Dollar General 2014 Annual Report Download - page 121

10-K
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. All derivative financial instrument transactions must be authorized and executed pursuant
to approval by the Board of Directors. As a matter of policy, we do not buy or sell financial
instruments for speculative or trading purposes, and any such derivative financial instruments 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 unsecured debt Facilities. As of January 30, 2015, we had variable rate
borrowings of $925 million under our Term Facility and no borrowings outstanding under our Revolving
Facility. In order to mitigate a portion of the variable rate interest exposure under the Facilities, we
have entered into various interest rate swaps in recent years. For a detailed discussion of our Facilities,
see Note 5 to the consolidated financial statements.
Currently, we are counterparty to certain interest rate swaps with a total notional amount of
$875.0 million entered into in May 2012 in order to mitigate a portion of the variable rate interest
exposure under the Facilities. These swaps are scheduled to mature in May 2015. Under the terms of
these agreements we swapped one month LIBOR rates for fixed interest rates, resulting in the payment
of an all-in fixed rate of 1.86% on a notional amount of $875.0 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 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 as of January 30, 2015 and January 31, 2014, respectively, the annualized effect of a one
percentage point increase in variable interest rates would have resulted in a pretax reduction of our
earnings and cash flows of approximately $0.6 million in 2014 and $1.4 million in 2013.
Market conditions and periodic uncertainties in the global credit markets may increase the credit
risk of 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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