DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

We use financial derivatives to manage interest rate and equity-based compensation risks inherent in our business operations. By using these instruments, we expose ourselves, from time to time, to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. We minimize this credit risk by entering into transactions with high-quality counterparties. We currently do not have any provisions in our agreements with counterparties that would require either party to hold or post collateral in the event that the market value of the related derivative instrument exceeds a certain limit. As such, the maximum amount of loss due to counterparty credit risk we would incur at May 28, 2017, if counterparties to the derivative instruments failed completely to perform, would approximate the values of derivative instruments currently recognized as assets on our consolidated balance sheet. Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates, commodity prices or the market price of our common stock. We minimize this market risk by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.

In the fourth quarter of fiscal 2017 we entered into Treasury lock derivative instruments with $500.0 million of notional value to hedge a portion of the risk of changes in the benchmark interest rate prior to the issuance of senior notes on April 10, 2017, as changes in the benchmark interest rate would cause variability in our forecasted interest payments. These derivative instruments were designated as cash flow hedges and were settled at the issuance of the senior notes for a cumulative loss of $1.3 million. This amount was recorded in accumulated other comprehensive income (loss) and will be reclassified into earnings as an adjustment to interest expense on the senior notes or similar debt as incurred.

We enter into equity forward contracts to hedge the risk of changes in future cash flows associated with the unvested, unrecognized Darden stock units. The equity forward contracts will be settled at the end of the vesting periods of their underlying Darden stock units, which range between four and five years and currently extend through July 2021. The contracts were initially designated as cash flow hedges to the extent the Darden stock units are unvested and, therefore, unrecognized as a liability in our financial statements. The forward contracts can only be net settled in cash. As the Darden stock units vest, we will de-designate that portion of the equity forward contract that no longer qualifies for hedge accounting, and changes in fair value associated with that portion of the equity forward contract will be recognized in current earnings. We periodically incur interest on the notional value of the contracts and receive dividends on the underlying shares. These amounts are recognized currently in earnings as they are incurred or received.

We entered into equity forward contracts to hedge the risk of changes in future cash flows associated with recognized, employee-directed investments in Darden stock within the non-qualified deferred compensation plan. We did not elect hedge accounting with the expectation that changes in the fair value of the equity forward contracts would offset changes in the fair value of Darden stock investments in the non-qualified deferred compensation plan within general and administrative expenses in our consolidated statements of earnings. These contracts currently extend through July 2021.

The notional and fair values of our derivative contracts are as follows:



						Fair Values
(in millions, except per share data)	Number of Shares Outstanding	Weighted-Average Per Share Forward Rates		Notional Values		Derivative Assets (1)				Derivative Liabilities (1)
	May 28, 2017					May 28, 2017		May 29, 2016		May 28, 2017		May 29, 2016
Equity Forwards
Designated	0.3	$	59.36	$	18.7	$	—	$	1.2	$	0.1	$	—
Not designated	0.6	$	51.85	$	31.5	—		2.6		0.3		—
Total equity forwards						$	—	$	3.8	$	0.4	$	—


(1)	Derivative assets and liabilities are included in receivables, net, prepaid expenses and other current assets, and other current liabilities, as applicable, on our consolidated balance sheets.

The effects of derivative instruments in cash flow hedging relationships in the consolidated statements of earnings are as follows:



	Equity (1)								Interest Rate (2)
	Fiscal Year								Fiscal Year
(in millions)	2017			2016		2015			2017			2016			2015
Gain (loss) recognized in AOCI (effective portion)	$	3.7		$	2.0	$	2.1		$	(1.3	)	$	—		$	—
Gain (loss) reclassified from AOCI to earnings (effective portion)	(1.4		)	2.1		(1.0		)	—			(37.4		)	(45.7		)
Gain (loss) recognized in earnings (ineffective portion)	0.5			0.9		1.1			—			—			—


(1)	Location of the gain (loss) reclassified from AOCI to earnings as well as the gain (loss) recognized in earnings for the ineffective portion of the hedge is restaurant labor expenses and general and administrative expenses.


(2)	Location of the gain (loss) reclassified from AOCI to earnings as well as the gain (loss) recognized in earnings for the ineffective portion of the hedge is interest, net.

The effects of derivatives not designated as hedging instruments in the consolidated statements of earnings are as follows:



	Amount of Gain (Loss) Recognized in Earnings
(in millions)	Fiscal Year
Location of Gain (Loss) Recognized in Earnings on Derivatives	2017		2016		2015
Restaurant labor expenses	$	5.3	$	3.9	$	4.0
General and administrative expenses	8.9		7.5		9.2
Total	$	14.2	$	11.4	$	13.2

Based on the fair value of our derivative instruments designated as cash flow hedges as of May 28, 2017, we expect to reclassify $0.2 million of net gains on derivative instruments from accumulated other comprehensive income (loss) to earnings during the next 12 months based on the maturity of equity forward contracts. However, the amounts ultimately realized in earnings will be dependent on the fair value of the contracts on the settlement dates.