Dollar General 2008 Annual Report Download - page 61

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In September 2006, the FASB issued SFAS 157, “Fair Value Measurements.” SFAS 157
provides guidance for using fair value to measure assets and liabilities. The standard also
requires expanded information about the extent to which companies measure assets and liabilities
at fair value, the information used to measure fair value, and the effect of fair value
measurements on earnings. 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 the components of SFAS 157 relating to
nonfinancial assets and liabilities during 2009. 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, and to a
lesser degree commodity prices. 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.
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 Credit Facilities. Our Credit Facilities provide
for variable rate borrowings of up to $3.425 billion including availability of $1.125 billion 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 Credit Facilities, we entered
into interest rate swaps which became effective on July 31, 2007. Pursuant to the swaps, we
swapped three month LIBOR rates for fixed interest rates, resulting in the payment of an all-in
fixed rate of 7.68% on an original notional amount of $2.0 billion originally scheduled to
amortize on a quarterly basis until maturity at July 31, 2012.
On October 3, 2008, a counterparty to one of our 2007 swap agreements declared
bankruptcy, which constituted a technical default under this contract and on October 30, 2008,
we terminated this swap agreement. We subsequently cash settled the swap on November 10,
2008 for approximately $7.6 million, including interest accrued to the date of termination. As of
January 30, 2009, the notional amount under the remaining 2007 swaps is $866.7 million.