Rogers 2011 Annual Report Download - page 54

MANAGEMENT’S DISCUSSION AND ANALYSIS
financing and the terms of such financing. A reduction in the credit
ratings on our debt by the rating agencies, particularly a downgrade
below investment grade ratings, could adversely affect our cost of
financing and our access to sources of liquidity and capital.
In March 2011, Standard & Poor’s Ratings Services affirmed the
corporate credit rating for RCI to be BBB and the rating for RCI’s
senior unsecured debt to be BBB, each with a stable outlook and
assigned its BBB rating to each of the 2021 Notes and the 2041 Notes.
In March 2011, Fitch Ratings affirmed the issuer default rating for RCI
to be BBB and the rating for RCI’s senior unsecured debt to be BBB,
each with a stable outlook and assigned its BBB rating to each of the
2021 Notes and the 2041 Notes.
In March 2011, Moody’s Investor Service affirmed the rating for RCI’s
senior unsecured debt to be Baa2 with a stable outlook and assigned
its Baa2 rating to each of the 2021 Notes and the 2041 Notes. In
October 2011, Moody’s Investors Service upgraded the rating for RCI’s
senior unsecured debt to Baa1 (from Baa2) with a stable outlook.
Credit ratings are intended to provide investors with an independent
measure of credit quality of an issue of securities. Ratings for debt
instruments range along a scale from AAA, in the case of Standard &
Poor’s and Fitch, or Aaa in the case of Moody’s, which represent the
highest quality of securities rated, to D, in the case of Standard &
Poor’s, C, in the case of Moody’s and Substantial Risk in the case of
Fitch, which represent the lowest quality of securities rated. The credit
ratings accorded by the rating agencies are not recommendations to
purchase, hold or sell the rated securities nor do such ratings provide
comment as to market price or suitability for a particular investor.
There is no assurance that any rating will remain in effect for any
given period of time, or that any rating will not be revised or
withdrawn entirely by a rating agency in the future if in its judgment
circumstances so warrant. The ratings on RCI’s senior debt of BBB
from Standard & Poor’s and Fitch and of Baa1 from Moody’s
represent investment grade ratings.
RATIO OF ADJUSTED OPERATING
PROFIT TO INTEREST
6.8x 6.9x 7.1x
2009 20102011
Deficiency of Pension Plan Assets Over Accrued Obligations
As disclosed in Note 20 to our 2011 Audited Consolidated Financial
Statements, our pension plans had a deficiency of plan assets over
accrued obligations of $133 million and $76 million as at
December 31, 2011 and December 31, 2010, respectively, related to
funded plans, and a deficiency of $39 million and $36 million as at
December 31, 2011 and December 31, 2010, respectively, related to
unfunded plans. Our pension plans had a deficiency on a solvency
basis at December 31, 2011, and are expected to have a deficiency on
a solvency basis at December 31, 2012. Consequently, in addition to
our regular contributions, we are making certain minimum monthly
special payments to eliminate the solvency deficiency. In 2011, the
special payments, including contributions associated with benefits
paid from the plans, totalled approximately $30 million. Our total
estimated annual funding requirements, which include both our
regular contributions and these special payments, are expected to
increase from $62 million (excluding a lump-sum contribution of $18
million related to the purchase of annuities described in the following
paragraph) in 2011 to approximately $73 million in 2012, subject to
annual adjustments thereafter, due to various market factors and the
assumption that our staffing levels will remain relatively stable year-
over-year. We are contributing to the plans on this basis. As further
discussed in the section entitled “Critical Accounting Estimates”,
changes in factors such as the discount rate, the rate of compensation
increase and the expected return on plan assets can impact the
accrued benefit obligation, pension expense and the deficiency of
plan assets over accrued obligations in the future.
Pension Plans Purchase of Annuities
In 2011, we made a lump-sum contribution of $18 million to our
pension plans, following which the pension plans purchased
$68 million of annuities from insurance companies for employees in
the pension plans who had retired between January 1, 2009 and
January 1, 2011. The purchase of the annuities relieves us of primary
responsibility for, and eliminates significant risk associated with, the
accrued benefit obligation for the retired employees. The non-cash
settlement loss arising from this settlement of pension obligations
was $11 million and was recorded in 2011. The Company did not
make any additional lump-sum contributions to its pension plans in
the year ended December 31, 2011.
INTEREST RATE AND FOREIGN EXCHANGE MANAGEMENT
Foreign Currency Forward Contracts
In July 2011, we entered into an aggregate U.S. $720 million of
foreign currency forward contracts to hedge the foreign exchange
risk on certain forecast expenditures (“Expenditure Derivatives”). The
Expenditure Derivatives fix the exchange rate on an aggregate U.S.
$20 million per month of our forecast expenditures at an average
exchange rate of Cdn $0.9643/U.S. $1 from August 2011 through July
2014. As at December 31, 2011, U.S. $620 million of these Expenditure
Derivatives remain outstanding, all of which qualify for and have
been designated as hedges for accounting purposes.
Economic Hedge Analysis
For the purposes of our discussion on the hedged portion of long-term
debt, we have used non-GAAP measures in that we include all Debt
Derivatives hedging our U.S. dollar-denominated debt, whether or not
they qualify as hedges for accounting purposes, since all such Debt
Derivatives are used for risk-management purposes only and are
designated as hedges of specific debt instruments for economic
purposes. As a result, the Canadian dollar equivalent of our U.S. dollar-
denominated long-term debt illustrated in the table below reflects the
contracted foreign exchange rate for all of our Debt Derivatives
regardless of qualifications for accounting purposes as a hedge.
As discussed above in Financing (see “Debt Redemption and
Termination of Derivatives”), in March 2011, RCI redeemed all of its
U.S. $350 million 7.875% Senior Notes due 2012 and all of its U.S. $470
million 7.25% Senior Notes due 2012 and terminated the related U.S.
$820 million aggregate notional principal amount of Debt Derivatives.
As a result, at December 31, 2011, 100% of our U.S. dollar-
denominated debt was hedged on an economic basis while 91.7% of
our U.S. dollar-denominated debt was hedged on an accounting basis.
The Debt Derivatives hedging our U.S. $350 million Senior Notes due
2038 do not qualify as hedges for accounting purposes.
50 ROGERS COMMUNICATIONS INC. 2011 ANNUAL REPORT