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Derivative Instruments and Fair Value Measurements
3 Months Ended
Mar. 31, 2012
Derivative Instruments and Fair Value Measurements [Abstract]  
Derivative Instruments and Fair Value Measurements [Text Block]

Note 9 Derivative instruments and fair value measurements

The Company is exposed to certain market risks such as changes in interest rates, foreign currency exchange rates, and commodity prices, which exist as a part of its ongoing business operations. Management uses derivative financial and commodity instruments, including futures, options, and swaps, where appropriate, to manage these risks. Instruments used as hedges must be effective at reducing the risk associated with the exposure being hedged.

The Company designates derivatives as cash flow hedges, fair value hedges, net investment hedges, and uses other contracts to reduce volatility in interest rates, foreign currency and commodities. As a matter of policy, the Company does not engage in trading or speculative hedging transactions.

 

Total notional amounts of the Company's derivative instruments as of March 31, 2012 and December 31, 2011 were as follows:

 

  March 31,  December 31,
(millions) 2012  2011
Foreign currency exchange contracts $ 1,140 $ 1,265
Interest rate contracts   2,450   600
Commodity contracts   129   175
Total $ 3,719 $ 2,040

Following is a description of each category in the fair value hierarchy and the financial assets and liabilities of the Company that were included in each category at March 31, 2012 and December 31, 2011, measured on a recurring basis.

 

Level 1 – Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market. For the Company, level 1 financial assets and liabilities consist primarily of commodity derivative contracts.

Level 2 – Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. For the Company, level 2 financial assets and liabilities consist of interest rate swaps and over-the-counter commodity and currency contracts.

The Company's calculation of the fair value of interest rate swaps is derived from a discounted cash flow analysis based on the terms of the contract and the interest rate curve. Over-the-counter commodity derivatives are valued using an income approach based on the commodity index prices less the contract rate multiplied by the notional amount. Foreign currency contracts are valued using an income approach based on forward rates less the contract rate multiplied by the notional amount. The Company's calculation of the fair value of level 2 financial assets and liabilities takes into consideration the risk of nonperformance, including counterparty credit risk.

Level 3 – Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management's own assumptions about the assumptions a market participant would use in pricing the asset or liability. The Company did not have any level 3 financial assets or liabilities as of March 31, 2012 or December 31, 2011.

The following table presents assets and liabilities that were measured at fair value in the Consolidated Balance Sheet on a recurring basis as of March 31, 2012 and December 31, 2011:
                   
                   
   Level 1  Level 2  Total
Derivatives designated as hedging March 31,  December 31,  March 31,  December 31,  March 31,  December 31,
instruments (millions) 2012  2011  2012  2011  2012  2011
                   
Assets:                 
Foreign currency exchange contracts:                 
 Other prepaid assets $ - $ - $ 7 $ 11 $ 7 $ 11
Interest rate contracts:                 
 Other assets   -   -   21   23   21   23
Commodity contracts:                 
 Other prepaid assets   -   2   -   -   -   2
Total assets $ - $ 2 $ 28 $ 34 $ 28 $ 36
                   
Liabilities:                 
Foreign currency exchange contracts:                 
 Other current liabilities $ - $ - $ (3) $ (18) $ (3) $ (18)
Interest rate contracts:                 
 Other liabilities   -   -   (9)   -   (9)   -
Commodity contracts:                 
 Other current liabilities   (3)   (4)   (13)   (12)   (16)   (16)
 Other liabilities   -   -   (35)   (34)   (35)   (34)
Total liabilities $ (3) $ (4) $ (60) $ (64) $ (63) $ (68)
                   
The fair value of non designated hedging instruments as of March 31, 2012 and December 31, 2011 was immaterial.

The effect of derivative instruments on the Consolidated Statements of Income and Comprehensive Income for the quarters ended March 31, 2012 and April 2, 2011 was as follows:
                    
                    
              Location of gain Gain (loss)
Derivatives in fair value hedging           (loss) recognized recognized in
relationships (millions)             in income income (a)
                March 31,  April 2,
                2012  2011
                    
Foreign currency exchange contracts              Other income (expense), net$ 15 $ 22
Interest rate contracts             Interest expense  1   -
Total              $ 16 $ 22
                    
(a) Includes the ineffective portion and amount excluded from effectiveness testing.        
                    
    Location of gain Gain (loss) Location of gain Gain (loss)
Derivatives in cash flow hedgingGain (loss) (loss) reclassified reclassified from (loss) recognized recognized in
relationships (millions) recognized in AOCI from AOCI AOCI into income in income (a) income (a)
  March 31,  April 2,   March 31,  April 2,   March 31,  April 2,
  2012  2011   2012  2011   2012  2011
                    
Foreign currency exchange contracts $ (2) $ (2) COGS$ - $ (2) Other income (expense), net$ - $ (1)
Foreign currency exchange contracts   -   (1) SGA expense  -   - Other income (expense), net  -   -
Interest rate contracts   -   (1) Interest expense  1   1 N/A  -   -
Commodity contracts   (6)   15 COGS  (5)   9 Other income (expense), net  -   -
Total $ (8) $ 11  $ (4) $ 8  $ - $ (1)
                    
(a) Includes the ineffective portion and amount excluded from effectiveness testing.        
                    
During the next 12 months, the Company expects $12 million of net deferred losses reported in accumulated other comprehensive income (AOCI) at March 31, 2012 to be reclassified to income, assuming market rates remain constant through contract maturities.
                    
                    
Derivatives in net investment         Gain (loss)
hedging relationships (millions)        recognized in AOCI
                March 31,  April 2,
                2012  2011
                    
Foreign currency exchange contracts              $ (6) $ -
Total              $ (6) $ -
   
                    
              Location of gain Gain (loss)
Derivatives not designated as hedging           (loss) recognized recognized in
instruments (millions)             in income income
                March 31,  April 2,
                2012  2011
                    
Interest rate contracts              Interest expense  26   (3)
Total               $ 26 $ (3)
         

Certain of the Company's derivative instruments contain provisions requiring the Company to post collateral on those derivative instruments that are in a liability position if the Company's credit rating is at or below BB+ (S&P), or Ba1 (Moody's). The fair value of all derivative instruments with credit-risk-related contingent features in a liability position on March 31, 2012 was $45 million. If the credit-risk-related contingent features were triggered as of March 31, 2012, the Company would be required to post additional collateral of $41 million. In addition, certain derivative instruments contain provisions that would be triggered in the event the Company defaults on its debt agreements. There were no collateral posting requirements as of March 31, 2012 triggered by credit-risk-related contingent features, however, there was $4 million of collateral posted under the reciprocal collateralization agreements as discussed under counterparty credit risk concentration below.

Financial instruments

The carrying values of the Company's short-term items, including cash, cash equivalents, accounts receivable, accounts payable and notes payable approximate fair value. The fair value of the Company's long-term debt, which are level 2 liabilities, is calculated based on broker quotes and was as follows at March 31, 2012:

 

(millions) Fair Value  Carrying Value
Current maturities of long-term debt$ 1,549 $ 1,525
Long-term debt  4,822   4,254
Total$ 6,371 $ 5,779

Counterparty credit risk concentration

The Company is exposed to credit loss in the event of nonperformance by counterparties on derivative financial and commodity contracts. Management believes a concentration of credit risk with respect to derivative counterparties is limited due to the credit ratings and use of master netting and reciprocal collateralization agreements with the counterparties and the use of exchange-traded commodity contracts.

Master netting agreements apply in situations where the Company executes multiple contracts with the same counterparty. There were no counterparties representing a concentration of credit risk to the Company at March 31, 2012.

For certain derivative contracts, reciprocal collateralization agreements with counterparties call for the posting of collateral in the form of cash, treasury securities or letters of credit if a fair value loss position to the Company or its counterparties exceeds a certain amount. As of March 31, 2012 the Company had posted collateral of $4 million in the form of cash, which was reflected as an increase in accounts receivable, net on the Consolidated Balance Sheet.

Management believes concentrations of credit risk with respect to accounts receivable is limited due to the generally high credit quality of the Company's major customers, as well as the large number and geographic dispersion of smaller customers. However, the Company conducts a disproportionate amount of business with a small number of large multinational grocery retailers, with the five largest accounts encompassing approximately 26% of consolidated trade receivables at March 31, 2012.