Dollar General 2011 Annual Report Download - page 152

10-K
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.
In October 2008, a counterparty to one of our 2007 swap agreements defaulted. We terminated
this agreement and in November 2008 we subsequently cash settled the swap. Representatives of the
counterparty challenged our calculation of the cash settlement, and this matter was settled in 2011 as
described in ‘‘Legal Proceedings’’ under Note 9 of the footnotes to the consolidated financial
statements. As of February 3, 2012, the notional amount under the remaining 2007 swaps is
$233.3 million.
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, resulting 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 through 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 variable rate borrowing levels and interest rate swaps
outstanding during 2011 and 2010, the annualized effect of a one percentage point change in variable
interest rates would have resulted in a pretax reduction of our earnings and cash flows of
approximately $16.3 million in 2011 and $9.3 million in 2010.
The conditions and uncertainties in the global credit markets have 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.
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