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DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
10. Derivatives
DPS is exposed to market risks arising from adverse changes in:
• interest rates;
• foreign exchange rates; and
• commodity prices, affecting the cost of raw materials.
The Company manages these risks through a variety of strategies, including the use of various interest rate derivative contracts,
foreign exchange forward contracts, commodity futures contracts and supplier pricing agreements. DPS does not hold or issue
derivative financial instruments for trading or speculative purposes.
Interest Rates
Cash Flow Hedges
During 2009, DPS utilized interest rate swaps designated as cash flow hedges to manage its exposure to volatility in floating
interest rates on borrowings under its Term Loan A.The intent of entering into these interest rate swaps is to eliminate the variability
in cash flows related to interest payments under the Term Loan A by effectively converting variable interest rates to fixed rates.
In February 2009, the Company entered into an interest rate swap effective December 31, 2009, with a duration of 12 months
and a $750 million notional amount that amortized at the rate of $100 million every quarter and designated it as a cash flow hedge.
As the Term Loan A was fully repaid in December 2009, the underlying forecasted transaction ceased to exist and the Company
de-designated the cash flow hedge as the interest rate swap no longer qualified for hedge accounting treatment. As a result, a loss
of $7 million related to the interest rate swap that was accumulated in AOCL was immediately recognized in earnings as interest
expense in December 2009. $345 million of the original notional amount of the interest rate swap was terminated and the remaining
$405 million was utilized as an economic hedge. Refer to the "Economic Hedges" section within this footnote for further
information.
There were no interest rate swaps in place that qualified as cash flow hedges as of December 31, 2010 or 2009.
Fair Value Hedges
The Company is also exposed to the risk of changes in the fair value of certain fixed-rate debt attributable to changes in
interest rates and manages these risks through the use of receive-fixed, pay-variable interest rate swaps.
In December 2009, the Company entered into two interest rate swaps having an aggregate notional amount of $850 million
and durations ranging from two to three years in order to convert fixed-rate, long-term debt to floating rate debt. These swaps
were entered into upon the issuance of the 2011 and 2012 Notes, and were originally accounted for as fair value hedges under
U.S. GAAP and qualified for the shortcut method of accounting for hedges.
Effective March 10, 2010, $225 million notional of the interest rate swap linked to the 2012 Notes was restructured to reflect
a change in the variable interest rate to be paid by the Company. This change triggered the de-designation of the $225 million
notional fair value hedge and the corresponding fair value hedging relationship was discontinued. With the fair value hedge
discontinued, the Company ceased adjusting the carrying value of the 2012 Notes corresponding to the restructured notional
amounts. The $1 million adjustment of the carrying value of the 2012 Notes that resulted from de-designation will continue to be
carried on the balance sheet and amortized completely over the remaining term of the 2012 Notes.
Effective September 21, 2010, the remaining $225 million notional interest rate swap linked to the 2012 Notes was terminated
and settled, thus the corresponding fair value hedging relationship was discontinued. With the fair value hedge discontinued, the
Company ceased adjusting the carrying value of the 2012 Notes corresponding to the remaining notional amount. The $4
million adjustment of the carrying value of the 2012 Notes that resulted from this de-designation will continue to be carried on
the balance sheet and amortized completely over the remaining term of the 2012 Notes.
As a result of these changes, the Company had a fair value hedge with a notional amount of $400 million remaining as of
December 31, 2010 linked to the 2011 Notes.
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