Kroger 2013 Annual Report Download - page 124

A-51
NO T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S , CO N T I N U E D
As of February 1, 2014, the Company had outstanding letters of credit in the amount of $209, of which
$12 reduces funds available under the Company’s Credit Agreement. The letters of credit are maintained
primarily to support performance, payment, deposit or surety obligations of the Company.
Most of the Company’s outstanding public debt is subject to early redemption at varying times and
premiums, at the option of the Company. In addition, subject to certain conditions, some of the Company’s
publicly issued debt will be subject to redemption, in whole or in part, at the option of the holder upon the
occurrence of a redemption event, upon not less than five days’ notice prior to the date of redemption, at a
redemption price equal to the default amount, plus a specified premium. “Redemption Event” is defined in
the indentures as the occurrence of (i) any person or group, together with any affiliate thereof, beneficially
owning 50% or more of the voting power of the Company, (ii) any one person or group, or affiliate thereof,
succeeding in having a majority of its nominees elected to the Company’s Board of Directors, in each case,
without the consent of a majority of the continuing directors of the Company or (iii) both a change of control
and a below investment grade rating.
The aggregate annual maturities and scheduled payments of long-term debt, as of year-end 2013, and for
the years subsequent to 2013 are:
2014 ................................................. $ 1,616
2015 ................................................. 524
2016 ................................................. 1,267
2017 ................................................. 708
2018 ................................................. 1,003
Thereafter ............................................ 5,662
Total debt ............................................. $10,780
7. D E R I V A T I V E F I N A N C I A L I N S T R U M E N T S
GAAP defines derivatives, requires that derivatives be carried at fair value on the balance sheet, and provides
for hedge accounting when certain conditions are met. The Company’s derivative financial instruments are
recognized on the balance sheet at fair value. Changes in the fair value of derivative instruments designated as
“cash flow” hedges, to the extent the hedges are highly effective, are recorded in other comprehensive income,
net of tax effects. Ineffective portions of cash flow hedges, if any, are recognized in current period earnings.
Other comprehensive income or loss is reclassified into current period earnings when the hedged transaction
affects earnings. Changes in the fair value of derivative instruments designated as “fair value” hedges, along
with corresponding changes in the fair values of the hedged assets or liabilities, are recorded in current period
earnings. Ineffective portions of fair value hedges, if any, are recognized in current period earnings.
The Company assesses, both at the inception of the hedge and on an ongoing basis, whether derivatives
used as hedging instruments are highly effective in offsetting the changes in the fair value or cash flow of
the hedged items. If it is determined that a derivative is not highly effective as a hedge or ceases to be highly
effective, the Company discontinues hedge accounting prospectively.
Interest Rate Risk Management
The Company is exposed to market risk from fluctuations in interest rates. The Company manages its
exposure to interest rate fluctuations through the use of a commercial paper program, interest rate swaps (fair
value hedges) and forward-starting interest rate swaps (cash flow hedges). The Company’s 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, the Company uses 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 of $2,500 or less, (iii) include no leveraged products, and (iv) hedge without regard to profit
motive or sensitivity to current mark-to-market status.