11.Fair Values of Financial Instruments

GAAP requires assets and liabilities carried at fair value to be classified and disclosed in one of the following categories:

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

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Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

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Level 3: Unobservable inputs that are not corroborated by market data.

The following methods and assumptions were used by the Company in estimating the fair values of its financial instruments. There were no transfers of assets or liabilities between Levels in any period presented.

Financial Instrument	Fair Value Level	Method and Assumptions
Deferred compensation plan assets and liabilities	Level 1	The fair values of the Company’s non-qualified deferred compensation plan for certain executives and other highly compensated employees has associated assets and liabilities, which are held in mutual funds and are based on the quoted market value of the securities held within the mutual funds.
Commodity hedging agreements	Level 2	The fair values for the Company’s commodity hedging agreements are based on current settlement values at each balance sheet date. The fair values of the commodity hedging agreements at each balance sheet date represent the estimated amounts the Company would have received or paid upon termination of these agreements. Credit risk related to the derivative financial instruments is managed by requiring high standards for its counterparties and periodic settlements. The Company considers nonperformance risk in determining the fair value of derivative financial instruments.
Non-public variable rate debt	Level 2	The carrying amounts of the Company’s variable rate borrowings approximate their fair values due to variable interest rates with short reset periods.
Non-public fixed rate debt	Level 2	The fair values of the Company’s fixed rate non-public debt are based on estimated current market prices.
Public debt securities	Level 2	The fair values of the Company’s public debt securities are based on estimated current market prices.
Acquisition related contingent consideration	Level 3	The fair values of acquisition related contingent consideration are based on internal forecasts and the weighted average cost of capital (“WACC”) derived from market data.

The following tables summarize, by assets and liabilities, the carrying amounts and fair values by level of the Company’s deferred compensation plan, commodity hedging agreements, debt and acquisition related contingent consideration:

	July 2, 2017
	Carrying		Total		Fair Value		Fair Value		Fair Value
(in thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
Assets:
Deferred compensation plan assets	$	29,019	$	29,019	$	29,019	$	-	$	-
Commodity hedging agreements		718		718		-		718		-
Liabilities:
Deferred compensation plan liabilities		29,019		29,019		29,019		-		-
Commodity hedging agreements		287		287		-		287		-
Non-public variable rate debt		499,310		500,000		-		500,000		-
Non-public fixed rate debt		124,799		125,000		-		125,000		-
Public debt securities		456,469		478,700		-		478,700		-
Acquisition related contingent consideration		319,102		319,102		-		-		319,102

	January 1, 2017
	Carrying		Total		Fair Value		Fair Value		Fair Value
(in thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
Assets:
Deferred compensation plan assets	$	24,903	$	24,903	$	24,903	$	-	$	-
Commodity hedging agreements		1,289		1,289		-		1,289		-
Liabilities:
Deferred compensation plan liabilities		24,903		24,903		24,903		-		-
Non-public variable rate debt		451,222		452,000		-		452,000		-
Public debt securities		456,032		475,800		-		475,800		-
Acquisition related contingent consideration		253,437		253,437		-		-		253,437

Under the Final CBA, the Company will make a quarterly sub-bottling payment to CCR on a continuing basis for the grant of exclusive rights to distribute, promote, market and sell specified covered beverages and beverage products in the Expansion Territories. This acquisition related contingent consideration is valued using a probability weighted discounted cash flow model based on internal forecasts and the WACC derived from market data, which are considered Level 3 inputs. Each reporting period, the Company adjusts its acquisition related contingent consideration liability related to the Expansion Territories to fair value by discounting future expected sub-bottling payments required under the Final CBA using the Company’s estimated WACC. These future expected sub-bottling payments extend through the life of the related distribution assets acquired in each Expansion Territory, which is generally 40 years. As a result, the fair value of the acquisition related contingent consideration liability is impacted by the Company’s WACC, management’s estimate of the amounts that will be paid in the future under the Final CBA, and current sub-bottling payments (all Level 3 inputs). Changes in any of these Level 3 inputs, particularly the underlying risk-free interest rate used to estimate the Company’s WACC, could result in material changes to the fair value of the acquisition related contingent consideration and could materially impact the amount of noncash expense (or income) recorded each reporting period.

The acquisition related contingent consideration is the Company’s only Level 3 asset or liability. A reconciliation of the Level 3 activity is as follows:

	Second Quarter						First Half
(in thousands)	2017			2016			2017			2016
Opening balance - Level 3 liability	$	303,952		$	177,933		$	253,437		$	136,570
Increase due to acquisitions		3,770			36,868			46,086			68,039
Payments/current payables		(4,739	)		(2,307	)		(8,786	)		(9,266	)
Unfavorable fair value adjustment		16,119			16,274			28,365			33,425
Ending balance - Level 3 liability	$	319,102		$	228,768		$	319,102		$	228,768

The fair value adjustment to the contingent consideration liability during the second quarter of 2017 was primarily driven by a change in the risk-free interest rate. The fair value adjustment to the contingent consideration liability during the first half of 2017 was primarily a result of a change in the risk-free interest rate and the final settlement of territory values for the Paducah and Pikeville, Kentucky Expansion Territory acquisitions and the Norfolk, Fredericksburg and Staunton, Virginia, and Elizabeth City, North Carolina Expansion Territory acquisitions, which closed in May 2015 and October 2015, respectively.

The fair value adjustments to the contingent consideration liability during the second quarter and first half of 2016 were primarily driven by a change in the projected future operating results of the Expansion Territories subject to sub-bottling fees. These adjustments were recorded in other expense, net on the Company’s consolidated condensed statements of operations.