Snapple 2010 Annual Report Download - page 97

DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of December 31, 2010, the carrying value of the 2011 and 2012 Notes increased by $9 million, which includes the $5
million adjustment, net of amortization, that resulted from the de-designation events discussed above, to reflect the change in fair
value of the Company's interest rate swap agreements. Refer to Note 9 for further 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 will be made by comparing the cumulative change in the fair value
of the hedge 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, 2010,
the carrying value of the 2038 Notes decreased by $2 million.
Economic Hedges ss
In addition to derivative instruments that qualify for and are designated as hedging instruments under U.S. GAAP,the Company
utilizes various interest rate derivative contracts that are not designated as cash flow or fair value hedges to manage interest rate
risk. Gains or losses on these derivative instruments were recognized in earnings during the period the instruments were outstanding.
As discussed above under “ Cash Flow Hedges ”, the interest rate swap entered into by the Company and designated as a
cash flow hedge under U.S. GAAP in February 2009 was subsequently de-designated with the full repayment of the Term Loan
A in December 2009. The Company also terminated $345 million of the original notional amount of the $750 million interest rate
swap in December 2009, leaving the remaining $405 million notional amount of the interest rate swap that had not been terminated
as an economic hedge during the first quarter of 2010. This remaining $405 million notional amount of the interest rate swap was
used to economically hedge the volatility in the floating interest rate associated with borrowings under the Revolver during the
first quarter. The Company terminated this interest rate swap instrument once the outstanding balance under the Revolver was
fully repaid during the first quarter of 2010.
As discussed above under “ Fair Value 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 resulted
in the de-designation of the $225 million notional fair value hedge and the discontinuance of the corresponding fair value hedging
relationship. The $225 million notional restructured interest rate swap was subsequently accounted for as an economic hedge.
Effective September 21, 2010, the interest rate swap was terminated and settled.
In December 2010, with the expected issuance of long-term fixed rate debt, the Company entered into a treasury lock agreement
with a notional value of $200 million and a maturity date of January 2011 to economically hedge the exposure to the possible rise
in the benchmark interest rate prior to a future issuance of senior unsecured notes. See Note 27 for further information.
Foreign Exchange
Cash Flow Hedges
The Company's Canadian business purchases its inventory through transactions denominated and settled in U.S. Dollars, a
currency different from the functional currency of the Canadian business. These inventory purchases are subject to exposure from
movements in exchange rates. During the year ended December 31, 2010 and 2009, the Company utilized foreign exchange
forward contracts designated as cash flow hedges to manage the exposures resulting from changes in these foreign currency
exchange rates. The intent of these foreign exchange contracts is to provide predictability in the Company's overall cost structure.
These foreign exchange contracts, carried at fair value, have maturities between 1 and 36 months. As of December 31, 2010 and
2009, the Company had outstanding foreign exchange forward contracts designated as cash flow hedges with notional amounts
of $135 million and $85 million, respectively.
Economic Hedges
The Company's Canadian business has various transactions denominated and settled in U.S. Dollars, a currency different
from the functional currency of the Canadian business. These transactions are subject to exposure from movements in exchange
rates. During the second quarter of 2010, the Company entered into foreign exchange forward contracts not designated as cash
flow hedges to manage foreign currency exposure and economically hedge the exposure from movements in exchange rates. These
foreign exchange contracts, carried at fair value, have maturities between 1 and 12 months. As of December 31, 2010, the Company
had outstanding foreign exchange forward contracts with notional amounts of $12 million. There were no derivative instruments
in place in 2009 to economically hedge the exposure from movements in exchange rates.
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