Pepsi Bottling Group (PBG)

used in our operations. With respect to commodity price risk, we currently have various contracts outstanding for commodity purchases in 2009 and 2010, which establish our purchase prices within defined ranges. We estimate that a 10 percent decrease in commodity prices with all other variables held constant would have resulted in a change in the fair value of our financial instruments of $14 million and $7 million at December 27, 2008 and December 29, 2007, respectively.

 

Interest Rate Risk

Interest rate risk is inherent to both fixed- and floating-rate debt. We effectively converted $1.1 billion of our senior notes to floating-rate debt through the use of interest rate swaps. Changes in interest rates on our interest rate swaps and other variable debt would change our interest expense. We estimate that a 50 basis point increase in interest rates on our variable rate debt and cash equivalents, with all other variables held constant, would have resulted in an increase to net interest expense of $1 million and $2 million in fiscal years 2008 and 2007, respectively.

 

Foreign Currency Exchange Rate Risk

In 2008, approximately 34 percent of our net revenues were generated from outside the United States. Social, economic and political conditions in these international markets may adversely affect our results of operations, financial condition and cash flows. The overall risks to our international businesses include changes in foreign governmental policies and other social, political or economic developments. These developments may lead to new product pricing, tax or other policies and monetary fluctuations that may adversely impact our business. In addition, our results of operations and the value of our foreign assets and liabilities are affected by fluctuations in foreign currency exchange rates.

 

As currency exchange rates change, translation of the statements of operations of our businesses outside the U.S. into U.S. dollars affects year-over-year comparability. We generally have not hedged against these types of currency risks because cash flows from our international operations have been reinvested locally. We have foreign currency transactional risks in certain of our international territories for transactions that are denominated in currencies that are different from their functional currency. We have entered into forward exchange contracts to hedge portions of our forecasted U.S. dollar cash flows in these international territories. A 10 percent weaker U.S. dollar against the applicable foreign currency, with all other variables held constant, would result in a change in the fair value of these contracts of $5 million and $6 million at December 27, 2008 and December 29, 2007, respectively.

 

In 2007, we entered into forward exchange contracts to economically hedge a portion of intercompany receivable balances that are denominated in Mexican pesos. A 10 percent weaker U.S. dollar versus the Mexican peso, with all other variables held constant, would result in a change of $4 million and $9 million in the fair value of these contracts at December 27, 2008 and December 29, 2007, respectively.

 

Unfunded Deferred Compensation Liability

Our unfunded deferred compensation liability is subject to changes in our stock price, as well as price changes in certain other equity and fixed-income investments. Employee investment elections include PBG stock and a variety of other equity and fixed-income investment options. Since the plan is unfunded, employees’ deferred compensation amounts are not directly invested in these investment vehicles. Instead, we track the performance of each employee’s investment selections and adjust the employee’s deferred compensation account accordingly. The adjustments to the employees’ accounts increases or decreases the deferred compensation liability reflected on our Consolidated Balance Sheet with an offsetting increase or decrease to our selling, delivery and administrative expenses in our Consolidated Statements of Operations. We use prepaid forward contracts to hedge the portion of our deferred compensation liability that is based on our stock price. Therefore, changes in compensation expense as a result of changes in our stock price are substantially offset by the changes in the fair value of these contracts. We estimate that a 10 percent unfavorable change in the year-end stock price would have reduced the fair value from these forward contract commitments by $1 million and $2 million at December 27, 2008 and December 29, 2007, respectively.

 

prices related primarily to anticipated purchases of raw materials and energy used in our operations. With respect to commodity price risk, we currently have various contracts outstanding for commodity purchases in 2009 and 2010, which establish our purchase prices within defined ranges. We estimate that a 10 percent decrease in commodity prices with all other variables held constant would have resulted in a change in the fair value of our financial instruments of $14 million and $7 million at December 27, 2008 and December 29, 2007, respectively.

 

Interest Rate Risk

Interest rate risk is inherent to both fixed- and floating-rate debt. We effectively converted $1.1 billion of our senior notes to floating-rate debt through the use of interest rate swaps. Changes in interest rates on our interest rate swaps and other variable debt would change our interest expense. We estimate that a 50 basis point increase in interest rates on our variable rate debt and cash equivalents, with all other variables held constant, would have resulted in an increase to net interest expense of $1 million and $2 million in fiscal years 2008 and 2007, respectively.

 

Foreign Currency Exchange Rate Risk

In 2008, approximately 34 percent of our net revenues were generated from outside the United States. Social, economic and political conditions in these international markets may adversely affect our results of operations, financial condition and cash flows. The overall risks to our international businesses include changes in foreign governmental policies and other social, political or economic developments. These developments may lead to new product pricing, tax or other policies and monetary fluctuations that may adversely impact our business. In addition, our results of operations and the value of our foreign assets and liabilities are affected by fluctuations in foreign currency exchange rates.

 

As currency exchange rates change, translation of the statements of operations of our businesses outside the U.S. into U.S. dollars affects year-over-year comparability. We generally have not hedged against these types of currency risks because cash flows from our international operations have been reinvested locally. We have foreign currency transactional risks in certain of our international territories for transactions that are denominated in currencies that are different from their functional currency. We have entered into forward exchange contracts to hedge portions of our forecasted U.S. dollar cash flows in these international territories. A 10 percent weaker U.S. dollar against the applicable foreign currency, with all other variables held constant, would result in a change in the fair value of these contracts of $5 million and $6 million at December 27, 2008 and December 29, 2007, respectively.

 

In 2007, we entered into forward exchange contracts to economically hedge a portion of intercompany receivable balances that are denominated in Mexican pesos. A 10 percent weaker U.S. dollar versus the Mexican peso, with all other variables held constant, would result in a change of $4 million and $9 million in the fair value of these contracts at December 27, 2008 and December 29, 2007, respectively.

 

Unfunded Deferred Compensation Liability

Our unfunded deferred compensation liability is subject to changes in our stock price, as well as price changes in certain other equity and fixed-income investments. Employee investment elections include PBG stock and a variety of other equity and fixed-income investment options. Since the plan is unfunded, employees’ deferred compensation amounts are not directly invested in these investment vehicles. Instead, we track the performance of each employee’s investment selections and adjust the employee’s deferred compensation account accordingly. The adjustments to the employees’ accounts increases or decreases the deferred compensation liability reflected on our Consolidated Balance Sheet with an offsetting increase or decrease to our selling, delivery and administrative expenses in our Consolidated Statements of Operations. We use prepaid forward contracts to hedge the portion of our deferred compensation liability that is based on our stock price. Therefore, changes in compensation expense as a result of changes in our stock price are substantially offset by the changes in the fair value of these contracts. We estimate that a 10 percent unfavorable change in the year-end stock price would have reduced the fair value from these forward contract commitments by $1 million and $2 million at December 27, 2008 and December 29, 2007, respectively.

 

 

In the normal course of business, our financial position is
routinely subject to a variety of risks. These risks include
changes in the price of commodities purchased and used in our
business, interest rates on outstanding debt and currency
movements impacting our
non-U.S. dollar
denominated assets and liabilities. We are also subject to the
risks associated with the business environment in which we
operate. We regularly assess all of these risks and have
strategies in place to reduce the adverse effects of these
exposures.

 

Our objective in managing our exposure to fluctuations in
commodity prices, interest rates and foreign currency exchange
rates is to minimize the volatility of earnings and cash flows
associated with changes in the applicable rates and prices. To
achieve this objective, we have derivative instruments to hedge
against the risk of adverse movements in commodity prices,
interest rates and foreign currency. We monitor our counterparty
credit risk on an ongoing basis. Our corporate policy prohibits
the use of derivative instruments for trading or speculative
purposes, and we have procedures in place to monitor and control
their use. See Note 11 in the Notes to Consolidated
Financial Statements for additional information relating to our
derivative instruments.

 

A sensitivity analysis has been prepared to determine the
effects that market risk exposures may have on our financial
instruments. These sensitivity analyses evaluate the effect of
hypothetical changes in commodity prices, interest rates and
foreign currency exchange rates and changes in our stock price
on our unfunded deferred compensation liability. Information
provided by these sensitivity analyses does not necessarily
represent the actual changes in fair value that we would incur
under normal market conditions because, due to practical
limitations, all variables other than the specific market risk
factor were held constant. As a result, the reported changes in
the values of some financial instruments that are affected by
the sensitivity analyses are not matched with the offsetting
changes in the values of the items that those instruments are
designed to finance or hedge.

 

Commodity
Price Risk

We are subject to market risks with respect to commodities
because our ability to recover increased costs through higher
pricing may be limited by the competitive business environment
in which we operate. We use future and option contracts to hedge
the risk of adverse movements in commodity

28

prices related primarily to anticipated purchases of raw
materials and energy used in our operations. With respect to
commodity price risk, we currently have various contracts
outstanding for commodity purchases in 2009 and 2010, which
establish our purchase prices within defined ranges. We estimate
that a 10 percent decrease in commodity prices with all
other variables held constant would have resulted in a change in
the fair value of our financial instruments of $14 million
and $7 million at December 27, 2008 and
December 29, 2007, respectively.

 

Interest
Rate Risk

Interest rate risk is inherent to both fixed- and floating-rate
debt. We effectively converted $1.1 billion of our senior
notes to floating-rate debt through the use of interest rate
swaps. Changes in interest rates on our interest rate swaps and
other variable debt would change our interest expense. We
estimate that a 50 basis point increase in interest rates
on our variable rate debt and cash equivalents, with all other
variables held constant, would have resulted in an increase to
net interest expense of $1 million and $2 million in
fiscal years 2008 and 2007, respectively.

 

Foreign
Currency Exchange Rate Risk

In 2008, approximately 34 percent of our net revenues were
generated from outside the United States. Social, economic and
political conditions in these international markets may
adversely affect our results of operations, financial condition
and cash flows. The overall risks to our international
businesses include changes in foreign governmental policies and
other social, political or economic developments. These
developments may lead to new product pricing, tax or other
policies and monetary fluctuations that may adversely impact our
business. In addition, our results of operations and the value
of our foreign assets and liabilities are affected by
fluctuations in foreign currency exchange rates.

 

As currency exchange rates change, translation of the statements
of operations of our businesses outside the U.S. into
U.S. dollars affects year-over-year comparability. We
generally have not hedged against these types of currency risks
because cash flows from our international operations have been
reinvested locally. We have foreign currency transactional risks
in certain of our international territories for transactions
that are denominated in currencies that are different from their
functional currency. We have entered into forward exchange
contracts to hedge portions of our forecasted U.S. dollar
cash flows in these international territories. A 10 percent
weaker U.S. dollar against the applicable foreign currency,
with all other variables held constant, would result in a change
in the fair value of these contracts of $5 million and
$6 million at December 27, 2008 and December 29,
2007, respectively.

 

In 2007, we entered into forward exchange contracts to
economically hedge a portion of intercompany receivable balances
that are denominated in Mexican pesos. A 10 percent weaker
U.S. dollar versus the Mexican peso, with all other
variables held constant, would result in a change of
$4 million and $9 million in the fair value of these
contracts at December 27, 2008 and December 29, 2007,
respectively.

 

Unfunded
Deferred Compensation Liability

Our unfunded deferred compensation liability is subject to
changes in our stock price, as well as price changes in certain
other equity and fixed-income investments. Employee investment
elections include PBG stock and a variety of other equity and
fixed-income investment options. Since the plan is unfunded,
employees’ deferred compensation amounts are not directly
invested in these investment vehicles. Instead, we track the
performance of each employee’s investment selections and
adjust the employee’s deferred compensation account
accordingly. The adjustments to the employees’ accounts
increases or decreases the deferred compensation liability
reflected on our Consolidated Balance Sheet with an offsetting
increase or decrease to our selling, delivery and administrative
expenses in our Consolidated Statements of Operations. We use
prepaid forward contracts to hedge the portion of our deferred
compensation liability that is based on our stock price.
Therefore, changes in compensation expense as a result of
changes in our stock price are substantially offset by the
changes in the fair value of these contracts. We estimate that a
10 percent unfavorable change in the year-end stock price
would have reduced the fair value from these forward contract
commitments by $1 million and $2 million at
December 27, 2008 and December 29, 2007, respectively.

 

 

Included in Item 7, Management’s Financial Review – Market Risks and Cautionary Statements.

 

Included in Item 7, Management’s Financial
Review – Market Risks and Cautionary Statements.