Dollar General 2008 Annual Report Download - page 62

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Effective February 28, 2008, we entered into a $350.0 million step-down interest rate
swap in order to mitigate an additional portion of the variable rate interest exposure under the
Credit Facilities. Under the terms of this agreement we swapped one month LIBOR rates for
fixed interest rates, which will result in the payment of a fixed rate of 5.58% on a notional
amount of $350.0 million for the first year and $150.0 million for the second year.
Effective December 31, 2008, we entered into a $475.0 million interest rate swap in order
to mitigate an additional portion of the variable rate interest exposure under the Credit Facilities.
This swap is scheduled to mature on January 31, 2013. Under the terms of this agreement we
swapped one month LIBOR rates for fixed interest rates, which will result in the payment of a
fixed rate of 5.06% on a notional amount of $475.0 million through April 2010, $400.0 million
from May 2010 to October 2011, and $300.0 million to maturity.
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 interest rate swaps 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 January 30, 2009 and assuming that our mix of debt instruments,
derivative instruments and other variables remain the same, the annualized effect of a one
percentage point change in variable interest rates would have a pretax impact on our earnings
and cash flows of approximately $6.2 million.
The interest rate swaps are accounted for in accordance with SFAS No. 133 “Accounting
for Derivative Instruments and Hedging Activities”, as amended and interpreted (collectively,
“SFAS 133”). SFAS 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. SFAS 133 requires that all derivatives be recognized as either
assets or liabilities at fair value.
The conditions and uncertainties in the global credit markets have substantially increased
the credit risk of other counterparties to our swap agreements. In the event such counterparties
fail to perform under our swap agreements and we are unable to enter into new swap agreements
on terms favorable to us, our ability to effectively manage our interest rate risk may be materially
impaired. We attempt to manage counterparty credit risk by periodically evaluating the financial
position and creditworthiness of such counterparties, monitoring the amount for which we are at
risk with each counterparty, and where possible, dispersing the risk among multiple
counterparties. There can be no assurance that we will manage or mitigate our counterparty
credit risk effectively.