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 and must be designated as a hedge at the inception of the contract.

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 December 29, 2018 and December 30, 2017 were as follows:



(millions)	2018		2017
Foreign currency exchange contracts	$	1,863	$	2,172
Cross-currency contracts	1,197		—
Interest rate contracts	1,608		2,250
Commodity contracts	417		544
Total	$	5,085	$	4,966

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 December 29, 2018 and December 30, 2017, 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. Cross-currency contracts are valued based on changes in the spot rate at the time of valuation compared to the spot rate at the time of execution, as well as the change in the interest differential between the two currencies. 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 December 29, 2018 or December 30, 2017.

The following table presents assets and liabilities that were measured at fair value in the Consolidated Balance Sheet on a recurring basis as of December 29, 2018 and December 30, 2017:

Derivatives designated as hedging instruments



	2018								2017
(millions)	Level 1		Level 2			Total			Level 1		Level 2			Total
Assets:
Cross currency contracts:
Other Assets	$	—	$	79		$	79		$	—	$	—		$	—
Interest rate contracts (a):
Other assets	—		17			17			—		—			—
Total assets	$	—	$	96		$	96		$	—	$	—		$	—
Liabilities:
Interest rate contracts:
Other liabilities (a)	—		(22		)	(22		)	—		(54		)	(54		)
Total liabilities	$	—	$	(22	)	$	(22	)	$	—	$	(54	)	$	(54	)


(a)	The fair value of the related hedged portion of the Company’s long-term debt, a level 2 liability, was $1.6 billion and $2.3 billion as of December 29, 2018 and December 30, 2017, respectively.

Derivatives not designated as hedging instruments



	2018									2017
(millions)	Level 1			Level 2			Total			Level 1			Level 2			Total
Assets:
Foreign currency exchange contracts:
Other current assets	$	—		$	3		$	3		$	—		$	10		$	10
Commodity contracts:
Other current assets	3			—			3			6			—			6
Total assets	$	3		$	3		$	6		$	6		$	10		$	16
Liabilities:
Foreign currency exchange contracts:
Other current liabilities	$	—		(4		)	$	(4	)	$	—		$	(14	)	$	(14	)
Commodity contracts:
Other current liabilities	(9		)	—			(9		)	(7		)	—			(7		)
Total liabilities	$	(9	)	$	(4	)	$	(13	)	$	(7	)	$	(14	)	$	(21	)

The Company has designated a portion of its outstanding foreign currency denominated long-term debt as a net investment hedge of a portion of the Company’s investment in its subsidiaries foreign currency denominated net assets. The carrying value of this debt was $2.6 billion and $2.7 billion as of December 29, 2018 and December 30, 2017, respectively.

The following amounts were recorded on the Consolidated Balance Sheet related to cumulative basis adjustments for existing fair value hedges as of December 29, 2018 and December 30, 2017.



(millions)	Line Item in the Consolidated Balance Sheet in which the hedged item is included	Carrying amount of the hedged liabilities				Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged liabilities (a)
		December 29, 2018		December 30, 2017		December 29, 2018			December 30, 2017
Interest rate contracts	Current maturities of long-term debt	$	503	$	402	$	3		$	2
Interest rate contracts	Long-term debt	$	3,354	$	3,481	$	(18	)	$	(22	)


(a)	The current maturities of hedged long-term debt includes $3 million and $2 million of hedging adjustment on discontinued hedging relationships as of December 29, 2018 and December 30, 2017. The hedged long-term debt includes $(12) million and $32 million of hedging adjustment on discontinued hedging relationships as of December 29, 2018 and December 30, 2017, respectively.

The Company has elected to not offset the fair values of derivative assets and liabilities executed with the same counterparty that are generally subject to enforceable netting agreements. However, if the Company were to offset and record the asset and liability balances of derivatives on a net basis, the amounts presented in the Consolidated Balance Sheet as of December 29, 2018 and December 30, 2017 would be adjusted as detailed in the following table:



As of December 29, 2018
				Gross Amounts Not Offset in the Consolidated Balance Sheet
	Amounts Presented in the Consolidated Balance Sheet			Financial Instruments			Cash Collateral Received/ Posted			Net Amount
Total asset derivatives	$	102		$	(27	)	$	(2	)	$	73
Total liability derivatives	$	(35	)	$	27		$	—		$	(8	)



As of December 30, 2017
				Gross Amounts Not Offset in the Consolidated Balance Sheet
	Amounts Presented in the Consolidated Balance Sheet			Financial Instruments			Cash Collateral Received/ Posted		Net Amount
Total asset derivatives	$	16		$	(15	)	$	—	$	1
Total liability derivatives	$	(75	)	$	15		$	37	$	(23	)

The effect of derivative instruments on the Consolidated Statement of Income for the years ended December 29, 2018 and December 30, 2017 were as follows:

Derivatives and non-derivatives in net investment hedging relationships



(millions)	Gain (loss) recognized in AOCI					Gain (loss) excluded from assessment of hedge effectiveness				Location of gain (loss) in income of excluded component
	2018		2017			2018		2017
Foreign currency denominated long-term debt	$	129	$	(316	)	$	—	$	—
Cross-currency contracts	79		—			16		—		Interest expense
Total	$	208	$	(316	)	$	16	$	—



Derivatives not designated as hedging instruments
(millions)	Location of gain (loss) recognized in income	Gain (loss) recognized in income
		2018			2017
Foreign currency exchange contracts	COGS	$	19		$	(8	)
Foreign currency exchange contracts	SGA	1			(1		)
Foreign currency exchange contracts	OIE	—			(10		)
Commodity contracts	COGS	(23		)	(18		)
Commodity contracts	SGA	—			(15		)
Total		$	(3	)	$	(52	)

The effect of fair value and cash flow hedge accounting on the Consolidated Income Statement for the year-to-date periods ended December 29, 2018 and December 30, 2017:



		December 29, 2018			December 30, 2017
(millions)		Interest Expense			COGS		Interest Expense			Other Income / (Expense)
Total amounts of income and expense line items presented in the Consolidated Income Statement in which the effects of fair value or cash flow hedges are recorded		$	287		$	8,155	$	256		$	526
	Gain (loss) on fair value hedging relationships:
	Interest contracts:
	Hedged items	(5		)	—		22			—
	Derivatives designated as hedging instruments	9			—		(4		)	(1		)

	Gain (loss) on cash flow hedging relationships:
	Interest contracts:
	Amount of gain (loss) reclassified from AOCI into income	(8		)	—		(10		)	—
	Foreign exchange contracts:
	Amount of gain (loss) reclassified from AOCI into income	—			1		—			—

During the next 12 months, the Company expects $7 million of net deferred losses reported in accumulated other comprehensive income (AOCI) at December 29, 2018 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 falls below BB+ (S&P), or Baa1 (Moody’s). The fair value of all derivative instruments with credit-risk-related contingent features in a liability position on December 29, 2018 was $3 million. If the credit-risk-related contingent features were triggered as of December 29, 2018, the Company would be required to post additional collateral of $3 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 December 29, 2018 triggered by credit-risk-related contingent features.

Other fair value measurements

Fair Value Measurements on a Nonrecurring Basis

As part of Project K, the Company has consolidated the usage of and has disposed certain long-lived assets, including manufacturing facilities and Corporate owned assets over the term of the program. See Note 5 for more information regarding Project K.

During the year-to-date period ended December 29, 2018, long-lived assets of $19 million related to a manufacturing facility in the Company's North America Other reportable segment, were written down to an estimated fair value of $5 million due to Project K activities. The Company's calculation of the fair value of these long-lived assets is based on level 3 inputs, including market comparables, market trends and the condition of the assets.

During 2017, there were no long-lived asset impairments related to Project K.

Financial instruments

The carrying values of the Company’s short-term items, including cash, cash equivalents, accounts receivable, accounts payable, notes payable and current maturities of long-term debt approximate fair value. The fair value of the Company’s long-term debt, which are level 2 liabilities, is calculated based on broker quotes. The fair value and carrying value of the Company's long-term debt was $8.2 billion as of December 29, 2018.

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. If these counterparties fail to perform according to the terms of derivative contracts, this could result in a loss to the Company. As of December 29, 2018, there were no counterparties that represented a significant concentration of credit risk to the Company.

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. In addition, the company is required to maintain cash margin accounts in connection with its open positions for exchange-traded commodity derivative instruments executed with the counterparty that are subject to enforceable netting agreements. As of December 29, 2018, the Company had no collateral posting requirements related to reciprocal collateralization agreements and collected approximately $20 million of collateral related to reciprocal collaterization agreements which is reflected as an increase in other liabilities. As of December 29, 2018, the Company posted $18 million in margin deposits for exchange-traded commodity derivative instruments, which was reflected as an increase in accounts receivable, net.

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 20% of consolidated trade receivables at December 29, 2018.

Refer to Note 1 for disclosures regarding the Company’s accounting policies for derivative instruments.