Dollar Tree 2015 Annual Report Download - page 56

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40
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various types of market risk in the normal course of our business, including the impact of interest rate
changes and diesel fuel cost changes. We may enter into interest rate or diesel fuel swaps to manage exposure to interest rate
and diesel fuel price changes. We do not enter into derivative instruments for any purpose other than cash flow hedging and we
do not hold derivative instruments for trading purposes.
Interest Rate Risk
In conjunction with the Acquisition, we entered into new financing arrangements as described in "Note 6 - Long-Term
Debt" in "Item 8. Financial Statements and Supplementary Data" beginning on page 63 of this Form 10-K. Borrowings under
the Term Loan A bear interest based on LIBOR plus 2.25% and borrowings under Term Loan B-1 bear interest at the higher of
LIBOR plus 2.75% or 3.50%. As such, these debt instruments expose us to market risk for changes in interest rates. As of
January 30, 2016, approximately 45% of our total debt includes variable interest rates. However, the terms of the Term Loan
B-1 limit our exposure to short-term interest rate fluctuations due to the existence of the interest rate floor of 3.50%. As current
monthly LIBOR rates plus the 2.75% spread are below the interest rate floor of 3.50%, Term Loan B-1 effectively has a fixed
interest rate unless monthly LIBOR rates were to increase above 0.75%. A 1.0% increase in the LIBOR rate would result in an
annual increase in interest expense related to our variable rate debt of $25.2 million.
Diesel Fuel Cost Risk
In order to manage fluctuations in cash flows resulting from changes in diesel fuel costs, we entered into fuel derivative
contracts with third parties. We hedged 6.6 million, 1.6 million and 2.8 million gallons of diesel fuel in 2015, 2014 and 2013,
respectively. These hedges represented approximately 36%, 10% and 20% of the Dollar Tree segment's total domestic
truckload fuel needs in 2015, 2014 and 2013, respectively. Under these contracts, we pay the third party a fixed price for diesel
fuel and receive variable diesel fuel prices at amounts approximating current diesel fuel costs, thereby creating the economic
equivalent of a fixed-rate obligation. These derivative contracts do not qualify for hedge accounting and therefore all changes
in fair value for these derivatives are included in earnings. The fair value of these contracts as of January 30, 2016 was a
liability of $0.8 million.