Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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Financial Risk Management

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We use derivative financial instruments primarily to manage our exposure to fluctuations in interest rates. We do not enter into derivative financial instruments for trading purposes. As a matter of policy, all of our derivative positions are intended to reduce risk by hedging an underlying economic exposure. Because of the high correlation between the hedging instrument and the underlying exposure, fluctuations in the value of the instruments generally are offset by reciprocal changes in the value of the underlying exposure. The interest rate derivatives we use are straightforward instruments with liquid markets.

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We manage our exposure to interest rates and changes in the fair value of our debt instruments primarily through the strategic use of our commercial paper program, variable and fixed rate debt, and interest rate swaps. Our current program relative to interest rate protection contemplates hedging the exposure to changes in the fair value of fixed-rate debt attributable to changes in interest rates. To do this, we use the following guidelines: (i) use average daily outstanding borrowings to determine annual debt amounts subject to interest rate exposure, (ii) limit the average annual amount subject to interest rate reset and the amount of floating rate debt to a combined total amount that represents 25% of the carrying value of our debt portfolio or less, (iii) include no leveraged products, and (iv) hedge without regard to profit motive or sensitivity to current mark-to-market status.

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As of February 1, 2020, we maintained seven forward-starting interest rate swap agreements with a maturity date of January 15, 2021 with an aggregate notional amount totaling $350 million. A forward-starting interest rate swap is an agreement that effectively hedges the variability in future benchmark interest payments attributable to changes in interest rates on the forecasted issuance of fixed-rate debt. We entered into these forward-starting interest rate swaps in order to lock in fixed interest rates on our forecasted issuances of debt in January 2021. The fixed interest rates for these forward-starting interest rate swaps range from 1.57% to 2.45%. The variable rate component on the forward-starting interest rate swaps is 3 month LIBOR. Accordingly, the forward-starting interest rate swaps were designated as cash-flow hedges as defined by GAAP. As of February 1, 2020, the fair value of the interest rate swaps was recorded in “Other long-term liabilities” for $19 million and accumulated other comprehensive loss for $17 million, net of tax.

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Annually, we review with the Financial Policy Committee of our Board of Directors compliance with the guidelines described above. The guidelines may change as our business needs dictate.

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The tables below provide information about our underlying debt portfolio as of February 1, 2020 and February 2, 2019. The amounts shown for each year represent the contractual maturities of long-term debt, excluding finance leases, as of February 1, 2020 and February 2, 2019. Interest rates reflect the weighted average rate for the outstanding instruments. The variable rate debt is based on U.S. dollar LIBOR using the forward yield curve as of February 1, 2020 and February 2, 2019. The Fair Value column includes the fair value of our debt instruments as of February 1, 2020 and February 2, 2019. We have no outstanding interest rate derivatives classified as fair value hedges as of February 1, 2020 or February 2, 2019. See Notes 6, 7 and 8 to the Consolidated Financial Statements.

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Based on our year-end 2019 variable rate debt levels, a 10 percent change in interest rates would be immaterial. See Note 7 to the Consolidated Financial Statements for further discussion of derivatives and hedging policies.

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