Snapple 2008 Annual Report Download - page 123

Additionally, DPS mitigates the exposure to volatility in the prices of certain commodities the Company uses
in its production process through the use of futures contracts and supplier pricing agreements. The intent of
contracts and agreements is to provide predictability in the Company’s operating margins and its overall cost
structure. The Company enters into futures contracts that economically hedge certain of its risks, although hedge
accounting may not apply. In these cases, a natural hedging relationship exists in which changes in the fair value of
the instruments act as an economic offset to changes in the fair value of the underlying item(s). Changes in the fair
value of these instruments are recorded in net income throughout the term of the derivative instrument and are
reported in the same line item of the Consolidated Statements of Operations as the hedged transaction. At
December 31, 2008, the fair value of DPS’ economic hedges related to commodities was a liability of $8 million and
was recorded in accounts payable and accrued expenses in the Consolidated Balance Sheet.
For more information on the valuation of these derivative instruments, see Note 19.
19. Fair Value of Financial Instruments
Effective January 1, 2008, the Company adopted SFAS 157, which defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. SFAS 157 provides a framework for measuring fair value and establishes a three-level hierarchy
for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability. The three-
level hierarchy for disclosure of fair value measurements is as follows:
Level 1 - Quoted market prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs such as quoted prices for similar assets or liabilities in active markets; quoted
prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations in
which all significant inputs and significant value drivers are observable in active markets.
Level 3 - Valuations with one or more unobservable significant inputs that reflect the reporting entity’s
own assumptions.
FSP FAS 157-2 delayed the effective date for all nonfinancial assets and liabilities until January 1, 2009, except
those that are recognized or disclosed at fair value in the financial statements on a recurring basis. The following
table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of
December 31, 2008 (in millions):
Level 1 Level 2 Level 3
Commodity futures ........................................ $— $ 8 $—
Interest rate swaps ......................................... — 32 —
Total liabilities .......................................... $— $40 $—
The estimated fair values of other financial liabilities not measured at fair value on a recurring basis at
December 31, 2008, are as follows (in millions):
Carrying Amount Fair Value
December 31, 2008
Long term debt — 6.12% Senior unsecured notes ................ 250 248
Long term debt — 6.82% Senior unsecured notes ................ 1,200 1,184
Long term debt — 7.45% Senior unsecured notes ................ 250 249
Long term debt — Senior unsecured term loan A facility ........... 1,805 1,606
The fair value amounts for cash and cash equivalents, accounts receivable, net and accounts payable and
accrued expenses approximate carrying amounts due to the short maturities of these instruments. The fair value of
long term debt as of December 31, 2008, was estimated based on quoted market prices for publicly traded securities.
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DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)