6.	Derivatives and Hedging Activities

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates and diesel fuel costs. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and payments related to the Company’s investments, borrowings, and diesel fuel purchases.

The effective portion of changes in the fair value of derivatives that are both designated and qualify as cash flow hedges is recorded in other comprehensive income and subsequently reclassified into earnings in the period that the hedged transaction occurs. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.

Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. Since the Company has a substantial portion of its debt in variable-rate instruments, it accomplishes this objective with interest rate swaps. These swaps are designated as cash flow hedges and involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. All of the Company’s interest rate swaps are designated and qualify as cash flow hedges.

Amounts reported in other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the twelve months ending October 1, 2016, the Company estimates that an additional $6.4 million will be reclassified to earnings as an increase to interest expense.

As of September 26, 2015, Performance Food Group, Inc. had five interest rate swaps with a combined $750 million notional amount that were designated as cash flow hedges of interest rate risk. The following table summarizes the outstanding Swap Agreements as of September 26, 2015 (in millions):


Effective Date	Maturity Date	Notional Amount		Fixed Rate Swapped

June 30, 2014	June 30, 2017		200.0		1.52	%
June 30, 2014	June 30, 2017		100.0		1.52	%
August 9, 2013	August 9, 2018		200.0		1.51	%
June 30, 2014	June 30, 2016		150.0		1.47	%
June 30, 2014	June 30, 2016		100.0		1.47	%

Hedges of Forecasted Diesel Fuel Purchases

From time to time, Performance Food Group, Inc. enters into costless collar arrangements to hedge its exposure to variability in cash flows expected to be paid for its forecasted purchases of diesel fuel. As of September 26, 2015, Performance Food Group, Inc. was a party to five such arrangements, with an aggregate 13.2 million gallon original notional amount in total and an aggregate 7.8 million gallon notional amount remaining. The remaining 7.8 million gallon forecasted purchases of diesel fuel are expected to be made between October 1, 2015 and December 31, 2016.

The fuel collar instruments do not qualify for hedge accounting. Accordingly, the derivative instruments are recorded as an asset or liability on the balance sheet at fair value and any changes in fair value are recorded in the period of change as unrealized gains or losses on fuel hedging instruments and included in Other, net in the accompanying consolidated statement of operations. The Company recorded $1.2 million in unrealized losses and $1.0 million in expense for cash settlements related to these fuel collars for the three-month period ended September 26, 2015, compared to $0.2 million in unrealized losses and no cash settlements related to these fuel collars for the three-month period ended September 27, 2014.

The Company does not currently have a payable or receivable related to cash collateral for its derivatives, and therefore it has not established an accounting policy for offsetting the fair value of its derivatives against such balances. The table below presents the fair value of the derivative financial instruments as well as their classification on the balance sheet as of September 26, 2015 and June 27, 2015:


Fair Value of Derivative Instruments
(in millions)
	Asset Derivatives						Liability Derivatives
	As of September 26, 2015			As of June 27, 2015			As of September 26, 2015			As of June 27, 2015
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value

Derivatives designated as hedging instruments under ASC 815-20:
Interest rate swaps	Prepaid expenses and other current assets	$	—	Prepaid expenses and other current assets	$	—	Current derivative liabilities	$	6.2	Current derivative liabilities	$	6.1
Interest rate swaps	Other assets		—	Other assets		0.2	Long- term derivative liabilities		2.9	Long- term derivative liabilities		1.3

Total		$	—		$	0.2		$	9.1		$	7.4

Derivatives not designated as hedging instruments under ASC 815-20:
Diesel fuel collars	Prepaid expenses and other current assets	$	—	Prepaid expenses and other current assets	$	—	Current derivative liabilities	$	2.8	Current derivative liabilities	$	1.7
Diesel fuel collars	Other assets		—	Other assets		—	Long- term derivative liabilities		0.1	Long- term derivative liabilities		—

Total		$	—		$	—		$	2.9		$	1.7

All of the Company’s derivative contracts are subject to a master netting arrangement with the respective counterparties that provide for the net settlement of all derivative contracts in the event of default or upon the occurrence of certain termination events. Upon exercise of termination rights by the non-defaulting party (i) all transactions are terminated, (ii) all transactions are valued and the positive value or “in the money” transactions are netted against the negative value or “out of the money” transactions, and (iii) the only remaining payment obligation is of one of the parties to pay the netted termination amount.

The Company has elected to present the derivative assets and derivative liabilities on the balance sheet on a gross basis for periods ended September 26, 2015 and June 27, 2015. The tables below present the derivative assets and liability balance by type of financial instrument, before and after the effects of offsetting, as of September 26, 2015 and June 27, 2015:

As of September 26, 2015

Gross
Amounts of
Recognized
Assets

Gross Amounts
Offset in the
Consolidated
Balance Sheet

Net Amounts of
Assets
Presented in the
Consolidated
Balance Sheet

Gross Amounts Not Offset in
the Consolidated Balance Sheet

(In millions)

Financial
Instruments

Cash
Collateral
Pledged

Net
Amounts

Interest rate swaps:

—

Diesel fuel collars:

—

Total derivatives, subject to a master netting arrangement

—


	As of September 26, 2015
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Consolidated Balance Sheet		Net Amounts of Liabilities Presented in the Consolidated Balance Sheet		Gross Amounts Not Offset in the Consolidated Balance Sheet
(In millions)	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Consolidated Balance Sheet				Financial Instruments		Cash Collateral Pledged		Net Amounts

Interest rate swaps:	$	9.1	$	—	$	9.1	$	—	$	—	$	9.1
Diesel fuel collars:		2.9		—		2.9		—		—		2.9

Total derivatives, subject to a master netting arrangement		12.0		—		12.0		—		—		12.0


	As of June 27, 2015
	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Consolidated Balance Sheet		Net Amounts of Assets Presented in the Consolidated Balance Sheet		Gross Amounts Not Offset in the Consolidated Balance Sheet
(In millions)	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Consolidated Balance Sheet				Financial Instruments		Cash Collateral Pledged		Net Amounts

Interest rate swaps:	$	0.2	$	—	$	0.2	$	0.2	$	—	$	—
Diesel fuel collars:		—		—		—		—		—		—

Total derivatives, subject to a master netting arrangement		0.2		—		0.2		0.2		—		—


	As of June 27, 2015
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Consolidated Balance Sheet		Net Amounts of Liabilities Presented in the Consolidated Balance Sheet		Gross Amounts Not Offset in the Consolidated Balance Sheet
(In millions)	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Consolidated Balance Sheet				Financial Instruments		Cash Collateral Pledged		Net Amounts

Interest rate swaps:	$	7.4	$	—	$	7.4	$	0.2	$	—	$	7.2
Diesel fuel collars:		1.7		—		1.7		—		—		1.7

Total derivatives, subject to a master netting arrangement		9.1		—		9.1		0.2		—		8.9

The tables below present the effect of the derivative financial instruments designated in hedging relationships on the consolidated statement of operations for the three-month periods ended September 26, 2015 and September 27, 2014:


Tabular Disclosure of the Effect of Derivative Instruments on the Consolidated Statement of Operations for the Three Month Period Ended September 26, 2015 (in millions)
Derivatives in FASB ASC 815-20 Cash Flow Hedging Relationships	Amount of (Gain) Loss Recognized in OCI on Derivative (Effective Portion), including all tax effects		Location of Loss Reclassified from OCI into Income (Effective Portion)		Amount of (Loss) Gain Reclassified from OCI into Income (Effective Portion)			Location of Loss Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain (Loss) Recognized in Income on Derivatives (Cumulative Ineffective Portion and Amount Excluded from Effectiveness Testing)

Interest Rate Swaps	$	2.9		Interest expense	$	(2.0	)	Other, net	$	—


Tabular Disclosure of the Effect of Derivative Instruments on the Consolidated Statement of Operations for the Three Month Period Ended September 27, 2014 (in millions)
Derivatives in FASB ASC 815-20 Cash Flow Hedging Relationships	Amount of (Gain) Loss Recognized in OCI on Derivative (Effective Portion), including all tax effects			Location of Loss Reclassified from OCI into Income (Effective Portion)		Amount of (Loss) Gain Reclassified from OCI into Income (Effective Portion)			Location of Loss Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain (Loss) Recognized in Income on Derivatives (Cumulative Ineffective Portion and Amount Excluded from Effectiveness Testing)

Interest Rate Swaps	$	(0.1	)		Interest expense	$	(2.0	)	Other, net	$	—

The derivative instruments are the only assets or liabilities that are recorded at fair value on a recurring basis. The fuel collars are exchange-traded commodities and their fair value is derived from valuation models based on certain assumptions regarding market conditions, some of which may be unobservable. Based on the lack of significance of these unobservable inputs, the Company has concluded that these instruments represent Level 2 on the hierarchy. The fair values of the Company’s interest rate swap agreements are determined using a valuation model with several inputs and assumptions, some of which may be unobservable. A specific unobservable input used by the Company in determining the fair value of its interest rate swaps is an estimation of both the unsecured borrowing spread to LIBOR for the Company as well as that of the derivative counterparties. Based on the lack of significance of this estimated spread component to the overall value of the Company’s interest rate swaps, the Company has concluded that these swaps represent Level 2 on the hierarchy.

There have been no transfers between levels in the hierarchy from June 27, 2015 to September 26, 2015.

Credit-risk-related Contingent Features

The Company has agreements with each of its derivative counterparties that provide that if the Company either defaults or is capable of being declared in default on any of its indebtedness, the Company can also be declared in default on its derivative obligations.

As of September 26, 2015, and June 27, 2015, the aggregate fair value amount of derivative instruments that contain contingent features was $12.0 million and $8.9 million, respectively. As of September 26, 2015, the Company has not been required to post any collateral related to these agreements. If the Company breached any of these provisions, it would be required to settle its obligations under the agreements at their termination value of $12.0 million.