Derivative Instruments and Fair Value Measurements

9 Months Ended

Sep. 29, 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 September 29, 2012 and December 31, 2011 were as follows:

		September 29,		December 31,
(millions)		2012		2011
Foreign currency exchange contracts	$	626	$	1,265
Interest rate contracts		2,150		600
Commodity contracts		101		175
Total	$	2,877	$	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 September 29, 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 September 29, 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 September 29, 2012 and December 31, 2011:

Derivatives designated as hedging instruments
			September 29, 2012						December 31, 2011
			Level		Level		Total		Level		Level		Total
(millions)			1		2				1		2

Assets:
Foreign currency exchange contracts:
	Other prepaid assets	$	-	$	5	$	5	$	-	$	11	$	11
Interest rate contracts (a):
	Other assets		-		71		71		-		23		23
Commodity contracts:
	Other prepaid assets		-		-		-		2		-		2
Total assets		$	-	$	76	$	76	$	2	$	34	$	36

Liabilities:
Foreign currency exchange contracts:
	Other current liabilities	$	-	$	(4)	$	(4)	$	-	$	(18)	$	(18)
Commodity contracts:
	Other current liabilities		-		(11)		(11)		(4)		(12)		(16)
	Other liabilities		-		(29)		(29)		-		(34)		(34)
Total liabilities		$	-	$	(44)	$	(44)	$	(4)	$	(64)	$	(68)

(a) The fair value of the related hedged portion of the Company's long-term debt, a level 2 liability, was $2.4 billion as of September 29, 2012 and $647 million as of December 31, 2011.

Derivatives not designated as hedging instruments
			September 29, 2012						December 31, 2011
			Level		Level		Total		Level		Level		Total
(millions)			1		2				1		2

Assets:
Commodity contracts:
	Other prepaid assets	$	6	$	1	$	7	$	-	$	-	$	-
Total assets		$	6	$	1	$	7	$	-	$	-	$	-

The effect of derivative instruments on the Consolidated Statements of Income and Comprehensive Income for the quarters ended September 29, 2012 and October 1, 2011 was as follows:


Derivatives in fair value hedging relationships
										Location of gain		Gain (loss)
										(loss) recognized		recognized in
(millions)										in income		income (a)
												Sep. 29,		Oct. 1,
												2012		2011
Foreign currency exchange contracts										Other income (expense), net	$	2	$	(9)
Interest rate contracts										Interest expense		4		-
Total											$	6	$	(9)

(a) Includes the ineffective portion and amount excluded from effectiveness testing.

Derivatives in cash flow hedging relationships
					Location of gain		Gain (loss)			Location of gain		Gain (loss)
		Gain (loss)			(loss) reclassified		reclassified from			(loss) recognized		recognized in
(millions)		recognized in AOCI			from AOCI		AOCI into income			in income (a)		income (a)
		Sep. 29,		Oct. 1,			Sep. 29,		Oct. 1,			Sep. 29,		Oct. 1,
		2012		2011			2012		2011			2012		2011
Foreign currency exchange contracts	$	(4)	$	5	COGS	$	(1)	$	(1)	Other income (expense), net	$	-	$	(1)
Foreign currency exchange contracts		-		2	SGA expense		1		-	Other income (expense), net		-		-
Interest rate contracts		-		-	Interest expense		1		1	N/A		-		-
Commodity contracts		3		(8)	COGS		(4)		(1)	Other income (expense), net		-		-
Total	$	(1)	$	(1)		$	(3)	$	(1)		$	-	$	(1)

(a) Includes the ineffective portion and amount excluded from effectiveness testing.

Derivatives in net investment hedging relationships
												Gain (loss)
												recognized in
(millions)												AOCI
												Sep. 29,		Oct. 1,
												2012		2011
Foreign currency exchange contracts											$	(1)	$	-
Total											$	(1)	$	-

Derivatives not designated as hedging instruments
										Location of gain		Gain (loss)
										(loss) recognized		recognized in
(millions)										in income		income
												Sep. 29,		Oct. 1,
												2012		2011
Foreign currency exchange contracts										Other income (expense), net	$	-	$	(1)
Interest rate contracts										Interest expense		-		2
Commodity contracts										COGS		(3)		-
Total											$	(3)	$	1

The effect of derivative instruments on the Consolidated Statement of Income for the year-to-date periods ended September 29, 2012 and October 1, 2011 were as follows:


Derivatives in fair value hedging relationships
										Location of gain		Gain (loss)
										(loss) recognized		recognized in
(millions)										in income		income(a)
												Sep. 29,		Oct. 1,
												2012		2011
Foreign currency exchange contracts										Other income (expense), net	$	1	$	16
Interest rate contracts										Interest expense		4		-
Total											$	5	$	16


(a) Includes the ineffective portion and amount excluded from effectiveness testing.

Derivatives in cash flow hedging relationships
					Location of gain		Gain (loss)			Location of gain		Gain (loss)
		Gain (loss)			(loss) reclassified		reclassified from			(loss) recognized		recognized in
(millions)		recognized in AOCI			from AOCI		AOCI into income			in income (a)		income(a)
		Sep. 29,		Oct. 1,			Sep. 29,		Oct. 1,			Sep. 29,		Oct. 1,
		2012		2011			2012		2011			2012		2011
Foreign currency exchange contracts	$	(5)	$	2	COGS	$	(1)	$	(4)	Other income (expense), net	$	-	$	(2)
Foreign currency exchange contracts		1		-	SGA expense		2		-	Other income (expense), net		-		-
Interest rate contracts		-		(13)	Interest expense		3		3	N/A		-		-
Commodity contracts		(5)		(25)	COGS		(16)		11	Other income (expense), net		-		-
Total	$	(9)	$	(36)		$	(12)	$	10		$	-	$	(2)


(a) Includes the ineffective portion and amount excluded from effectiveness testing.

Derivatives in net investment hedging relationships
												Gain (loss)
												recognized in
(millions)												AOCI
												Sep. 29,		Oct. 1,
												2012		2011
Foreign currency exchange contracts											$	5	$	-
Total											$	5	$	-


Derivatives not designated as hedging instruments
										Location of gain		Gain (loss)
										(loss) recognized		recognized in
(millions)										in income		income
												Sep. 29,		Oct. 1,
												2012		2011
Interest rate contracts										Interest expense		(1)		(1)
Commodity contracts										COGS		(3)		-
Total											$	(4)	$	(1)

During the next 12 months, the Company expects $8 million of net deferred losses reported in accumulated other comprehensive income (AOCI) at September 29, 2012 to be reclassified to income, assuming market rates remain constant through contract maturities.

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 September 29, 2012 was $21 million. If the credit-risk-related contingent features were triggered as of September 29, 2012, the Company would be required to post collateral of $21 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 September 29, 2012 triggered by credit-risk-related contingent features.

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 September 29, 2012:

(millions)		Fair Value		Carrying Value
Current maturities of long-term debt	$	1,519	$	1,510
Long-term debt		6,879		6,065
Total	$	8,398	$	7,575

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. Certain counterparties represent a concentration of credit risk to the Company. If those counterparties fail to perform according to the terms of derivative contracts, this would result in a loss to the Company of $65 million as of September 29, 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. There were no collateral balance requirements at September 29, 2012.

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 27% of consolidated trade receivables at September 29, 2012.

- Definition

The entire disclosure for the entity's entire derivative instruments and hedging activities. Describes an entity's risk management strategies, derivatives in hedging activities and non-hedging derivative instruments, the assets, obligations, liabilities, revenues and expenses arising therefrom, and the amounts of and methodologies and assumptions used in determining the amounts of such items. The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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