Fair Value

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Based upon the transparency of inputs to the valuation of an asset or liability, a three-level hierarchy has been established for fair value measurements. The three-level hierarchy for disclosure of fair value measurements is as follows:

Level 1 - Quoted market prices in active markets for identical assets or liabilities.

Level 2 - Observable inputs such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

Level 3 - Valuations with one or more unobservable significant inputs that reflect the reporting entity's own assumptions.

The fair value of senior unsecured notes and marketable securities as of December 31, 2017 and 2016 are based on quoted market prices for publicly traded securities.

The Company estimates fair values of financial instruments measured at fair value in the financial statements on a recurring basis to ensure they are calculated based on market rates to settle the instruments. These values represent the estimated amounts DPS would pay or receive to terminate agreements, taking into consideration current market rates and creditworthiness.

As of December 31, 2017 and 2016, the Company did not have any assets or liabilities measured on a recurring basis without observable market values that would require a high level of judgment to determine fair value (Level 3).

Transfers between levels are recognized at the end of each reporting period. There were no transfers of financial instruments between the three levels of fair value hierarchy during the years ended December 31, 2017, 2016 and 2015.

Refer to Notes 4, 6, 7 and 8 for additional information.

As such, the Company uses the fair value hierarchy to measure the fair value of these trading securities as follows:



	Fair Value Hierarchy Level	For the Year Ended December 31,
(in millions)	Fair Value Hierarchy Level	2017		2016
Marketable securities - trading	Level 1	$	48	$	35

FAIR VALUE OF THE PENSION AND POSTRETIREMENT PLAN ASSETS

The fair value hierarchy (refer to Note 2 for further information) is not only applicable to assets and liabilities that are included in our consolidated balance sheets, but is also applied to certain other assets that indirectly impact our consolidated financial statements. Assets contributed by the Company to pension or other PRMB plans become the property of the individual plans. Even though the Company no longer has control over these assets, DPS is indirectly impacted by subsequent fair value adjustments to these assets. The actual return on these assets impacts the Company's future net periodic benefit cost, as well as amounts recognized in our consolidated balance sheets. As such, the Company uses the fair value hierarchy to measure the fair value of assets held by our various pension and PRMB plans.

The following tables present the major categories of plan assets and the respective fair value hierarchy for the pension and post plan assets as of December 31, 2017 and 2016:



	Fair Value Measurements as of December 31, 2017
	Fair Value Hierarchy Level			Pension Assets		PRMB Assets
(in millions)	Fair Value Hierarchy Level	Total		Pension Assets		PRMB Assets
Cash and cash equivalents	Level 1	$	2	$	2	$	—
Equity securities⁽¹⁾
U.S. Large-Cap equities⁽²⁾	Level 2	21		20		1
International equities⁽²⁾	Level 2	17		17		—
Fixed income securities
International bonds⁽²⁾	Level 2	16		16		—
Fixed income commingled funds⁽³⁾	Level 2	164		158		6
Total assets		$	220	$	213	$	7



	Fair Value Measurements as of December 31, 2016
	Fair Value Hierarchy Level			Pension Assets		PRMB Assets
(in millions)	Fair Value Hierarchy Level	Total		Pension Assets		PRMB Assets
Cash and cash equivalents	Level 1	$	4	$	4	$	—
Equity securities⁽¹⁾
U.S. Large-Cap equities⁽²⁾	Level 2	30		29		1
International equities⁽²⁾	Level 2	14		13		1
Fixed income securities
International bonds⁽²⁾	Level 2	13		13		—
Fixed income commingled funds⁽³⁾	Level 2	122		118		4
Total assets		$	183	$	177	$	6

____________________________


(1)	Equity securities are comprised of actively managed U.S. index funds and Europe, Australia, Far East ("EAFE") index funds.


(2)	The NAV is based on the fair value of the underlying assets owned by the equity index fund or fixed income investment vehicle per share multiplied by the number of units held as of the measurement date and are classified as Level 2 assets.


(3)	Fixed income commingled funds are comprised of a diversified portfolio of investment-grade corporate and government securities. Investments are provided by the investment managers using a unit price or NAV based on the fair value of the underlying investments of the funds.

SHORT-TERM BORROWINGS AND CURRENT PORTION OF LONG-TERM OBLIGATIONS

The following table summarizes the Company's short-term borrowings and current portion of long-term obligations as of December 31, 2017 and 2016:



	Fair Value Hierarchy Level	December 31, 2017				December 31, 2016
(in millions)	Fair Value Hierarchy Level	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Commercial paper	1	$	66	$	66	$	—	$	—
Current portion of long-term obligations:
Capital lease obligations⁽¹⁾	N/A	13				10
Short-term borrowings and current portion of long-term obligations		$	79	$	66	$	10	$	—

____________________________


(1)	Capital lease obligations are specifically excluded from the calculation of fair value under U.S. GAAP.

SENIOR UNSECURED NOTES

The Company's senior unsecured notes (collectively, the "Notes") consisted of the following carrying values and estimated fair values that are not required to be measured at fair value in the Consolidated Balance Sheets are as follows:



(in millions)			Fair Value Hierarchy Level	December 31, 2017					December 31, 2016
Issuance	Maturity Date	Rate	Fair Value Hierarchy Level	Carrying Amount			Fair Value		Carrying Amount			Fair Value
2018 Notes⁽¹⁾	May 1, 2018	6.82%	2	$	—		$	—	$	364		$	389
2019 Notes	January 15, 2019	2.60%	2	250			251		250			254
2020 Notes	January 15, 2020	2.00%	2	250			248		250			248
2021-A Notes	November 15, 2021	3.20%	2	250			255		250			256
2021-B Notes	November 15, 2021	2.53%	2	250			249		250			248
2022 Notes	November 15, 2022	2.70%	2	250			248		250			247
2023 Notes	December 15, 2023	3.13%	2	500			504		500			500
2025 Notes	November 15, 2025	3.40%	2	500			508		500			498
2026 Notes	September 15, 2026	2.55%	2	400			378		400			370
2027 Notes⁽²⁾	June 15, 2027	3.43%	2	500			501		400			398
2038 Notes⁽¹⁾	May 1, 2038	7.45%	2	125			179		250			347
2045 Notes⁽²⁾	November 15, 2045	4.50%	2	550			588		250			253
2046 Notes	December 15, 2046	4.42%	2	400			424		400			407
Principal amount				4,225			4,333		4,314			4,415
Adjusted for:
Unamortized premiums, discounts, and debt issuance costs				(13		)			(30		)
Adjustments to carrying value for interest rate swaps⁽³⁾				18					41
Carrying amount				$	4,230				$	4,325

____________________________

(1)

In June 2017, the Company completed a tender offer for a portion of its 2018 Notes and its 2038 Notes, and in July 2017, the Company redeemed the remainder of its 2018 Notes. As a result of these transactions, the Company retired, at a premium, an aggregate principal amount of approximately $364 million of the 2018 Notes and approximately $125 million of the 2038 Notes. The total loss on early extinguishment of the 2018 Notes and the 2038 Notes was approximately $62 million, comprised of $75 million for the principal amount, the early tender premium, the make-whole premium, and the write off of deferred financing costs, partially offset by a $13 million gain on the termination of interest rate swap related to the 2038 Notes. Refer to Note 8 for additional information on the termination of the interest rate swap.

(2)

In June 2017, the Company issued $400 million of senior unsecured notes, consisting of $100 million aggregate principal amount of 2027 Notes and $300 million aggregate principal amount of 2045 Notes in a private offering under Rule 144A under the Securities Act of 1933, as amended. The 2027 Notes and 2045 Notes have substantially identical terms, other than with respect to transfer restrictions and registration rights, as the previously issued 2027 Notes and 2045 Notes. A portion of the proceeds from the issuance of the 2027 Notes and 2045 Notes was used to complete the June 2017 tender offer and July 2017 redemption described in (1) above.


(3)	Refer to Note 8 for additional information on the Company's interest rate swaps.

FAIR VALUE OF DERIVATIVE INSTRUMENTS

The following table summarizes the fair value hierarchy and the location of the fair value of the Company's derivative instruments designated as hedging instruments within the Consolidated Balance Sheets as of December 31, 2017 and 2016:



(in millions)	Fair Value Hierarchy Level	Balance Sheet Location	December 31, 2017		December 31, 2016
Assets:
Interest rate contracts	2	Prepaid expenses and other current assets	$	3	$	6
FX forward contracts	2	Prepaid expenses and other current assets	2		—
Interest rate contracts	2	Other non-current assets	16		21
Liabilities:
Interest rate contracts	2	Other current liabilities	3		1
Interest rate contracts	2	Other non-current liabilities	8		7

The following table summarizes the fair value hierarchy and the location of the fair value of the Company's derivative instruments not designated as hedging instruments within the Consolidated Balance Sheets as of December 31, 2017 and 2016:



(in millions)	Fair Value Hierarchy Level	Balance Sheet Location	December 31, 2017		December 31, 2016
Assets:
Interest rate contracts	2	Prepaid expenses and other current assets	$	—	$	4
Commodity contracts	2	Prepaid expenses and other current assets	27		9
Interest rate contracts	2	Other non-current assets	—		8
Commodity contracts	2	Other non-current assets	17		12
Liabilities:
Commodity contracts	2	Other current liabilities	—		1

The fair values of commodity contracts, interest rate contracts and FX forward contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. The fair value of commodity contracts are valued using the market approach based on observable market transactions, primarily underlying commodities futures or physical index prices, at the reporting date. Interest rate contracts are valued using models based primarily on readily observable market parameters, such as LIBOR forward rates, for all substantial terms of the Company's contracts and credit risk of the counterparties. The fair value of FX forward contracts are valued using quoted forward FX prices at the reporting date. Therefore, the Company has categorized these contracts as Level 2.

Cash equivalents are composed of certificates of deposit, time deposits and other interest-bearing investments with original maturity dates of three months or less. Cash equivalents are recorded at cost, which approximates fair value. The Company's cash and cash equivalents are not required to be measured at fair value in the Consolidated Balance Sheets. The following table provides a reconciliation of the carrying value and estimated fair value of the Company's cash, cash equivalents, restricted cash and restricted cash equivalents reported with the Consolidated Balance Sheets to the total of the same amounts shown in the Consolidated Statements of Cash Flows:



	Fair Value Hierarchy	December 31, 2017				December 31, 2016
(in millions)	Fair Value Hierarchy	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Cash and cash equivalents	Level 1	$	61	$	61	$	1,787	$	1,787
Restricted cash and restricted cash equivalents⁽¹⁾	Level 1	18		18		—		—
Non-current restricted cash and restricted cash equivalents included in Other non-current assets⁽¹⁾	Level 1	79		79		—		—
Total cash, cash equivalents, restricted cash and restricted cash equivalents shown in the Consolidated Statement of Cash Flows		$	158	$	158	$	1,787	$	1,787

____________________________


(1)	Amounts included in restricted cash and restricted cash equivalents represent the holdback held in escrow in connection with the Bai Brands Merger. Refer to Note 3 for additional information on the Bai Brands Merger.

Historical Timeline

Fiscal Year	Filed
2017	Feb 14, 2018	Showing above
2016	Feb 14, 2017

2015	Feb 23, 2016

About Fair Value Disclosures

Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.

Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.

Keurig Dr Pepper Inc. Fair Value Disclosure

Historical Timeline

About Fair Value Disclosures

Other Available Disclosures