International Paper 2012 Annual Report Download - page 36

December 31, 2012, the applicable interest rate on
such debt may increase upon each downgrade in our
credit rating. As a result, a downgrade in our credit
rating may lead to an increase in our interest
expense. There can be no assurance that such credit
ratings will remain in effect for any given period of
time or that such ratings will not be lowered, sus-
pended or withdrawn entirely by the rating agencies,
if, in each rating agency’s judgment, circumstances
so warrant. Any such downgrade of our credit rat-
ings could adversely affect our cost of borrowing,
limit our access to the capital markets or result in
more restrictive covenants in agreements governing
the terms of any future indebtedness that we may
incur.
DOWNGRADES IN THE CREDIT RATINGS OF
BANKS ISSUING CERTAIN LETTERS OF
CREDIT WILL INCREASE OUR COST OF MAIN-
TAINING CERTAIN INDEBTEDNESS AND MAY
RESULT IN THE ACCELERATION OF DEFERRED
TAXES. We are subject to the risk that a bank with
currently issued irrevocable letters of credit support-
ing installment notes delivered to the Company in
connection with our 2006 sale of forestlands may be
downgraded below a required rating. Since 2006,
certain banks have fallen below the required ratings
threshold and were successfully replaced, or waivers
were obtained regarding their replacement. Ongoing
uncertainty in the banking environment continues,
including continued uncertainty with respect to
whether the euro-zone will emerge from its sover-
eign debt crisis and the rating agencies’ ongoing
reassessment of bank ratings. As a result, a number
of the letter-of-credit banks currently in place remain
subject to risk of downgrade and the number of
qualified replacement banks remains limited. The
downgrade of one or more of these banks may sub-
ject the Company to additional costs of securing a
replacement letter-of-credit bank or could result in an
acceleration of deferred taxes if a replacement bank
cannot be obtained. See Note 11 Variable Interest
Entities and Preferred Securities of Subsidiaries on
pages 69 through 72 of Item 8. Financial Statements
and Supplementary Data for further information.
OUR PENSION AND HEALTH CARE COSTS
ARE SUBJECT TO NUMEROUS FACTORS
WHICH COULD CAUSE THESE COSTS TO
CHANGE. We have defined benefit pension plans
covering substantially all U.S. salaried employees
hired prior to July 1, 2004 and substantially all hourly
and union employees regardless of hire date. We
provide retiree health care benefits to certain of our
U.S. salaried and certain hourly employees. Our
pension costs are dependent upon numerous factors
resulting from actual plan experience and assump-
tions of future experience. Pension plan assets are
primarily made up of equity and fixed income
investments. Fluctuations in actual equity market
returns, changes in general interest rates and
changes in the number of retirees may result in
increased pension costs in future periods. Likewise,
changes in assumptions regarding current discount
rates and expected rates of return on plan assets
could also increase pension and health care costs.
Significant changes in any of these factors may
adversely impact our cash flows, financial condition
and results of operations.
OUR PENSION PLANS ARE CURRENTLY
UNDERFUNDED, AND OVER TIME WE MAY BE
REQUIRED TO MAKE CASH PAYMENTS TO
THE PLANS, REDUCING THE CASH AVAIL-
ABLE FOR OUR BUSINESS. We record a liability
associated with our pension plans equal to the
excess of the benefit obligation over the fair value of
plan assets. The benefit liability recorded under the
provisions of Accounting Standards Codification
(ASC) 715, “Compensation – Retirement Benefits,” at
December 31, 2012 was $4.1 billion. This includes
liability for the International Paper Company pension
plans as well as the Temple-Inland Retirement Plan
and the Temple-Inland Supplemental Executive
Retirement Plan, for which we have responsibility in
connection with the Temple-Inland acquisition. The
amount and timing of future contributions will
depend upon a number of factors, principally the
actual earnings and changes in values of plan assets
and changes in interest rates.
CHANGES IN INTERNATIONAL CONDITIONS
COULD ADVERSELY AFFECT OUR BUSINESS
AND RESULTS OF OPERATIONS. Our operating
results and business prospects could be sub-
stantially affected by risks related to the countries
outside the United States in which we have manu-
facturing facilities or sell our products. Specifically,
Brazil, Russia, Poland, China, and India, where we
have substantial manufacturing facilities, are coun-
tries that are exposed to economic and political
instability in their respective regions of the world.
Downturns in economic activity, adverse tax con-
sequences, fluctuations in the value of local cur-
rency versus the U.S. dollar, nationalization or any
change in social, political or labor conditions in any
of these countries or regions could negatively
affect our financial results. Trade protection meas-
ures in favor of local producers of competing
products, including governmental subsidies, tax
benefits and other measures giving local producers
a competitive advantage over International Paper,
may also adversely impact our operating results
and business prospects in these countries. In addi-
tion, our international operations are subject to
regulation under U.S. law and other laws related to
operations in foreign jurisdictions. For example,
the Foreign Corrupt Practices Act prohibits U.S.
companies and their representatives from offering,
promising, authorizing or making payments to
foreign officials for the purpose of obtaining or
retaining business abroad. Failure to comply with
domestic or foreign laws could result in
various adverse consequences, including the
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