Snapple 2012 Annual Report Download - page 86

DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
68
INTEREST RATES
Cash Flow Hedges
During the second quarter of 2011, in order to hedge the variability in cash flows from interest rate changes associated with
the Company's planned issuances of long-term debt, the Company entered into two forward starting swap agreements with an
aggregate notional value of $150 million and one forward starting swap agreement with a notional value of $100 million in order
to fix the rate for a portion of a future seven and ten year unsecured debt issuance in 2011, respectively. These forward starting
swaps were unwound during the fourth quarter of 2011 in connection with the Company's issuance of the 2019 and 2021 Notes.
Upon termination, the Company paid $25 million to the counterparties, which will be amortized to interest expense over the term
of the issued debt.
During the second and third quarter of 2011, the Company also entered into forward starting swap agreements with an aggregate
notional value of $300 million in order to fix the rate for a portion of a future seven and ten year unsecured debt issuance in 2012.
These forward starting swaps were unwound during the fourth quarter of 2012 in connection with the Company's issuance of the
2020 and 2022 Notes. Upon termination, the Company paid $49 million to the counterparties, which will be amortized to interest
expense over the term of the issued debt.
The effective portion of changes in the fair value of the derivative that is designated as a cash flow hedge is being recorded
in AOCL and will be subsequently reclassified into earnings during the period in which the hedged forecasted transaction affects
earnings. Ineffectiveness, if any, related to the Company's changes in estimates about the debt issuance related to the forward
starting swap would be recognized directly in earnings as a component of interest expense during the period incurred.
Fair Value Hedges
The Company is 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 and qualified
for the shortcut method of accounting under U.S. GAAP.
During 2010, the Company terminated and settled the $450 million notional interest rate swap linked to the 2012 Notes. With
the fair value hedge discontinued, the Company ceased adjusting the carrying value of the 2012 Notes corresponding to the notional
amounts. The previous adjustments of the carrying value of the 2012 Notes were carried on the balance sheet and amortized over
the remaining term of the 2012 Notes. As of December 31, 2011, the unamortized portion was $2 million, and was included in the
current portion of long-term obligations. Refer to Note 8 for additional information.
In December 2010, the Company entered into an interest rate swap having a notional amount of $100 million and maturing
in May 2038 in order to effectively convert a portion of the 2038 Notes from fixed-rate debt to floating-rate debt and designated
it as a fair value hedge. The assessment of hedge effectiveness is made by comparing the cumulative change in the fair value of
the hedged item attributable to changes in the benchmark interest rate with the cumulative changes in the fair value of the interest
rate swap, with any ineffectiveness recorded in earnings as interest expense during the period incurred. As of December 31, 2012,
and 2011, the impact of the fair value hedge on the 2038 Notes increased the carrying value by $22 million and $27 million,
respectively.
In November 2011, the Company entered into four interest rate swaps having an aggregate notional amount of $250 million
and durations ranging from seven to ten years in order to convert fixed-rate, long-term debt to floating rate debt. These swaps were
entered into upon the issuance of the 2019 and 2021 Notes, and were accounted for as fair value hedges and qualified for the
shortcut method of accounting under U.S. GAAP. As of December 31, 2012, the impact of the fair value hedge on the 2019 and
2021 Notes increased the carrying value by $8 million. As of December 31, 2011, there was no change in the carrying value of
the 2019 and 2021 Notes as a result of the impact of the fair value hedge.
In November 2012, the Company entered into five interest rate swaps having an aggregate notional amount of $120 million
and maturing in January 2020 in order to convert fixed-rate, long-term debt to floating rate debt. These swaps were entered into
upon the issuance of the 2020 Notes, and were accounted for as fair value hedges and qualified for the shortcut method of accounting
under U.S. GAAP. As of December 31, 2012, the impact of the fair value hedge on the 2020 Notes decreased the carrying value
by $1 million.