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DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
72
Effective September 21, 2010, the remaining $225 million notional interest rate swap linked to the 2012 Notes was terminated
and settled, thus 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 remaining notional amount. The $4 million adjustment
to the carrying value of the 2012 Notes that resulted from this de-designation will continue to be carried on the balance sheet and
will be amortized over the remaining term of the 2012 Notes.
As of December 31, 2011 and 2010, the carrying value of the 2012 Notes increased by $2 million and $5 million, respectively,
which represents the unamortized value of the de-designated fair value hedges discussed above.
As of December 31, 2010, the carrying value of the 2011 Notes increased by $4 million to reflect the change in value of the
Company's interest rate swap agreements. Effective December 21, 2011, the $400 million notional interest rate swap linked to the
2011 Notes expired, thus the corresponding hedging relationship was discontinued.
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, 2011,
the carrying value of the 2038 Notes increased by $27 million. As of December 31, 2010, the carrying value of the 2038 Notes
decreased by $2 million.
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.
Economic Hedges
In addition to derivative instruments that qualify for and are designated as hedging instruments under U.S. GAAP, the Company
utilized various interest rate derivative contracts that were 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.
In February 2009, the Company entered into an interest rate swap to manage its exposure to volatility in the floating interest
rates on borrowings under the Term Loan A. 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 it no longer qualified for hedge accounting
treatment. A portion of the original notional amount was terminated which left an interest rate swap with a $405 million notional
amount used to economically hedge the volatility in the floating interest rate associated with borrowings under the Revolver during
the first quarter of 2010. 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. This treasury lock was cash settled for
approximately $1 million coincident with the issuance of the 2016 Notes in January 2011.