Snapple 2011 Annual Report Download - page 91

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DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
71
9. 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 and fuels.
The Company manages these risks through a variety of strategies, including the use of interest rate contracts, foreign exchange
forward contracts, commodity forward 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 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 future seven and ten year unsecured debt issuance in 2011, respectively. These forward starting swaps
were terminated 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 life of the
issued debt.
During the second quarter of 2011, the Company also entered into a forward starting swap agreement with a notional value
of $100 million in order to fix the rate for a portion of future ten year unsecured debt issuance in 2012. This forward starting swap
is expected to be unwound during 2012.
During the third 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 additional forward starting swap agreements with
a notional value of $100 million each in order to fix the rate for a portion of future seven and ten year unsecured debt issuance in
2012. These forward starting swaps are expected to be unwound during 2012.
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. During the
year ended December 31, 2011, the Company realized no ineffectiveness as a result of these hedging relationships.
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.
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 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 will be amortized over the remaining term of the 2012 Notes.