Notes to Consolidated Financial Statements

Environmental Litigation liabilities related to property owned by Corning based on expert analysis and continual monitoring by both internal and external consultants. Corning has been named by the Environmental Protection Agency At December 31, 2019 and 2018, Corning had accrued approximately (the Agency) under the Superfund Act, or by state governments under $41 million (undiscounted) and $30 million (undiscounted), respectively, similar state laws, as a potentially responsible party for 15 active for the estimated liability for environmental cleanup and related hazardous waste sites. Under the Superfund Act, all parties who may litigation. Based upon the information developed to date, management have contributed any waste to a hazardous waste site, identified by the believes that the accrued reserve is a reasonable estimate of the Agency, are jointly and severally liable for the cost of cleanup unless Company’s liability and that the risk of an additional loss in an amount the Agency agrees otherwise. It is Corning’s policy to accrue for its materially higher than that accrued is remote. estimated liability related to Superfund sites and other environmental

14. Hedging Activities

Corning is exposed to interest rate and foreign currency risks due to the Corning uses regression analysis or critical term match method movement of these rates. to assess initial effectiveness. Following the inception of a hedging relationship, hedge effectiveness is assessed quarterly based The areas in which exchange rate fluctuations affect us include: on qualitative factors. Corning defers gains and losses related to the • Financial instruments and transactions denominated in foreign cash flow hedges into accumulated other comprehensive loss on the currencies, which impact earnings; and consolidated balance sheets until the hedged item impacts earnings. At December 31, 2019, the amount expected to be reclassified into earnings • The translation of net in foreign subsidiaries for which the within the next 12 months is a pre-tax net gain of $30 million. functional currency is not the U.S. dollar, which impacts our net equity. Our most significant foreign currency exposures relate to the Japanese yen, South Korean won, new Taiwan dollar, Chinese yuan, the euro Undesignated Hedges and British pound. We seek to mitigate the impact of exchange rate Corning also uses OTC foreign exchange forward and contracts movements in our income statement by using over-the-counter (OTC) that are not designated as hedged instruments. These contracts are instruments including foreign exchange forward and option used to offset economic currency risks. The undesignated hedges limit contracts. In general, these hedge expirations coincide with the timing exposures to foreign functional currency fluctuations related to certain of the underlying foreign currency commitments and transactions. subsidiaries’ monetary assets, monetary liabilities and net earnings in We are exposed to potential losses in the event of non-performance by foreign currencies. our counterparties to these derivative contracts. However, we minimize A significant portion of the Company’s non-U.S. revenues and expenses this risk by maintaining our portfolio with a diverse group of highly-rated are denominated in Japanese yen, South Korean won, new Taiwan major financial institutions. We do not expect to record any losses as a dollar, Chinese yuan and euro. When these revenues and expenses result of such counterparty default. Neither we nor our counterparties are translated back to U.S. dollars, the Company is exposed to foreign are required to post collateral for these financial instruments. The exchange rate movements. To protect translated earnings against Company qualified for and elected the end-user exception to the movements in these currencies, the Company has entered into a series mandatory swap clearing requirement of the Dodd-Frank Act. of average rate forwards and other derivative instruments. The Company continued its foreign exchange hedge program in 2019 Cash Flow Hedges and entered into a series of average rate forwards, and purchased put or call options. These will hedge a significant portion of its projected yen Our cash flow hedging activities utilize OTC foreign exchange forward exposure for the period of 2020-2023. As of December 31, 2019, the U.S. contracts to reduce the risk that movements in exchange rates will dollar gross notional value of the yen average rate forwards program is adversely affect the net cash flows resulting from the sale of products to $7.7 billion and $2.5 billion for zero-cost collars and purchased put or call customers and purchases from suppliers. The total gross notional values options. The average rate forward program was also expanded to partially for foreign currency cash flow hedges are $2.1 billion and $0.4 billion at hedge the impact of the South Korean won, Chinese yuan, euro, new December 31, 2019 and 2018, respectively. The majority of our foreign Taiwan dollar and British pound translation on the Company’s projected exchange forward contracts hedge a portion of the Company’s exposure . As of December 31, 2019, these average rate forwards have to the Japanese yen denominated sales with maturities spanning a total notional value of $2.0 billion. The entire average rate forward the years 2020-2023 and with gross notional values of $1.5 billion at program will settle net without obligation to deliver Japanese yen, December 31, 2019. South Korean won, Chinese yuan, euro and British pound. With respect 2019 ANNUAL REPORTCORNING Our cash flow hedging activity also uses interest rate derivatives to the zero-cost collars, the gross notional amount includes the value of including Treasury rate lock agreements to reduce the risk of increases both put and call options. However, due to the nature of the zero-cost in benchmark interest rates on the probable issuance of debt. In the collars, only the put or the call option can be exercised at maturity. second quarter of 2018, the Company entered into Treasury rate lock The fair values of these derivative contracts are recorded as either assets agreements to hedge against the variability in cash flows due to changes (gain position) or liabilities (loss position) on the consolidated balance in the benchmark interest rate related to an anticipated debt issuance. sheets. Changes in the fair value of the derivative contracts are recorded The instruments were designated as cash flow hedges, and were settled currently in earnings in the translated earnings contract gain (loss), net on October 31, 2018 concurrent with the debt issuance. The settlement line of the consolidated statements of income (loss). amount of $16 million received is released from accumulated other comprehensive income into earnings when the corresponding interest expense occurs each period.

68 69