13.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 value of the Company’s non-qualified deferred compensation plan for certain executives and other highly compensated employees is based on the fair values of 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 of 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. The Company’s 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 non-public variable rate debt 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 non-public fixed rate 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 1, 2018
	Carrying		Total		Fair Value		Fair Value		Fair Value
(in thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
Assets:
Deferred compensation plan assets	$	34,555	$	34,555	$	34,555	$	-	$	-
Commodity hedging agreements		1,750		1,750		-		1,750		-
Liabilities:
Deferred compensation plan liabilities		34,555		34,555		34,555		-		-
Non-public variable rate debt		399,485		400,000		-		400,000		-
Non-public fixed rate debt		274,678		258,800		-		258,800		-
Public debt securities		457,150		457,100		-		457,100		-
Acquisition related contingent consideration		374,537		374,537		-		-		374,537

	December 31, 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	$	33,166	$	33,166	$	33,166	$	-	$	-
Commodity hedging agreements		4,420		4,420		-		4,420		-
Liabilities:
Deferred compensation plan liabilities		33,166		33,166		33,166		-		-
Non-public variable rate debt		506,398		507,000		-		507,000		-
Non-public fixed rate debt		124,829		126,400		-		126,400		-
Public debt securities		456,791		475,100		-		475,100		-
Acquisition related contingent consideration		381,291		381,291		-		-		381,291

Under the CBA, the Company is required to make quarterly sub-bottling payments 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 distribution territories acquired in the System Transformation, excluding territories the Company acquired in an exchange transaction. 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 distribution territories to fair value by discounting future expected sub-bottling payments required under the 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 distribution 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 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)	2018			2017			2018			2017
Beginning balance - Level 3 liability	$	368,804		$	303,952		$	381,291		$	253,437
Increase due to System Transformation Transactions acquisitions		-			3,770			-			46,086
Measurement period adjustments⁽¹⁾		3,151			-			2,092			-
Payment of acquisition related contingent consideration		(5,381	)		(6,556	)		(11,263	)		(6,556	)
Reclassification to current payables		(1,180	)		1,817			(1,540	)		(2,230	)
Unfavorable fair value adjustment		9,143			16,119			3,957			28,365
Ending balance - Level 3 liability	$	374,537		$	319,102		$	374,537		$	319,102

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Measurement period adjustments relate to post-closing adjustments made in relation to the April 2017 Transactions and the October 2017 Transactions in accordance with the terms and conditions of the applicable asset purchase agreement or asset exchange agreement. See Note 3 to the consolidated condensed financial statements for additional information on the System Transformation Transactions.

The fair value adjustments to the acquisition related contingent consideration liability during the first half of 2018 were primarily driven by cash payments, post-closing adjustments related to System Transformation Transactions and a change in projected future operating results of the distribution territories acquired as part of the System Transformation subject to sub-bottling fees, partially offset by an increase in the discount rate. The fair value adjustments to the acquisition related contingent consideration liability during the first half of 2017 were primarily a result of the final settlement of territory values for the Paducah and Pikeville, Kentucky distribution territory acquisition and the Norfolk, Fredericksburg and Staunton, Virginia, and Elizabeth City, North Carolina distribution territory acquisition, which closed in May 2015 and October 2015, respectively. These adjustments were recorded in other expense, net on the Company’s consolidated condensed statements of operations.

The anticipated amount the Company could pay annually under the acquisition related contingent consideration arrangements for the System Transformation Transactions is expected to be in the range of $25 million to $47 million.