Rogers 2009 Annual Report Download - page 105

ROGERS COMMUNICATIONS INC. 2009 ANNUAL REPORT 109
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Also effective on August 6, 2008, the Company re-couponed three
of its existing Derivatives by terminating the original Derivatives
aggregating U.S. $575 million notional principal amount and
simultaneously entering into three new Derivatives aggregating
U.S. $575 million notional principal amount at then current market
rates. In each case, only the fixed foreign exchange rate and the
Canadian dollar fixed interest rate were changed and all other terms
for the new Derivatives are identical to the respective terminated
Derivatives they are replacing. The termination of the three original
Derivatives resulted in the Company paying U.S. $360 million
(Cdn. $375 million) for the aggregate out-of-the-money fair value
for the terminated Derivatives on the date of termination, thereby
reducing by an equal amount, the fair value of the derivative
instruments liability on that date. The three new Derivatives have
the effect of converting U.S. $575 million aggregate notional
principal amount of U.S. dollar denominated debt from a weighted
average U.S. dollar fixed interest rate of 7.20% into notional
Cdn. $589 million ($1.025 exchange rate) at a weighted average
Canadian dollar fixed interest rate of 6.88%. In comparison, the
original Derivatives had the effect of converting U.S. $575 million
aggregate notional principal amount of U.S. dollar-denominated
debt from a weighted average U.S. dollar fixed interest rate of 7.20%
into notional Cdn. $815 million ($1.4177 exchange rate) at a weighted
average Canadian dollar fixed interest rate of 7.89%. Each of the
three new Derivatives has been designated as a hedge against the
designated U.S. dollar-denominated debt for accounting purposes.
Prior to the termination of the Derivatives noted above, changes in
the fair value of these Derivatives had been recorded in accumulated
other comprehensive income and were periodically reclassified to
income to offset foreign exchange gains or losses on related debt
or to modify interest expense to its hedged amount. The remaining
balance in accumulated other comprehensive income relating
to these terminated Derivatives on the termination date was
$144 million. The portion related to future periodic exchanges of
interest of $68 million, net of income taxes of $26 million, will be
recorded in income over the remaining life of the specific debt
securities to which the settled hedging items related using the
effective interest rate method. The portion of the remaining
balance that relates to the future principal exchange of $43 million,
net of income taxes of $7 million, will remain in accumulated other
comprehensive income until such time as the related debt is settled.
The total amortization of the terminated Derivatives is $6 million
for 2009 (2008 – $3 million) and is recorded in interest expense.
In addition, two Derivatives matured on December 15, 2008.
These Derivatives hedged the foreign exchange risk related to the
U.S. $400 million 8.00% Senior Subordinated Notes due 2012. As a
result of the maturity of these Derivatives, the Company’s U.S. $400
million 8.00% Senior Subordinated Notes due 2012 were not hedged
for the period from December 15, 2008 until their redemption on
December 15, 2009 (see note 14(c)). Proceeds of $494 million (U.S.
$400 million) were received on the settlement of the Derivatives
and a payment of $475 million was made. In addition, upon
settlement of forward foreign exchange contracts on December 15,
2008, proceeds of $476 million were received and payments on the
forward contracts of $494 million (U.S. $400 million) were made.
The effect of estimating fair value using credit-adjusted interest
rates on the Company’s Derivatives at December 31, 2009 is
illustrated in the table below. As at December 31, 2009, the credit-
adjusted net liability position of the Company’s derivative portfolio
was $1,002 million, which is $25 million less than the unadjusted risk-
free mark-to-market net liability position.
Of the $25 million impact, ($1) million was recorded in the
consolidated statements of income related to Derivatives
not accounted for as hedges and $26 million related to Derivatives
accounted for as hedges was recorded in other comprehensive
income.
The effect of estimating fair value using credit-adjusted interest
rates on the Company’s Derivatives at December 31, 2008 is
illustrated in the table below. As at December 31, 2008, the
credit-adjusted net liability position of the Company’s derivative
portfolio was $154 million, which is $10 million more than the
unadjusted risk-free mark-to-market net liability position.
As at December 31, 2009
Derivatives
in an asset
position (A)
Derivatives
in a liability
position (B)
Net liability
position
(A) + (B)
Mark-to-market value – risk-free analysis $ 94 $ (1,121) $ (1,027)
Mark-to-market value – credit-adjusted estimate (carrying value) 82 (1,084) (1,002)
Difference $ 12 $ (37) $ 25
As at December 31, 2008
Derivatives
in an asset
position (A)
Derivatives
in a liability
position (B)
Net liability
position
(A) + (B)
Mark-to-market value – risk-free analysis $ 572 $ (716) $ (144)
Mark-to-market value – credit-adjusted estimate (carrying value) 507 (661) (154)
Difference $ 65 $ (55) $ (10)