Snapple 2014 Annual Report Download - page 76

DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
73
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, 2014
and 2013, the impact of the fair value hedge on the 2038 Notes increased the carrying value by $23 million and $2 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, 2014 and 2013, the impact of the fair value hedge on the
2019 and 2021 Notes decreased the carrying value by $1 million and $11 million, respectively.
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 effectively 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, 2014 and 2013, the impact of the fair value hedge on the 2020 Notes decreased
the carrying value by $4 million and $7 million, respectively.
In December 2013, the Company entered into four interest rate swaps having an aggregate notional amount of $250 million
and maturing in November 2022 in order to effectively convert all of the 2022 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, 2014 and 2013, the impact of the fair value hedge on the 2022 Notes increased the carrying value by $16 million and decreased
the carrying value by $2 million, respectively.
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 years ended December 31, 2014, 2013 and 2012, 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 one and 12 months as of December 31, 2014. The
Company had outstanding foreign exchange forward contracts with notional amounts of $10 million and $45 million as of December
31, 2014 and 2013, respectively.
COMMODITIES
Economic Hedges
DPS centrally manages the exposure to volatility in the prices of certain commodities used in its production process and
transportation through forward and future contracts. The intent of these contracts is to provide a certain level of predictability in
the Company's overall cost structure. During the years ended December 31, 2014, 2013 and 2012, the Company held forward and
future contracts that economically hedged certain of its risks. In these cases, a natural hedging relationship exists in which changes
in the fair value of the instruments act as an economic offset to changes in the fair value of the underlying items. Changes in the
fair value of these instruments are recorded in net income throughout the term of the derivative instrument and are reported in the
same line item of the Consolidated Statements of Income as the hedged transaction. Unrealized gains and losses are recognized
as a component of unallocated corporate costs until the Company's operating segments are affected by the completion of the
underlying transaction, at which time the gain or loss is reflected as a component of the respective segment's operating profit
("SOP"). The total notional values of derivatives related to economic hedges of this type were $160 million and $179 million as
of December 31, 2014 and 2013, respectively.