fair value of $24Ìýmillion and nil, respectively, was recorded as a gain in other comprehensive income.
ÌýÌýÌýÌýÌýÌýÌýÌýAs of and for the three and nine months ended SeptemberÌý30, 2011, the changes in fair value of the realized gains (losses) recorded in the accompanying condensed consolidated statements of operations (unaudited) of our other outstanding foreign currency rate hedging contracts and derivatives were not considered significant.
ÌýÌýÌýÌýÌýÌýÌýÌýA significant portion of our intercompany debt is denominated in euros. We also finance certain of our non-U.S. subsidiaries with intercompany loans that are, in many cases, denominated in currencies other than the entities' functional currency. We manage the net foreign currency exposure created by this debt through various means, including cross-currency swaps, the designation of certain intercompany loans as permanent loans because they are not expected to be repaid in the foreseeable future ("permanent loans") and the designation of certain debt and swaps as net investment hedges.
ÌýÌýÌýÌýÌýÌýÌýÌýForeign currency transaction gains and losses on intercompany loans that are not designated as permanent loans are recorded in earnings. Foreign currency transaction gains and losses on intercompany loans that are designated as permanent loans are recorded in other comprehensive loss. From time to time, we review such designation of intercompany loans.
ÌýÌýÌýÌýÌýÌýÌýÌýFrom time to time, we review our non-U.S. dollar denominated debt and swaps to determine the appropriate amounts designated as hedges. As of SeptemberÌý30, 2011, we have designated €304Ìýmillion (approximately $414Ìýmillion) of euro-denominated debt and cross-currency interest rate swap as a hedge of our net investments. For the three and nine months ended SeptemberÌý30, 2011, the amount of gain (loss) recognized on the hedge of our net investments was $28Ìýmillion and $(7) million and was recorded as a gain (loss) in other comprehensive income. As of SeptemberÌý30, 2011, we had €1,133Ìýmillion (approximately $1,543Ìýmillion) in net euro assets.
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