Dollar General 2007 Annual Report Download - page 53

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assets or liabilities to be measured at fair value. The standard does not expand the use of fair
value in any new circumstances. SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal years. For non-
financial assets and liabilities, the effective date has been delayed to fiscal years beginning after
November 15, 2008. We currently expect to adopt SFAS 157 during our 2008 and 2009 fiscal
years. We are in the process of evaluating the potential impact of this standard on our
consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Financial Risk Management
We are exposed to market risk primarily from adverse changes in interest rates. To
minimize this risk, we may periodically use financial instruments, including derivatives. As a
matter of policy, we do not buy or sell financial instruments for speculative or trading purposes
and all derivative financial instrument transactions must be authorized and executed pursuant to
approval by the Board of Directors. All financial instrument positions taken by us are intended to
be used to reduce risk by hedging an underlying economic exposure. Because of high correlation
between the derivative financial instrument and the underlying exposure being hedged,
fluctuations in the value of the financial instruments are generally offset by reciprocal changes in
the value of the underlying economic exposure. The financial instruments we use are
straightforward instruments with liquid markets.
Interest Rate Risk
We manage our interest rate risk through the strategic use of fixed and variable interest
rate debt and, from time to time, derivative financial instruments. Our principal interest rate
exposure relates to outstanding amounts under our New Credit Facilities. Our New Credit
Facilities provide for variable rate borrowings of up to $3,425.0 million including availability of
$1,125.0 million under our senior secured asset-based revolving credit facility, subject to the
borrowing base. In order to mitigate a portion of the variable rate interest exposure under the
New Credit Facilities, we entered into interest rate swaps with affiliates of Goldman, Sachs &
Co., Lehman Brothers Inc. and Wachovia Capital Markets, LLC. Pursuant to the swaps, which
became effective on July 31, 2007, we swapped three month LIBOR rates for fixed interest rates
which will result in the payment of a fixed rate of 7.68% on a notional amount of
$2,000.0 million which will amortize on a quarterly basis until maturity at July 31, 2012. At
February 1, 2008, the notional amount was $1,630.0 million.
A change in interest rates on variable rate debt impacts our pre-tax earnings and cash
flows; whereas a change in interest rates on fixed rate debt impacts the economic fair value of
debt but not our pre-tax earnings and cash flows. Our derivatives qualify for hedge accounting
as cash flow hedges. Therefore, changes in market fluctuations related to the effective portion of
these cash flow hedges do not impact our pre-tax earnings until the accrued interest is recognized
on the derivatives and the associated hedged debt. Based on our outstanding debt as of February
1, 2008 and assuming that our mix of debt instruments, derivative instruments and other