Rogers Communications
Annual Report 2016

Plain-text annual report

At the speed of life Rogers Communications Inc. 2016 Annual Report At home, across the country and around the world – that’s the speed of life, and it’s never been faster. About Rogers Rogers is a leading diversified Canadian communications and media company that’s working to deliver a great experience to our customers every day. We are Canada’s largest provider of wireless communications services and one of Canada’s leading providers of cable television, high-speed Internet, information technology, and telephony services to consumers and businesses. Through Rogers Media, we are engaged in radio and television broadcasting, sports, televised and online shopping, magazines and digital media. Our shares are publicly traded on the Toronto Stock Exchange (TSX: RCI.A and RCI.B) and on the New York Stock Exchange (NYSE: RCI). Page 3 Page 4 Page 5 Delivering on our strategy in 2016 2016 financial and operating results Segment overview Pages 7–15 Letter from the CEO Page 15 Looking ahead Pages 16–17 Corporate governance Page 18 Senior executive officers Page 19 Directors Pages 20–21 Page 22 Page 23 Corporate social responsibility Our vision and values 2016 financial report Page 152 Shareholder information 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 1 2 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT Delivering on our strategy in 2016 Total revenue (In billions of dollars) Adjusted operating profit (In billions of dollars) 13.7 13.4 5.0 5.0 5.1 12.9 Free cash flow (In billions of dollars) 1.7 1.7 1.4 2014 2015 2016 2014 2015 2016 2014 2015 2016 5% Wireless service revenue growth compared to 2% in 2015 11% Internet revenue growth the growth engine of our Cable segment 4bps decrease in Wireless postpaid churn to a churn rate of 1.23% in 2016 97k Internet net additions 60k or 162% increase from 2015 286k Wireless postpaid net additions 180k or 170% increase from 2015 56% increase in self-serve transactions on the Rogers brand from 2015 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 3 2016 financial and operating results Total revenue Adjusted operating profit $13.7 Billion Wireless 57% Cable 25% Media 15% Business Solutions 3% KEY FINANCIAL INFORMATION (In millions of dollars, except margins and per share amounts, unaudited) Total revenue Total service revenue 1 Adjusted operating profit 2 Adjusted operating profit margin 2 Net income 3 Adjusted net income 2, 3 Basic earnings per share 3 Adjusted basic earnings per share 2, 3 Additions to property, plant and equipment Cash provided by operating activities Free cash flow 2 Annualized per-share dividend at year-end KEY PERFORMANCE INDICATORS Subscriber count results (000s) 1 Wireless postpaid net additions Wireless prepaid net additions Internet net additions Television net losses Phone net additions (losses) Additional Wireless metrics 1 Postpaid churn (monthly) Postpaid ARPA (monthly) Blended ARPU (monthly) Ratios Capital intensity 1 Dividend payout ratio of free cash flow 2 Return on assets 1,3 Adjusted net debt / adjusted operating profit 2 1 As defined. See “Key Performance Indicators”. $5.1 Billion 2016 13,702 13,027 5,092 37.2% 835 1,481 $1.62 $2.88 2,352 3,957 1,705 $1.92 Wireless 63% Cable 32% Media 3% Business Solutions 2% Years ended December 31 2015 % Change 13,414 12,649 5,032 37.5% 1,342 1,479 $2.61 $2.87 2,440 3,747 1,676 $1.92 2 3 1 (0.3 pts) (38) - (38) - (4) 6 2 – As at or years ended December 31 2016 2015 Change 286 111 97 (76) 4 1.23% $117.37 $60.42 17.2% 58% 2.9% 3.0 106 75 37 (128) (60) 1.27% $110.74 $59.71 18.2% 59% 4.6% 3.1 180 36 60 52 64 (0.04 pts) $6.63 $0.71 (1.0 pts) (1.0 pts) (1.7 pts) (0.1) 2 Adjusted operating profit, adjusted operating profit margin, adjusted net income, adjusted basic earnings per share, free cash flow, dividend payout ratio of free cash flow, and adjusted net debt / adjusted operating profit are non-GAAP measures and should not be considered substitutes or alternatives for GAAP measures. They are not defined terms under IFRS and do not have standard meanings, so may not be a reliable way to compare us to other companies. See “Non-GAAP Measures” for information about these measures, including how we calculate them. 3 As a result of an IASB-issued clarification to IAS 12 Income Taxes, certain amounts have been retrospectively amended. See “Accounting Policies” for more information. 4 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT Wireless Cable & Business Solutions Media 2016 Revenue 2016 Revenue 2016 Revenue $7.9 Billion l Service 92% l Equipment 8% Canada’s largest service provider 95% LTE coverage of Canada’s population A Canadian leader in M2M communications & IoT applications $3.8 Billion $2.1 Billion l Television 41% l Internet 39% l Phone 10% l Business Solutions 10% l Sports 56% l TV and Radio Broadcasting 22% l The Shopping Channel and other 22% Ignite Gigabit Internet service offered to our entire Cable footprint in 2016 4.2 Million homes passed, representing the largest cable footprint across ON, NB and NL 1 #1 sports media brand in Canada for the second year in a row Owner of the Toronto Blue Jays Baseball Club Canada’s largest cable TV provider Operating 51 radio stations & 25 TV channels 1 Ontario, New Brunswick, and Newfoundland and Labrador 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 5 6 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT Our 2016 results reflect solid execution of our plan and the value inherent in our unmatched asset portfolio. Building for the long term Alan D. Horn Chairman of the Board and Interim President and Chief Executive Officer Fellow Shareholders, In 2016, we took important strategic steps designed to build long-term shareholder value, while at the same time delivering strong results. We continued to invest in our networks and our people to provide an ever-improving experience for our customers. Our 2016 results reflect solid execution of our plan and the value inherent in our unmatched asset portfolio. We achieved our best subscriber acquisition and retention metrics for a number of years, and revenue, adjusted operating profit and free cash flow all increased in line with our 2016 targets. Shareholder return for the year, which included $988 million in dividend payments, was 12.6%. 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 7 We achieved our best subscriber metrics in recent years. 2016 Achievements Against Guidance 1 (in millions of dollars, except percentages) 2015 Actuals 2016 Guidance ranges 3 2016 Actuals Achievement Consolidated Guidance Revenue Adjusted operating profit 2 Additions to property, plant and equipment 3 Free cash flow 2 13,414 5,032 2,440 1,676 Increase of 1% to 3% 13,702 2.1% Increase of 1% to 3% 5,092 1.2% 2,300 to 2,400 2,352 n/m Increase of 1% to 3% 1,705 1.7% 1 The table outlines guidance ranges for selected full-year 2016 consolidated financial metrics provided in our January 27, 2016 earnings release. Achieved Guidance ranges presented as percentages reflect percentage increases over 2015 actual results. 2 Adjusted operating profit and free cash flow are non-GAAP measures and should not be considered substitutes or alternatives for GAAP measures. These are not defined terms under IFRS and do not have standard meanings, so may not be a reliable way to compare us to other companies. See “Non-GAAP Measures” for information about these measures, including how we calculate them. 3 Includes additions to property, plant and equipment for the Wireless, Cable, Business Solutions, Media, and Corporate segments and does not include expenditures on spectrum licences. We regained strong momentum in Wireless, our largest segment, despite another year of intense competition. We gained more market share than we have in several years, reinforcing our position as Canada’s largest wireless provider. We also attracted the highest number of new postpaid customers in Rogers history while retaining more existing customers. Our postpaid customer churn was at its lowest level since 2010. In Cable, Internet continued to be the growth engine of this business. Our product mix continues to shift to these higher-margin services. At Rogers, we offer the fastest widely available speeds in our marketplace. Accordingly, we reported double-digit Internet revenue growth in 2016 and our Ignite Internet offerings are being experienced by an ever- increasing number of Canadian households. 8 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT Revenue, adjusted operating profit and free cash flow all increased in line with our 2016 targets. Late in 2016, we announced a long-term strategic partnership with Comcast to bring Rogers customers a best-in-class video experience by deploying the X1 all-IP-based video platform. As a result, we terminated our internal IPTV initiative. While the financial impact of this was significant, we plan to offer customers a proven, scalable IPTV experience beginning in early 2018. They will also benefit from a continuous stream of the latest innovations in voice, data, video, smart home monitoring, and other connected devices in the home. In the interim, customers will see enhancements to our existing TV platform, as well as new customer premise equipment which will leverage our DOCSIS 3.1 network upgrade completed in 2016. Media delivered another year of compelling content and entertainment. For the second year in a row, Sportsnet was the number one sports media brand in Canada. We made a commitment to shift from print to digital to keep pace with changing audience demands. We regained strong momentum in our largest segment, Wireless, despite another year of intense competition. 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 9 Roam Like Home has revolutionized the way our customers use their smartphones when they travel. 10 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT Rogers has consistently differentiated itself by investing in our network to deliver leading network service performance. Based on the Commissioner for Complaints for Telecommunications Services 2015-2016 Annual Report, Rogers had a complaint resolution rate of 95% which was the best of any major Canadian carrier. We still have significant work to do and look forward to doing more for our customers in 2017, including offering more self-serve options and new ways to interact with us digitally. Rogers has consistently differentiated itself by investing in our network to deliver leading network service performance. Today, more than ever, this is critical to our ongoing success. The average number of connected devices has increased to more than 10 per household. Customers are consuming more and more video content, including 4K television. Customers need more speed and capacity and this will only increase. We are in the best position to provide this now and customers can be sure that with Rogers, they will continue to enjoy a leading Internet and video experience. As always, our customers are at the centre of everything we do, and our top priority is to offer the products and services they want and need for the best customer experience. With that in mind, we launched a number of tools and offerings throughout the year to make our customers’ lives a little easier. Among others, we expanded worry-free wireless roaming; launched simplified, mobile-first billing; and introduced a tool that allows families to manage their wireless data in real time. We also introduced Rogers Unison, which offers the features of a traditional office desk phone system across multiple devices, allowing businesses to become more mobile and cost-effective. We recognize our customers want simplicity and immediacy when it comes to customer care. One of the ways we have addressed this is by investing in a variety of self-serve options, including social media support. We were the first telecommunications company in the world to launch customer care via Facebook Messenger, and this year, we were among the first globally to launch on Twitter. Our approach is resonating with customers, as we saw 56% more self-service transactions in 2016 than in the prior year. Our customers are at the centre of everything we do . 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 11 We offer the fastest widely available Internet speeds in our marketplace. Our hybrid fibre-coax cable network allows us to scale efficiently in line with our customers’ growing demands. In our footprint, 46% of our residential Internet customers experience speeds of 100 Mbps or higher – twice as fast as our major competitor’s widely available speed. In anticipation of our customers’ future needs, we also rolled out our Ignite Gigabit Internet service using the latest DOCSIS 3.1 technology to our entire footprint of more than four million homes in 2016. Our Wireless spectrum and network investments enable us to provide the connectivity, speed and reliability our customers have come to enjoy and expect. We expanded our multi-band LTE wireless network coverage to 95% of Canada’s population and continued to roll out our prime 700 MHz spectrum, which now covers 91% of Canada’s population. As with our networks, we are committed to making the right investments in our people to ensure we deliver for our customers. Our goal has always been to attract, develop and retain the best people to serve our customers. 46% of our Internet residential customers experience the benefits from speeds of 100 Mbps or more. In 2016, we increased our investment in training and development. We launched an intensive leadership program for more than 160 executives, and we plan to broaden that program to include another 650 leaders. This year we are also expanding our onboarding program to include all of our 1,400 call centre employees. We again garnered external recognition for our efforts to make Rogers a great place to work when we were named one of Canada’s Top 100 Employers for the fourth consecutive year. Rogers has always been committed to making meaningful contributions to the communities where we live and work. This year, we expanded our Connected for Success program across our Cable footprint. The program offers access to affordable broadband Internet to more than 150,000 low-income Canadians living in community housing. I encourage you to review the corporate social responsibility section of this annual report for a more detailed discussion of our commitments. 12 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT t r a d e m a r k s a n d / o r c o p y r i g h t o l f R o g e r s B u e J a y s B a s e b a l l P a r t n e r s h p i . U s e d u n d e r l i c e n s e . ™ T O R O N T O B L U E J A Y S , u n i f o r m a , l l l r e a t e d m a r k s a n d d e s i g n s a n d p a y e r p h o t o g r a p h a r e l Another successful season for the Toronto Blue Jays TM contributed to Sportsnet’s success as the #1 sports media brand in Canada. 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 13 We intend to deliver sustainable long-term growth by making the most of the opportunities embedded in our existing assets. 14 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT Our 2017 guidance reflects a stronger growth outlook. Full Year 2017 Guidance 1 (In millions of dollars, except percentages) Consolidated Guidance 2016 Actual 2017 Guidance Ranges 1 Revenue Adjusted operating profit 2 Additions to property, plant and equipment, net 3 Free cash flow 2 13,702 5,092 2,352 1,705 Increase of 3% to 5% Increase of 2% to 4% 2,250 to 2,350 Increase of 2% to 4% 1 Guidance ranges presented as percentages reflect percentage increases over full-year 2016 actual results. 2 Adjusted operating profit and free cash flow are non-GAAP measures and should not be considered substitutes or alternatives for GAAP measures. These are not defined terms under IFRS and do not have standard meanings, so may not be a reliable way to compare us to other companies. See “Non-GAAP Measures” for information about these measures, including how we calculate them. 3 Includes additions to property, plant and equipment for the Wireless, Cable, Business Solutions, Media, and Corporate segments net of proceeds on disposition, but does not include expenditures for spectrum licences. Looking ahead We begin 2017 with a strong financial position, including investment grade debt ratings with stable outlooks. We plan to enhance our financial flexibility, improve our execution and capture cost efficiencies and productivity improvements we see throughout the business. This will position us well to translate our revenue growth into increased profitability and free cash flow. As such, our 2017 guidance reflects a stronger growth outlook compared to our achievements in 2016. We have the right plan, tremendous strength in our 25,000 dedicated employees and executive team to build on the momentum we have established. As always our goal is to deliver sustainable, long-term growth by making the most of the opportunities embedded in our existing assets. In closing, I would like to thank our customers, employees and shareholders for their support and my fellow Board members for their stewardship and guidance. While 2017 will undoubtedly mark another year of fierce competition, we will continue our journey of building long-term value for the benefit of all our key stakeholders. We plan to enhance our financial flexibility, improve our execution and capture cost efficiencies and productivity improvements we see throughout our business. Alan D. Horn Chairman of the Board and Interim President and Chief Executive Officer 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 15 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 15 Corporate governance As of February 9, 2017 “ Rogers is committed to sound corporate governance practices and the structure of our Board is intended to ensure that the Directors and management act in the interests of all Rogers shareholders. Rogers benefits from the presence of strong, independent voices on our Board who add valued perspectives to oversight and decision making.” Charles Sirois Lead Director Rogers Communications Inc. Rogers Communications Inc.’s Board of Directors (the Board) biographies – in the Corporate Governance section at rogers. is strongly committed to sound corporate governance and com/governance. At this link, you will find a summary of the continually reviews its governance practices and benchmarks differences between the NYSE corporate governance rules them against acknowledged leaders and evolving legislation. applicable to U.S.-based companies and our governance We are a family-founded and controlled company and take practices as a non-U.S.-based issuer that is listed on the NYSE. pride in our proactive and disciplined approach towards ensuring that Rogers’ governance structures and practices are deserving of the confidence of the public capital markets. Voting control of Rogers Communications Inc. is held by a trust, of which members of the Rogers family are beneficiaries. This trust holds voting control of Rogers Communications Inc. for the benefit of successive generations of the Rogers family. The Audit and Risk Committee reviews the Company’s accounting policies and practices, the integrity of the Company’s financial reporting processes and procedures and the financial statements and other relevant disclosures for release to shareholders and the public. The Committee also assists the Board in its oversight of the Company’s compliance with legal and regulatory requirements relating As substantial stakeholders, the Rogers family is represented to financial reporting; assesses the accounting systems and on our Board and brings a long-term commitment to oversight financial control systems; and evaluates the qualifications, and value creation. At the same time, we benefit from having independence and work of external and internal auditors. outside directors who are experienced North American It also reviews risk management policies and associated business leaders. processes to identify major risk exposures. The Board believes that the Company’s governance and risk management systems are effective and that the appropriate structures and procedures are in place. The Corporate Governance Committee assists and makes recommendations to ensure the Board has developed appropriate systems and procedures to enable it to exercise The composition of our Board and structure of its various and discharge its responsibilities. To carry this out, the committees are outlined in the table on the next page. As well, Corporate Governance Committee assists the Board in we make available detailed information on our governance developing, recommending and establishing corporate structures and practices – including our complete Statement governance policies and practices, and leads the Board of Corporate Governance Practices, our codes of conduct in its periodic review of the performance of the Board and ethics, full committee charters and Board member and its committees. 16 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT Board of Directors and its Committees Audit and Risk Corporate Governance Nominating Human Resources Executive Finance Pension Chair Member Alan D. Horn, cpa, ca Charles Sirois C. William D. Birchall Bonnie R. Brooks Robert K. Burgess John H. Clappison, fcpa, fca Philip B. Lind, cm John A. MacDonald Isabelle Marcoux The Hon. David R. Peterson, pc, qc Edward S. Rogers Loretta A. Rogers Martha L. Rogers Melinda M. Rogers Rogers’ good governance practices Separation of CEO and Chairman Roles 1 Independent Lead Director Formal Corporate Governance Policy and Charters Code of Business Conduct and Whistleblower Hotline Director Share Ownership Guidelines Board and Committee In Camera Discussions Annual Reviews of Board and Committee Performance Audit and Risk Committee Meetings with Internal and External Auditors Orientation Program for New Directors Board Education Sessions Committee Authority to Retain Independent Advisors Director Material Relationship Standards 1 As a result of the departure of our former CEO, on an interim basis the roles of CEO and Chairman are not separated. The roles of CEO and Chairman will again be seperate once our new CEO commences at Rogers. The Nominating Committee identifies prospective Director nominees for election by the shareholders and for appointment by the Board and also recommends nominees for each committee of the Board, including each committee’s Chair. The Human Resources Committee assists the Board in monitoring, reviewing and approving compensation and benefit policies and practices. The Committee is responsible for recommending senior management compensation and for monitoring succession planning with respect to senior executives. The Executive Committee assists the Board in discharging its responsibilities in the intervals between meetings of the Board, including to act in such areas as specifically designated and authorized at a preceding meeting of the Board and to consider matters concerning the Company that may arise from time to time. The Finance Committee reviews and reports to the Board on matters relating to the Company’s investment strategies and general debt and equity structure. The Pension Committee supervises the administration of the Company’s pension plans and reviews the provisions and investment performance of the Company’s pension plans. For a complete description of Rogers’ corporate governance structure and practices and copies of our annual information circular and proxy, go to rogers.com/investors 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 17 Senior executive officers 1 6 2 7 3 8 4 9 5 10 11 12 For detailed biographical information of Rogers’ Executive Officers go to rogers.com/investors 11 Jamie Williams Chief Information Officer 12 Dirk Woessner President, Consumer Business Unit 1 Alan D. Horn, cpa, ca Interim President and Chief Executive Officer 2 Bob Berner Chief Technology Officer 3 Frank Boulben Chief Strategy Officer 4 Rick Brace President, Media Business Unit 5 Dale Hooper Chief Brand Officer 6 Nitin Kawale President, Enterprise Business Unit 7 Deepak Khandelwal Chief Customer Officer 8 David Miller Chief Legal Officer and Secretary 9 Jim Reid Chief Human Resources Officer 10 Anthony Staffieri, fcpa, fca Chief Financial Officer 18 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT Directors 1 6 2 7 3 8 4 9 5 10 11 12 13 For detailed biographical information of Rogers’ Directors go to rogers.com/investors * Alan D. Horn, cpa, ca Chairman Rogers Communications Inc. * Pictured on previous page 1 Charles Sirois, cm Lead Director Rogers Communications Inc. Chairman Telesystem Ltd. 2 C. William D. Birchall Company Director 3 Bonnie R. Brooks, cm Company Director 4 Robert K. Burgess Company Director 5 John H. Clappison, fcpa, fca Company Director 6 Philip B. Lind, cm Vice Chairman 7 John A. MacDonald Company Director 8 Isabelle Marcoux Chair Transcontinental Inc. 9 The Hon. David R. Peterson, pc, qc Chairman Emeritus Cassels Brock & Blackwell LLP 10 Edward S. Rogers Deputy Chairman 11 Loretta A. Rogers Company Director 12 Martha L. Rogers Company Director 13 Melinda M. Rogers Company Director 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 19 Corporate social responsibility We’re always striving to do what’s right for our stakeholders and our country, whether it’s providing access to the Internet to people who can’t afford it, exercising environmental stewardship across our organization, or ensuring our suppliers are living up to our own values. Recognized as one of Canada’s Top 100 Employers. Our Connected for Success program offers access to affordable broadband Internet to over 150,000 Canadians with low-incomes living in community housing. Originally launched in 2013 in partnership with Toronto Community Housing, we expanded the program in 2016 so that it is now available for residents in non-profit housing organizations across our Cable footprint, giving them the tools and resources needed to experience the benefits of connectivity. In 2016, we made significant strides to ensure that our suppliers are adhering to ethical and sustainable practices that meet with our own values. In early 2016, we joined the Joint Audit Cooperation (JAC), a group of global telecom companies that share common suppliers. Through our participation in JAC, we share audit results among our peers to ensure that our suppliers adhere to internationally recognized supply chain and sustainability standards along the ICT supply chain, upholding human rights and social, labour and environmental standards. Rogers was the first Canadian company to join JAC and we began our first audits in 2016. 20 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT In addition to ensuring that our products are made while upholding sustainability principles, we also ensure that our products and services are inclusive and accessible. We have a team of customer service representatives who specialize in our accessibility offerings. We continue to offer a wireless accessibility data and text plan for people who are deaf or hard-of-hearing or have speech impediments. The plan includes unlimited messaging and adjusts based on the customer’s monthly usage. We continue to make steady progress towards our environmental targets to reduce our greenhouse gas emissions and energy usage by 25% and 10%, respectively, by 2025, based on 2011 levels. We were once again named as one of Canada’s Greenest Employers by Mediacorp. We also received our best-ever score from our 2016 Carbon Disclosure Project submission – receiving an overall grade of B, ahead of our industry and Canadian average of C, demonstrating that we are taking the necessary steps to reduce our carbon emissions. In 2016, Rogers Hometown Hockey returned to host events in 24 new Canadian communities, uniting hockey fans and families across the country. In 2016, we continued to invest in lighting upgrades, temperature adjustments and equipment run times in order to reduce energy consumption. We’ve also made energy improvements, with more energy efficient computers, monitors and lighting. Our waste reduction programs have also continued to take hold. Our Get Up & Get Green internal waste program has allowed us to centralize waste bins and allow for better sorting measures. Within our business, we have also invested in the employee experience by delivering more training and development programs. In 2016, our employee engagement score rose by two points to 78%, showing that our investments are making an impact on our employees. We were also recognized once again this year as one of Canada’s Top 100 Employers, one of Canada’s Best Diversity Employers, one of Canada’s Top Employers for Young People and one of Greater Toronto’s Top Employers. In addition, we’re continuing to support the Canadian economy through our business and community investments. Over the last year, we’ve donated approximately $60 million through cash and in-kind donations to various charitable organizations and causes and our Jays Care Foundation funds programs and facilities that promote physical activity, education and life-skill development among Canadian youth. As well, through the Rogers Employee Volunteer program, employees are given one paid day off annually, to volunteer at the registered charity of their choice. We look forward to continuing our stewardship as a responsible corporate citizen for all of the stakeholders of our organization. For more information on Corporate Social Responsibility at Rogers, please see our website rogers.com/csr and look out for our 2016 CSR Report, which will be released in spring 2017. 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 21 Our vision and values We aspire to grow our company by building a brilliant digital future for Canadians Who We Are We are Rogers, a Canadian family business. We believe in innovation in everything we do. We invest ahead of the curve, and build for tomorrow. We deliver value and quality. We don’t cut corners. We understand you’re really busy, so we make things simple. Customers are part of our family, and we always look after family. We train and develop our people so you can always rely on us. We work as one team, with one goal: to serve you better. We love what we do. Tomorrow, we aim to do it even better. “The best is yet to come.” — Ted Rogers What We Believe In How We Work The world always needs new ideas Simplify and innovate The customer’s problems are ours to solve Take ownership of the what and the how Investing in people always pays off Equip people to succeed Being the best is the only goal worth having Execute with discipline and pride We win as a team, or not at all Talk straight, build trust, and over deliver 22 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT M A N A G E M E N T ’ S D I I S C U S S O N A N D A N A L Y S I S 2016 Financial Report 24 MANAGEMENT’S DISCUSSION AND ANALYSIS 71 26 Executive Summary 26 About Rogers 27 29 2016 Highlights Financial Highlights 30 Understanding Our Business Products and Services 30 32 Competition 34 Industry Trends Social Responsibility Governance and Risk Management 71 Governance at Rogers 73 74 Risk Management 75 Risks and Uncertainties Affecting Our Business 81 Controls and Procedures 82 Regulation in Our Industry 83 Wireless 85 Cable 86 Media 35 Our Strategy, Key Performance Drivers, and Strategic 87 Highlights 35 Our Strategic Priorities 2016 Objectives 36 Key Performance Drivers and 2016 Strategic Highlights 36 2017 Objectives 38 Financial and Operating Guidance 39 Other Information 87 Accounting Policies 91 93 Non-GAAP Measures 96 Key Performance Indicators Summary of Financial Results of Long-Term Debt Guarantor Five-Year Summary of Consolidated Financial Results 97 40 Capability to Deliver Results 98 CONSOLIDATED FINANCIAL STATEMENTS Leading Networks Powerful Brands 40 42 42 Widespread Product Distribution 43 First Class Media Content 43 Customer Experience Engaged People 43 43 Financial Strength and Flexibility 44 Healthy Trading Volumes and Dividends 98 Management’s Responsibility for Financial Reporting 99 Report of Independent Registered Public Accounting Firm 101 Consolidated Statements of Income 102 Consolidated Statements of Comprehensive Income 45 2016 Financial Results 103 Consolidated Statements of Financial Position 104 Consolidated Statements of Changes in Shareholders’ Equity 105 Consolidated Statements of Cash Flows 106 Notes to Consolidated Financial Statements 45 46 Summary of Consolidated Results Key Changes in Financial Results This Year Compared to 2015 Business Solutions 47 Wireless 50 Cable 52 53 Media 54 Additions to Property, Plant and Equipment 55 Review of Consolidated Performance 58 Quarterly Results 61 Overview of Financial Position 62 Managing Our Liquidity and Financial Resources Sources and Uses of Cash 62 Financial Condition 65 66 Financial Risk Management 70 Dividends and Share Information 71 Commitments and Contractual Obligations 71 Off-Balance Sheet Arrangements 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 23 MANAGEMENT’S DISCUSSION AND ANALYSIS Our forward-looking information and statements include forecasts and projections related to the following items, some of which are non-GAAP measures (see “Non-GAAP Measures” for more information), among others: • revenue; • total service revenue; • adjusted operating profit; • additions to property, plant and equipment; • cash income taxes; • free cash flow; • dividend payments; • the growth of new products and services; • expected growth in subscribers and the services to which they subscribe; • the cost of acquiring and retaining subscribers and deployment of new services; • continued cost reductions and efficiency improvements; • traction against our ratio of adjusted net debt / adjusted operating profit; and • all other statements that are not historical facts. Specific forward-looking information included or incorporated in this document includes, but is not limited to, our information and statements under “Financial and Operating Guidance” relating to our 2017 consolidated guidance on revenue, adjusted operating profit, additions to property, plant and equipment, and free cash flow. All other statements that are not historical facts are forward- looking statements. We base our conclusions, forecasts, and projections (including the aforementioned guidance) on the following factors, among others: • general economic and industry growth rates; • currency exchange rates and interest rates; • product pricing levels and competitive intensity; • subscriber growth; • pricing, usage, and churn rates; • changes in government regulation; • technology deployment; • availability of devices; • timing of new product launches; • content and equipment costs; • the integration of acquisitions; and • industry structure and stability. Except as otherwise indicated, this MD&A and our forward-looking statements do not reflect the potential impact of any non-recurring or other special items or of any dispositions, monetizations, mergers, acquisitions, other business combinations, or other transactions that may be considered or announced or may occur after the date the statement containing the forward-looking information is made. Management’s Discussion and Analysis This Management’s Discussion and Analysis (MD&A) contains important information about our business and our performance for the year ended December 31, 2016. This MD&A should be read in conjunction with our 2016 Audited Consolidated Financial Statements, which have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). All dollar amounts are in Canadian dollars unless otherwise stated. All percentage changes are calculated using the rounded numbers as they appear in the tables. Charts, graphs, and diagrams are included for reference; however, they do not form part of this MD&A. This MD&A is current as at February 9, 2017 and was approved by the Rogers Communications Inc. Board of Directors (the Board). This MD&A includes forward-looking statements and assumptions. See “About Forward-Looking Information” for more information. We, us, our, Rogers, Rogers Communications, and the Company refer to Rogers Communications Inc. and our subsidiaries. RCI refers to the legal entity Rogers Communications Inc., not including our subsidiaries. Rogers also holds interests in various investments and ventures. We are publicly traded on the Toronto Stock Exchange (TSX: RCI.A and RCI.B) and on the New York Stock Exchange (NYSE: RCI). In this MD&A, this year refers to the year ended December 31, 2016, and last year refers to the year ended December 31, 2015. All results commentary is compared to the equivalent period in 2015 or as at December 31, 2015, unless otherwise indicated. ABOUT FORWARD-LOOKING INFORMATION This MD&A includes “forward-looking information” and “forward- looking statements” within the meaning of applicable securities laws (collectively “forward-looking information”), and assumptions about, among other things, our business, operations, and financial performance and condition approved by our management on the date of this MD&A. This forward-looking information and these assumptions include, but are not limited to, statements about our objectives and strategies to achieve those objectives, and about our beliefs, plans, expectations, anticipations, estimates, or intentions. Forward-looking information: • typically includes words like could, expect, may, anticipate, assume, believe, intend, estimate, plan, project, guidance, outlook, target, and similar expressions, although not all forward- looking information includes them; • includes conclusions, forecasts, and projections based on our current objectives and strategies and on estimates, expectations, assumptions, and other factors, most of which are confidential and proprietary and that we believe to have been reasonable at the time they were applied but may prove to be incorrect; and • was approved by our management on the date of this MD&A. 24 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT RISKS AND UNCERTAINTIES Actual events and results can be substantially different from what is expressed or implied by forward-looking information because of risks, uncertainties, and other factors, many of which are beyond our control, including but not limited to: • regulatory changes; • technological changes; • economic conditions; • unanticipated changes in content or equipment costs; • changing conditions in the communications, entertainment, and/or information industries; • the integration of acquisitions; • litigation and tax matters; • the level of competitive intensity; • the emergence of new opportunities; and • new interpretations and new accounting standards from accounting standards bodies. These factors can also affect our objectives, strategies, and intentions. Many of these factors are beyond our control or our current expectations or knowledge. Should one or more of these risks, uncertainties, or other factors materialize, our objectives, strategies, or factors or assumptions underlying the forward-looking information prove incorrect, our actual results and our plans could vary significantly from what we currently foresee. intentions change, or any other Accordingly, we warn investors to exercise caution when considering statements containing forward-looking information and caution them that it would be unreasonable to rely on such statements as creating legal rights regarding our future results or plans. We are under no obligation (and we expressly disclaim any such obligation) to update or alter any statements containing forward-looking information or the factors or assumptions underlying them, whether as a result of new information, future events, or otherwise, except as required by law. All of the forward-looking information in this MD&A is qualified by the cautionary statements herein. BEFORE MAKING AN INVESTMENT DECISION Before making any investment decisions and for a detailed discussion of the risks, uncertainties, and environment associated with our business, fully review the sections in this MD&A entitled “Regulation in Our Industry” and “Governance and Risk Management”, as well as our various other filings with Canadian and US securities regulators which can be found at sedar.com and sec.gov, respectively. FOR MORE INFORMATION You can find more information about us, including our Annual Information Form, on our website (rogers.com/investors), on SEDAR (sedar.com), and on EDGAR (sec.gov), or you can e-mail us at investor.relations@rci.rogers.com. Information on or connected to these and any other websites referenced in this document does not constitute part of this MD&A. You can also go to rogers.com/investors for information about our governance practices, corporate social responsibility reporting, a glossary of communications and media industry terms, and additional information about our business. M A N A G E M E N T ’ S D I I S C U S S O N A N D A N A L Y S I S 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 25 MANAGEMENT’S DISCUSSION AND ANALYSIS Executive Summary ABOUT ROGERS Rogers is a leading diversified Canadian communications and media company. 2016 REVENUE BY SEGMENT (%) $13.7 Billion WIRELESS 57% CABLE 25% MEDIA 15% BUSINESS SOLUTIONS 3% 2016 ADJUSTED OPERATING PROFIT BY SEGMENT (%) $5.1 Billion WIRELESS 63% CABLE 32% MEDIA 3% BUSINESS SOLUTIONS 2% Rogers is a leading diversified Canadian communications and media company that’s working to deliver a great experience to our customers every day. We are Canada’s largest provider of wireless communications services and one of Canada’s leading providers of cable television, high-speed Internet, information technology, and telephony services to consumers and businesses. Through Rogers Media, we are engaged in radio and television broadcasting, sports, televised and online shopping, magazines, and digital media. Almost all of our operations and sales are in Canada. We have a highly skilled and diversified workforce of approximately 25,200 employees. Our head office is in Toronto, Ontario and we have numerous offices across Canada. FOUR REPORTING SEGMENTS We report our results of operations in four reporting segments. Each segment and the nature of its business are as follows: Segment Wireless Cable Principal activities Wireless telecommunications operations for Canadian consumers and businesses. Cable telecommunications operations, including Internet, television, and telephony (phone) services for Canadian consumers and businesses. Business Solutions Network connectivity through our fibre Media network and data centre assets to support a range of voice, data, networking, hosting, and cloud-based services for the enterprise, public sector, and carrier wholesale markets. A diversified portfolio of media properties, including sports media and entertainment, television and radio broadcasting, specialty channels, multi-platform shopping, digital media, and publishing. 26 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT 2016 HIGHLIGHTS KEY FINANCIAL INFORMATION (In millions of dollars, except margins and per share amounts) Consolidated Total revenue Total service revenue 1 Adjusted operating profit 2 Adjusted operating profit margin 2 Net income 3 Adjusted net income 2, 3 Basic earnings per share 3 Adjusted basic earnings per share 2, 3 Cash provided by operating activities Free cash flow 2 Wireless Revenue Adjusted operating profit Adjusted operating profit margin as a % of service revenue Cable Revenue Adjusted operating profit Adjusted operating profit margin Business Solutions Revenue Adjusted operating profit Adjusted operating profit margin Media Revenue Adjusted operating profit Adjusted operating profit margin M A N A G E M E N T ’ S D I I S C U S S O N A N D A N A L Y S I S Years ended December 31 2016 2015 % Chg 13,702 13,027 5,092 37.2% 835 1,481 $ 1.62 $ 2.88 3,957 1,705 7,916 3,285 45.3% 3,449 1,674 48.5% 384 123 32.0% 2,146 169 7.9% 13,414 12,649 5,032 37.5% 1,342 1,479 $ 2.61 $ 2.87 3,747 1,676 7,651 3,239 46.9% 3,465 1,658 47.8% 377 116 30.8% 2,079 172 8.3% 2 3 1 (0.3 pts) (38) – (38) – 6 2 3 1 (1.6 pts) – 1 0.7 pts 2 6 1.2 pts 3 (2) (0.4 pts) 1 As defined. See “Key Performance Indicators”. 2 Adjusted operating profit, adjusted operating profit margin, adjusted net income, adjusted basic earnings per share, and free cash flow are non-GAAP measures and should not be considered substitutes or alternatives for GAAP measures. These are not defined terms under IFRS and do not have standard meanings, so may not be a reliable way to compare us to other companies. See “Non-GAAP Measures” for information about these measures, including how we calculate them. 3 As a result of the IFRS Interpretations Committee’s agenda decision relating to IAS 12 Income Taxes, certain amounts have been retrospectively amended. See “Accounting Policies” for more information. 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 27 MANAGEMENT’S DISCUSSION AND ANALYSIS KEY PERFORMANCE INDICATORS Subscriber count results (000s) 1 Wireless postpaid net additions Wireless prepaid net additions Wireless subscribers Internet net additions Internet subscribers Television net losses Television subscribers Phone net additions (losses) Phone subscribers Additional Wireless metrics 1 Postpaid churn (monthly) Postpaid ARPA (monthly) Blended ARPU (monthly) Ratios Capital intensity 1 Dividend payout ratio of net income 1, 2 Dividend payout ratio of free cash flow 1, 3 Return on assets 1, 2 Adjusted net debt / adjusted operating profit 3 Employee-related information Total active employees (approximate) As at or years ended December 31 2016 2015 Chg 286 111 10,274 97 2,145 (76) 1,820 4 1,094 106 75 9,877 37 2,048 (128) 1,896 (60) 1,090 180 36 397 60 97 52 (76) 64 4 1.23% $ 117.37 $ 60.42 1.27% $110.74 $ 59.71 (0.04 pts) 6.63 0.71 $ $ 17.2% 118.0% 57.9% 2.9% 3.0 18.2% 74.0% 58.9% 4.6% 3.1 (1.0 pts) 44.0 pts (1.0 pts) (1.7 pts) (0.1) 25,200 26,200 (1,000) 1 As defined. See “Key Performance Indicators”. 2 As a result of the IFRS Interpretations Committee’s agenda decision relating to IAS 12 Income Taxes, certain amounts have been retrospectively amended. See “Accounting Policies” for more information. 3 Dividend payout ratio of free cash flow and adjusted net debt / adjusted operating profit are non-GAAP measures and should not be considered substitutes or alternatives for GAAP measures. These are not defined terms under IFRS and do not have standard meanings, so may not be a reliable way to compare us to other companies. See “Non-GAAP Measures” for information about these measures, including how we calculate them. 28 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT FINANCIAL HIGHLIGHTS REVENUE AND ADJUSTED OPERATING PROFIT • Revenue increased by 2% this year, primarily driven by Wireless service revenue growth of 5%. • Wireless service revenue increased largely as a result of a larger subscriber base and the continued adoption of higher-postpaid- ARPA-generating Rogers Share Everything plans and the increase in data usage on these plans. • Cable revenue decreased marginally as the 11% increase in Internet revenue from the larger subscriber base and movement of customers to higher-end speed and usage tiers was offset by lower Television and Phone revenue, primarily due to Television subscriber losses over the past year and the impact of Phone pricing packages. We reported positive Cable total service unit net additions in 2016, driven by Internet net additions of 97,000, up 60,000 year on year, and improved Television net losses. We continue to see an ongoing shift in product mix to higher- margin Internet services, with 46% of our residential Internet base now on plans with download speeds of 100 megabits per second or higher. • Business Solutions revenue increased this year primarily as a result of the growth in on-net next generation services (including the our data centre businesses), which more than offset continued planned reduction in lower margin, off-net legacy revenue. • Media revenue increased as a result of higher sports-related revenue, driven by the strength of Sportsnet and the success of the Toronto Blue Jays, partially offset by continued softness in publishing and radio advertising. • Adjusted operating profit increased 1% this year, with a consolidated adjusted operating profit margin of 37.2%, resulting from higher adjusted operating profit in Wireless, Cable, and Business Solutions, partially offset by lower adjusted operating profit in Media. NET INCOME • Net income decreased 38% to $835 million, primarily as a result of the impairment and related charges we recognized on our Internet Protocol television (IPTV) product because of our decision to discontinue developing this product and develop a long-term relationship with Comcast Corporation (Comcast) and deploy their X1 IP-based video platform, along with higher restructuring, acquisition and other costs and higher equity losses associated with the wind down of shomi. See “Review of Consolidated Performance” for more information. CASH FLOW • Our substantial cash flow generation enabled us to reduce outstanding debt, continue to make investments in our network, and return substantial dividends to shareholders. We paid $988 million in dividends in 2016. • Our cash provided by operating activities increased 6% this year to $3,957 million as a result of higher net funding provided by non-cash working capital and lower interest paid. Free cash flow increased 2% this year to $1,705 million as a result of higher adjusted operating profit and lower additions to property, plant and equipment, partially offset by higher cash income taxes. LIQUIDITY POSITION • Ended the year with approximately $2.7 billion of available liquidity (2015 – $3.3 billion), comprised of nil cash on hand (2015 – $0.01 billion), $2.4 billion available under our bank credit facilities (2015 – $3.0 billion), and $0.25 billion available under our $1.05 billion accounts receivable securitization program (2015 – $0.25 billion available under our $1.05 billion accounts receivable securitization program). • Our adjusted net debt / adjusted operating profit ratio improved to 3.0 as at December 31, 2016 from 3.1 as at December 31, 2015. • Issued US$500 million ($671 million) of 2.9% senior notes due 2026. • Our overall weighted average cost of borrowings was 4.72% as at December 31, 2016 (2015 – 4.82%) and our overall weighted average term to maturity on our debt was 10.6 years as at December 31, 2016 (2015 – 10.8 years). M A N A G E M E N T ’ S D I I S C U S S O N A N D A N A L Y S I S REVENUE BY SEGMENT (IN MILLIONS OF DOLLARS) 2016 2015 2014 7,916 3,449 384 2,146 7,651 3,465 377 2,079 7,305 3,467 382 1,826 Wireless Cable Business Solutions Media ADJUSTED OPERATING PROFIT BY SEGMENT (IN MILLIONS OF DOLLARS) 2016 2015 2014 3,285 1,674 123 169 3,239 1,658 116 172 3,246 1,665 122 131 Wireless Cable Business Solutions Media ADJUSTED BASIC EARNINGS PER SHARE ($) 2016 2015 2014 $2.88 $2.87 $2.97 OTHER SIGNIFICANT DEVELOPMENTS • We announced our intention to hire Joseph Natale as President and Chief Executive Officer, effective July 2017. Alan Horn is currently acting as our Interim President and Chief Executive Officer. • Late in 2016, we announced a long-term agreement with Comcast to bring their X1 IP-based video platform to our customers in early 2018. Customers will benefit from Comcast’s substantial research and development investments and their continuing commitment to innovation. 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 29 MANAGEMENT’S DISCUSSION AND ANALYSIS Understanding Our Business Rogers is a leading diversified Canadian communications and media company. We report our results based on four reporting segments, as follows: Wireless provides wireless voice and data communication services to individual consumers, businesses, governments, and other telecommunications service providers. Our wireless network is one of the most extensive and advanced independent high-speed wireless data networks in Canada, capable of supporting wireless services on smartphones, tablets, computers, and a broad variety of machine-to-machine and specialized devices. See “Capability to Deliver Results” for more information about our extensive wireless network and significant spectrum position. Cable provides high-speed Internet, television, and voice communication services to consumers, businesses, governments, and wholesale resellers, leveraging our expansive fibre and hybrid fibre-coaxial network infrastructure in Ontario, New Brunswick, and Newfoundland and Labrador. See “Capability to Deliver Results” for more information about our expansive cable networks. Business Solutions provides voice and data communications and advanced services, including data centres and cloud computing, to the enterprise, public sector, and carrier wholesale markets over our fibre network facilities. Media provides services in sports media and entertainment (including both the Toronto Blue Jays and our 12-year, exclusive national licensing agreement (NHL Agreement) with the National Hockey League (NHL) to broadcast all nationally televised live NHL hockey games within Canada on multiple platforms), television and radio broadcasting, multi-platform shopping experiences, digital media, and publishing. During the year, our Wireless, Cable, and Business Solutions reporting segments were operated by our wholly-owned subsidiary, Rogers Communications Canada Inc. (RCCI). In 2015, those segments were operated by Rogers Communications Partnership (RCP), and certain other wholly-owned subsidiaries. Our Media reporting segment is operated by our wholly-owned subsidiary, Rogers Media Inc., and its subsidiaries. On January 1, 2016, Fido Solutions Inc., a subsidiary of RCI, transferred its partnership interest in RCP to Rogers Cable and Data Centres Inc. (RCDCI), a subsidiary of RCI, leaving RCDCI as the sole partner of RCP, thereby causing RCP to cease to exist. RCDCI became the owner of all the assets and assumed all the liabilities previously held by RCP. Subsequent to the reorganization, RCDCI changed its name to Rogers Communications Canada Inc. PRODUCTS AND SERVICES WIRELESS in innovative wireless network Rogers is a Canadian leader technologies and services. We provide postpaid and prepaid wireless services under the Rogers, Fido, and chatr brands, and provide consumers and businesses with the latest wireless devices, services, and applications including: • mobile and fixed high-speed Internet access; • wireless voice and enhanced voice features; • wireless home phone; • device protection; • text messaging; • e-mail; • global voice and data roaming, including Roam Like Home and Fido Roam; • bridging landline phones with wireless phones; • machine-to-machine solutions; and • advanced wireless solutions for businesses. CABLE Our cable network provides an innovative and leading selection of high-speed broadband Internet access, digital television and online viewing, phone, and advanced home Wi-Fi services to consumers and businesses in Ontario, New Brunswick, and Newfoundland and Labrador. Internet services include: • Internet access (including basic and unlimited usage packages), security solutions, and e-mail; • access speeds of up to one gigabit per second (Gbps), covering our entire Cable footprint; • Rogers Ignite unlimited packages, combining fast and reliable speeds with the freedom of unlimited usage; and • plans available under both the Rogers and Fido brands. Television services include: • local and network TV, including starter and premium channel packages along with à la carte channels; • on-demand television; • personal video recorders (PVRs), including Whole Home PVRs and a 4K PVR; • linear and time-shifted programming; • digital specialty channels; • 4K television programming, including all 2016 and 2017 regular season Toronto Blue Jays home games and select marquee NHL and National Basketball Association (NBA) games; and • Rogers Anyplace TV, smartphones, tablets, and personal computers. televised content delivered on Phone services include: • residential and small business local telephony service; and • calling features such as voicemail, call waiting, and long distance. 30 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT BUSINESS SOLUTIONS Our services aim to meet the increasing demands of today’s critical business applications. These services include: • voice, data networking, (IP), and Ethernet services over multiservice customer access devices that allow customers to scale and add services, such as private networking, Internet, IP voice, and cloud solutions, which blend seamlessly to grow with their business requirements; Internet protocol • optical wave, Internet, Ethernet, and multi-protocol label switching services, providing scalable and secure metro and wide area private networking that enables and interconnects critical business applications for businesses that have one or many offices, data centres, or points of presence (as well as cloud applications) across Canada; with security-embedded, • simplified “leapfrog” information technology (IT) and network cloud-based, technologies professionally-managed solutions, including: • Managed Wi-Fi, which allows customers to remotely monitor their networks at any site and view network performance analytics via a web portal; this allows customers to better understand how their network is being used, from almost anywhere; and • Rogers Public Cloud, which enables businesses to manage their IT infrastructure in the cloud securely and cost effectively; and • extensive wireless and cable access networks services for primary, bridging, and back-up connectivity. MEDIA Our portfolio of Media assets reaches Canadians from coast to coast. In Television, we operate several conventional and specialty television networks: • Sportsnet’s four regional stations, Sportsnet ONE, Sportsnet 360, and Sportsnet World; • City network, which, together with affiliated stations, has broadcast distribution to approximately 86% of Canadian households; • OMNI multicultural broadcast television stations; • specialty channels that include FX (Canada), FXX (Canada), Outdoor Life Network, VICELAND, and G4 Canada; and • The Shopping Channel (TSC), Canada’s only nationally televised shopping channel, which generates a significant and growing portion of its revenue from online sales. In Radio, we operate more than 50 AM and FM radio stations in markets across Canada, including popular radio brands such as 98.1 CHFI, 680 NEWS, Sportsnet The FAN, KiSS, JACK FM, and SONiC. M A N A G E M E N T ’ S D I I S C U S S O N A N D A N A L Y S I S As part of our strategic change to focus on digital media, our services and products include: • our digital including Rogers NHL sports-related assets, GameCentre LIVE and Sportsnet NOW; • many well-known consumer brands, such as Maclean’s, Chatelaine, Today’s Parent, Flare, and Hello! Canada; • Texture by Next Issue, our digital magazine service, which offers unlimited access to a catalogue of over 230 premium Canadian and US magazine titles; and • a broad digital presence that continues the extension of content across new and existing platforms. In Sports Media and Entertainment, we own the Toronto Blue Jays, Canada’s only Major League Baseball (MLB) team, and the Rogers Centre event venue, which hosts the Toronto Blue Jays’ home games, concerts, trade shows, and special events. Our NHL Agreement, which began with the 2014-2015 NHL season, allows us to deliver unprecedented coverage of professional hockey, with more than 1,200 regular season games per season streamed across television, smartphones, tablets, and the Internet, both through traditional streaming services as well as Rogers NHL GameCentre Live. Our NHL Agreement also grants Rogers national rights on those platforms to the NHL playoffs and Stanley Cup Final, all NHL-related special events and non-game events (such as the NHL All-Star Game and the NHL Draft), and rights to sublicense broadcasting rights to TVA and the Canadian Broadcasting Corporation (CBC) and to use the Hockey Night In Canada brand through a sublicense agreement. OTHER Other services we offer to consumers and businesses include: • Rogers Smart Home Monitoring and Smart Business Monitoring, an innovative home or business monitoring, security, and automation system; and • Rogers Platinum MasterCard and Fido MasterCard, credit cards that allow customers to earn cashback rewards points on credit card spending. in a number of associates and joint OTHER INVESTMENTS We hold interests arrangements, some of which include: • our 37.5% ownership interest in Maple Leaf Sports & Entertainment Ltd. (MLSE), which owns the Toronto Maple Leafs, the Toronto Raptors, Toronto FC, and the Toronto Marlies, as well as various associated real estate holdings; and • our 50% ownership interest in Glentel Inc. (Glentel), a large provider of multicarrier wireless and wireline products and services with several hundred Canadian retail distribution outlets. 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 31 MANAGEMENT’S DISCUSSION AND ANALYSIS COMPETITION Competition in the wireless industry from national and regional operators and resellers has led to a highly competitive environment, as consumers have considerable choice in service providers and plan offerings across a wide array of pricing and service points. This puts downward pressure on pricing, potentially reducing profit margins, and could also affect our customer churn. Traditional wireline telephone and television services are now offered over the Internet. This has allowed more non-traditional providers to enter the market and has changed how traditional providers compete. This is changing the mix of packages and pricing that service providers offer and could affect customer churn levels. In the media industry, there continues to be a shift towards digital and online media consumption by consumers, which in turn drives advertisers to direct more advertising dollars to digital and online versus traditional media. In addition, the number of competitors has increased as more digital and online media companies, including large global companies, enter the market. WIRELESS We compete on customer experience, quality of service, scope of services, network coverage, sophistication of wireless technology, breadth of distribution, selection of devices, branding and positioning, and price. • Wireless technology — our extensive long-term evolution (LTE) network caters to customers seeking the increased capacity and speed it provides. We compete with Bell, Telus, Shaw, MTS, Videotron, SaskTel, and Eastlink, all of whom operate LTE networks. We also compete with these providers on high-speed system for mobile packet communications (GSM) networks and with providers that use alternative wireless technologies, like Wi-Fi “hotspots” and mobile virtual network operators (MVNO), such as President’s Choice Mobile and Primus. and global (HSPA) access • Product, branding, and pricing — we compete nationally with Bell, Telus, and Shaw, including their discount brands Virgin Mobile (Bell), Koodo (Telus), and Freedom Mobile (Shaw). We also compete with various regional players and resellers. • Distribution of services and devices — we compete with other service providers for dealers, prime locations for our own stores, and third-party retail distribution shelf space. • Wireless networks — consolidation amongst regional players, or with incumbent carriers, could alter the regional or national competitive landscapes for Wireless. • Inbound roaming — we compete with other major national carriers to provide service to international operators who have customers who roam while in Canada. • Spectrum — Innovation, Science and Economic Development Canada (ISED Canada), formerly known as Industry Canada, has announced a future 600 MHz spectrum auction, expected to take place in the next two to three years. The outcome of this auction may increase competition. 32 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT CABLE Internet We compete with other Internet Service Providers (ISPs) that offer residential and commercial high-speed Internet access services. Rogers and Fido high-speed Internet services compete directly with: • Bell and Cogeco’s Internet service in Ontario; • Bell Aliant’s in New Brunswick Internet and services Newfoundland and Labrador; and • various resellers using wholesale telecommunication company digital subscriber line (DSL) and cable Third-Party Internet Access (TPIA) services in local markets. Television We compete with: • other Canadian multi-channel Distribution Broadcast including Bell, Shaw, other alternative Undertakings (BDUs) satellite TV services, and IPTV; • over-the-top (OTT) video offerings through providers like Netflix, YouTube, Apple, Amazon Prime Video, Google, and other channels streaming their own content; and • over-the-air local and regional broadcast television signals received directly through antennas, and the illegal reception of US direct broadcast satellite services. Phone We compete with: • Bell and Bell Aliant’s wireline phone service in Ontario, New Brunswick, and Newfoundland and Labrador; • Incumbent Local Exchange Carrier (ILEC) local loop resellers and Voice over IP (VoIP) service providers (such as Primus and Comwave), other VoIP-only service providers (such as Vonage and Skype), and other voice applications riding over the Internet access services of ISPs; and • substitution of wireline for wireless products, including mobile phones and wireless home phone products. BUSINESS SOLUTIONS A number of different players in the Canadian market compete for enterprise network and communications services. There are relatively few national providers, but each market has its own competitors that usually focus on the geographic markets where they have the most extensive networks. In the wireline voice and data market, we compete with facilities- and non-facilities-based telecommunications service providers. In markets where we own network infrastructure, we compete with incumbent fibre-based providers. Our main competitors are as follows, but there are also regional competitors: • Ontario – Bell, Cogeco Data Services, and Zayo; • Quebec – Bell, Telus, and Videotron; • Atlantic Canada – Bell Aliant and Eastlink; and • Western Canada – Shaw and Telus. MEDIA Television and specialty services compete for advertisers with: • other Canadian television stations that broadcast in their local markets, including those owned and operated by the CBC, Bell Media, and Corus Entertainment, some of which have greater national coverage; viewers and • other specialty channels; • distant Canadian signals and US border stations, given the time- shifting capability available to subscribers; • other media, including newspapers, magazines, radio, and outdoor advertising; and • content available on the Internet, such as web-based streaming services. Our radio stations compete mainly with individual stations in local markets, but they also compete: • nationally with other large radio operators, including the CBC, Bell Media, Corus Entertainment, and satellite radio operator SiriusXM; • with other media, including newspapers, magazines, television, and outdoor advertising; and • with new technologies, such as online web information services, music downloading, portable media players, and online music streaming services. M A N A G E M E N T ’ S D I I S C U S S O N A N D A N A L Y S I S TSC competes with: • retail stores; • catalogue, Internet, and direct mail retailers; • infomercials that sell products on television; and • other television channels, for channel placement, viewer attention, and loyalty. Our publishing products compete for readership and advertisers with: • other Canadian magazines, both digital and printed; • foreign, mostly US, titles that sell directly into Canada, both digital and printed; and • online information and entertainment websites. Competition in Sports Media and Entertainment includes other: • televised and online sports programming; • Toronto professional teams, for attendance at Toronto Blue Jays games; • MLB teams, for Toronto Blue Jays players and fans; • local sporting and special event venues; and • professional sports teams, for merchandise sales revenue. Our digital media assets compete with: • other content available on the Internet, including news services, streaming services, and portals; and • traditional media, including TV, radio, and publishing. 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 33 MANAGEMENT’S DISCUSSION AND ANALYSIS INDUSTRY TRENDS The telecommunications industry in Canada and our reporting segments are affected by various overarching trends relating to changing technologies, consumer demands, economic conditions, and regulatory developments. See “Risks and Uncertainties Affecting Our Business” and “Regulation in Our Industry” for more information. Outlined in the table below are industry trends affecting our specific reporting segments. WIRELESS TRENDS More sophisticated wireless networks and devices and the rise of multimedia and Internet-based applications are making it easier and faster to receive data, driving growth in wireless data services. Consumer demand for mobile devices, digital media, and on-demand content is pushing providers to build networks that can support the expanded use of applications, mobile video, messaging, and other wireless data. Wireless providers are investing in the next generation of broadband wireless data networks, such as LTE and future 5G technologies, to support the growing data demand. Wireless market penetration in Canada is approximately 83% of the population and is expected to grow at an estimated 0.9% annually over the next four years, per International Data Corporation. The Canadian Radio-television and Telecommunications Commission (CRTC) Wireless Code has limited consumer wireless term contracts to two years from three years, which has resulted in a greater number of customers completing and renewing contracts at any given time. Shorter- term contracts allow less time for carriers to recover subsidies. Subscribers are increasingly bringing their own devices or keeping their existing devices longer and therefore may not enter into term contracts for wireless services. This may negatively impact our subscriber churn, but may create gross addition subscriber opportunities as a result of increased churn from other carriers. This also may negatively impact the monthly service fees charged to subscribers. Wireless providers are collaborating with OTT services to offer their customers unique, value-added benefits and service options. Mobile commerce continues to increase as more devices and platforms adopt secure technology to facilitate wireless transactions. CABLE TRENDS The Internet and social media are increasingly being used as a substitute for wireline telephone services, and televised content is increasingly available online. Downward Television tier migration (cord shaving) and Television cancellation with the intent of substitution (cord cutting) appear to be on the rise with increased adoption of OTT services, such as Apple TV, Netflix, and Android-based TV boxes. The CRTC’s decision to lower wholesale Internet access rates may also adversely affect companies that wholesale Internet services. television technology continues to improve with 4K TV Broadcast broadcasts and high dynamic range (HDR) for higher resolution and improved motion video. The CRTC Let’s Talk TV guidance requires service providers to offer customers with pick-and-pay choices, small reasonably priced packages, and affordable entry-level TV channel options that may negatively impact the industry. In 2016, the CRTC established several criteria to increase Internet access for Canadian residents and businesses. As a result, subscribers should have access to speeds of at least 50 Mbps and a service with unlimited data allowance. Our digital cable and VoIP telephony services compete with competitor IPTV deployments and non-facilities-based service providers, respectively, which continue to increase competitive intensity that have and may continue to negatively impact the industry. Cable and wireline companies are expanding their service offerings to include faster broadband Internet. Canadian companies, including Rogers, are increasingly offering download speeds of 1 Gbps and Internet offerings with unlimited bandwidth in response to the perceived “need for speed”. Consumers are demanding ever-faster speeds for streaming online media, playing online video games, and for their ever- growing number of Internet-capable devices. In order to help facilitate these speeds, cable and wireline companies are shifting their networks towards higher speed and capacity data over cable service interface specifications (FTTH) technologies. These technologies provide faster potential data communication speeds, allowing both television and Internet signals to reach consumers more quickly in order to sustain reliable speeds to address the increasing number of Internet-capable devices. and fibre-to-the-home (DOCSIS) 3.0/3.1 BUSINESS SOLUTIONS TRENDS Companies are using fibre-based access and cloud computing to capture and share information in more secure and accessible environments. This, combined with the rise of multimedia and Internet-based business applications, is driving exponential growth in data demand. Enterprises and all levels of government are transforming data centre infrastructure by moving toward virtual data storage and hosting. This is driving demand for more advanced network functionality, robust, scalable services, and supportive dynamic network infrastructure. Carriers are dismantling legacy networks and investing in next generation platforms and data centres that combine voice, data, and video solutions onto a single distribution and access platform. As next generation platforms become more popular, our competition will begin to include systems integrators and manufacturers. Companies are using third parties to increase security for their data and information to address cyber threats and other information security risks. Devices and machines are becoming more interconnected and there is more reliance on the Internet and other networks to facilitate updates and track usage. MEDIA TRENDS Consumer demand for digital media, mobile devices, and on-demand content is increasing and media products, such as magazines, have experienced significant digital uptake, requiring industry players to increase their efforts in digital content and capabilities in order to compete. This trend is also causing advertisers to shift their spending from conventional TV and print publishing to digital platforms. Competition has changed and traditional media assets in Canada are increasingly being controlled by a small number of competitors with significant scale and financial resources. Technology has allowed new entrants and even individuals to become media players in their own right. Some players have become more vertically integrated across both traditional and emerging platforms. Relationships between providers and purchasers of content have become more complex. Global aggregators have also emerged and are competing for both content and viewers. Access to live sports and other premium content has become even more important for acquiring and retaining audiences that in turn attract advertisers and subscribers. Therefore, ownership of content and/or long-term agreements with content owners has also become increasingly important teams, and networks are also experimenting with the delivery of live sports content through online, social, and virtual platforms, while non-traditional sports are also growing in mindshare. to media companies. Leagues, 34 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT M A N A G E M E N T ’ S D I I S C U S S O N A N D A N A L Y S I S Our Strategy, Key Performance Drivers, and Strategic Highlights As part of our overall strategy and related priorities, we set new corporate objectives each year to progress on our long-term strategic priorities and address short-term opportunities and risks. OUR STRATEGIC PRIORITIES We announced our new set of strategic priorities in May 2014. This strategy builds on our many strengths, including a unique mix of network and media assets, and focuses on how we can reaccelerate our growth relative to our industry peers, increase the focus around the customer, reinvigorate our brands, continue our network and innovation leadership, and create an enhanced working environment for our employees. To achieve these goals, we established strategic priorities as follows: • Be a Strong Canadian Growth Company • Overhaul the Customer Experience • Drive Growth in the Business Market • Invest in and Develop our People • Deliver Compelling Content Everywhere • Focus on Innovation and Network Leadership • Go to Market as One Rogers BE A STRONG CANADIAN GROWTH COMPANY The overarching goal of our strategy is to accelerate revenue growth in a sustainable way and translate this revenue growth into free cash flow, an strong margins, adjusted operating profit, increasing return on assets, and returns to shareholders. OVERHAUL THE CUSTOMER EXPERIENCE Improving customer experience is core to our strategy. We believe that we can improve significantly in this area and have started on that journey. Our goal is to make it easy for customers to interact with Rogers when, how, and where they want, with a focus on becoming a leader in self-serve options. This means simplifying our processes and policies and integrating them into our IT systems and front-line employee training. DRIVE GROWTH IN THE BUSINESS MARKET The Canadian business market for communications services was valued in September 2016 by International Data Corporation Canada at an estimated $22 billion for 2017. We believe Rogers is currently under-indexed in this market. Currently, we provide our business customers with core telecommunication services such as wireless, broadband, next generation IP, and data centre services, and have begun offering emerging services, such as unified communications and collaboration, security, cloud, and Internet of Things (IoT). We believe our strategy of being first-to-market with business service innovation, supported by an aligned and execution-focused organization, will deliver new opportunities for Rogers in the business market. These opportunities will be a key focus of ours as we strive to attract and serve more business customers. INVEST IN AND DEVELOP OUR PEOPLE Our employees are the heart and soul of Rogers and their passion for our company and our customers is world-class. Our strategy is to invest more in our people by updating our onboarding, training, and development programs and establishing clear accountabilities for all employees. We strive to provide our people, particularly our front-line employees, with the training, tools, and support they need. We believe that providing better training and tools to empower our employees will lead to increasingly positive experiences for our customers. DELIVER COMPELLING CONTENT EVERYWHERE The ways in which Canadians consume content continue to evolve. The new expectation is that content will be available “on demand”. Whether it is watching the latest episode of their favourite TV program at home or streaming a live sporting event on their mobile device, Canadians now expect to be able to consume any content they want, when and where they want, and on the device that they want. Rogers has some of the most sought-after media assets in Canada, with a deep roster of leading sports assets, top radio stations, iconic periodicals, and award-winning television programming. We will continue to invest in compelling content for our customers and focus on enhancing the cooperation between our Wireless, Cable, Business Solutions, and Media teams so we can fully leverage our highly popular content and make it available wherever our customers want to consume it. FOCUS ON INNOVATION AND NETWORK LEADERSHIP Innovation has always been a part of our identity. Whether it is bringing to market new products or the latest network technologies, Rogers has led the way with many “firsts”. We will continue to invest in our wireless and cable networks and innovative new products that run across them. We will aim to meet the growing demand for data with the highest quality of service while maintaining our network speed advantage. We will continue to generate and develop technologies and services that support our core product offerings. GO TO MARKET AS ONE ROGERS One Rogers is our plan for all of our employees, network, content, and brand assets to work much more closely together. To operate remove barriers to collaboration, as One Rogers, we must cooperation, and agility across the organization. This allows for assets and expertise in one part of the company to be easily shared with other parts of the company to the benefit of our customers. We will work as One Rogers across our business segments to deliver enriched experiences across our product sets and customer base. 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 35 MANAGEMENT’S DISCUSSION AND ANALYSIS 2016 OBJECTIVES For 2016, we set forth the following objectives related to our strategic priorities. Following these objectives are our strategic highlights for the year, showing our achievements against these objectives. Strategic Priority 2016 Objectives Be a strong Canadian growth company Overhaul the customer experience Drive growth in the business market Invest in and develop our people Deliver compelling content everywhere Focus on innovation and network leadership Go to market as one Rogers Achieve our 2016 financial targets while investing to support future growth Save our customers time by making it easier for them to do business with us online and in-person Expand our sales reach and introduce “leapfrog” technologies using our enterprise-grade networks Build a high-performing culture by investing in employee development, new technology, and the workplace Deliver our content where our audiences want it and leverage it to differentiate our businesses Reclaim our leadership in Cable, maintain it in Wireless, and grow it in our business markets Work together, using all our assets and resources, to set Rogers apart from competitors KEY PERFORMANCE DRIVERS AND 2016 STRATEGIC HIGHLIGHTS The following achievements display the progress we made towards meeting our 2016 objectives we set last year. BE A STRONG CANADIAN GROWTH COMPANY • 100% achievement of our 2016 guidance on selected full-year metrics and achieved our best subscriber metrics in recent years. See “Financial and Operating Guidance” for more information. OVERHAUL THE CUSTOMER EXPERIENCE • Launched a number of tools and offerings with a focus on becoming a leader in self-serve options. We saw a 56% increase in self-serve transactions on the Rogers brand and a 9% increase on the Fido brand this year. • Expanded Roam Like Home to over 100 destinations in Europe, Asia, Mexico, South America, and Latin America, further simplifying how Wireless consumers use the Internet, make calls, and send texts and e-mails. Customers have access to their Canadian plan features while traveling, all at a relatively low cost. Furthermore, we broadened the availability of Roam Like Home by making it available on most consumer Wireless plans. • Introduced Fido Roam, allowing customers to use existing data, talk, and text from their Fido Pulse plans while traveling, for a low daily price. Fido Roam covers all of the US along with destinations in Europe, the Caribbean, South and Central America, the Middle East, Oceania, South Africa, and Asia. • Launched Data Manager, a new tool that gives families the ability to manage their wireless data in real-time and provide worry-free control. • Launched Rogers EnRoute and Fido EnRoute, tools that save our customers time by giving them the ability to track, in real-time, when a technician will arrive for an installation or service call. • Launched DeviceAdvice and Message Me for our Fido customers. DeviceAdvice is a tool allowing customers to self- diagnose device issues and receive quick, personalized advice so they can maximize the performance of their device. Message Me allows customers to contact Fido customer representatives via Facebook Messenger on their mobile or desktop device. • Launched Rogers Assist, an app that allows all Rogers employees to submit an issue to customer care on behalf of their friends, family, and acquaintances. • Collaborated with a Canadian app creator that helps people with cognitive special needs, to create how-to videos for using a wireless device. Rogers.com now features five videos with easy-to-follow instructions and closed-captioning that explain how to perform key functions related to your Rogers wireless device like sending a text or picture, connecting to a Wi-Fi network, and making a phone call. • Expanded our Connected for Success program to more communities across Ontario, New Brunswick, and Newfoundland and Labrador. This program provides affordable Internet services to people that live in non-profit housing. This expansion more than doubled the number of eligible households across the country to up to 150,000. • Released Rogers’ 2016 Transparency Report, our annual report on how we share customer information in response to requests from legal authorities. We are committed to protecting our customers’ privacy and fulfilling our obligation as a good corporate citizen to follow the law and contribute to public safety. 36 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT M A N A G E M E N T ’ S D I I S C U S S O N A N D A N A L Y S I S DRIVE GROWTH IN THE BUSINESS MARKET • Launched Rogers Unison, a new mobile solution that brings the features of a traditional landline office phone to one’s mobile phone. We were the first telecommunications provider in North America to launch such a solution. This solution allows our customers to stay connected across multiple devices regardless of their location, allowing them to better serve their customers. • Launched Rogers Public Cloud, a new data sovereign, cloud infrastructure as-a-service solution that lets businesses securely manage critical data, applications, servers, systems software, and network resources over the Internet. • Launched Rogers Ignite Gigabit to small business customers in Ontario, enabling them to leverage blazing-fast Internet speeds and unlimited data usage to improve productivity with faster file transfers, real-time data backup for business continuity, and high-quality video conferencing. The increased bandwidth also means businesses can connect more users online simultaneously, without compromising Internet performance. Internet • Announced certain IoT as-a-service offerings to simplify the process of managing complex IoT solutions. Two of the first solutions being offered as a service include Farm & Food Monitoring and Level Monitoring. • Launched Business App Market, a new platform for small businesses to manage multiple cloud-based applications. INVEST IN AND DEVELOP OUR PEOPLE • Recognized again as a Top Employer for 2017 in November 2016 and as a Top Employer for Young People in January 2017 by the editors of Canada’s Top 100 Employers. • Selected as one of Canada’s Best Diversity Employers for 2016 in in March 2016 for a report recognition of our efforts to promote diversity and inclusion in the workplace. released by Mediacorp Inc. • Named one of Canada’s Greenest Employers for 2016 by the editors of Canada’s Top 100 Employers in April 2016, an award recognizes employers with innovative environmental that programs and earth-friendly policies that actively involve their employees. • Named one of the 50 Best Corporate Citizens in Canada by Corporate Knights in June 2016, an award that recognizes employers that incorporate social, economic, and ecological benefits and costs in their normal course of business. • Launched an intensive leadership program for more than 160 executives. • Expanded our national onboarding program to include 1,400 call centre employees and launched a mobile onboarding solution for part-time employees. • Continued to modernize our workplace to help us be more productive to better serve our customers. beats our closest English-language competitor, and marks a 7% increase year on year. The 2016 Blue Jays regular season was the most-watched Blue Jays season in network history, reaching 20 million Canadians. In November 2016, Sportsnet delivered its largest World Series audience ever, with an average audience of 2.66 million viewers, which more than doubled Sportsnet’s previous game. Furthermore, Sportsnet achieved great success with the World Cup of Hockey, with an average audience of 1.1 million viewers for the entire tournament, and reached 15.5 million Canadians throughout the tournament. all-time most-watched World Series • Launched Sportsnet NOW, one of the first mainstream sports TV channels in North America to be available direct to consumers, as well as Sportsnet 4K, which delivered all regular season Toronto Blue Jays home games in 4K. This will continue in 2017, during which we plan to bring sports fans more than 100 Blue Jays, NHL, and NBA games in 4K. • Broadcast the first live NBA, NHL, and MLB games in 4K. • Introduced the new NextBox 4K PVR, giving customers the ability to record up to eight 4K programs at one time and store up to 90 hours of 4K entertainment. • Added six new programs to the 2016/2017 schedule for Canadian specialty channel VICELAND, including the network’s first-ever scripted series, Nirvana The Band The Show. This new original programming series is produced by VICE Media Canada Inc. (VICE) through VICE Studio Canada. • Successfully completed the second year of our exclusive 12-year national NHL Agreement while bringing the NHL to more than ever before. Rogers Hometown Hockey Canadians returned for a third season during the 2016-2017 NHL season with hockey festivities and entertainment. • Continued our commitment to deliver world-class Canadian content by adding two new original scripted series to our City lineup, with the millennial-focused comedy Second Jen and drama Bad Blood: The Vito Rizzuto Story. FOCUS ON INNOVATION AND NETWORK LEADERSHIP • Extended our Ignite Gigabit Internet coverage to cover Rogers’ entire cable footprint, such that we offer the fastest widely available Internet speeds in our marketplace. • Announced the long-term strategic partnership with Comcast Corporation to bring our customers a world-class IPTV service with the most advanced features available in the market today by deploying Comcast’s X1 IP-based video platform. • Extended our 700 MHz LTE network reach to 91% of Canada’s population in 2016, compared to 78% in 2015. Extended our overall LTE network reach to 95% of Canada’s population in 2016, compared to 93% in 2015. • Installed a new suite of technology and enterprise solutions to enable the most connected arena in Canada, the Rogers Place in Edmonton. DRIVE COMPELLING CONTENT EVERYWHERE • For the second consecutive year, Sportsnet solidified its position as the destination for Canadian sports fans by closing out 2016 as Canada’s number-one sports media brand. Sportsnet won eight months in 2016 and has widened the gap from its closest competitor with a 42% lead in average minute audience and a 39% lead in audience share. Sportsnet.ca reached an all-time high with 4.25 million unique visitors in October 2016, which GO TO MARKET AS ONE ROGERS • Successfully worked as one company, showing we can bring our entire team together to achieve our goals. We demonstrated this by bringing Rogers Hometown Hockey to 150,000 Canadians, introducing low-cost for more community housing residents, and bringing viewers our strongest primetime lineup ever, while delivering a strong year of NHL and Sportsnet. Internet 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 37 MANAGEMENT’S DISCUSSION AND ANALYSIS 2017 OBJECTIVES Strategic Priority Be a strong Canadian growth company Overhaul the customer experience Drive growth in the business market Invest in and develop our people Deliver compelling content everywhere Focus on innovation and network leadership Go to market as one Rogers 2017 Objectives Achieve our 2017 financial targets while at the same time investing to support future growth Foster good relationships and obtain positive feedback from our customers through continual improvements to our customer service with a focus on self-serve Utilize our enterprise-grade networks and introduce new products to gain market share in the business market Invest in our employees’ futures, in part so they say they are proud to work for us, and to enhance employee engagement Maintain our status as the number-one sports media brand in Canada and leverage that status across our different platforms Continue to grow our leadership in Wireless and Internet, and set forth developments to reclaim a sound position in video Introduce the best customer offerings possible through leveraging the skills and capabilities of all our internal teams Be a strong Canadian growth company Overhaul the customer experience Go to market as one Rogers Drive growth in the business market Focus on innovation & network leadership Invest in and develop our people Deliver compelling content everywhere 38 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT M A N A G E M E N T ’ S D I I S C U S S O N A N D A N A L Y S I S FINANCIAL AND OPERATING GUIDANCE We provide consolidated annual guidance ranges for selected financial metrics on a consolidated basis consistent with the annual plans approved by our Board. 2016 ACHIEVEMENTS AGAINST GUIDANCE The following table outlines guidance ranges that we had previously provided and our actual results and achievements for the selected full-year 2016 financial metrics. ✓ ✓ ✓ ✓ (In millions of dollars, except percentages) Consolidated Guidance 1 Revenue Adjusted operating profit 2 2015 Actuals 2016 Guidance Ranges 2016 Actuals Achievement 13,414 Increase of 1% to 3% 5,032 Increase of 1% to 3% 13,702 2.1% 5,092 1.2% Additions to property, 2,440 plant and equipment 3 2,300 to 2,400 2,352 n/m Free cash flow 2 1,676 Increase of 1% to 3% 1,705 1.7% Missed ✘ Achieved ✓ n/m – not meaningful 1 The table outlines guidance ranges for selected full-year 2016 consolidated financial metrics provided in our January 27, 2016 earnings release. Guidance ranges presented as percentages reflect percentage increases over 2015 actual results. 2 Adjusted operating profit and free cash flow are non-GAAP measures and should not be considered substitutes or alternatives for GAAP measures. These are not defined terms under IFRS and do not have standard meanings, so they may not be a reliable way to compare us to other companies. See “Non-GAAP Measures” for information about these measures, including how we calculate them. 3 Includes additions to property, plant and equipment for the Wireless, Cable, Business Solutions, Media, and Corporate segments and does not include expenditures on spectrum licences. 2017 FULL-YEAR CONSOLIDATED GUIDANCE We expect steady growth in revenue and adjusted operating profit and lower additions to property, plant and equipment to drive higher free cash flow. We expect to have the financial flexibility to maintain our network advantages, to further reduce debt, and to continue to return cash to shareholders. (In millions of dollars, except percentages) 2016 Actuals 2017 Guidance Ranges 1 Consolidated Guidance Revenue Adjusted operating profit 2 Additions to property, plant and equipment, net 3 Free cash flow 2 13,702 5,092 Increase of 3% to 5% Increase of 2% to 4% 2,352 1,705 2,250 to 2,350 Increase of 2% to 4% 1 Guidance ranges presented as percentages reflect percentage increases over full- year 2016 actual results. 2 Adjusted operating profit and free cash flow are non-GAAP measures and should not be considered substitutes or alternatives for GAAP measures. These are not defined terms under IFRS and do not have standard meanings, so may not be a reliable way to compare us to other companies. See “Non-GAAP Measures” for information about these measures, including how we calculate them. 3 Includes additions to property, plant and equipment for the Wireless, Cable, Business Solutions, Media, and Corporate segments net of proceeds on disposition, but does not include expenditures for spectrum licences. The above table outlines guidance ranges for selected full-year 2017 consolidated financial metrics. These ranges take into consideration our current outlook and our actual results for 2016. the financial outlook is to assist investors, The purpose of shareholders, and others in understanding certain financial metrics relating to expected 2017 financial results for evaluating the performance of our business. This information may not be appropriate for other purposes. Information about our guidance, including the various assumptions underlying it, is forward-looking and should be read in conjunction with “About Forward-Looking Information”, “Risks and Uncertainties Affecting Our Business”, and the related disclosure and information about various economic, competitive, and regulatory assumptions, factors, and risks that may cause our actual future financial and operating results to differ from what we currently expect. We provide annual guidance ranges on a consolidated full-year full-year Board-approved basis that are consistent with annual plans. Any updates to our full-year financial guidance over the course of the year would only be made to the consolidated guidance ranges that appear above. Key underlying assumptions Our 2017 guidance ranges above are based on many assumptions including, but not limited to, the following material assumptions: • continued intense competition consistent with our experience during the full-year 2016 in all segments in which we operate; • a substantial portion of our US dollar-denominated expenditures for 2017 is hedged at an average exchange rate of $1.33/US$; • key interest rates remain relatively stable throughout 2017; • no significant additional regulatory developments, shifts in economic condition, or macro changes in the competitive environment affecting our business activities. We note that regulatory decisions expected during 2017 could materially alter underlying assumptions around our 2017 Wireless, Cable, Business Solutions, and/or Media results in the current and future years, the impacts of which are currently unknown and not factored into our guidance; • the CRTC decision to require distributors to offer a basic entry- level television package capped at $25 per month, as well as channels above the basic tier on an “à la carte” basis and in smaller, is not expected to materially impact our Cable revenue; reasonably priced packages, • the CRTC decision to significantly reduce interim rates for the capacity charge tariff component of wholesale high-speed access service pending approval of final rates is expected to have an impact on our Cable revenue; • Wireless customers will continue to adopt, and upgrade to, higher-value smartphones and a similar proportion of customers will remain on term contracts; • overall wireless market penetration in Canada is expected to grow in 2017 at a similar rate as in 2016; • our relative market share in Wireless and Cable will not be negatively impacted; • continued subscriber growth in Wireless and Cable Internet; moderating net losses in Cable Television subscribers; and a relatively stable Phone subscriber base; 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 39 MANAGEMENT’S DISCUSSION AND ANALYSIS • in Business Solutions, continued declines in our legacy and off-net business, and the continued execution of our plan to grow higher-margin next generation IP- and cloud-based services; • in Media, continued growth in Sportsnet and declines in our including our print publishing traditional media businesses, offerings; and • with respect to additions to property, plant and equipment: • we have rolled out LTE across the majority of our coverage area as well as deployed newly-acquired 700 MHz and AWS-1 spectrum; and • we will make expenditures to prepare our network for our anticipated rollout of the Comcast X1 IPTV platform in early 2018. Capability to Deliver Results LEADING NETWORKS WIRELESS Rogers has one of the most extensive and advanced wireless networks in Canada, which: • was the first LTE high-speed network in Canada; • reached approximately 95% of the Canadian population as at We are continuously enhancing our IP service infrastructure for all of our wireless services. Advances in technology have transformed how our customers interact and how they use the variety of tools that are available to them in their personal and professional lives. Technology has also changed the way businesses operate. December 31, 2016 on our LTE network alone; • is supported by voice and data roaming agreements with international carriers in more than 200 destinations, including a growing number of LTE roaming operators; and • includes network sharing arrangements with three regional wireless operators that operate in urban and rural parts of Canada. Significant spectrum position Our wireless services are supported by our significant wireless spectrum holdings in both high-band and low-band frequency ranges. As part of our network strategy, we expect to continue making significant capital investments in spectrum to: • support the rapidly growing usage of wireless data services; and • introduce new innovative network-enabled features and functionality. Our spectrum holdings as at December 31, 2016 include: Type of spectrum Rogers licence 700 MHz 24 MHz in Canada’s major geographic markets, covering 91.1% of the Canadian population. 850 MHz 25 MHz across Canada. 1900 MHz 60 MHz in all areas of Canada except 40 MHz in northern Quebec, 50 MHz in southern Ontario, and 40 MHz in the Yukon, Northwest Territories, and Nunavut. Who it supports 4G LTE subscribers. 2G GSM and subscribers (4G LTE in the future). 3.5G HSPA+ 2G GSM and subscribers (4G LTE in the future). 3.5G HSPA+ AWS 1700/2100 MHz 40 MHz in British Columbia, Alberta, 30 MHz in southern Ontario and 20 MHz in the rest of Canada. 4G LTE subscribers. 2500 MHz 40 MHz FDD across Canada and an additional 20 MHz TDD in key population areas in Quebec, Ontario, and British Columbia. 4G LTE subscribers. 40 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT M A N A G E M E N T ’ S D I I S C U S S O N A N D A N A L Y S I S We also have access to additional spectrum through the following network sharing agreements: Type of spectrum Kind of venture 2.3 GHz/3.5 GHz range Inukshuk Wireless Partnership is a joint operation with BCE Inc. in which Rogers holds a 50% interest. Inukshuk holds 30 MHz (of which 20 MHz is usable) of FDD 2.3 GHz spectrum primarily in eastern Canada, including certain population centres in southern and eastern Ontario, southern Quebec, and smaller holdings in New Brunswick, Manitoba, Alberta, and British Columbia. Inukshuk (between 50-175 MHz) in most of the major population centres across Canada. The current fixed wireless LTE national network utilizes the jointly held 2.3 GHz and 3.5 GHz spectrum bands. also holds 3.5 GHz TDD licences Who it supports Mobile and fixed wireless subscribers. 850 MHz, 1900 MHz AWS spectrum Three network-sharing arrangements to enhance coverage and network capabilities: • with Manitoba Telecom Services, which covers 96% of the population across Manitoba; • with TBayTel, that covers the combined base of customers in northwestern Ontario; and 3.5G / 4G HSPA+, 4G LTE subscribers. 3.5G / 4G HSPA+ subscribers. • with Quebecor (Videotron) to provide LTE services across the 3.5G / 4G LTE subscribers. province of Quebec. We have an option arrangement to buy additional spectrum, subject to commercial terms and regulatory approvals, as follows: Type of spectrum Transaction AWS-1 spectrum Part of a larger strategic transaction with Videotron, which could lead to the acquisition of Videotron’s Tier 3 Toronto AWS-1 spectrum. Who it will support 4G LTE subscribers. CABLE Our expansive fibre and hybrid fibre-coaxial infrastructure delivers services to consumers and businesses in Ontario, New Brunswick, and Newfoundland and Labrador. We also operate a transcontinental fibre-optic network that extends over 46,000 route kilometres and is used to service enterprise customers, including government and other telecommunications service providers. We also use our extensive fibre network for backhaul for wireless cell In Canada, the network extends coast-to-coast and site traffic. includes local and regional fibre, transmission electronics and systems, hubs, points of presence, and IP routing and switching infrastructure. The network also extends to the US from Vancouver south to Seattle; from the Manitoba-Minnesota border through Minneapolis, Milwaukee, and Chicago; from Toronto through Buffalo; and from Montreal through Albany to New York City and Ashburn, allowing us to connect Canada’s largest markets, while also reaching key US markets for the exchange of data and voice traffic. The network is structured to optimize performance and reliability and to allow for the simultaneous delivery of video, voice, and Internet over a single platform. It is generally constructed in rings that interconnect with distribution hubs, minimizing disruptions that can result from fibre cuts and other events. Homes and commercial buildings are connected to our network through hybrid fibre-coaxial nodes. We connect the node to the network using fibre optic cable and the home to the node using coaxial cable. Using 860 MHz and 750 MHz of shared cable spectrum in Ontario and Atlantic Canada, respectively, we deliver video, voice, and broadband services to our customers. Hybrid fibre- coaxial node segmentation increases bandwidth per home passed by reducing the number of customers that share the cable spectrum. We continually upgrade the network to improve capacity, enhance performance and reliability, reduce operating costs, and introduce new features and functionality. For example, we invest in: • further segmenting our network nodes to reduce the number of homes sharing spectrum in each node; • improving video signal compression by moving to more advanced video protocols; • improving channel and on-demand capacity through switched digital video; and • increasing the FTTH footprint by connecting more homes directly to fibre. In early 2016, we completed the transitioning of customers receiving television signals over our analog broadcast channels to all-digital services, freeing up significant cable network capacity for additional features and services. The analog-to-digital subscriber migration strengthened the customer experience and, in addition to allowing us to reclaim significant amounts of network capacity, enabled us to reduce future network operating and maintenance costs. The migration from analog to digital required additional spending as it involved fitting analog homes with digital converters and removing existing analog filtering equipment. 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 41 MANAGEMENT’S DISCUSSION AND ANALYSIS Broadband Internet service is provided using a DOCSIS CCAP 3.0/3.1 platform, which combines multiple radio frequency channels onto one access point at the customer premise, delivering exceptional performance. The bandwidth of our Internet service offerings has increased 55-fold in the last 10 years as we bring new technologies to market when they become available. This track record of investing in our networks and demonstrating the capability to deploy best-in-class service is one of our key strategies for ensuring that we stay competitive with other service providers that provide Internet service into homes and businesses over copper facilities. As at December 31, 2016, 100% of our cable network has been upgraded to DOCSIS CCAP technology supporting DOCSIS 3.1 and Ignite Gigabit Internet. We continue to invest in and improve our cable network; for example, with technology to support gigabit Internet speeds, Rogers 4K TV, our 4K PVR set-top box, and a significant commitment to live broadcasting in 4K, including all regular season Toronto Blue Jays home games in 2017 and numerous NHL and NBA games. Voice-over-cable telephony services are provided over a dedicated DOCSIS network. Our offerings ensure a high quality of service by including network redundancy as well as network and customer premise backup powering. Our phone service includes a rich set of features, such as TV Call Display, three-way calling, and advanced voicemail features that allow customers to be notified of, and listen to, their home voicemail on their wireless phone or over the Internet. BUSINESS SOLUTIONS We own and operate some of the most advanced networks and data centres in Canada. We leverage our national fibre, cable, and wireless networks and data centre infrastructure to enable businesses to deliver greater value to their customers through proactive network monitoring and problem resolution with enterprise-level reliability, security, and performance. We operate our own robust, transcontinental network with 100% digital fibre optic backbone and strategic interconnect points to the US and overseas for cross-border and international coverage. Our primary and secondary Network Operation Centres proactively monitor Rogers’ networks service to mitigate the risk of interruptions and allow for rapid responses to any outages. facilities-based, Our data centres provide guaranteed uptime and expertise in collocation, cloud, and managed services solutions. We own and operate 16 state-of-the-art, highly reliable, certified data centres across Canada, including: • Canada’s first Tier III Design and Construction certified multi- tenant facility, opened in 2012 in Toronto; • Alberta’s first Tier III certified data centre, opened in 2014; and • a third Tier III certified data centre in Ottawa, opened in 2015. POWERFUL BRANDS The Rogers brand has strong national recognition through our: • established networks; • extensive distribution; • recognizable media content and programming; • advertising; • event sponsorships, including the Rogers Cup; • community investment, including Rogers Youth Fund; and • naming rights to some of Canada’s landmark buildings. 42 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT We also own or utilize some of Canada’s most recognized brands including: • the wireless brands of Rogers, Fido, and chatr; • over 20 TV stations and specialty channels, including Sportsnet, FX (Canada) and FXX (Canada), OMNI, VICELAND, and City; • publications, including Maclean’s, Chatelaine, Today’s Parent, Flare, and Hello! Canada; • Texture by Next Issue, with a catalogue of over 230 premium Canadian and US magazine titles; • over 50 radio stations, including 98.1 CHFI, 680 NEWS, Sportsnet The FAN, KiSS, JACK FM, and SONiC; • major league sports teams, including the Toronto Blue Jays, and teams owned by MLSE, such as the Toronto Maple Leafs, the Toronto Raptors, and Toronto FC; • an exclusive 12-year agreement with the NHL that allows us to deliver unprecedented coverage of professional hockey; • TSC, the leading nationally broadcast, interactive, multi-channel Canadian retailer; and • VICE, a global youth media company that produces and distributes global online video and text content. WIDESPREAD PRODUCT DISTRIBUTION WIRELESS We distribute our wireless products nationally using various channels, including: • an extensive independent dealer network; • company-owned Rogers, Fido, and chatr retail stores; • major retail chains and convenience stores; • other distribution channels, such as WOW! mobile boutique, as well as Wireless Wave and TBooth Wireless through our ownership interest in Glentel; • customer self-serve using rogers.com, fido.ca, chatrwireless.com, and e-commerce sites; • our call centres; and • outbound telemarketing. CABLE We distribute our cable products using various channels, including: • company-owned Rogers and Fido retail stores; • customer self-serve using rogers.com and fido.ca; • our call centres, outbound telemarketing, and door-to-door agents; • major retail chains; and • an extensive network of third-party retail locations. BUSINESS SOLUTIONS Our sales team and third-party retailers sell Business Solutions services to the enterprise, public sector, and carrier wholesale markets. An extensive network of third-party channel distributors deals with IT integrators, consultants, local service providers, and other indirect sales relationships. This diverse approach gives greater breadth of coverage and allows for strong sales growth for next generation services. FIRST CLASS MEDIA CONTENT We deliver highly sought-after sports content enhanced by the following initiatives: • an exclusive national 12-year agreement with the NHL, which began with the 2014-2015 NHL season and allows us to deliver unprecedented coverage of North American professional hockey across television, smartphones, tablets, and the Internet; • Rogers NHL GameCentre LIVE, an upgraded online destination for enhancing NHL action on any screen; • GamePlus, an innovative and interactive experience within Rogers NHL GameCentre LIVE that includes revolutionary camera angles, exclusive interviews and analysis, and original video-on-demand content; • Rogers Hometown Hockey Tour, which brings hockey-themed festivities and outdoor viewing parties to 24 communities across Canada over the 2016-2017 NHL season; • the MLB Network, a 24-hour network dedicated to baseball, brought to Canada for the first time on Rogers digital cable; • an 8-year, multi-platform broadcast rights agreement with MLB Properties and MLB Advanced Media to show live and in-progress games and highlights within Canada through 2021; • a 10-year multi-platform agreement that commenced in August 2014, which makes Rogers the exclusive wholesaler and a distributor of World Wrestling Entertainment’s (WWE) flagship programming in Canada; • exclusive broadcasting and distribution rights of the Toronto Blue Jays through our ownership of the team; and • delivery of our exclusive Canadian English language broadcast and mobile rights for the 2016 World Cup of Hockey. CUSTOMER EXPERIENCE We are committed to providing our customers with the best experience possible. To do this, we have invested in several different methods, such as: • contact centres located throughout Canada; • an innovative Integrated Voice Response (IVR) system that can take calls in four languages, including English, French, Mandarin, and Cantonese; • self-serve options, including: • the ability for Fido and Rogers consumer customers to complete price plan changes and hardware upgrades online; • simplified login, allowing Fido customers to log in to their accounts online or through the Fido MyAccount app using their Facebook login credentials, eliminating the need to remember multiple login credentials and making self-service easier to access; • the ability for customers to install their Internet and TV the need for a technician visiting their products without residence; and • Rogers EnRoute, a new tool that saves customers time by giving them the ability to track on their phone when a technician will arrive for an installation or service call; • customer care available over Facebook Messenger (a global first for a telecommunications company) and Twitter (among the first globally); M A N A G E M E N T ’ S D I I S C U S S O N A N D A N A L Y S I S • Family Data Manager, a data manager tool that allows Wireless customers to manage and customize their data usage in real- time through MyRogers; • a simplified mobile bill, making it easier for customers to read and understand their monthly charges; • Roam Like Home and Fido Roam, worry-free wireless roaming allowing Canadians to use their wireless plan like they do at home when traveling to included destinations; and • Rogers Assist, an app that allows all Rogers employees to submit an issue to customer care on behalf of their friends, family, and acquaintances. ENGAGED PEOPLE For our team of approximately 25,200 employees, we strive to create a great workplace, focusing on all aspects of the employee experience, which include: • engaging employees and building high-performing teams through initiatives including engagement surveys and leadership development programs; • aiming to attract and retain top talent through effective training and development, performance-driven employee recognition programs, and career progression programs for front-line employees; • maintaining our commitment to diversity and inclusion; and • providing a safe, collaborative, and agile workplace that provides employees the tools and training to be successful. FINANCIAL STRENGTH AND FLEXIBILITY We have an investment-grade balance sheet, conservative debt leverage, and substantial available liquidity of $2.7 billion as at December 31, 2016. Our capital resources consist primarily of cash provided by operating activities, cash and cash equivalents, available lines of credit, funds available under our accounts receivable securitization program, and issuances of long-term debt. We also own approximately $1,047 million of marketable equity securities in publicly-traded companies as at December 31, 2016. The following information is forward-looking and should be read in conjunction with “About Forward-Looking Information”, “Financial and Operating Guidance”, “Risks and Uncertainties Affecting Our Business”, and our other disclosures about various economic, competitive, and regulatory assumptions, factors, and risks that could cause our actual future financial and operating results to differ from those currently expected. Similar to 2016, we anticipate generating a net cash surplus in 2017 from our cash provided by operating activities. We expect that we will have sufficient capital resources to satisfy our cash funding requirements in 2017, including the funding of dividends on our common shares, repayment of maturing long-term debt, and other financing activities, investing activities, and other requirements. This takes into account our opening bank advance balance, cash provided by operating activities, the amount available under our $2.8 billion bank credit receivable securitization program, and funds available to us from the issuance of other bank, publicly issued, or private placement debt from time to time. As at December 31, 2016, there were no significant restrictions on the flow of funds between Rogers and its subsidiary companies. facilities, our accounts 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 43 MANAGEMENT’S DISCUSSION AND ANALYSIS funding We believe we can satisfy foreseeable additional requirements by financing, which, issuing additional debt depending on market conditions, could include restructuring our existing bank credit and letter of credit facilities, entering into new bank credit facilities, issuing public or private debt, amending the terms of our accounts receivable securitization program, or issuing equity. We may also opportunistically refinance a portion of existing debt depending on market conditions and other factors. There is no assurance, however, that these financing initiatives will or can be done as they become necessary. HEALTHY TRADING VOLUMES AND DIVIDENDS Our Class B Non-Voting common shares actively trade on the TSX and NYSE with a combined average daily trading volume of approximately 1.1 million shares in 2016. In addition, our Class A Voting common shares trade on the TSX. Dividends are the same on both classes of shares. In 2016, each share paid an annualized dividend of $1.92. 44 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT M A N A G E M E N T ’ S D I I S C U S S O N A N D A N A L Y S I S 2016 Financial Results See “Accounting Policies” in this MD&A and the notes to our 2016 Audited Consolidated Financial Statements important accounting policies and estimates as they relate to the following discussion. for We use several key performance indicators to measure our performance against our strategy and the results of our peers and SUMMARY OF CONSOLIDATED RESULTS (In millions of dollars, except margins and per share amounts) Revenue Wireless Cable Business Solutions Media Corporate items and intercompany eliminations Revenue Adjusted operating profit Wireless Cable Business Solutions Media Corporate items and intercompany eliminations Adjusted operating profit 1 Adjusted operating profit margin 1 Net income 2 Basic earnings per share 2 Diluted earnings per share 2 Adjusted net income 1, 2 Adjusted basic earnings per share 1, 2 Adjusted diluted earnings per share 1, 2 Additions to property, plant and equipment Cash provided by operating activities Free cash flow 1 Total service revenue 3 competitors. Many of these are not defined terms under IFRS and should not be considered alternative measures to net income or any other financial measure of performance under IFRS. See “Key Performance Indicators” and “Non-GAAP Measures” for more information. Years ended December 31 2016 2015 % Chg 7,916 3,449 384 2,146 (193) 7,651 3,465 377 2,079 (158) 13,702 13,414 3,285 1,674 123 169 (159) 3,239 1,658 116 172 (153) 3 – 2 3 22 2 1 1 6 (2) 4 5,092 37.2% 1 5,032 37.5% (0.3 pts) 835 1,342 $ 1.62 $ 2.61 $ 1.62 $ 2.60 1,481 1,479 $ 2.88 $ 2.87 $ 2.86 $ 2.86 2,352 3,957 1,705 13,027 2,440 3,747 1,676 12,649 (38) (38) (38) – – – (4) 6 2 3 1 Adjusted operating profit, adjusted operating profit margin, adjusted net income, adjusted basic and diluted earnings per share, and free cash flow are non-GAAP measures and should not be considered substitutes or alternatives for GAAP measures. These are not defined terms under IFRS and do not have standard meanings, so may not be a reliable way to compare us to other companies. See “Non-GAAP Measures” for information about these measures, including how we calculate them. 2 As a result of the IFRS Interpretations Committee’s agenda decision relating to IAS 12 Income Taxes, certain amounts have been retrospectively amended. See “Accounting Policies” for more information. 3 As defined. See “Key Performance Indicators”. 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 45 MANAGEMENT’S DISCUSSION AND ANALYSIS KEY CHANGES IN FINANCIAL RESULTS THIS YEAR COMPARED TO 2015 REVENUE Wireless service revenue increased this year primarily as a result of a larger subscriber base and the continued adoption of higher- postpaid-ARPA-generating Rogers Share Everything plans. Cable revenue decreased marginally this year as the impacts of a Internet products and the higher subscriber base for our movement of customers to higher-end speed and usage tiers were more than offset by Television subscriber losses and the impact of Phone pricing packages. Business Solutions revenue increased this year primarily as a result of the growth in on-net next generation services, including our data centre businesses, which more than offset the continued reduction in lower margin, off-net legacy revenue. Media revenue increased this year primarily as a result of higher sports-related revenue, driven by the success of Sportsnet and the Toronto Blue Jays, partially offset by continued softness in publishing and radio advertising. ADJUSTED OPERATING PROFIT Wireless adjusted operating profit increased this year primarily as a result of service revenue growth as described above, partially offset by higher costs associated with increased volumes and costs of devices. Cable adjusted operating profit increased this year as a result of lower operating expenses. Business Solutions adjusted operating profit increased this year as a result of the increase in revenues described above. Media adjusted operating profit decreased this year primarily as a result of higher sports-related costs, partially offset by lower conventional broadcast TV, publishing, and radio costs and the higher revenue described above. NET INCOME AND ADJUSTED NET INCOME income decreased this year primarily as a result of a Net $484 million charge recognized on our IPTV product, a $140 million loss associated with the writedown of our shomi joint venture, and higher restructuring, acquisition and other costs. Adjusted net income increased marginally this year as a result of higher adjusted operating profit, partially offset by higher other expense and higher income tax expense. 46 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT M A N A G E M E N T ’ S D I I S C U S S O N A N D A N A L Y S I S WIRELESS 2016 WIRELESS REVENUE MIX (%) ROGERS IS CANADA’S LARGEST PROVIDER OF WIRELESS COMMUNICATIONS SERVICES As at December 31, 2016, we had: • approximately 10.3 million subscribers; and • approximately 34% subscriber share and 33% revenue share of the Canadian wireless market. WIRELESS FINANCIAL RESULTS $7.9 Billion SERVICE 92% EQUIPMENT 8% Years ended December 31 WIRELESS SUBSCRIBER RESULTS 1 (In thousands, except churn, postpaid ARPA, and blended ARPU) Years ended December 31 2016 2015 Chg Postpaid Gross additions Net additions Total postpaid subscribers 2 Churn (monthly) ARPA (monthly) Prepaid Gross additions Net additions Total prepaid subscribers 2, 3 Churn (monthly) Blended ARPU (monthly) 1,521 286 8,557 1.23% 1,354 106 8,271 1.27% $117.37 $110.74 167 180 286 (0.04 pts) 6.63 $ 761 111 1,717 3.32% 677 75 1,606 3.45% $ 60.42 $ 59.71 84 36 111 (0.13 pts) 0.71 $ 1 Subscriber counts, subscriber churn, postpaid ARPA, and blended ARPU are key performance indicators. See “Key Performance Indicators”. 2 As at end of period. 3 On July 2, 2015, we acquired approximately 154,000 Wireless prepaid subscribers as a result of our acquisition of Mobilicity, which are not included in net additions, but do appear in the ending total balance for December 31, 2015. WIRELESS POSTPAID MONTHLY CHURN (%) 2016 2015 2014 1.23% 1.27% 1.27% (In millions of dollars, except margins) 2016 2015 1 % Chg Revenue Service revenue Equipment revenue Revenue Operating expenses Cost of equipment 2 Other operating expenses Operating expenses Adjusted operating profit 7,258 658 6,902 749 5 (12) 7,916 7,651 1,947 2,684 1,845 2,567 4,631 4,412 3,285 3,239 3 6 5 5 1 Adjusted operating profit margin as a % of service revenue Additions to property, plant and equipment 45.3% 46.9% (1.6 pts) (19) 866 702 1 The operating results of Mobilicity are included in the Wireless results of operations from the date of acquisition on July 2, 2015. 2 Includes the cost of equipment revenue and direct channel subsidies. WIRELESS SERVICE REVENUE (IN MILLIONS OF DOLLARS) 2016 2015 2014 WIRELESS SUBSCRIBER BREAKDOWN (IN THOUSANDS) 2016 2015 2014 Postpaid Prepaid $7,258 $6,902 $6,743 8,557 1,717 8,271 1,606 8,073 1,377 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 47 The 1% increase in blended ARPU this year was a result of: • increased service revenue as discussed above; partially offset by • the impact of expanding our lower-blended-ARPU-generating prepaid subscriber base relative to our total subscriber base as a result of our acquisition of Mobilicity and the general increase in prepaid net additions over the past year. We believe the increases in gross and net additions to our postpaid subscriber base and the lower postpaid churn this year were results of our strategic focus on enhancing the customer experience by providing higher-value offerings, such as our Share Everything plans, improving our customer service, and continually increasing the quality of our network. We believe the increases in gross and net additions to our prepaid subscriber base and the lower prepaid churn were a result of our continued focus on the promotion of our chatr offerings. ROAM LIKE HOME AND FIDO ROAM SUBSCRIBERS (IN THOUSANDS) 2016 2015 2014 5,459 2,252 457 revenue (net of subsidies) Equipment revenue Equipment sales to: • independent dealers, agents, and retailers; and • subscribers through fulfillment by Wireless’ customer service includes revenue from groups, websites, telesales, and corporate stores. The 12% decrease in revenue from equipment revenue this year was a result of: • larger average subsidies given to customers who purchased devices; and • a 4% decrease in device upgrades by existing subscribers; partially offset by • higher gross additions. MANAGEMENT’S DISCUSSION AND ANALYSIS REVENUE Our revenue depends on the size of our subscriber base, the revenue per account, the revenue from the sale of wireless devices, and other equipment revenue. Service revenue Service revenue includes revenue derived from voice and data services from: • postpaid and prepaid monthly fees; • data usage; • airtime; • long distance charges; • essential services charges; • inbound and outbound roaming charges; and • certain fees. The 5% increase in service revenue this year was a result of: • larger postpaid and prepaid subscriber bases. The overall increase in service revenue pertaining to the increased prepaid subscriber base was partially a result of our mid-2015 acquisition of Mobilicity; and • the continued adoption of customer-friendly Rogers Share Everything plans and the general increase in data usage noted on these types of plans. These plans generate higher postpaid ARPA, bundle in various calling features and long distance, provide the ability to pool and manage data usage across multiple devices, and grant access to our other offerings, such as Roam Like Home, Rogers NHL GameCentre LIVE, Spotify, and Texture by Next Issue. The 6% increase in postpaid ARPA was a result of the continued adoption of Rogers Share Everything plans relative to the number of subscriber accounts as customers have increasingly utilized the advantages of premium offerings and access their shareable plans with multiple devices on the same account. POSTPAID ARPA (MONTHLY) ($) 2016 2015 2014 SHARE EVERYTHING SUBSCRIBERS AS A PERCENTAGE OF OUR ROGERS-BRANDED POSTPAID SUBSCRIBER BASE (%) 2016 2015 2014 $117.37 $110.74 $106.41 58% 51% 31% 48 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT OPERATING EXPENSES We assess operating expenses in two categories: • the cost of wireless handsets and equipment; and • all other expenses involved in day-to-day operations, to service existing subscriber relationships, and to attract new subscribers. The 6% increase in the cost of equipment this year was a result of: • a shift in the product mix of device sales towards higher-cost smartphones; and • higher gross additions; partially offset by • the decrease in device upgrades by existing subscribers, as discussed above. The 5% increase in other operating expenses this year was a result of: • higher service costs to support the higher service revenue discussed above; and • higher advertising costs; partially offset by • lower commissions. ADJUSTED OPERATING PROFIT The marginal increase in adjusted operating profit this year was a result of higher revenue, partially offset by higher operating expenses, as discussed above. WIRELESS ADJUSTED OPERATING PROFIT (IN MILLIONS OF DOLLARS) 2016 2015 2014 $3,285 $3,239 $3,246 LTE COVERAGE AS A PERCENTAGE OF THE CANADIAN POPULATION (%) 2016 2015 2014 95% 93% 84% M A N A G E M E N T ’ S D I I S C U S S O N A N D A N A L Y S I S 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 49 TELEVISION 45% INTERNET 44% PHONE 11% Years ended December 31 2016 2015 Chg 97 2,145 37 2,048 (76) 1,820 (128) 1,896 4 1,094 (60) 1,090 4,241 4,153 60 97 52 (76) 64 4 88 25 5,059 (151) 5,034 176 25 MANAGEMENT’S DISCUSSION AND ANALYSIS CABLE 2016 CABLE SERVICE REVENUE MIX (%) ONE OF CANADA’S LEADING PROVIDERS OF HIGH- SPEED INTERNET, CABLE TELEVISION, AND PHONE SERVICES $3.4 Billion As at December 31, 2016, we had: • approximately 2.1 million high-speed Internet subscribers; • approximately 1.8 million Television subscribers – approximately 31% of Canadian cable television subscribers; • approximately 1.1 million Phone subscribers; and • a network passing approximately 4.2 million homes in Ontario, New Brunswick, and Newfoundland and Labrador. CABLE FINANCIAL RESULTS CABLE SUBSCRIBER RESULTS 1 (In thousands) Internet Net additions Total Internet subscribers 2 Years ended December 31 Television (In millions of dollars, except margins) 2016 2015 % Chg Revenue Internet Television Phone Service revenue Equipment revenue Revenue Operating expenses Cost of equipment Other operating expenses Operating expenses Adjusted operating profit 1,495 1,562 386 3,443 6 1,343 1,669 445 3,457 8 3,449 3,465 3 1,772 4 1,803 1,775 1,807 1,674 1,658 11 (6) (13) – (25) – (25) (2) (2) 1 Adjusted operating profit margin Additions to property, plant and equipment 48.5% 47.8% 0.7 pts 1,085 5 1,030 CABLE REVENUE (IN MILLIONS OF DOLLARS) 2016 2015 2014 $3,449 $3,465 $3,467 CABLE SERVICE REVENUE BREAKDOWN (IN MILLIONS OF DOLLARS) 2016 2015 2014 Internet Television Phone 1,495 1,562 386 1,343 1,669 445 1,245 1,734 478 50 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT Net losses Total Television subscribers 2 Phone Net additions (losses) Total Phone subscribers 2 Cable homes passed 2 Total service units 3 Net additions (losses) Total service units 2 1 Subscriber count is a key performance indicator. See “Key Performance Indicators”. 2 As at end of period. 3 Includes Internet, Television, and Phone subscribers. CABLE SUBSCRIBER BREAKDOWN (IN THOUSANDS) 2016 2015 2014 Internet Television Phone 2,145 1,820 1,094 2,048 1,896 1,190 2,011 2,024 1,150 REVENUE Internet revenue includes: • monthly subscription and additional use service revenue from residential, small business, and wholesale Internet access subscribers; and • modem rental fees. Television revenue includes: • digital and analog cable services – comprised of: • basic cable service fees; • tier service fees; • access fees for use of channel capacity by third parties; and • premium and specialty service subscription fees, including pay-per-view service fees and video-on-demand service fees; and • rentals of digital cable set-top boxes. Phone revenue includes revenue from residential and small business local telephony service from: • monthly service fees; • calling features such as voicemail, call waiting, and caller ID; and • long distance calling. The marginal decrease in revenue this year was a result of: • Television subscriber losses over the past year; partially offset by • the impact and timing of general pricing increases implemented over the past year, net of promotional pricing; • a higher subscriber base for our Internet products; and • the movement of Internet customers to higher speed and usage tiers. Internet revenue The 11% increase in Internet revenue this year was a result of: • a larger Internet subscriber base; • general movement of customers to higher speed and usage tiers of our Ignite broadband Internet offerings; and • the net impact of changes in Internet service pricing; partially offset by Television revenue The 6% decrease in Television revenue this year was a result of: • the decline in Television subscribers over the past year primarily consumption changing television the associated with environment; partially offset by • the impact and timing of general pricing increases implemented over the past year, net of promotional pricing. Phone revenue The 13% decrease in Phone revenue this year was a result of: • the impact of pricing packages; partially offset by • less promotional pricing provided to subscribers as a result of the pricing packages described above. Equipment revenue Equipment revenue includes revenue generated from the sale of digital cable set-top boxes and Internet modems. • The decrease in equipment revenue this year was a result of a decrease in cable set-top box sales compared to the prior year. M A N A G E M E N T ’ S D I I S C U S S O N A N D A N A L Y S I S • a decline in additional usage-based revenue as portions of the subscriber base move to higher-value, unlimited usage plans; and • lower wholesale revenue as a result of a CRTC decision that OPERATING EXPENSES We assess Cable operating expenses in three categories: • the cost of programming; • the cost of equipment revenue (cable digital set-top boxes and reduced access service rates. Internet modem equipment); and INTERNET SUBSCRIBERS (IN THOUSANDS) 2016 2015 2014 >100 Mbps SUBSCRIBERS AS A PERCENTAGE OF OUR INTERNET SUBSCRIBER BASE (%) 2016 2015 2014 • all other expenses involved in day-to-day operations, to service and retain existing subscriber relationships, and to attract new subscribers. The 2% decrease in operating expenses this year was a result of: • lower service and programming costs, partially due to a vendor credit received this year; • relative shifts in product mix to higher-margin Internet from conventional Television broadcasting; and • various cost efficiency and productivity initiatives; partially offset by • increased advertising, partially related to our Ignite Internet and 4K TV offerings. ADJUSTED OPERATING PROFIT The 1% increase in adjusted operating profit this year was a result of the revenue and expense changes described above. 2,145 2,048 2,011 46% 28% 4% CABLE ADJUSTED OPERATING PROFIT (IN MILLIONS OF DOLLARS) 2016 2015 2014 $1,674 $1,658 $1,665 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 51 MANAGEMENT’S DISCUSSION AND ANALYSIS BUSINESS SOLUTIONS LEADING-EDGE WIRELINE TELECOM AND DATA COMMUNICATIONS SERVICES TO CANADIAN BUSINESSES As at December 31, 2016, Business Solutions: • sold to enterprises and public sector; • sold to other carriers on a wholesale basis; • had 9,300 on-net fibre connected buildings; and • had fibre passing close to an additional 24,500 near-net buildings. BUSINESS SOLUTIONS FINANCIAL RESULTS (In millions of dollars, except margins) 2016 2015 % Chg Years ended December 31 Revenue Next generation Legacy Service revenue Equipment revenue Revenue Operating expenses Adjusted operating profit 307 71 378 6 384 261 123 288 85 373 4 377 261 116 7 (16) 1 50 2 – 6 Adjusted operating profit margin Additions to property, plant and equipment 32.0% 30.8% 187 146 1.2pts (22) Business Solutions generates revenue from the provision of wireline communications services and the sale of related equipment to enterprises and public sector at rates and to other telecommunications carriers on a wholesale basis. retail Next generation revenue is generated by the provision of high- speed, high-reliability data and voice communications, provided on Rogers’ advanced IP, Ethernet, and cloud platforms, and mainly through Rogers’ extensive communications network and data centre infrastructure. 2016 BUSINESS SOLUTIONS SERVICE REVENUE MIX (%) $0.4 Billion NEXT GENERATION 81% LEGACY 19% Business Solutions continues to focus primarily on next generation IP-based services, leveraging higher margin on-net and near-net service revenue opportunities, and using existing network facilities to expand offerings to the enterprise, public sector, and carrier wholesale markets. Business Solutions also provides voice and data communications and advanced services, including data centres, cloud computing, fibre networking, and professional services. REVENUE The 1% increase in service revenue this year was a result of: • the continuing execution of our plan to grow higher margin, next generation on-net and near-net IP-based services revenue; partially offset by • the continued decline in the legacy and off-net voice business, a trend we expect to continue as we focus the business on next generation on-net and near-net opportunities and customers move to more advanced and cost-effective IP-based services and solutions. Next generation services, which include our data centre operations, represented 81% (2015 – 77%) of total service revenue during the year. OPERATING EXPENSES Operating expenses this year were in line with 2015. ADJUSTED OPERATING PROFIT The 6% increase in adjusted operating profit this year was a result of the revenue changes discussed above. BUSINESS SOLUTIONS ADJUSTED OPERATING PROFIT (IN MILLIONS OF DOLLARS) Legacy revenue is generated mainly by circuit-switched local and long distance voice services and legacy data services, provided over time-division multiplexing (TDM) and prior generation data platforms, with client access often delivered using leased third- party network elements and tariffed ILEC services. 2016 2015 2014 $123 $116 $122 BUSINESS SOLUTIONS SERVICE REVENUE BREAKDOWN (IN MILLIONS OF DOLLARS) 2016 2015 2014 Next Generation Legacy 307 71 288 85 271 106 52 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT M A N A G E M E N T ’ S D I I S C U S S O N A N D A N A L Y S I S MEDIA DIVERSIFIED CANADIAN MEDIA COMPANY We have a broad portfolio of media properties, which most significantly includes: • sports media and entertainment, such as the Toronto Blue Jays; • our exclusive national 12-year NHL Agreement; • category-leading television and radio broadcasting properties; • multi-platform televised and online shopping; • digital media; and • publishing. MEDIA FINANCIAL RESULTS Years ended December 31 SPORTS REVENUE AND SPORTS REVENUE AS A PERCENTAGE OF MEDIA REVENUE (%) (IN MILLIONS OF DOLLARS) 2016 2015 2014 56% 52% 43% $1,203 $1,106 $778 The 3% increase in revenue this year was a result of: • higher sports-related revenue driven by the strength of Sportsnet and the success of the Toronto Blue Jays; and • higher digital advertising revenue; partially offset by • lower advertising revenues across publishing and radio. OPERATING EXPENSES We assess Media operating expenses by: • the cost of broadcast content, including sports programming and production; • the cost of retail products sold by TSC and Sports Media and (In millions of dollars, except margins) 2016 2015 % Chg Entertainment; Revenue Operating expenses Adjusted operating profit 2,146 1,977 2,079 1,907 169 172 3 4 (2) Adjusted operating profit margin Additions to property, plant and equipment 7.9% 62 8.3% (0.4pts) 3 60 REVENUE Media revenue is earned from: • advertising sales across its television, radio, publishing, and digital media properties; • Toronto Blue Jays player payroll; and • all other expenses involved in day-to-day operations. The 4% increase in operating expenses this year was a result of: • higher sports-related costs; and • higher digital media costs; partially offset by • lower conventional broadcast TV and radio costs, partially due to cost savings from operating efficiencies and job cuts during the first half of 2016; and • lower publishing costs due to the strategic shift related to magazine content announced earlier this year. • subscriptions to televised products; • retail product sales; • ticket sales, receipts of MLB revenue sharing, and concession ADJUSTED OPERATING PROFIT The 2% decrease in adjusted operating profit this year was a result of the revenue and expense changes described above. sales; and • circulation of published products. MEDIA ADJUSTED OPERATING PROFIT (IN MILLIONS OF DOLLARS) MEDIA REVENUE (IN MILLIONS OF DOLLARS) 2016 2015 2014 2016 MEDIA REVENUE MIX (%) $2.1 Billion 2016 2015 2014 $2,146 $2,079 $1,826 $169 $172 $131 SPORTS 56% BROADCASTING 22% THE SHOPPING CHANNEL 13% PUBLISHING 9% 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 53 MANAGEMENT’S DISCUSSION AND ANALYSIS ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT Additions to property, plant and equipment include costs associated with acquiring property, plant and equipment and placing it into service. The telecommunications business requires extensive and continual investments, including investment in new technologies and the expansion of capacity and geographical reach. The expenditures related to the acquisition of spectrum licences are not included in additions to property, plant and equipment and do not factor into the calculation of free cash flow intensity. See “Managing Our Liquidity and Financial or capital Resources”, “Key Performance Indicators”, and “Non-GAAP Measures” for more information. Additions to property, plant and equipment are significant and therefore our have a material management teams focus on planning, funding, and managing them. impact on our cash flows, Additions to property, plant and equipment before related changes to non-cash working capital represent capital assets to which we took title. We believe this measure best reflects our cost of property, plant and equipment in a given period and is a simpler measure for comparing between periods. (In millions of dollars, except capital intensity) 2016 2015 % Chg Additions to property, plant and equipment Years ended December 31 Wireless Cable Business Solutions Media Corporate 702 1,085 146 62 357 866 1,030 187 60 297 Total additions to property, plant and equipment 1 2,352 2,440 (19) 5 (22) 3 20 (4) ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT (IN MILLIONS OF DOLLARS) 2016 2015 2014 $2,352 $2,440 $2,366 2016 ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT (%) $2.4 Billion CABLE 46% WIRELESS 30% CORPORATE 15% BUSINESS SOLUTIONS 6% MEDIA 3% CABLE The increase in additions to property, plant and equipment in Cable this year was a result of greater investment in network infrastructure to further improve the reliability and quality of the network and to improve the capacity of our Internet platform to deliver gigabit Internet speeds, partially offset by lower purchases of our next generation NextBox digital set-top box along with lower investment in information technology compared to last year. Capital intensity 2 17.2% 18.2% (1.0 pts) 1 Additions to property, plant and equipment do not include expenditures on spectrum licences. 2 As defined. See “Key Performance Indicators”. BUSINESS SOLUTIONS The decrease in additions to property, plant and equipment in Business Solutions this year was a result of greater investments to our network and data centre last year. WIRELESS The decrease in additions to property, plant and equipment in Wireless this year was a result of lower expenditures on our wireless network, along with lower software and information technology costs. Deployment of our 700 MHz LTE network has reached 91% of Canada’s population as at December 31, 2016 (2015 – 78%). The 700 MHz LTE network offers improved signal quality in basements, elevators, and buildings with thick concrete walls. Deployment of our overall LTE network has reached approximately 95% of Canada’s population as at December 31, 2016 (2015 – 93%). MEDIA The increase in additions to property, plant and equipment in Media this year was a result of higher investments made to our broadcast facilities and IT infrastructure. CORPORATE The increase in additions to property, plant and equipment in Corporate this year was a result of higher information technology costs as well as higher spending on premise improvements at our various offices. CAPITAL INTENSITY Capital intensity decreased this year as a result of the decrease in additions to property, plant and equipment as described above, combined with the increase in revenue described previously in this MD&A. 54 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT M A N A G E M E N T ’ S D I I S C U S S O N A N D A N A L Y S I S REVIEW OF CONSOLIDATED PERFORMANCE This section discusses our net income and other expenses that do not form part of the segment discussions above. We had a liability of $189 million as at December 31, 2016 (2015 – $157 million) related to stock-based compensation recorded at its fair value, including stock options, RSUs, and DSUs. Years ended December 31 We paid $69 million in 2016 (2015 – $73 million) to holders of stock options, RSUs, and DSUs upon exercise. (In millions of dollars) 2016 2015 % Chg Adjusted operating profit 1 Deduct (add): Stock-based compensation Depreciation and amortization Impairment of assets and related onerous contract charges Restructuring, acquisition and other Finance costs Other expense (income) 2 Income tax expense 2 5,092 5,032 61 2,276 55 2,277 484 160 761 191 324 – 111 774 (4) 477 Net income 2 835 1,342 1 11 – – 44 (2) n/m (32) (38) 1 Adjusted operating profit is a non-GAAP measure and should not be considered a substitute or alternative for GAAP measures. It is not a defined term under IFRS and does not have a standard meaning, so may not be a reliable way to compare us to other companies. See “Non-GAAP Measures” for information about this measure, including how we calculate it. 2 As a result of the IFRS Interpretations Committee’s agenda decision relating to IAS 12 Income Taxes, certain amounts have been retrospectively amended. See “Accounting Policies” for more information. ADJUSTED OPERATING PROFIT See “Key Changes in Financial Results This Year Compared to 2015” for a discussion of the increase in adjusted operating profit this year. STOCK-BASED COMPENSATION Our stock-based compensation, which includes stock options (with restricted share units (RSUs), and stock appreciation rights), deferred share units (DSUs), is generally determined by: • the vesting of stock options and share units; and • changes in the market price of RCI Class B shares; offset by • the impact of certain derivative instruments to hedge a portion of the stock price appreciation risk stock-based compensation program. See “Financial Risk Management” for information about equity derivatives. for our (In millions of dollars) 2016 2015 Years ended December 31 Impact of vesting Impact of change in price Equity derivatives, net of interest receipt Total stock-based compensation 70 24 (33) 61 57 20 (22) 55 Stock-based compensation increased to $61 million in 2016 (2015 – $55 million) primarily as a result of the vesting of additional stock-based compensation to employees, directors, and key executives. DEPRECIATION AND AMORTIZATION Years ended December 31 (In millions of dollars) 2016 2015 % Chg Depreciation Amortization 2,183 93 2,117 160 Total depreciation and amortization 2,276 2,277 3 (42) – Depreciation and amortization was stable this year primarily as a result of: • the overall increase in additions to property, plant and equipment over the last several years, which has resulted in more depreciable assets; offset by • certain intangible assets that were fully amortized; and • ceasing amortization on certain brand name assets in 2016. IMPAIRMENT OF ASSETS AND RELATED ONEROUS CONTRACT CHARGES During the year ended December 31, 2016, we recorded an aggregate $484 million impairment charge and onerous contract charge related to our IPTV product. (In millions of dollars) Year ended December 31, 2016 Impairment of property, plant and equipment Onerous contracts and other Total impairment of assets and related onerous contract charges 412 72 484 These charges related to our decision to discontinue developing our IPTV product as a result of our decision to develop a long-term relationship with Comcast and deploy their X1 IP-based video platform. The onerous contract charges primarily relate to the remaining contractual liabilities for the development of our IPTV product and were recognized in accounts payable and accrued liabilities. We did not record an impairment charge in 2015. RESTRUCTURING, ACQUISITION AND OTHER in This year, we incurred $160 million (2015 – $111 million) restructuring, acquisition and other expenses. These expenses in 2016 primarily consisted of severance costs associated with the targeted restructuring of our employee base and costs related to the wind down of and changes to certain businesses. In 2015, these expenses were incurred primarily as a result of severance costs associated with the targeted restructuring of our employee base, the reorganization of our OMNI television stations, the acquisition of Mobilicity, and the purchase of our interest in Glentel. 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 55 MANAGEMENT’S DISCUSSION AND ANALYSIS FINANCE COSTS (In millions of dollars) 2016 2015 % Chg Years ended December 31 Interest on borrowings 1 Interest on post-employment benefits liability Loss on repayment of long-term debt Loss on foreign exchange Change in fair value of derivatives Capitalized interest Other 758 761 – 9 11 (18) – 13 (16) (18) 15 7 11 3 (29) 10 (100) 18 n/m (38) 50 (2) Total finance costs 761 774 1 Borrowings include long-term debt and short-term borrowings associated with our accounts receivable securitization program. Interest on borrowings Interest on borrowings decreased this year as a result of a lower amount of debt outstanding compared to 2015. See “Managing Our Liquidity and Financial Resources” for more information about our debt and related finance costs. Loss on repayment of long-term debt We recognized a $7 million loss on repayment of long-term debt in 2015 related to debt derivatives associated with the repayment or repurchase of certain senior notes in March 2015. These losses were deferred in the hedging reserve until maturity of the notes and were then recognized in net income. The loss relates to transactions in 2013 wherein foreign exchange rates on the related debt derivatives were updated to then-current rates. Loss on foreign exchange During 2016, all of our US dollar-denominated senior notes and debentures were hedged for accounting purposes. Foreign exchange losses recognized in 2016 were primarily related to our US dollar-denominated credit facility borrowings, which were not designated as hedges for accounting purposes due to the short- term nature of the borrowings. Foreign exchange losses recognized in 2015 were primarily related to the impact of fluctuations in the value of the Canadian dollar relative to the US dollar on working capital, consisting mainly of the unhedged portion of our US dollar-denominated accounts payable. See “Managing Our Liquidity and Financial Resources” for more information about our debt and related finance costs. OTHER EXPENSE (INCOME) The increase in other expense this year was primarily a result of equity losses recognized on certain of our joint ventures. During the year, we announced the decision to wind down our shomi joint venture and recognized a loss of $140 million associated with the writedown of the investment and our share of the estimated cost of the remaining obligations of shomi. Additionally, we recognized a net loss of $11 million this year on divestitures pertaining to investments. In 2015, we recognized a $74 million gain on our acquisition of Mobilicity, partially offset by a $72 million loss related to our share of an obligation to purchase at fair value the non-controlling interest in one of our joint ventures. 56 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT INCOME TAX EXPENSE The table below shows the difference between income tax expense computed by applying the statutory income tax rate to income before income tax expense and the actual income tax expense for the year: Years ended December 31 (In millions of dollars, except tax rates) Statutory income tax rate Income before income tax expense 1 Computed income tax expense 1 Increase (decrease) in income tax expense resulting from: Non-deductible stock-based compensation Non-deductible portion of equity losses Income tax adjustment, legislative tax change Non-taxable gain on acquisition 1 Non-taxable portion of capital gain Other items Total income tax expense 1 Effective income tax rate 1 Cash income taxes paid 2016 26.6% 1,159 308 5 18 3 – (7) (3) 324 28.0% 295 2015 26.5% 1,819 482 5 11 6 (20) – (7) 477 26.2% 184 1 As a result of the IFRS Interpretations Committee’s agenda decision relating to IAS 12 Income Taxes, certain amounts have been retrospectively amended. See “Accounting Policies” for more information. Our effective income tax rate this year was 28.0% compared to 26.2% for 2015. The effective income tax rate for 2016 was higher than the statutory tax rate primarily as a result of non-deductible equity losses recognized on certain of our investments, partially offset by the non-taxable portion of capital gains on the sale of investments. Cash income taxes paid increased this year as a result of applying non-capital losses from the Mobilicity transaction to offset our 2015 liability. NET INCOME Net income was 38% lower than last year. See “Key Changes in Financial Results This Year Compared to 2015” for more information. Years ended December 31 (In millions of dollars, except per share amounts) Net income 1 Basic earnings per share 1 Diluted earnings per share 1 2016 2015 % Chg 835 1,342 $1.62 $ 2.61 $1.62 $ 2.60 (38) (38) (38) 1 As a result of the IFRS Interpretations Committee’s agenda decision relating to IAS 12 Income Taxes, certain amounts have been retrospectively amended. See “Accounting Policies” for more information. ADJUSTED NET INCOME Adjusted net income was marginally higher compared to 2015, primarily as a result of higher adjusted operating profit and lower finance costs, partially offset by higher other expense (income) and higher income tax expense. (In millions of dollars, except per share amounts) Adjusted operating profit 1 Deduct (add): Depreciation and amortization Finance costs 2 Other expense (income) 3 Income tax expense 4, 5 Adjusted net income 1 Years ended December 31 2016 2015 % Chg 5,092 5,032 1 2,276 761 40 534 2,277 767 (2) 511 1,481 1,479 – (1) n/m 5 – – – Adjusted basic earnings per share 1 Adjusted diluted earnings per share 1 $ 2.88 $ 2.87 $ 2.86 $ 2.86 1 Adjusted operating profit, adjusted net income, and adjusted basic and diluted earnings per share are non-GAAP measures and should not be considered as substitutes or alternatives for GAAP measures. These are not defined terms under IFRS, and do not have standard meanings, so may not be a reliable way to compare us to other companies. See “Non-GAAP Measures” for information about these measures, including how we calculate them. 2 Finance costs exclude the $7 million loss on repayment of long-term debt for the year ended December 31, 2015. 3 Other expense for 2016 excludes an $11 million net loss on divestitures pertaining to investments and a $140 million loss on the wind down of our shomi joint venture. For 2015, other income excludes a $74 million gain on acquisition of Mobilicity and a $72 million loss related to our share of an obligation to purchase at fair value the non-controlling interest in one of our joint ventures. 4 Income tax expense excludes the $213 million recovery (2015 – $40 million recovery) for the year ended December 31, 2016 related to the income tax impact for adjusted items. For 2016, income tax expense also excludes the $3 million expense (2015 – $6 million expense) for the revaluation of deferred tax balances as a result of legislative income tax rate changes. 5 As a result of the IFRS Interpretations Committee’s agenda decision relating to IAS 12 Income Taxes, certain amounts have been retrospectively amended. See “Accounting Policies” for more information. ADJUSTED NET INCOME (IN MILLIONS OF DOLLARS) 2016 2015 2014 $1,481 $1,479 $1,532 EMPLOYEES Employee salaries and benefits represent a material portion of our expenses. As at December 31, 2016, we had approximately 25,200 employees (2015 – 26,200) across all of our operating groups, including shared services and the corporate office. Total salaries and benefits for full-time employees and part-time employees in 2016 were approximately $2,073 million (2015 – $1,975 million). The increase was mainly a result of higher Toronto Blue Jays player salaries and higher pension expenses. M A N A G E M E N T ’ S D I I S C U S S O N A N D A N A L Y S I S 2015 FULL YEAR RESULTS COMPARED TO 2014 Revenue Consolidated revenue increased by 4% in 2015, reflecting revenue growth of 5% in Wireless and 14% in Media, while Cable revenue was stable. Wireless revenue increased as a result of the continued adoption of higher-postpaid-ARPA-generating Rogers Share Everything plans, partially offset by the introduction of lower-priced roaming plans. Cable revenue was stable as the increase in Internet revenue was offset by decreases in Television and Phone revenue. Media revenue increased as a result of the NHL Agreement, growth at Sportsnet, and higher revenue at the Toronto Blue Jays, partially offset by continued softness in conventional TV and print advertising, as well as lower consumer retail sales at TSC. Adjusted operating profit Consolidated adjusted operating profit increased in 2015 to $5,032 million, reflecting increases in Media of $41 million, partially offset by decreases in Business Solutions of $6 million. Wireless adjusted operating profit decreased marginally as a result of higher net unit costs for equipment and a greater number of upgrades, partially offset by the continued adoption of higher-postpaid- ARPA-generating service plans and higher equipment revenue. Cable adjusted operating profit was stable in 2015 as a result of higher investments in customer care, network, and customer value enhancement-related costs, offset by various efficiency and productivity initiatives. The decrease in Business Solutions was a result of continued declines in the legacy, off-net business, partially offset by continued growth in the higher-margin on-net, next generation business improvements. Media adjusted operating profit increased primarily as a result of the success of the Toronto Blue Jays. Net income and adjusted net income Net income increased to $1,342 million in 2015 from $1,341 million in 2014 primarily as a result of lower restructuring, acquisition and other costs, lower finance costs, lower income tax expense, and higher other income, partially offset by higher has been depreciation retrospectively amended as a result of the IFRS Interpretations Committee’s agenda decision relating to IAS 12 Income Taxes. See “Accounting Policies” for more information. and amortization. Net income Adjusted net income decreased to $1,479 million in 2015 from $1,532 million in 2014 as a result of higher depreciation and amortization and higher other expense, partially offset by higher adjusted operating profit and lower income tax expense. Adjusted net income has been retrospectively amended as a result of the IFRS Interpretations Committee’s agenda decision relating to IAS 12 Income Taxes. See “Accounting Policies” for more information. 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 57 MANAGEMENT’S DISCUSSION AND ANALYSIS QUARTERLY RESULTS The table below shows our quarterly consolidated financial results and key performance indicators for 2016 and 2015. QUARTERLY CONSOLIDATED FINANCIAL SUMMARY 2016 2015 (In millions of dollars, except per share amounts) Full Year Q4 Q3 Q2 Q1 Full Year Q4 Q3 Q2 Q1 Revenue Wireless Cable Business Solutions Media Corporate items and intercompany eliminations 7,916 3,449 384 2,146 (193) 2,058 858 96 550 (52) 2,037 865 95 533 (38) 1,931 870 97 615 (58) 1,890 856 96 448 (45) 7,651 3,465 377 2,079 (158) 1,981 855 95 560 (39) 1,973 871 94 473 (27) 1,903 869 94 582 (45) 1,794 870 94 464 (47) Total revenue Adjusted operating profit (loss) 13,702 3,510 3,492 3,455 3,245 13,414 3,452 3,384 3,403 3,175 Wireless Cable Business Solutions Media Corporate items and intercompany eliminations 3,285 1,674 123 169 (159) 792 435 30 49 (47) 884 431 31 79 (40) 846 415 31 90 (35) 763 393 31 (49) (37) 3,239 1,658 116 172 (153) 754 426 30 56 (40) 879 416 31 58 (39) 841 414 27 90 (35) 765 402 28 (32) (39) Adjusted operating profit 1 Deduct (add): Stock-based compensation Depreciation and amortization Impairment of assets and related onerous contract charges Restructuring, acquisition and other Finance costs Other expense (income) 2 Net income (loss) before income tax expense (recovery) 2 Income tax expense (recovery) 2 Net income (loss) 2 Earnings (loss) per share 2: Basic Diluted Net income (loss) 2 Add (deduct): Stock-based compensation Restructuring, acquisition and other Gain on acquisition of Mobilicity 2 Loss on non-controlling interest purchase obligation Loss on repayment of long-term debt Loss on wind down of shomi Net loss (gain) on divestitures pertaining to investments Impairment of assets and related onerous contract charges Income tax impact of above items 2 Income tax adjustment, legislative tax change Adjusted net income 1, 2 Adjusted earnings per share 1, 2: Basic Diluted Additions to property, plant and equipment Cash provided by operating activities Free cash flow 1 Total service revenue 3 5,092 1,259 1,385 1,347 1,101 5,032 1,226 1,345 1,337 1,124 61 2,276 484 160 761 191 1,159 324 835 16 555 484 34 188 (4) (14) (5) (9) 18 575 – 55 188 220 329 109 220 15 572 – 27 189 9 535 141 394 12 574 – 44 196 (34) 309 79 230 55 2,277 – 111 774 (4) 1,819 477 1,342 16 580 – 23 192 4 411 112 299 13 576 – 37 190 (31) 560 135 425 14 562 – 42 182 26 511 148 363 12 559 – 9 210 (3) 337 82 255 $ 1.62 ($ 0.02) $ 0.43 $ 0.77 $ 0.45 $ 1.62 ($ 0.04) $ 0.43 $ 0.76 $ 0.44 $ 2.61 $ 0.58 $ 0.83 $ 0.70 $ 0.50 $ 2.60 $ 0.58 $ 0.82 $ 0.70 $ 0.48 (9) 220 394 230 1,342 299 425 363 255 16 34 – – – – – 18 55 – – – 140 50 – (56) – 15 27 – – – – – – (9) – 12 44 – – – – (39) – (5) 3 55 111 (74) 72 7 – – – (40) 6 16 23 – – – – – – (7) – 13 37 (74) 72 – – – – (12) – 14 42 – – – – – – (13) 6 12 9 – – 7 – – – (8) – 484 (213) 3 484 (143) – 1,481 382 427 427 245 1,479 331 461 412 275 $ 2.88 $ 0.74 $ 0.83 $ 0.83 $ 0.48 $ 2.86 $ 0.74 $ 0.83 $ 0.83 $ 0.47 552 598 220 3,085 2,352 3,957 1,705 13,027 647 1,121 495 3,308 549 1,185 598 3,328 604 1,053 392 3,306 $ 2.87 $ 0.64 $ 0.90 $ 0.80 $ 0.53 $ 2.86 $ 0.64 $ 0.89 $ 0.80 $ 0.53 475 227 266 3,048 2,440 3,747 1,676 12,649 621 1,114 476 3,204 571 1,456 660 3,183 773 950 274 3,214 835 61 160 – – – 140 11 1 Adjusted operating profit, adjusted net income, adjusted basic and diluted earnings per share, and free cash flow are non-GAAP measures and should not be considered as substitutes or alternatives for GAAP measures. These are not defined terms under IFRS, and do not have standard meanings, so may not be a reliable way to compare us to other companies. See “Non-GAAP Measures” for information about these measures, including how we calculate them. 2 As a result of the IFRS Interpretations Committee’s agenda decision relating to IAS 12 Income Taxes, certain amounts have been retrospectively amended. See “Accounting Policies” for more information. 3 As defined. See “Key Performance Indicators”. 58 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT FOURTH QUARTER 2016 RESULTS Results commentary in “Fourth Quarter 2016 Results” compares the fourth quarter of 2016 with the fourth quarter of 2015. Higher revenue Consolidated revenue increased 2% in the fourth quarter, largely driven by Wireless service revenue growth of 6%. Wireless service revenue increased 6% in the fourth quarter primarily as a result of a larger subscriber base and the continued adoption of higher-postpaid-ARPA-generating Rogers Share Everything plans and the increase in data usage on these plans. • higher handset sales as more consumers shift to smartphones; and • stable postpaid churn, which we believe is beginning to reflect the realization of our enhanced customer service efforts; partially offset by • decreasing voice revenue as rate plans increasingly incorporate more monthly minutes and calling features, such as long distance; and • lower roaming revenue as more subscribers are taking advantage of value-added roaming plans, such as Roam Like Home and Fido Roam. Peak travel seasons typically impact roaming usage and vary over the course of a calendar year. Cable revenue increased marginally in the fourth quarter as strong Internet revenue growth of 9% was largely offset by the decline in Television and Phone revenue. We continue to see an ongoing shift in product mix to higher-margin Internet services. The trends in Wireless adjusted operating profit reflect: • higher handset subsidies that offset the higher handset sales as more consumers shift to smartphones; and • higher voice and data costs related to the increasing number of M A N A G E M E N T ’ S D I I S C U S S O N A N D A N A L Y S I S Media revenue decreased 2% in the fourth quarter primarily as a result of fewer postseason Toronto Blue Jays games compared to last year, lower overall advertising revenue, and lower circulation revenue within publishing, partially offset by higher sales at TSC. Higher adjusted operating profit Higher consolidated adjusted operating profit in the fourth quarter reflects an increase in Wireless adjusted operating profit as a result of the strong flow through of top line growth described above and improved Cable performance due to the shift in product mix to higher-margin Internet services. Net loss and higher adjusted net income The net loss of $9 million in the fourth quarter was primarily a result of the $484 million impairment and other charges we recognized related to the discontinued investment in our IPTV product. See “Review of Consolidated Performance” for more information. Adjusted net income increased in the fourth quarter as a result of higher adjusted operating profit, lower depreciation and amortization, and lower finance costs, partially offset by higher income tax expense. QUARTERLY TRENDS AND SEASONALITY Our operating results generally vary from quarter to quarter as a result of changes in general economic conditions and seasonal fluctuations, among other reporting things, segments. This means our results in one quarter are not necessarily a good indication of how we will perform in a future quarter. Wireless, Cable, and Media each have unique seasonal aspects to, and certain other historical trends in, their businesses. in each of our Fluctuations in net income from quarter to quarter can also be attributed to losses on the repayment of debt, foreign exchange gains or losses, changes in the fair value of derivative instruments, other income and expenses, impairment of assets, and changes in income tax expense. Wireless The trends in Wireless revenue and adjusted operating profit reflect: • the growing number of wireless voice and data subscribers; • higher usage of wireless data; subscribers. We continue to target organic growth in higher-value postpaid subscribers. We have maintained a stable mix of postpaid and prepaid subscribers. Prepaid plans are evolving to have properties similar to those of traditional postpaid plans. We believe this evolution provides Canadians with greater choice of subscribing to a postpaid or prepaid service plan. Growth in our customer base time has resulted in higher costs for customer service, over retention, credit, and collection; however, most of the cost increases have been offset by gains in operating efficiencies. Wireless operating results are influenced by the timing of our marketing and promotional expenditures and higher levels of subscriber additions and related subsidies, resulting in higher subscriber acquisition- and activation-related expenses, typically in the third and fourth quarters. The third and fourth quarters typically experience this activity as a result of “back to school” and holiday season-related consumer behaviour. The launch of popular new wireless handset models can also affect the level of subscriber additions. Highly-anticipated device launches typically occur in the fall season of each year. We typically see lower subscriber additions in the first quarter of the year, which is a direct impact of the higher additions around the fourth quarter holiday season. Wireless roaming revenue is dependent on customer travel volumes, which is impacted by the value of the foreign exchange rate of the Canadian dollar and general economic conditions. Cable The trends in Cable service revenue primarily reflect: • higher Internet subscription fees as customers increasingly including those with upgrade to higher-tier speed plans, unlimited usage; and • general pricing increases; offset by • competitive losses of Television subscribers; • Television subscribers downgrading their service plans; and • lower additional usage of Internet, Television, and Phone products and services as service plans are increasingly bundling more features, such as unlimited bandwidth or a greater number of TV channels. 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 59 MANAGEMENT’S DISCUSSION AND ANALYSIS The trends in Cable adjusted operating profit primarily reflect: • higher Internet operating expenses, in line with the increased Internet subscription fees; and • higher premium supplier fees in Television as a result of bundling more value-added offerings into our Cable products; offset by • lower general Television and Phone operating expenses. Cable’s operating results are affected by modest seasonal fluctuations in subscriber additions and disconnections, typically caused by: • university and college students who live in residences moving out early in the second quarter and canceling their service as well as students moving in late in the third quarter and signing up for cable service; • individuals temporarily vacations or seasonal relocations; and suspending service for extended Seasonal fluctuations relate to: • periods of increased consumer activity and their impact on advertising and related retail cycles, which tend to be most active in the fourth quarter due to holiday spending and slower in the first quarter; • the MLB season, where: • games played are concentrated in the spring, summer, and fall months (generally the second and third quarters of the year); • revenue related to game day ticket sales, merchandise sales, and advertising are concentrated in the spring, summer, and fall months (generally the second and third quarters of the year), with postseason games commanding a premium in advertising revenue and additional revenue from game day ticket sales and merchandise sales, if and when the Toronto Blue Jays play in the postseason; and • programming and production costs and player payroll are • the concentrated marketing we generally conduct in our fourth expensed based on the number of games aired; and quarter. • the NHL season, where: Cable operating results are also influenced by trends in cord shaving and cord cutting, which has resulted in fewer subscribers watching traditional cable television, as well as a lower number of Television subscribers. In addition, trends in the use of wireless products and Internet or social media to substitute for traditional home phone products have resulted in fewer Phone subscribers. Business Solutions The trends in Business Solutions operating profit margin primarily reflect the ongoing shift from lower-margin, off-net legacy long distance and data services to higher-margin, next generation services and data centre businesses. Business Solutions does not generally have any unique seasonal aspects to its business. Media The trends in Media’s results are generally the result of: • fluctuations in advertising and consumer market conditions; • subscriber rate increases; • higher sports and rights costs, including increases as we move further along in our NHL Agreement; and • continual investment in primetime and specialty programming relating to both our broadcast networks (such as City) and our specialty channels (such as FX (Canada)). • regular season games are concentrated in the fall and winter months (generally the first and fourth quarters of the year) and playoff games are concentrated in the spring months (generally the second quarter of the year). We expect a correlation between the quality of revenue and earnings and the extent of Canadian teams’ presence during the playoffs; • programming and production costs are expensed based on the timing of when the rights are aired or are expected to be consumed; and • advertising revenue and programming expenses are concentrated in the fall, winter, and spring months, with playoff games commanding a premium in advertising revenue. Other expenses Depreciation and amortization has been trending upward over the past several years as a result of an increase in our general depreciable asset base, related significantly to our recent rollout and expansion of our wireless network. This is a direct result of increasing additions to property, plant and equipment in previous and current years as we worked to upgrade our wireless network, purchase NextBox set-top boxes, and roll out Ignite Gigabit Internet and 4K TV to our Cable footprint. We expect depreciation and amortization to be relatively stable for the next several years as our additions to property, plant and equipment moderate and certain intangible assets become fully amortized. 60 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT OVERVIEW OF FINANCIAL POSITION CONSOLIDATED STATEMENTS OF FINANCIAL POSITION As at December 31 (In millions of dollars) Assets Current assets: Cash and cash equivalents Accounts receivable Inventories Other current assets 2016 2015 $ Chg % Chg Explanation of significant changes – 1,949 315 215 11 1,792 318 303 (11) 157 (3) (88) See “Managing Our Liquidity and Financial Resources” for more information. Reflects an increase in trade receivables driven by increased revenue. (100) 9 (1) n/m (29) Primarily reflects the reduction of a receivable pertaining to the divestiture of Glentel’s international operations. Current portion of derivative instruments 91 198 (107) (54) Reflects changes in market values of debt derivatives and expenditure derivatives primarily as a result of the difference between the year-end exchange rate and the hedged rate on our outstanding derivatives, as well as the settlement and maturity of certain derivatives discussed in “Financial Risk Management”. Total current assets Property, plant and equipment 2,570 10,749 2,622 10,997 (52) (248) (2) (2) Reflects the impairment of our IPTV-related assets as well as annual depreciation, partially offset by additions to property, plant and equipment. See “Additions to Property, Plant and Equipment” for more information. M A N A G E M E N T ’ S D I I S C U S S O N A N D A N A L Y S I S Intangible assets Investments 7,130 2,174 7,243 2,271 (113) (97) Derivative instruments Other long-term assets Deferred tax assets Goodwill 1 1,708 98 8 3,905 1,992 150 9 3,905 (284) (52) (1) – (2) Reflects amortization of intangible assets. (4) Reflects lower carrying values as a result of certain divestitures and the wind down of shomi, partially offset by fair value increases for publicly-traded investments. See “Current portion of derivative instruments” for more information. (14) (35) Reflects a reclassification of long-term receivables to current. (11) n/m n/m – Total assets 28,342 29,189 (847) (3) Liabilities and shareholders’ equity Current liabilities: Bank advances Short-term borrowings Accounts payable and accrued liabilities 71 800 2,783 – 800 2,708 71 – 75 Income tax payable Current portion of provisions 186 134 96 10 90 124 n/m See “Managing Our Liquidity and Financial Resources” for more information. – 3 94 n/m Primarily reflects increased liabilities pertaining to onerous contract charges recorded relating to our IPTV product and an overall increase in trade payables as a result of the timing of payments made, partially offset by the reduction of a payable pertaining to the divestiture of Glentel’s international operations. Reflects the timing of tax installments. n/m Primarily reflects a provision related to our share of remaining obligations expected to be incurred in our shomi joint venture. Unearned revenue 367 388 (21) (5) Reflects a decrease pertaining to a loyalty program, partially offset by increases Current portion of long-term debt 750 1,000 (250) (25) Reflects the upcoming maturity of our $250 million and $500 million senior in customer deposits at the Toronto Blue Jays. Current portion of derivative instruments 22 15 7 47 notes in 2017, partially offset by the repayment of $1,000 million of senior notes during the year. Reflects changes in market values of equity and expenditure derivatives. See “Financial Risk Management” for more information. Total current liabilities Provisions Long-term debt 5,113 33 15,330 5,017 50 15,870 96 (17) (540) Derivative instruments 118 95 23 Other long-term liabilities Deferred tax liabilities 1 Total liabilities Shareholders’ equity 1 562 1,917 455 2,066 23,073 5,269 23,553 5,636 107 (149) (480) (367) 2 (34) n/m 24 (3) Primarily reflects revaluation from the appreciation of the Cdn$ relative to the US$, the upcoming maturity of $750 million in senior notes in early 2017 that are now classified as current, and a decrease in our credit facility borrowings. See “Sources and Uses of Cash” for more information. Reflects changes in market values of bond forwards and debt derivatives, primarily as a result of the appreciation of the Cdn$ relative to the US$. See “Financial Risk Management” for more information. 24 Reflects an increase in long-term pension obligations. (7) Primarily reflects the reversal of certain temporary differences. (2) (7) Reflects changes in retained earnings and equity reserves. Total liabilities and shareholders’ equity 28,342 29,189 (847) (3) 1 As a result of the IFRS Interpretations Committee’s agenda decision relating to IAS 12 Income Taxes, certain amounts have been retrospectively amended. See “Accounting Policies” for more information. 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 61 MANAGEMENT’S DISCUSSION AND ANALYSIS Managing Our Liquidity and Financial Resources SOURCES AND USES OF CASH OPERATING, INVESTING AND FINANCING ACTIVITIES (In millions of dollars) Cash provided by operating activities before changes in non-cash working capital items, income taxes paid, and interest paid Change in non-cash operating working capital items Cash provided by operating activities before income taxes paid and interest paid Income taxes paid Interest paid Cash provided by operating activities Investing activities: Additions to property, plant and equipment Additions to program rights Changes in non-cash working capital related to property, plant and equipment and intangible assets Acquisitions and other strategic transactions, net of cash acquired Other Cash used in investing activities Financing activities: Net repayments on short-term borrowings Net (repayments) issuance of long-term debt Net (repayments) proceeds on settlement of debt derivatives and forward contracts Transaction costs incurred Dividends paid Other Years ended December 31 2016 2015 4,994 14 5,008 (295) (756) 3,957 (2,352) (46) (103) – 45 (2,456) – (538) (45) (17) (988) 5 (1,583) (82) 11 (71) 5,004 (302) 4,702 (184) (771) 3,747 (2,440) (64) (116) (1,077) (70) (3,767) (42) 754 129 (9) (977) – (145) (165) 176 11 Cash used in financing activities Change in cash and cash equivalents Cash and cash equivalents, beginning of year (Bank advances) cash and cash equivalents, end of year OPERATING ACTIVITIES The 6% increase in cash provided by operating activities this year was a result of higher net funding provided by non-cash working capital and lower interest paid, partially offset by higher cash income taxes paid. INVESTING ACTIVITIES Additions to property, plant and equipment We spent $2,352 million this year on property, plant and equipment before related changes in non-cash working capital items, which was 4% lower than 2015. See “Additions to Property, Plant and Equipment” for more information. Acquisitions and other strategic transactions Expenditures in 2015 included $129 million for the acquisition of our 2500 MHz spectrum licences and Shaw spectrum licences (including $2 million of related transaction costs) and $948 million related to the acquisitions of Mobilicity, our investment in Glentel, and certain dealer stores. 62 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT FINANCING ACTIVITIES Accounts receivable securitization Below is a summary of receivable securitization program for the quarter and year to date: the activity relating to our accounts (In millions of dollars) Short-term borrowings Proceeds received on short-term borrowings Repayment of short-term borrowings Net repayments on short-term borrowings Years ended December 31 2016 2015 295 294 (295) (336) – (42) total funding under the As at December 31, 2016, our securitization program was $800 million (2015 – $800 million) and the program was committed to fund up to a maximum of $1,050 million (2015 – $1,050 million). In July 2016, we amended the terms of the accounts receivable securitization program to, among other things, extend the expiry date from January 1, 2018 to January 1, 2019. We continue to service and retain substantially all of the risks and rewards relating to the accounts receivables we sell, and therefore, the receivables remain recognized on our consolidated statements financial position and the funding received is recorded as of short-term borrowings. The buyer’s interest in these trade receivables ranks ahead of our interest. The program restricts us from using the receivables as collateral for any other purpose. The buyer of our trade receivables has no claim on any of our other assets. Bank and letter of credit facilities In April 2015, we borrowed the full amount of a new $1.0 billion bank credit facility (non-revolving credit facility) that was established in addition to our existing $2.5 billion revolving credit facility. The non-revolving credit facility is available on a non-revolving basis and matures in April 2018 with no scheduled principal repayments prior to maturity. In December 2015, we amended our non-revolving bank credit facility to allow partial, temporary repayment from December 2015 through May 2016; the maximum credit limit remained $1.0 billion. As a result of repayments made during the year, we reduced the amount of borrowings available under our non-revolving credit facility from $1.0 billion to $301 million. The interest rate charged on borrowings under the non-revolving credit facility falls within the range of pricing indicated for our revolving credit facility. Below is a summary of the activity relating to our revolving and non-revolving bank credit facilities for 2015 and 2016: Year ended December 31, 2016 (In millions of dollars, except exchange rates) Notional (US$) Exchange rate Notional (Cdn$) Issuance of US dollar long-term debt 2,188 1.31 2,877 Issuance of Canadian dollar long-term debt Total long-term debt issued Repayment of US dollar long- 1,140 4,017 term debt (2,038) 1.32 (2,686) Repayment of Canadian dollar long-term debt Total long-term debt repaid (1,540) (4,226) M A N A G E M E N T ’ S D I I S C U S S O N A N D A N A L Y S I S Year ended December 31, 2015 (In millions of dollars, except exchange rates) Notional (US$) Exchange rate Notional (Cdn$) Issuance of Canadian dollar long-term debt Repayment of Canadian dollar long-term debt – – – – 6,025 (5,525) As at December 31, 2016, we had $301 million ($100 million and US$150 million) of borrowings outstanding under our revolving and non-revolving credit facilities (2015 – $500 million). Certain funds were borrowed in US dollars to take advantage of a favourable interest rate spread; we have entered into debt derivatives related to these borrowings to convert all the interest and principal payment obligations to Canadian dollars. See “Financial Risk Management” for more information. As at December 31, 2016, we had available liquidity under our bank credit facilities of $2.4 billion, as illustrated below. Each of these facilities is unsecured and guaranteed by RCCI and ranks equally with all of our senior notes and debentures. (In millions of dollars) Total revolving & non-revolving credit and letter of credit facilities Add (deduct): Outstanding letters of credit Borrowings Bank advances As at December 31 2016 2015 2,860 3,568 (68) (301) (71) (68) (500) – Available liquidity – bank credit facilities 2,420 3,000 Effective April 1, 2016, we amended our $2.5 billion revolving credit facility to, among other things, extend the maturity date from July 2019 to September 2020. At the same time, we also amended the $1.0 billion non-revolving credit facility to, among other things, extend the maturity date from April 2017 to April 2018. 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 63 MANAGEMENT’S DISCUSSION AND ANALYSIS Issuance of senior notes and related debt derivatives The table below provides a summary of the senior notes we issued during 2016 and 2015, with the proceeds used to repay outstanding advances under our credit facilities and for general corporate purposes. (In millions of dollars, except interest rates and discounts) Date Issued 2016 issuances Principal amount Due date Interest rate Discount/premium at issuance Total gross proceeds 1 (Cdn$) Transaction costs and discounts 2 (Cdn$) November 4, 2016 US 500 2026 2.900% 98.354% 671 2015 issuances December 8, 2015 December 8, 2015 Total for 2015 US US 700 300 2025 2044 3.625% 5.000% 99.252% 101.700% 937 401 1,338 17 13 1 Gross proceeds before transaction costs, discounts, and premiums. 2 Transaction costs, discounts, and premiums are included as deferred transaction costs and discounts in the carrying value of the long-term debt, and recognized in net income using the effective interest method. The 2016 and 2015 senior notes were issued pursuant to public offerings in the US. Concurrent with the 2016 and 2015 issuances, we entered into debt derivatives to convert all interest and principal payment obligations to Canadian dollars. See “Financial Risk Management” for more information. All the notes issued are unsecured and guaranteed by RCCI, ranking equally with all of our other unsecured senior notes and debentures, bank credit facilities, and letter of credit facilities. Repayment of senior notes and related derivative settlements The table below provides a summary of the repayment of our senior notes during 2016 and 2015. (In millions of dollars) Maturity date 2016 repayments May 26, 2016 2015 repayments March 15, 2015 March 15, 2015 Total for 2015 Notional amount (US$) Notional amount (Cdn$) – 550 280 830 1,000 702 357 1,059 There were no debt derivatives associated with the 2016 repayment. The associated debt derivatives the 2015 repayments were settled at maturity. See “Financial Risk Management” for more information. for WEIGHTED AVERAGE COST OF BORROWINGS (%) 2016 2015 2014 4.72% 4.82% 5.20% 64 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT RATIO OF ADJUSTED NET DEBT / ADJUSTED OPERATING PROFIT 2016 2015 2014 3.0x 3.1x 2.9x Dividends In 2016, we declared and paid dividends on each of our outstanding Class A Voting and Class B Non-Voting shares. We paid $988 million in cash dividends, an increase of $11 million from 2015. See “Dividends and Share Information” for more information. Shelf prospectuses We have two shelf prospectuses that qualify the offering of debt securities from time to time. One shelf prospectus qualifies the public offering of up to $4 billion of our debt securities in each of the provinces of Canada (Canadian Shelf) and the other shelf prospectus (together with a corresponding registration statement filed with the US Securities and Exchange Commission) qualifies the public offering of up to US$4 billion of our debt securities in the United States and Ontario (US Shelf). Both the Canadian Shelf and the US Shelf will expire in April 2018. In November 2016, we issued US$500 million ($671 million) of debt securities under the US Shelf. Dissolution of RCP As a result of the dissolution of RCP on January 1, 2016, RCP is no longer a guarantor, or co-obligor, as applicable, for the Company’s bank credit and letter of credit facilities, senior notes and debentures, and derivative instruments. Effective January 1, 2016, RCI continues to be the obligor in respect of each of these, while RCCI remains either a co-obligor or guarantor for the senior notes and debentures and a guarantor, as applicable, for the bank credit and letter of credit facilities and derivative instruments. See “Understanding Our Business” and “Summary of Financial Results of Long-Term Debt Guarantor” for more information. M A N A G E M E N T ’ S D I I S C U S S O N A N D A N A L Y S I S FREE CASH FLOW (In millions of dollars) Adjusted operating profit 1 Deduct (add): Additions to property, plant and equipment 2 Interest on borrowings, net of capitalized interest Cash income taxes 3 Free cash flow 1 Years ended December 31 2016 2015 % Chg 5,092 5,032 1 2,352 2,440 (4) 740 295 732 184 1,705 1,676 1 60 2 1 Adjusted operating profit and free cash flow are non-GAAP measures and should not be considered as substitutes or alternatives for GAAP measures. These are not defined terms under IFRS, and do not have standard meanings, so may not be a reliable way to compare us to other companies. See “Non-GAAP Measures” for information about these measures, including how we calculate them. 2 Additions to property, plant and equipment do not include expenditures for spectrum licences. 3 Cash income taxes are net of refunds received. The 2% increase in free cash flow this year was primarily a result of: • higher adjusted operating profit; and • lower additions to property, plant and equipment; partially offset by • higher cash income tax payments as a result of applying losses from the Mobilicity transaction during the non-capital same period in 2015. FREE CASH FLOW (IN MILLIONS OF DOLLARS) 2016 2015 2014 $1,705 $1,676 $1,437 FINANCIAL CONDITION LIQUIDITY (In millions of dollars) Cash and cash equivalents Bank credit facilities Accounts receivable securitization program Total available liquidity As at December 31 2016 2015 – 2,420 250 11 3,000 250 2,670 3,261 In addition to the noted sources of available liquidity, we held $1,047 million of marketable securities in publicly-traded companies as at December 31, 2016 (2015 – $966 million). Weighted average cost of borrowings Our borrowings had a weighted average cost of 4.72% as at December 31, 2016 (2015 – 4.82%) and a weighted average term to maturity of 10.6 years (2015 – 10.8 years). This comparatively favourable decline in our 2016 weighted average interest rate reflects the combined effects of: • greater utilization of our bank credit facilities; • our issuance of senior notes in November 2016 at comparatively lower interest rates; and • the scheduled repayments and repurchases of comparatively more expensive senior notes made in March 2015 and May 2016. COVENANTS The provisions of our $2.5 billion revolving and $301 million non-revolving bank credit facilities described above impose certain restrictions on our operations and activities, the most significant of which are leverage-related maintenance tests. As at December 31, 2016 and 2015, we were in compliance with all financial covenants, financial ratios, and all of the terms and conditions of our debt agreements. Throughout 2016, these covenants did not impose restrictions of any material consequence on our operations. CREDIT RATINGS Credit ratings provide an independent measure of credit quality of an issue of securities and can affect our ability to obtain short-term and long-term financing and the terms of the financing. If rating agencies lower the credit ratings on our debt, particularly a downgrade below investment-grade, it could adversely affect our cost of financing and access to liquidity and capital. We have engaged each of Standard & Poor’s Ratings Services (Standard & Poor’s), Fitch Ratings (Fitch), and Moody’s Investors issues. As at Service (Moody’s) December 31, 2016, the credit ratings on RCI’s outstanding senior notes and debentures were as follows: • Standard & Poor’s affirmed RCI’s senior unsecured debt at BBB+ to rate our public debt with a stable outlook; • Fitch affirmed its BBB+ rating with a stable outlook; and • Moody’s affirmed its comparably equivalent rating of Baa1 with a stable outlook. The table below shows the credit ratings on our borrowings received from the rating agencies as at December 31, 2016: Issuance Standard & Poor’s Fitch Moody’s Corporate credit issuer default rating Senior unsecured debt BBB+ with a stable outlook BBB+ with a stable outlook BBB+ with a stable outlook BBB+ with a stable outlook Baa1 with a stable outlook Baa1 with a stable outlook Ratings for debt instruments across the universe of composite rates range from AAA (Standard & Poor’s and Fitch) or Aaa (Moody’s) representing the highest quality of to D (Standard & Poor’s), Substantial Risk (Fitch), and C (Moody’s) for securities rated, the lowest quality of securities rated. Investment-grade credit ratings are generally considered to range from BBB- (Standard & Poor’s and Fitch) or Baa3 (Moody’s) to AAA (Standard & Poor’s and Fitch) or Aaa (Moody’s). 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 65 MANAGEMENT’S DISCUSSION AND ANALYSIS Credit ratings are not recommendations for investors to purchase, hold, or sell the rated securities, nor are they a comment on market price or investor suitability. There is no assurance that a rating will remain in effect for a given period, or that a rating will not be revised or withdrawn entirely by a rating agency if it believes circumstances warrant it. The ratings on our senior debt provided by Standard & Poor’s, Fitch, and Moody’s are investment-grade ratings. RATIO OF ADJUSTED OPERATING PROFIT / INTEREST ON BORROWINGS 2016 2015 2014 6.7x 6.6x 6.4x PENSION OBLIGATIONS Our retiree pension plans had a funding deficit of approximately $387 million as at December 31, 2016 (2015 – $281 million). During 2016, our increased by $106 million primarily as a result of a decrease in the discount rate we used to measure these obligations and increased participation in our defined benefit pension plan prior to its closure to new members in 2016. funding deficit We made a total of $125 million (2015 – $118 million) of contributions to our pension plans. We expect our total estimated FINANCIAL RISK MANAGEMENT funding requirements to be $144 million in 2017 and to be adjusted annually thereafter based on various market factors, such as interest rates, expected returns, and staffing assumptions. Changes in factors such as the discount rate, participation rates, increases in compensation, and the expected return on plan assets can affect the accrued benefit obligation, pension expense, and the deficiency of plan assets over accrued obligations in the future. See “Accounting Policies” for more information. to manage the rising cost of our pension plans, effective June 30, 2016, the Rogers Defined Benefit Pension Plan was closed to new enrolment. Beginning July 1, 2016, employees not participating in the Rogers Defined Benefit Pension Plan became eligible for enrolment into a new Defined Contribution Pension Plan. In order Purchase of annuities From time to time, we have made additional lump-sum contributions to our pension plans, and the pension plans have purchased annuities from insurance companies to fund the pension benefit obligations for certain groups of retired employees in the plans. Purchasing the annuities relieves us of our primary responsibility for that portion of the accrued benefit obligations for the retired employees and eliminates the significant risk associated with the obligations. We did not make any additional lump-sum contributions to our pension plans in 2016 or 2015, and the pension plans did not purchase additional annuities. We use derivative instruments from time to time to manage risks related to our business activities, summarized as follows: Derivative Debt derivatives Bond forwards Expenditure derivatives The risk they manage Types of derivative instruments • Impact of fluctuations in foreign exchange rates on principal and interest payments for US dollar- denominated long-term debt • Impact of fluctuations in market interest rates on forecasted interest payments for expected long- term debt • Impact of fluctuations in foreign exchange rates on forecasted US dollar-denominated expenditures • Cross-currency interest rate exchange agreements • Forward foreign exchange agreements (from time to time as necessary) • Forward interest rate agreements • Forward foreign exchange agreements Equity derivatives • Impact of fluctuations in share price on stock- • Total return swap agreements based compensation expense We also manage our exposure to fluctuating interest rates and we have fixed the interest rate on 91.2% (2015 – 90.3%) of our debt, including short-term borrowings, as at December 31, 2016. FIXED AND FLOATING DEBT AS A PERCENTAGE OF TOTAL BORROWINGS (%) $15.4 Billion FIXED 91.2% FLOATING 8.8% We designate the debt derivatives related to our senior notes and debentures as hedges for accounting purposes against the foreign exchange risk associated with specific debt instruments. We do not designate the debt derivatives related to our credit facility borrowings as hedges for accounting purposes. Our bond forwards and expenditure derivatives are also designated as hedges for accounting purposes. 66 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT DEBT DERIVATIVES We use cross-currency interest rate exchange agreements (debt derivatives) to hedge the foreign exchange risk on all of the interest and principal payment obligations of our US dollar-denominated senior notes and debentures. New debt derivatives to hedge new senior notes issued US Hedging effect (In millions of dollars, except interest rates) Effective date Principal/ Notional amount (US$) Maturity date Coupon rate Fixed hedged Cdn$ interest rate 1 November 4, 2016 500 2026 2.900% 2.834% December 8, 2015 December 8, 2015 700 300 2025 3.625% 3.566% 2044 5.000% 5.145% Equivalent (Cdn$) 671 937 401 As at December 31, 2016, we had US$6.7 billion of US dollar- denominated senior notes and debentures, all of which were hedged using debt derivatives. (In millions of dollars, except exchange rates, percentages, and years) US dollar-denominated long-term debt 1 Hedged with debt derivatives Hedged exchange rate Percent hedged 2 Amount of borrowings at fixed rates 3 Total borrowings Total borrowings at fixed rates Percent of borrowings at fixed rates Weighted average interest rate on borrowings Weighted average term to maturity As at December 31 2016 2015 US$ US$ 6,700 US$ 6,700 US$ 1.1070 100.0% $ $ 15,418 $ 14,067 $ 91.2% 6,200 6,200 1.0882 100.0% 15,947 14,397 90.3% 4.72% 10.6 years 4.82% 10.8 years 1 Converting from a fixed US$ coupon rate to a weighted average Cdn$ fixed rate. 1 US dollar-denominated long-term debt reflects the hedged exchange rate and the hedged interest rate. M A N A G E M E N T ’ S D I I S C U S S O N A N D A N A L Y S I S Matured debt derivatives (In millions of dollars) Maturity date March 15, 2015 March 15, 2015 Total Notional amount (US$) Net cash (proceeds) settlement (Cdn$) 550 280 830 (106) (48) (154) During the year, we entered into debt derivatives related to our credit facility borrowings as a result of a favourable interest rate spread obtained from borrowing funds in US dollars. We used these derivatives to offset the foreign exchange and interest rate risk on our US dollar-denominated credit facility borrowings. As a result of the short-term nature of these debt derivatives related to our credit facility borrowings, we have not designated them as hedges for accounting purposes. During 2016, we entered into and settled debt derivatives related to our credit facility borrowings as follows: Year ended December 31, 2016 (In millions of dollars, except exchange rates) Notional (US$) Exchange rate Notional (Cdn$) Debt derivatives entered Debt derivatives settled Net cash received 8,683 8,533 1.31 1.31 11,360 11,159 8 We did not enter into any debt derivatives related to our credit facility borrowings during 2015. 2 Pursuant to the requirements for hedge accounting under IAS 39, Financial Instruments: Recognition and Measurement, on December 31, 2016, and December 31, 2015, RCI accounted for 100% of its debt derivatives as hedges against designated US dollar-denominated debt. As a result, on December 31, 2016 and 2015, 100% of our US dollar-denominated debt is hedged for accounting and economic purposes. 3 Borrowings include long-term debt, including the impact of debt derivatives, and short-term borrowings associated with our accounts receivable securitization program. BOND FORWARDS From time to time, we use extendible bond forward derivatives (bond forwards) to hedge interest rate risk on the debt instruments we expect to issue in the future. As at December 31, 2016, approximately $5.9 billion of our outstanding public debt matures over the next five years (2015 – $5.5 billion) and we anticipate that we will issue public debt over that time to fund at least a portion of those maturities together with other general corporate funding requirements. We use bond forwards for risk management purposes only. The bond forwards noted below have been designated as hedges for accounting purposes. During 2014, we entered into bond forwards to hedge the underlying Government of Canada (GoC) interest rate risk that will comprise a portion of the interest rate risk associated with our anticipated future debt issuances. As a result of these bond forwards, we hedged the underlying GoC 10-year rate on $1.5 billion notional amount for anticipated future debt issuances from 2015 to 2018 and the underlying GoC 30-year rate on $0.4 billion notional amount for December 31, 2018. The bond forwards are effective from December 2014. On November 4, 2016, we exercised a $500 million notional bond forward due January 4, 2017 in relation to the issuance of the US$500 million senior notes due 2026 and paid $53 million to settle the derivative. The amount paid represents the fair value of the bond forward at the time of settlement and will be recycled into finance costs from the hedging reserve using the effective interest rate method over the life of the US$500 million senior notes due 2026. 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 67 MANAGEMENT’S DISCUSSION AND ANALYSIS On December 8, 2015, we exercised a $500 million notional bond forward due December 31, 2015 in relation to the issuance of the US$700 million senior notes due 2025 and paid $25 million to settle the derivative. The amount paid represents the fair value of the bond forward at the time of settlement and will be recycled into finance costs from the hedging reserve using the effective interest rate method over the life of the US$700 million senior notes due 2025. As at December 31, 2016 we had $900 million notional amount of bond forwards outstanding (2015 – $1,400 million), all of which were designated as hedges for accounting purposes. (In millions of dollars, except interest rates) GoC term (years) Effective date Maturity date 1 Notional amount Hedged GoC interest rate as at December 31, 2016 Hedged GoC interest rate as at December 31, 2015 1 10 10 30 Total December 2014 December 2014 December 2014 January 4, 2017 April 30, 2018 December 31, 2018 500 500 400 1,400 – 2.52% 2.62% 2.34% 2.23% 2.52% 2016 2015 – 500 400 900 500 500 400 1,400 1 Bond forwards with maturity dates beyond December 31, 2016 are subject to GoC rate re-setting from time to time. The $500 million due April 2018 was extended in April 2016 to reset in April 2017. The $400 million due December 2018 was extended in December 2016 to reset in January 2018. EXPENDITURE DERIVATIVES We use foreign currency forward contracts (expenditure derivatives) to hedge the foreign exchange risk on the notional amount of certain forecasted US dollar-denominated expenditures. The table below shows the expenditure derivatives into which we entered to manage foreign exchange risk related to certain forecasted expenditures. (In millions of dollars, except exchange rates) Expenditure derivatives entered Expenditure derivatives settled Year ended December 31, 2016 Year ended December 31, 2015 Notional (US$) Exchange rate Notional (Cdn$) Notional (US$) Exchange rate Notional (Cdn$) 990 840 1.33 1.22 1,318 1,025 990 810 1.28 1.11 1,266 902 The expenditure derivatives noted above have been designated as hedges for accounting purposes. As at December 31, 2016, we had US$1,290 million of expenditure derivatives outstanding (2015 – US$1,140 million), at an average rate of $1.32/US$ (2015 – $1.24/US$), with terms to maturity ranging from January 2017 to December 2018 (2015 – January 2016 to December 2017). Our outstanding expenditure derivatives maturing in 2017 are hedged at an average exchange rate of $1.33/US$. EQUITY DERIVATIVES We use stock-based compensation derivatives (equity derivatives) to hedge the market price appreciation risk of the RCI Class B shares granted under our stock-based compensation programs. As at December 31, 2016, we had equity derivatives for 5.4 million RCI Class B shares with a weighted average price of $50.30. These derivatives have not been designated as hedges for accounting purposes. We record changes in their fair value as a stock-based compensation expense, or offset thereto, which serves to offset a substantial portion of the impact of changes in the market price of RCI Class B shares on the accrued value of the stock-based compensation liability stock-based compensation programs. In April 2016, we executed extension agreements for each of our equity derivative contracts under substantially the same terms and conditions with revised expiry dates to April 2017 (from April 2016). for our In August 2016, we settled 0.3 million equity derivatives at a weighted average price of $58.16 as a result of a reduction in the number of share-based compensation units outstanding. 68 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT MARK-TO-MARKET VALUE We record our derivatives using an estimated credit-adjusted, mark-to-market valuation, calculated in accordance with IFRS. As at December 31, 2016 Notional amount (US$) Exchange rate Notional amount (Cdn$) Fair value (Cdn$) (In millions of dollars, except exchange rates) Debt derivatives accounted for as cash flow hedges: As assets As liabilities 5,200 1,500 1.0401 1.3388 5,409 2,008 1,751 (68) Short-term debt derivatives not accounted for as hedges: As liabilities 150 1.3407 201 – ADJUSTED NET DEBT AND ADJUSTED NET DEBT / ADJUSTED OPERATING PROFIT We use adjusted net debt and adjusted net debt / adjusted operating profit to conduct valuation-related analysis and make capital structure-related decisions. Adjusted net debt includes long-term debt, net debt derivative assets or liabilities, short-term borrowings, and cash and cash equivalents. (In millions of dollars, except ratios) 2016 2015 As at December 31 Long-term debt 1 Net debt derivative assets valued without any adjustment for credit risk Short-term borrowings Bank advances (cash and cash equivalents) 1,683 Adjusted net debt 2 Adjusted net debt / adjusted operating 900 (51) profit 2,3 16,197 16,981 (1,740) 800 71 (2,180) 800 (11) 15,328 15,590 3.0 3.1 M A N A G E M E N T ’ S D I I S C U S S O N A N D A N A L Y S I S Net mark-to-market debt derivative asset Bond forwards accounted for as cash flow hedges: As liabilities Expenditure derivatives accounted for as cash flow hedges: As assets As liabilities Net mark-to-market expenditure derivative asset Equity derivatives not accounted for as hedges: As assets Net mark-to-market asset (In millions of dollars, except exchange rates) Debt derivatives accounted for as cash flow hedges: 990 300 1.2967 1.4129 1,284 424 40 (21) 19 1 Includes current and long-term portion of long-term debt before deferred transaction costs and discounts. See “Reconciliation of adjusted net debt” in the section “Non-GAAP Measures” for the calculation of this amount. 2 Adjusted net debt and adjusted net debt / adjusted operating profit are non-GAAP measures and should not be considered substitutes or alternatives for GAAP measures. These are not defined terms under IFRS and do not have standard meanings, so may not be a reliable way to compare us to other companies. See “Non-GAAP Measures” for information about these measures, including how we calculate them. 3 Adjusted net debt / adjusted operating profit is measured using adjusted operating profit for the last twelve consecutive months. 270 8 1,659 As at December 31, 2015 Notional amount (US$) Exchange rate Notional amount (Cdn$) Fair value (Cdn$) In addition to the cash and cash equivalents as at December 31, 2016 and December 31, 2015 noted above, we held $1,047 million of marketable securities in publicly-traded companies (2015 – $966 million). Our adjusted net debt decreased by $0.26 billion from December 31, 2015 primarily as a result of a decrease in our outstanding long-term debt, partially offset by a reduction in the fair value of our net debt derivative asset. See “Overview of Financial Position” for more information. As assets As liabilities 5,900 300 1.0755 1.3367 6,345 401 2,032 (4) Net mark-to-market debt derivative asset Bond forwards accounted for as cash flow hedges: As liabilities Expenditure derivatives accounted for as cash flow hedges: 2,028 – – 1,400 (91) As assets 1,140 1.2410 1,415 158 Equity derivatives not accounted for as hedges: As liabilities Net mark-to-market asset – – 286 (15) 2,080 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 69 MANAGEMENT’S DISCUSSION AND ANALYSIS DIVIDENDS AND SHARE INFORMATION DIVIDENDS The table below shows when dividends have been declared and paid on both classes of our shares: Declaration date Record date January 27, 2016 April 18, 2016 August 11, 2016 October 20, 2016 January 28, 2015 April 21, 2015 August 13, 2015 October 22, 2015 March 13, 2016 June 12, 2016 September 11, 2016 December 12, 2016 March 13, 2015 June 12, 2015 September 11, 2015 December 11, 2015 Payment date April 1, 2016 July 4, 2016 October 3, 2016 January 3, 2017 April 1, 2015 July 2, 2015 October 1, 2015 January 4, 2016 Dividend per share (dollars) Dividends paid (in millions of dollars) 0.48 0.48 0.48 0.48 0.48 0.48 0.48 0.48 247 247 247 247 248 247 247 247 In January 2017, the Board declared a quarterly dividend of $0.48 per Class A Voting share and Class B Non-Voting share, to be paid on April 3, 2017, to shareholders of record on March 13, 2017. We currently expect that the remaining record and payment dates for the 2017 declaration of dividends will be as follows, subject to the declaration by our Board each quarter at its sole discretion: Record date June 12, 2017 September 15, 2017 December 11, 2017 Payment date July 4, 2017 October 3, 2017 January 2, 2018 We use the weighted average number of shares outstanding to calculate earnings per share and adjusted earnings per share. Years ended December 31 (Number of shares in millions) 2016 2015 Basic weighted average number of shares outstanding Diluted weighted average number of shares outstanding 515 517 515 517 ANNUALIZED DIVIDENDS PER SHARE ($) $1.92 $1.92 $1.83 OUTSTANDING COMMON SHARES As at December 31 2016 2015 2016 2015 2014 Common shares outstanding 1 Class A Voting Class B Non-Voting 112,411,992 112,438,692 402,396,133 402,307,976 Total common shares 514,808,125 514,746,668 Options to purchase Class B Non-Voting shares Outstanding options Outstanding options exercisable 3,732,524 4,873,940 1,770,784 2,457,005 1 Holders of our Class B Non-Voting shares are entitled to receive notice of and to attend shareholder meetings; however, they are not entitled to vote at these meetings except as required by law or stipulated by stock exchanges. If an offer is made to purchase outstanding Class A Voting shares, there is no requirement under applicable law or our constating documents that an offer be made for the outstanding Class B Non-Voting shares, and there is no other protection available to shareholders under our constating documents. If an offer is made to purchase both classes of shares, the offer for the Class A Voting shares may be made on different terms than the offer to the holders of Class B Non-Voting shares. 70 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT M A N A G E M E N T ’ S D I I S C U S S O N A N D A N A L Y S I S COMMITMENTS AND CONTRACTUAL OBLIGATIONS CONTRACTUAL OBLIGATIONS The table below shows a summary of our obligations under firm contractual arrangements as at December 31, 2016. See notes 3, 21, and 28 to our 2016 Audited Consolidated Financial Statements for more information. (In millions of dollars) Short-term borrowings Long-term debt 1 Net interest payments Debt derivative instruments 2 Expenditure derivative instruments 2 Bond forwards 2 Operating leases Player contracts 3 Purchase obligations 4 Property, plant and equipment Intangible assets Program rights 5 Other long-term liabilities Total Less than 1 Year 1-3 Years 4-5 Years 800 750 727 – 9 – 159 161 422 73 93 510 – 3,704 – 3,081 1,294 (445) 15 (51) 235 165 359 110 108 1,083 12 5,966 – 2,350 1,033 – – – 109 18 153 31 32 1,067 3 4,796 After 5 Years – 10,016 5,832 (1,134) – – 94 – 105 27 – 2,421 3 17,364 Total 800 16,197 8,886 (1,579) 24 (51) 597 344 1,039 241 233 5,081 18 31,830 1 Principal obligations of long-term debt (including current portion) due at maturity. 2 Net (receipts) disbursements due at maturity. US dollar amounts have been translated into Canadian dollars at the Bank of Canada year-end rate. 3 Player contracts are Toronto Blue Jays players’ salary contracts into which we have entered and are contractually obligated to pay. 4 Purchase obligations are the contractual obligations under service, product, and handset contracts we have committed to for at least the next five years. 5 Program rights are the agreements into which we have entered to acquire broadcasting rights for sports broadcasting programs and films for periods in excess of one year at contract inception. OFF-BALANCE SHEET ARRANGEMENTS GUARANTEES As a regular part of our business, we enter into agreements that provide for indemnification and guarantees to counterparties in transactions involving business sale and business combination agreements, sales of services, and purchases and development of assets. Due to the nature of these indemnifications, we are unable to make a reasonable estimate of the maximum potential amount we could be required to pay counterparties. Historically, we have not made any significant payment under these indemnifications or guarantees. See note 27 to our 2016 Audited Consolidated Financial Statements. OPERATING LEASES We have entered into operating leases for the rental of premises, distribution facilities, equipment and wireless towers, and other contracts. Terminating any of these lease agreements would not have a material adverse effect on us as a whole. See “Commitments and Contractual Obligations” and note 28 to our 2016 Audited Consolidated Financial Statements for quantification. Governance and Risk Management GOVERNANCE AT ROGERS Rogers is a family-founded, family-controlled company and we take pride in our proactive and disciplined approach to ensuring that our governance structure and practices instil the confidence of our shareholders. Voting control of Rogers Communications Inc. is held by a trust, the beneficiaries of which are members of the Rogers family. The trust holds voting control of Rogers Communications for the benefit of the Rogers family via the trust’s successive generations of ownership of 91% of the outstanding Class A Voting shares of the Company (2015 – 91%). The Rogers family are substantial stakeholders and owned approximately 27% of our equity as at December 31, 2016 (2015 – 28%) through its ownership of a combined total of 141 million Class A Voting and Class B Non-Voting shares (2015 – 142 million). Our Board is made up of four members of the Rogers family and another 10 directors who bring a rich mix of experience as business leaders in North America. All of our directors are firmly committed to firm governance, strong oversight, and the ongoing creation of shareholder value. The Board as a whole is committed to sound corporate governance and continually reviews its governance practices and benchmarks them against acknowledged leaders and evolving legislation. The Board believes that Rogers’ governance system is effective and that there are appropriate structures and procedures in place. GOVERNANCE BEST PRACTICES The majority of our directors are independent and we have adopted many best practices for effective governance, including: • independent lead director; • formal corporate governance policy and charters; • code of business conduct and whistleblower hotline; • director share ownership guidelines; 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 71 MANAGEMENT’S DISCUSSION AND ANALYSIS • Board and committee in camera discussions; • annual reviews of Board and director performance; • Audit and Risk Committee meetings with internal and external auditors; • orientation programs for new directors; • regular Board education sessions; • committee authority to retain independent advisors; • director material relationship standards; and • separation of CEO and chairman roles (except for the interim period where the Chairman acts as the interim CEO until a successor CEO is appointed). We comply with all relevant corporate governance guidelines and standards as a Canadian public company listed on the TSX and as a foreign private issuer listed on the NYSE in the US. BOARD OVERSIGHT The Board delegates certain responsibilities to its seven standing committees to ensure proper oversight and accountability: • Audit and Risk Committee - reviews our accounting policies and practices, the integrity of our financial reporting processes and procedures, and the financial statements and other relevant disclosure for release to shareholders and the public. It assists the Board in its oversight of our compliance with legal and regulatory requirements for financial reporting, assesses our accounting and financial control systems, and evaluates the qualifications, independence, and work of our internal and external auditors. It also reviews risk management policies and associated processes used to manage major risk exposures. • Corporate Governance Committee - assists the Board to ensure it has appropriate systems and procedures for carrying out its responsibilities. This committee develops governance policies and practices, recommends them to the Board for approval, and leads the Board in its periodic review of Board and committee performance. • Nominating Committee - identifies prospective candidates to serve on our Board. Nominated directors are either elected by shareholders at a meeting or appointed by the Board. The committee also recommends nominees for each Board committee, including each committee chair. • Human Resources Committee - assists the Board in monitoring, reviewing, and approving compensation and benefit policies and practices. It is also responsible for recommending the compensation of senior management and monitoring senior executive succession planning. • Executive Committee - assists the Board in discharging its responsibilities between meetings, including acting in such areas as are specifically designated and authorized at a preceding Board meeting to consider matters that may arise from time to time. • Finance Committee - reviews our investment strategies, general debt, and equity structure and reports on them to the Board. • Pension Committee - oversees the administration of our retiree pension plans and reviews the investment performance and provisions of the plans. You can find more details about governance at Rogers in the Investor Relations section of our website (rogers.com/governance), including: • a complete statement of our corporate governance practices; • our codes of conduct and ethics; • full Board committee charters; • director biographies; and • a summary of the differences between the NYSE corporate governance rules that apply to US-based companies and our governance practices as a non-US-based issuer listed on the NYSE. Board of Directors and its Committees Audit and Risk Corporate Governance Nominating Human Resources Executive Finance Pension As at February 9, 2017 Chair Member Alan D. Horn, CPA, CA Charles Sirois C. William D. Birchall Bonnie R. Brooks Robert K. Burgess John H. Clappison, FCPA, FCA Philip B. Lind, CM John A. MacDonald Isabelle Marcoux The Hon. David R. Peterson, PC, QC Edward S. Rogers Loretta A. Rogers Martha L. Rogers Melinda M. Rogers 72 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT SOCIAL RESPONSIBILITY CORPORATE SOCIAL RESPONSIBILITY Rogers prides itself on being a good corporate citizen. Our stakeholders want to deal with a company they feel is ethical and transparent, and that means putting programs in place that have societal, economic, and environmental benefits. Our material aspects, grouped into six Corporate Social Responsibility focus areas, are listed below along with our approaches in addressing them: Good governance • Governance and Ethics: We strive to uphold the highest standards of integrity, ethical behaviour, and good corporate citizenship, underpinned by guidelines and policies that govern the actions of our directors and employees and promote responsible conduct. Customer experience • Customer Service and Transparency: Customer service is a core pillar of our strategy. We are committed to an improved customer experience and have implemented programs to address customer issues. • Network Leadership and Innovation: Innovation has always been a part of our identity, whether it is bringing new products or the latest network technologies to market. Focusing on innovation and network leadership continues to be a key priority under our strategy. • Product Responsibility: We have programs and policies in place to manage a range of product responsibility issues. For instance, we comply with all relevant safety regulations and codes, have programs and teams to manage and advise on our accessibility offerings, and operate stewardship programs to manage the proper disposal and recycling of our used products, including Rogers Trade-Up and FidoTrade. • Customer Privacy: Rogers highly values the security, integrity, and sensitivity of our customers’ private information. Rogers’ Privacy Policy outlines our responsibilities and practices regarding the protection of the personal information of our employees and customers. Our Chief Privacy Officer oversees our compliance with this policy and all applicable laws, and responds to requests from law enforcement for customer data. Employee experience • Talent Management: With the launch of our strategy in 2014, we emphasized “Invest In and Develop Our People” as one of our key strategic priorities. We want to attract, develop, and engage the best talent in Canada. We have increased our investment in employee programs including an onboarding program, new training programs, a new development planning program, and a revised employee engagement survey. We are also changing the way our employees work in order to foster collaboration across the organization. Our Chief Human Resources Officer oversees talent management, while the Human Resources Committee assists the Board in monitoring, reviewing, and approving compensation and benefit policies and practices. • Inclusion and Diversity: At Rogers, we believe that an inclusive workplace reflective of the diverse communities we serve drives better performance – for our employees, our customers, and our company. Our Inclusion and Diversity Council, comprised of leaders from across the business, oversees the development of our inclusion and diversity strategy. • Health, Safety, and Wellness: We have a comprehensive integrated healthy workplace program. Our goal is always to protect people by preventing injuries and we invest millions of dollars as well as thousands of hours in safety training every year. We have robust programs and practices in place to identify and minimize potential hazards. We continually monitor those practices, our sites, and our work to ensure employees remain safe. Environmental responsibility • Energy Use and Climate Change: Rogers operates thousands of facilities, which include owned and leased buildings, cell transmission sites, power supply stations, and retail stores, as well as an extensive vehicle fleet. We are committed to reducing the associated greenhouse gas emissions and energy consumption by 2025, reflected in our company-wide reduction targets of 25% and 10%, respectively, based on 2011 levels. M A N A G E M E N T ’ S D I I S C U S S O N A N D A N A L Y S I S • Paper Reduction: We are committed to reducing the environmental impact of our paper use. Our Publishing Paper Procurement Practices promise guides our purchasing decisions for paper used for publishing. We also work with suppliers to ensure responsible paper sourcing, production, and recycling, to reduce their paper and encourage our employees consumption. We promote the benefits of e-billing to our customers, which help to reduce both paper and energy usage. In addition, our transition to digital media formats, such as reduce our paper Texture by Next consumption. Issue, will further • Waste and Recycling: Reducing the amount of waste we produce is another important way in which we are managing our environmental footprint. To reduce and responsibly manage the waste we produce, we look for opportunities to avoid waste generation, run programs to recycle and reuse materials, and work to increase employees’ recycling behaviours through our award-winning “Get Up and Get Green” program. Community investment • Community Giving: We stand by the principles of good corporate citizenship, targeting to commit at least 1% of our net earnings before taxes each year to charities and non-profit In 2016, Rogers provided approximately organizations. $60 million in cash and in-kind donations to support various organizations and causes. We also support our employees and their community activities through the Rogers Employee Volunteer Program, which gives employees the opportunity to volunteer in their communities for one paid day per year. The Jays Care Foundation also works to ensure children in need make positive life choices through programs that support physical activity, education, and life-skill development. • Digital Inclusion: Digital inclusion is a priority for Rogers and one of the best ways we can contribute to society. Our Connected for to rent- Success program provides broadband Internet 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 73 MANAGEMENT’S DISCUSSION AND ANALYSIS subsidized tenants within partnered non-profit organizations and housing providers. Up to 150,000 Canadian households are eligible for Internet access through the Connected for Success program, giving them the tools and resources needed to experience the benefits of connectivity. Economy and society • Economic Performance: We strive to offer innovative solutions for customers, create diverse and well-paying jobs, support small taxes, and deliver robust businesses, pay our fair share of dividends to shareholders. Beyond these direct economic impacts, our performance produces indirect economic benefits as well, including significant charitable donations and locally procured goods and services. socially and environmentally • Supply Chain Management: Suppliers play a huge role in our success, which is why we ensure that we have strong supplier selection processes and management, and that we conduct business with responsible companies who share our values. Our Supplier Code of Conduct sets out high standards for supplier performance in the areas of ethics, rights, health and safety, environment, and management systems. In early 2016, we joined the Joint Audit Cooperation (JAC), a group of global telecom companies that share common suppliers. Through our participation in JAC, we share audit results among our peers to ensure that our suppliers adhere to internationally chain and sustainability standards. Rogers was the first Canadian company to join JAC, and we began our first audits in 2016. recognized supply labour • Public Policy: We participate actively in public policy discussions that are relevant to our operations and are fully transparent about our positions and activities. We are heavily involved with governments and regulators at the federal level through our Regulatory and Government Relations offices and teams in both Toronto and Ottawa. The majority of our interactions take place with two groups that regulate our activities: the CRTC and ISED Canada. See our annual Corporate Social Responsibility report on our website (rogers.com/csr) for more information about our social and environmental performance. INCOME TAX AND OTHER GOVERNMENT PAYMENTS We proactively manage our tax affairs to enhance Rogers’ business decisions and optimize after-tax free cash flow available for investment in our business and shareholder returns. We have established comprehensive policies and procedures to ensure we tax laws and reporting requirements, are compliant with all including filing and making all requisite income and sales tax returns and payments on a timely basis. As a part of this process, we maintain open and cooperative relationships with revenue authorities to minimize audit effort and reduce tax uncertainty while engaging with government policy makers on taxation matters that affect Rogers and its shareholders, employees, customers, and other stakeholders. Income tax payments Rogers’ total income tax expense of $324 million in 2016 is close to the expense computed on its accounting income at the statutory rate of 26.6%. Cash income tax payments totaled $295 million in 2016. Cash income tax payments can differ from the tax expense shown on the financial statements for various reasons, including timing of payments. Our cash income tax is generally lower than our tax expense primarily as a result of the significant capital investment we continue to make in our wireless and broadband telecommunications networks throughout Canada. Similar to tax systems throughout the world, Canadian tax laws generally permit these additions to property, plant and equipment to be deducted for tax purposes more quickly than they are depreciated for financial statement recognition purposes. In 2015, our cash income taxes were further reduced by the utilization of loss carryforwards from the acquisition of Mobilicity. Other government payments In addition to paying income tax on the profits we earn, we contribute significantly to Canadians by paying taxes and fees to federal, provincial, and municipal governments as follows: • various taxes on the salaries and wages we pay (payroll taxes) to approximately 25,200 employees; • property and business taxes; • unrecoverable sales taxes and custom duties; and • broadcast, spectrum, and other regulatory fees. As outlined in the table below, the total cost to Rogers of these payments in 2016 was approximately $998 million. (In millions of dollars) Income taxes Non-recoverable sales taxes Payroll taxes Regulatory and spectrum fees 1 Property and business taxes Total taxes and other payments Total payments 295 9 133 511 50 998 1 Includes an allocation of $266 million relating to the $1.0 billion, $3.3 billion, and $24 million we paid for the acquisition of spectrum licences in 2008, 2014, and 2015, respectively. We also collected on behalf of the government approximately $1,809 million in sales taxes on our products and services and $545 million in employee payroll taxes. to optimize trade-offs between risk and return to maximize value to the organization. RISK MANAGEMENT We are committed to continually risk management capabilities to protect and enhance shareholder value. The purpose of risk management is not to eliminate risk but strengthening our RISK GOVERNANCE risk governance and responsibility for The Board has overall oversees management in identifying the principal risks we face in our business and implementing appropriate risk assessment processes to manage these risks. It delegates certain risk oversight and management duties to the Audit and Risk Committee. 74 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT The Audit and Risk Committee discusses risk policies with management and the Board and assists the Board in overseeing our compliance with legal and regulatory requirements. The Audit and Risk Committee also reviews: • the adequacy of the internal controls that have been adopted to safeguard assets from loss and unauthorized use, to prevent, deter, and detect fraud, and to ensure the accuracy of the financial records; • the processes for identifying, assessing, and managing risks; • our exposure to major risks and trends and management’s implementation of risk policies and actions to monitor and control these exposures; • our business continuity and disaster recovery plans; • any special audit steps adopted due to material weaknesses or significant deficiencies that may be identified; and • other risk management matters from time to time as determined by the Audit and Risk Committee or directed by the Board. ENTERPRISE RISK MANAGEMENT Our Enterprise Risk Management (ERM) program uses the “3 Lines of Defence” framework to identify, assess, manage, monitor, and communicate risks. Our business units and departments, led by the Executive Leadership Team, are the first line of defence and are accountable for managing or accepting the risks. Together, they identify and assess key risks, define controls and action plans to minimize these risks, and enhance our ability to meet our business objectives. ERM is the second line of defence. ERM helps management identify the top risks to meeting our business objectives, our risk appetite, and emerging risks. At the business unit and department level, ERM works with management to provide governance and advice in managing the key risks and associated controls to mitigate these risks. ERM works with Internal Audit to monitor the adequacy and effectiveness of the controls to reduce risks to an acceptable level. ERM carries out an annual strategic risk assessment to identify our principal risks to achieving our corporate objectives by identifying corporate-, business unit- and department-level risks and aligning business unit and department objectives to the corporate objectives. Using an aggregate approach, ERM identifies the top impact on our ability to achieve our risks and their potential corporate objectives. This assessment includes reviewing risk reports, audit reports, and industry benchmarks and interviewing senior management with business unit and department accountability. ERM reports the results of the annual strategic risk assessment to the Executive Leadership Team, the Audit and Risk Committee, and the Board. Internal Audit is the third line of defence. Internal Audit evaluates the governance the design and operational effectiveness of program, internal controls, and risk management. Risks, controls, and mitigation plans identified through this process are incorporated into the annual Internal Audit plan. Annually, Internal Audit also facilitates and monitors management’s completion of the financial statement fraud risk assessment to identify areas of potential fraud or misstatement in our financial statements and disclosures and to ensure these controls are designed and operating effectively. M A N A G E M E N T ’ S D I I S C U S S O N A N D A N A L Y S I S The Executive Leadership Team and the Audit and Risk Committee are responsible for approving our enterprise risk policies. Our ERM methodology and policies rely on the expertise of our management and employees to identify risks and opportunities and implement risk mitigation strategies as required. RISKS AND UNCERTAINTIES AFFECTING OUR BUSINESS This section describes the principal risks and uncertainties that could have a material adverse effect on our business and financial results. Any discussion about risks should be read in conjunction with “About Forward-Looking Information”. GENERAL RISKS ECONOMIC CONDITIONS Our businesses are affected by general economic conditions and consumer confidence and spending. Recessions, declines in economic activity, and economic uncertainty can erode consumer and business confidence and reduce discretionary spending. Any these factors can negatively affect us through reduced of advertising, lower demand for our products and services, decreased revenue and profitability, and higher churn and bad debt expense. A significant portion of our broadcasting, publishing, and digital revenue comes from the sale of advertising and is affected by the strength of the economy. Poor economic conditions can also have an impact on our pension plans as there is no assurance that the plans will be able to earn the assumed rate of return. Capital market volatility may result in changes in the discount rates and other variables used to calculate our pension obligations, requiring us to make contributions in the future that differ significantly from current contributions and assumptions being used in the actuarial valuation process. SUBSTANTIAL COMPETITION There is no assurance that our current or future competitors will not provide services that are superior to ours or at lower prices, adapt more quickly to evolving industry trends or changing market requirements, enter markets we operate in, or introduce competing services. Any of these factors could reduce our business market share or revenue, or increase churn. We may have some ongoing re-pricing of products and services, as we may need to extend lower wireless pricing offers to attract new customers and retain existing subscribers. As wireless penetration of the population deepens, new wireless customers may generate lower average monthly revenue, which could slow revenue growth. Wireless could face increased competition due to recent changes to foreign ownership rules and control of wireless licences: • foreign telecommunication companies the Canadian market by acquiring wireless licences or a holder of wireless licences. If companies with significantly greater capital resources enter the Canadian market, it could reduce our wireless market share. See “Foreign Ownership and Control” for more information. could enter 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 75 MANAGEMENT’S DISCUSSION AND ANALYSIS • ISED Canada’s policy regarding the transfer of spectrum licences, combined with 2012 legislation that allows foreign ownership of wireless providers with less than 10% market share, could make it harder for incumbent wireless carriers to acquire additional regarding foreign ownership of wireless providers could make it less expensive for foreign wireless carriers to enter the Canadian wireless market. This could increase the intensity of competition in the Canadian wireless sector. legislation spectrum. The In addition, the CRTC Broadcasting Distribution Regulations do not allow cable operators to obtain exclusive contracts in buildings where it is technically feasible to install two or more transmission systems. TECHNOLOGY RISKS INFORMATION SECURITY RISK Our industry is vulnerable to cyber risks that are growing in both frequency and complexity. Rogers, along with our suppliers, employs systems and network infrastructure that are subject to cyberattacks, which may include theft of assets, unauthorized access to sensitive information, or operational disruption. A significant cyberattack against our – or our suppliers’ – critical network infrastructure and supporting information systems could result in service disruptions, litigation, loss of customers, significant remediation costs, and reputational damage. Management has committed to an information and cybersecurity program designed to reinforce the importance of remaining a secure, vigilant, and resilient organization. Our ongoing success depends on protecting our sensitive data, including personal information about our customers and employees. We rely on security awareness training, policies, procedures, and information technology systems to protect this information. Rogers continues to monitor this risk, leveraging external threat intelligence, internal monitoring, reviewing best practices, and implementing controls as required to mitigate cybersecurity risks. We have insurance related to cybersecurity coverage against certain damages breaches, intrusions, and attacks, amongst other things. The Audit and Risk Committee is responsible for overseeing management’s policies and associated procedures related to cyber security risks. External threats to the network are constantly changing and there is no assurance we will be able to protect the network from all future threats. The impact of such attacks may affect service revenue. IMPACT OF NETWORK FAILURES ON REVENUE AND CUSTOMER SERVICE If our networks or key network components fail, it could, in some circumstances, result in a loss of service for our customers for certain periods and have an adverse effect on our results and financial position. We rely on business partners to carry some traffic for certain customers. If one of these carriers has a service failure, it might also cause a service interruption for those customers that would last until we could reroute the traffic to another carrier. We work to protect our service from the impact of natural disasters and major weather events such as ice storms, flooding, or landslides where it is necessary and feasible to do so. There are no 76 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT assurances that a future event will not cause service outages. Such outages may affect service revenue. DEPENDENCE ON INFORMATION TECHNOLOGY SYSTEMS Our businesses depend on IT systems for day-to-day operations. If we are unable to operate our systems, make enhancements to accommodate customer growth and new products and services, or if our systems go down, it could have an adverse effect on our ability to acquire new subscribers, service customers, manage subscriber churn, produce accurate and timely subscriber invoices, generate revenue growth, and manage operating expenses. This could have an adverse impact on our results and financial position. Most of our employees and critical elements of our network infrastructure and IT systems are concentrated in various physical facilities. If we cannot access one or more of these facilities as a result of a natural or manmade disaster or otherwise, our operations may be significantly affected to the extent that it may be difficult for us to recover without a significant interruption in service or negative impact to our revenue or customer base. UNAUTHORIZED ACCESS TO DIGITAL BOXES OR INTERNET MODEMS We use encryption technology developed and supported by our vendors to protect our cable signals from unauthorized access and to control access to programming based on subscription packages. We also use encryption and security technologies to prevent unauthorized access to our Internet service. There is no assurance that we will be able to effectively prevent unauthorized decoding of television signals or Internet access in the future. If we are unable to control cable access with our encryption technology, subscriptions to digital programming, subscription including video-on-demand, and Internet service revenue may both decrease, which could result in a decline in our Cable revenue. premium video-on-demand and NEW TECHNOLOGY Our network plans assume the availability of new technology for both Wireless and Wireline networks. While we work with industry standards bodies and our vendors to ensure timely delivery of new technology, there are no assurances these technologies will be available as and when required. technologies have affected the way our services are COMPETING TECHNOLOGIES Several delivered, including: • broadband; • IP-based voice, data, and video delivery services; • increased use of optical fibre technologies to businesses and/or residences; and • broadband wireless access and wireless services using a radio frequency spectrum to which we may have limited or no access. These technologies may also lead to significantly different cost structures for users and therefore affect the long-term viability of some of our current technologies. Some of the new technologies have allowed competitors to enter our markets with similar products or services at lower costs. These competitors may also be larger and have greater access to financial resources than Rogers. M A N A G E M E N T ’ S D I I S C U S S O N A N D A N A L Y S I S Improvements in the quality of streaming video over the Internet, coupled with the increasing availability of television shows and movies online through OTT content providers, which compete for viewership, are anticipated to increase competition for Canadian cable television service providers. If advances in technology are made to any alternative Canadian multi-channel broadcasting distribution system, our cable services may face increased competition. In addition, wireless Internet is, in some instances, replacing traditional wireline Internet as the technology for wireless Internet continues to develop. The use of PVRs has affected our ability to generate television advertising revenue as viewers can skip advertising aired on the television networks. The continued emergence and growth of subscriber-based satellite and digital radio products could affect AM and FM radio audience listening habits and have a negative effect on the results of our radio stations. Certain audiences are also migrating away from traditional broadcast platforms to the Internet as more video and audio content streaming becomes available. REGULATORY RISKS CHANGES IN GOVERNMENT REGULATIONS Substantially all of our business activities are regulated by ISED Canada and/or the CRTC, and any regulatory changes or decisions could adversely affect our consolidated results of operations. See “Regulation in Our Industry” for more information. Regulatory changes or decisions made by these regulators could adversely impact our results on a consolidated basis. This regulation relates to, among other things, licensing and related fees, competition, the cable television programming services that we must distribute, wireless and wireline interconnection agreements, the rates we may charge to provide access to our network by third parties, the resale of our networks and roaming on our networks, our operation and ownership of communications systems, and our ability in other the costs of providing In addition, communications systems. services may be increased from time to time as a result of compliance with industry or legislative initiatives to address consumer protection concerns or such Internet-related issues as copyright infringement, unsolicited commercial e-mail, cybercrime, and lawful access. to acquire an interest Generally, our licences are granted for a specified term and are subject to conditions on the maintenance of these licences. These licensing conditions and related fees may be modified at any time by the regulators. The regulators may decide not to renew a licence when it expires, and any failure by us to comply with the conditions on the maintenance of a licence could result in a revocation or forfeiture of any of our licences or the imposition of fines. Our cable, wireless, and broadcasting licences generally may not be transferred without regulatory approval. The licences include conditions requiring us to comply with Canadian ownership restrictions of the applicable legislation. We are currently in compliance with all of these Canadian ownership and control requirements. However, if these requirements were violated, we would be subject to various penalties, possibly including, in the extreme case, the loss of a licence. SPECTRUM Radio spectrum is one of the fundamental assets required to carry on our Wireless business. Our ability to continue to offer and improve current services and to offer new services depends on, among other factors, continued access to, and deployment of, adequate spectrum, including both the ability to renew current spectrum licences and acquire new spectrum licences. If we cannot acquire and retain needed spectrum, we may not be able to continue to offer and improve our current services and including providing deploy new services on a timely basis, competitive data speeds that customers want. As a result, our ability to attract and retain customers could be adversely affected. In addition, an inability to acquire and retain needed spectrum could affect network quality and result in higher additions to property, plant and equipment. Changes to government spectrum fees could significantly increase our payments and therefore materially reduce our net income. HIGHER HANDSET SUBSIDIES Our wireless business model is based substantially on subsidizing the cost of subscriber handsets, similar to other Canadian wireless carriers. This model attracts customers and in exchange, they commit to a term contract with us. We also commit to a minimum subsidy per unit with the supplier of certain smartphone devices. If we are unable to recover the costs of the subsidies over the term of the customer contract, this could have an adverse effect on our business, results of operations and financial condition. THE WIRELESS CODE The CRTC’s decision to implement its Wireless Code, among other things, effectively required Canadian wireless carriers to move away from offering three-year service contracts and instead offer two-year contracts, and this affects our customer acquisition and retention costs and subscriber churn. The code was applied to all contracts (excluding enterprise plans) entered into or renewed after December 2, 2013 and applied to contracts (excluding enterprise plans) as of June 3, 2015, no matter when they were originally entered into. See “Regulation in Our for more information. Industry” laws, Our Wireless business could be adversely affected if regulation, or customer behaviour make it difficult for us to impose term commitments or early cancellation fees on customers or receive the service revenue we anticipate from the term commitments. NATIONAL WIRELESS TOWER POLICY The policy affects all parties that plan to install or modify an antenna system, including personal communications service (PCS), cellular, and broadcasting service providers. The policy requires, among other things, that antenna proponents consider using existing antenna structures before proposing new structures and those owners of existing systems respond to requests to share antenna systems. Antenna proponents must follow a defined process for requirements and notifying the public and addressing local concerns. Certain types of antenna installations are excluded from the consultation requirements with local authorities and the public. 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 77 MANAGEMENT’S DISCUSSION AND ANALYSIS The policy could prevent us from installing certain new antenna systems and/or expanding our network, which would ultimately affect our ability to serve our customers. RADIO FREQUENCY EMISSIONS From time to time, the media and other reports have highlighted alleged links between radio frequency emissions from wireless handsets and various health concerns, including cancer, and interference with various medical devices, including hearing aids and pacemakers. This may discourage the use of wireless handsets or expose us to potential litigation even though there are no definitive reports or studies stating that these health issues are directly attributable to radio frequency emissions. Future regulatory actions may result in more restrictive standards on radio frequency emissions from low-powered devices like wireless handsets. We cannot predict the nature or extent of any restrictions. OBTAINING ACCESS TO SUPPORT STRUCTURES AND MUNICIPAL RIGHTS OF WAY We must have access to support structures and municipal rights of way for our cable facilities. We can apply to the CRTC to obtain a right of access under (Canada) (Telecommunications Act) in areas where we cannot secure access to municipal rights of way. Failure to obtain access could increase Cable costs and adversely affect our business. the Telecommunications Act The Supreme Court of Canada ruled in 2003, however, that the CRTC does not have the jurisdiction to establish the terms and conditions of accessing the poles of hydroelectric companies. As a result, we normally obtain access under terms established by the provincial utility boards. DEPENDENCE ON FACILITIES AND SERVICES OF ILECS Certain business telephony operations outside of our cable territory depend significantly on the availability of facilities and services acquired from incumbent telecommunication operators, according to CRTC rules. Changes to these rules could significantly affect the cost of operating these businesses. COPYRIGHT TARIFFS Pressures on copyright tariffs continue to affect our services. Any increase in fees could negatively affect our results of operations. CRTC LICENCE RENEWALS In November 2016, the CRTC held hearings to consider the renewal of many of our CRTC licences that permit us to operate many of our Media television properties. These licences expire on August 31, 2017. The CRTC has not yet issued its decision to renew these licences. If any of these licences are not renewed, or are renewed on terms that are adverse to our business plans, it could have a significant negative impact on our results of operations. See “Regulation in Our Industry” for more information. BUSINESS RISKS can offer these services. It is possible, however, that there may not be sufficient consumer demand, or that we may not anticipate or satisfy demand for certain products and services or be able to offer or market these new products and services successfully to subscribers. If we do not attract subscribers to new products and services profitably or keep pace with changing consumer preferences, we could experience slower revenue growth and increased churn. This could have a materially adverse effect on our business, results of operations, and financial condition. COMPLEXITY OF OUR BUSINESS Our businesses, technologies, processes, and systems are operationally complex and increasingly interconnected. If we do not execute properly, or if manmade or natural disasters affect them, customers may have a negative experience, resulting in increased churn and lower revenue. STRATEGY AND BUSINESS PLANS Our strategy is vital to our long-term success. Changing strategic priorities or adding new strategic priorities could compromise existing initiatives and could have a materially adverse effect on our business, results of operations, and financial condition. We develop business plans, execute projects, and launch new ventures to grow our business. If the expected benefits from these do not materialize, this could have a materially adverse effect on our business, results of operations, and financial condition. RELIANCE ON THIRD-PARTY SERVICE PROVIDERS We have outsourcing and managed service arrangements with third parties to provide certain essential components of our business operations to our employees and customers, including payroll, certain facilities or property management functions, call centre support, certain installation and service technicians, certain network and IT functions, and invoice printing. Interruptions in these services could adversely affect our ability to service our customers. and businesses complementary ACQUISITIONS, DIVESTITURES, OR INVESTMENTS Acquiring technologies, developing strategic alliances, and divesting portions of our business are often required to optimally execute our business strategy. Some areas of our operations (and adjacent businesses) are subject to rapidly evolving technologies and consumer usage and demand trends. It is possible that we may not effectively forecast the value of consumer demand or risk of competing technologies resulting in higher valuations for acquisitions or missed opportunities. Services, technologies, key personnel, or businesses of companies we acquire may not be effectively integrated into our business or service offerings, or our alliances may not be successful. We also may not be able to successfully complete certain divestitures on satisfactory terms, if at all. REVENUE EXPECTATIONS FROM NEW AND ADVANCED SERVICES We expect that a substantial portion of our future revenue growth may come from new and advanced services, and we continue to invest significant capital resources to develop our networks so we ORGANIZATIONAL STRUCTURE AND TALENT The industry is competitive in attracting and retaining a skilled workforce. Losing certain employees or changes in morale due to a restructuring or other event could affect our revenue and profitability in certain circumstances. 78 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT M A N A G E M E N T ’ S D I I S C U S S O N A N D A N A L Y S I S DEPENDENCE ON CERTAIN KEY INFRASTRUCTURE AND HANDSET VENDORS Our wireless business has relationships with a relatively small number of essential network infrastructure and handset vendors. We do not have operational or financial control over them and only have limited influence on how they conduct their business with us. Handset vendor market share has recently shifted towards fewer top suppliers which will augment this dependency. If one of our network infrastructure suppliers fails, it could delay adding network capacity or new capabilities and services. Handsets and network infrastructure suppliers can extend delivery times, raise prices, and limit supply due to their own shortages and business requirements, among other things. these suppliers do not develop handsets that satisfy customer demands, or deliver products and services on a timely basis, it could have a material adverse effect on our business, financial condition, and results of operations. Any interruption in the supply of equipment for our networks could also affect the quality of our service or impede network development and expansion. If Apple has introduced soft Subscriber Identification Module (SIM) technology to its latest iPads launched in the US, allowing customers of certain carriers to switch between carriers without the use of a carrier-provided SIM card. If Apple or other major handset vendors introduce soft SIM to their mobile products in Canada, this could have an adverse effect on our business, churn, and results of operations as many customers without subsidized devices are under no contractual obligation to remain with Rogers. We expect that soft SIM will be coming to the Canadian market in the next few years. INCREASE IN BRING YOUR OWN DEVICE (BYOD) CUSTOMERS With the CRTC’s Wireless Code limiting wireless term contracts to two years from three years, the number of BYOD customers with no-term contracts has increased. These customers are under no contractual obligation to remain with Rogers, which could have a material adverse effect on our churn. INVENTORY OBSOLESCENCE Our inventory balance mainly consists of wireless handset devices, which generally have relatively short product lifecycles due to frequent wireless handset introductions. If we cannot effectively manage inventory levels based on product demand, this may increase the risk of inventory obsolescence. INCREASING PROGRAMMING COSTS Acquiring programming is the single most significant purchasing commitment in our Cable television business and is a material cost for Media television properties. Increased competition for programming rights to content and popular properties from both traditional linear television broadcasters and digital competitors continue to increase the cost of programming rights. Higher programming costs could adversely affect the operating results of our business if we are unable to recover programming investments through subscription fee increases that reflect the market. the and unbundling environment. operating package CHANNEL UNBUNDLING Recent CRTC regulatory decisions have been unfavourable to certain of our Media television properties and have resulted in a CRTC-mandated challenging programming required flexible channel packaging by BDUs could implementation of negatively affect the tier status, subscription levels, and results of certain of Media’s channels, including TSC, Sportsnet, Sportsnet 360, Sportsnet ONE, Sportsnet World, and our specialty channels, including Outdoor Life Network, FX (Canada), FXX (Canada), G4 Canada, and VICELAND. Certain channels are currently included in favourable channel packaging with many BDUs. This could adversely affect our results and some industry specialty networks may not survive in such an environment. See “Television Services Distribution” for more information. DECLINE OF PAY TELEVISION SUBSCRIBERS IN CANADA The number of pay television households in Canada continues to decline. Other video offerings available to consumers (for example, direct-to-consumer subscription and free services), as well as piracy, have contributed to this trend. If this decline continues, it could have a material adverse effect on our results of operations. MIGRATING FROM CONVENTIONAL TO DIGITAL MEDIA Our Media business operates in many industries that can be affected by customers migrating from conventional to digital media, which is driving shifts in the quality and accessibility of data and mobile alternatives to conventional media. We have been shifting our focus towards the digital market to limit this risk. Increasing competition for advertising revenue from digital platforms, such as search engines, social networks, and digital content alternatives, has resulted in advertising dollars migrating from conventional television broadcasters to digital platforms. The impact is greater on conventional over-the-air broadcast networks, such as City and OMNI, that do not have a second revenue stream from subscription revenue. Our Media results could be adversely affected if we are unsuccessful in shifting advertising dollars from conventional to digital platforms. OUR MARKET POSITION IN RADIO, TELEVISION, OR MAGAZINE READERSHIP Advertising dollars typically migrate to media properties that are leaders in their respective markets and categories, particularly when advertising budgets are tight. Our radio, television, and magazine properties may not continue performing how they currently perform. Advertisers base a substantial part of their purchasing decisions on ratings and readership data generated by industry associations and agencies. If our radio and television ratings or magazine readership levels decrease substantially, our advertising sales volumes and the rates that we charge advertisers could be adversely affected. 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 79 MANAGEMENT’S DISCUSSION AND ANALYSIS FINANCIAL RISKS LITIGATION RISKS CAPITAL COMMITMENTS, LIQUIDITY, DEBT, AND INTEREST PAYMENTS Our capital commitments and financing obligations could have important consequences including: • requiring us to dedicate a substantial portion of cash provided by operating activities to pay interest, principal, and dividends, which reduces funds available for other business purposes including other financial operations; • making us more vulnerable to adverse economic and industry conditions; • limiting our flexibility in planning for, and/or reacting to, changes in our business and/or industry; • putting us at a competitive disadvantage compared to competitors who may have more financial resources and/or less financial leverage; or • restricting our ability to obtain additional financing to fund working capital and additions to property, plant and equipment and for other general corporate purposes. Our ability to satisfy our financial obligations depends on our future operating performance and economic, financial, competitive, and other factors, many of which are beyond our control. Our business may not generate sufficient cash flow in the future and financings may not be available to provide sufficient net proceeds to meet these obligations or to successfully execute our business strategy. CREDIT RATINGS Credit ratings provide an independent measure of credit quality of an issuer of securities and can affect our ability to obtain short- and long-term financing and the terms of the financing. If rating agencies lower the credit ratings on our debt, particularly a downgrade below investment-grade, it could adversely affect our cost of financing and access to liquidity and capital. INCOME TAXES AND OTHER TAXES We collect, pay, and accrue significant amounts of income and other taxes such as federal and provincial sales, employment, and property taxes. We have recorded significant amounts of deferred income tax liabilities and current income tax expense, and calculated these amounts based on substantively enacted income tax rates in effect at the relevant time. A legislative change in these rates could have a material effect on the amounts recorded and payable in the future. We provide for income and indirect taxes based on all currently available information and believe that we have adequately provided for these items. The calculation of applicable taxes in many cases, however, requires significant judgment in interpreting tax rules and regulations. Our tax filings are subject to audits, which could materially change the amount of current and deferred income tax assets, liabilities, and provisions, and could, in certain circumstances, result in the assessment of interest and penalties. While we believe we have paid and provided for adequate amounts of tax, our business is complex and significant judgment is required in interpreting how tax legislation and regulations apply to us. 80 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT SYSTEM ACCESS FEE – SASKATCHEWAN In 2004, a class action was commenced against providers of wireless communications in Canada under the Class Actions Act (Saskatchewan). The class action relates to the system access fee wireless carriers charge to some of their customers. The plaintiffs are seeking unspecified damages and punitive damages, which would effectively be a reimbursement of all system access fees collected. In 2007, the Saskatchewan Court granted the plaintiffs’ application to have the proceeding certified as a national, “opt-in” class action where affected customers outside Saskatchewan must take specific steps to participate in the proceeding. In 2008, our motion to stay the proceeding based on the arbitration clause in our wireless service agreements was granted. The Saskatchewan Court directed that its order, in respect of the certification of the action, would exclude customers who are bound by an arbitration clause from the class of plaintiffs. In 2009, counsel for the plaintiffs began a second proceeding under the Class Actions Act (Saskatchewan) asserting the same claims as the original proceeding. If successful, this second class action would be an “opt-out” class proceeding. This second proceeding was ordered conditionally stayed in 2009 on the basis that it was an abuse of process. In 2013, the plaintiffs applied for an order to be allowed to proceed with the second system access fee class action. However, the court denied this application and the second action remains conditionally stayed. At the time the Saskatchewan class action was commenced in 2004, corresponding claims were filed in multiple jurisdictions across Canada, although the plaintiffs took no active steps. The appeal courts in several provinces dismissed the corresponding claims as an abuse of process. The claims in all provinces other than Saskatchewan have now been dismissed or discontinued. We have not recognized a liability for this contingency. 911 FEE In June 2008, a class action was launched in Saskatchewan against providers of wireless communications services in Canada. It involves allegations of breach of contract, misrepresentation, and false advertising, among other things, in relation to the 911 fee that had been charged by us and the other wireless telecommunication providers in Canada. The plaintiffs are seeking unspecified damages and restitution. The plaintiffs intend to seek an order certifying the proceeding as a national class action in Saskatchewan. We have not recognized a liability for this contingency. of wireless communications CELLULAR DEVICES In July 2013, a class action was launched in British Columbia against providers and manufacturers of wireless devices. The class action relates to the alleged adverse health effects incurred by long-term users of cellular devices. The plaintiffs are seeking unspecified damages and punitive damages, effectively equal to the reimbursement of the portion of revenue the defendants have received that can reasonably be attributed to the sale of cellular phones in Canada. We have not recognized a liability for this contingency. in Canada M A N A G E M E N T ’ S D I I S C U S S O N A N D A N A L Y S I S OTHER CLAIMS There are certain other claims and potential claims against us. We do not expect any of these to have a material adverse effect on our financial results. MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management adequate internal controls over financial reporting. is responsible for establishing and maintaining is subject OUTCOME OF PROCEEDINGS the proceedings and claims against us, The outcome of all to future including the matters described above, resolution that includes the uncertainties of litigation. It is not possible for us to predict the result or magnitude of the claims due to the various factors and uncertainties involved in the legal process. Based on information currently known to us, we believe it is not probable that these proceedings and claims, individually or in total, will have a material financial adverse effect on our business, condition. If it becomes probable that we will be held liable for claims against us, we will recognize a provision during the period in which the change in probability occurs, which could be material to Income or Consolidated our Consolidated Statements of Statements of Financial Position. the ultimate resolution of any of results, or financial OWNERSHIP RISK CONTROLLING SHAREHOLDER Rogers is a family-founded, family-controlled company. Voting control of Rogers Communications is held by Rogers Control Trust, whose beneficiaries are a small group of individuals that are members of the Rogers family, several of whom are also directors voting control of Rogers of our Board. The trust holds Communications Inc. and its subsidiaries for the benefit of successive generations of the Rogers family. The trustee is the trust company subsidiary of a Canadian chartered bank. As at December 31, 2016, private, Rogers family holding companies controlled by the trust owned approximately 91% of our outstanding Class A Voting shares (2015 – 91%) and approximately 10% of our Class B Non-Voting shares (2015 – 10%), or in total approximately 27% of the total shares outstanding (2015 – 28%). Only Class A Voting shares carry the right to vote in most circumstances. As a result, the trust is able to elect all members of our Board and to control the vote on most matters submitted to a shareholder vote. CONTROLS AND PROCEDURES DISCLOSURE CONTROLS AND PROCEDURES We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as at December 31, 2016, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, pursuant to Rule 13a-15 promulgated under the US Securities Exchange Act of 1934, as amended. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at that date. Our internal control system is designed to give management and the Board reasonable assurance that our financial statements are prepared and fairly presented in accordance with IFRS as issued by the IASB. The system is intended to provide reasonable assurance that transactions are authorized, assets are safeguarded, and financial records are reliable. Management also takes steps to assure the flow of information and communication is effective, and monitors performance and our internal control procedures. Management assessed the effectiveness of our internal control over financial reporting as at December 31, 2016, based on the criteria set out in the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and concluded that it was effective at that date. Our independent auditors, KPMG LLP, have issued an audit report on management’s assessment of internal control over financial reporting as at December 31, 2016, and provided an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of that date. This report is included in our 2016 Audited Consolidated Financial Statements filed on SEDAR (sedar.com). All internal control systems, however, no matter how well designed, have inherent limitations, and even systems that have been determined to be effective can only provide reasonable assurance about the preparation and presentation of financial statements. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING AND DISCLOSURE CONTROLS AND PROCEDURES There were no changes in 2016 that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 81 MANAGEMENT’S DISCUSSION AND ANALYSIS Regulation In Our Industry Our business, except Media, is regulated by two groups: • Innovation, Science and Economic Development Canada (ISED Canada) on behalf of the Minister of Innovation, Science and Economic Development; and for the non-broadcasting operations of • the CRTC, under the Telecommunications Act and the Broadcasting Act (Canada) (Broadcasting Act). Regulation relates to the following, among other things: • wireless spectrum and broadcasting licensing; • competition; • the cable television programming services we must, and can, distribute; • wireless and wireline interconnection agreements; • rates we can charge third parties for access to our network; • the resale of our networks; • roaming on our networks and the networks of others; • ownership and operation of our communications systems; and • our ability to acquire an interest in other communications systems. Regulatory changes or decisions can adversely affect our consolidated results of operations. Our costs of providing services may increase from time to time as legislative initiatives to address we comply with industry or consumer protection concerns or Internet-related issues like copyright infringement, unsolicited commercial e-mail, cybercrime, and lawful access. Generally, our spectrum and broadcast licences are granted for a specified term and are subject to conditions for maintaining these licences. Regulators can modify these licensing conditions at any time, and they can decide not to renew a licence when it expires. If we do not comply with the conditions, a licence may be forfeited or revoked, or we may be fined. The licences have conditions that require us, amongst other things, to comply with Canadian ownership restrictions of the applicable legislation. We are currently in compliance with these conditions. If we violate the requirements, we would be subject to various penalties and it could include losing a licence in extreme cases. Cable, wireless, and broadcasting licences generally cannot be transferred without regulatory approval. Canadian CANADIAN BROADCASTING AND TELECOMMUNICATIONS OPERATIONS Our telecommunications operations – including our cable television systems, radio and television stations, and specialty services – are licensed (or operated under an exemption order) and regulated by the CRTC under the Broadcasting Act. broadcasting and The CRTC is responsible for regulating and supervising all aspects of the Canadian broadcasting and telecommunications system. It is also responsible under the regulation of telecommunications carriers, including: • Wireless’ mobile voice and data operations; and • Cable’s Internet and telephone services. the Telecommunications Act for Our cable and telecommunications retail services are not subject to price regulation, other than our affordable entry-level basic cable 82 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT television service ordered by the CRTC and introduced in 2016, as the CRTC believes there is enough competition for these services provided by other carriers to protect the interests of users and has forborne from regulating them. Regulations can and do, however, affect the terms and conditions under which we offer these services. SPECTRUM LICENCES ISED Canada sets technical standards for telecommunications (Canada) under Radiocommunication It (Radiocommunication Act) and the Telecommunications Act. licences and oversees: • the technical aspects of the operation of radio and television Act the stations; • the frequency-related operations of cable television networks; and • awarding and supervising spectrum for wireless communications systems in Canada. ROYALTIES The Copyright Board of Canada (Copyright Board) oversees the administration of copyright royalties in Canada and establishes the royalties to be paid for the use of certain copyrighted works. It sets that Canadian broadcasting the copyright television, and specialty undertakings, services, pay to copyright collectives. royalties including cable, radio, tariff BILLING AND CONTRACTS Manitoba, Newfoundland and Labrador, Ontario, and Quebec have enacted consumer protection legislation for wireless, wireline, and Internet service contracts. This legislation addresses the content of such contracts, the early cancellation fees that can be charged to customers, the use of security deposits, the cancellation and renewal rights of customers, the sale of prepaid cards, and the disclosure of related costs. Rogers is also currently subject to the CRTC Wireless Code and will come under the forthcoming CRTC Television Service Provider Code of Conduct that will become effective on September 1, 2017. See “CRTC Wireless Code” for more information. the determination of FOREIGN OWNERSHIP AND CONTROL Non-Canadians can own and control, directly or indirectly: • up to 33.3% of the voting shares and the related votes of a holding company that has a subsidiary operating company licenced under the Broadcasting Act, and • up to 20% of the voting shares and the related votes of the operating licensee company may be owned and controlled directly or indirectly by non-Canadians. Combined, these limits can enable effective foreign control of up to 46.7%. The chief executive officer and 80% of the members of the Board of Directors of the operating licensee must be resident Canadians. There are no restrictions on the number of non-voting shares that may be held by non-Canadians at either the holding company or the licensee company level. Neither the Canadian carrier nor its parent may be otherwise controlled in fact by non-Canadians. Subject to appeal to the federal Cabinet, the CRTC has the jurisdiction to determine as a question of fact whether a given licensee is controlled by non-Canadians. the same to the Telecommunications Act and associated Pursuant regulations, to Canadian also telecommunications carriers such as Wireless, except that there is no requirement that the chief executive officer be a resident Canadian. We believe we are in compliance with the foregoing foreign ownership and control requirements. apply rules less On June 29, 2012, Bill C-38 amending the Telecommunications Act passed into law. The amendments exempt telecommunications companies with total Canadian telecommunications market measured by revenue from foreign investment restrictions. Companies that are successful in growing their market total Canadian telecommunications market revenue other than by way of merger or acquisitions will continue to be exempt from the restrictions. in excess of 10% of 10% of shares than CRTC REVIEW OF BASIC TELECOMMUNICATIONS SERVICES On April 9, 2015, the CRTC issued Telecom Notice of Consultation 2015-134. Through an extensive proceeding culminating with a three-week public hearing in April 2016, the CRTC examined which telecommunications services Canadians require to participate meaningfully in the digital economy and the CRTC’s role in ensuring the availability of affordable basic telecommunications services to all Canadians. The CRTC released its decisions in the proceeding on December 21, 2016 in Telecom Regulatory Policy CRTC 2016-496. The CRTC set as its universal service objective that Canadians, in urban areas as well as in rural and remote areas, have access to voice services and broadband Internet access services, on both fixed and mobile wireless networks. To measure the successful achievement of this objective, the CRTC has established several criteria, including: • 90% of Canadian residential and business fixed broadband Internet access service subscribers should be able to access speeds of at least 50 Mbps download and 10 Mbps upload, and to subscribe to a service offering with an unlimited data allowance by 2021, with the remaining 10% of the population receiving such service by 2031; and • the latest generally deployed mobile wireless technology should be available not only in Canadian homes and businesses, but on as many major transportation roads as possible in Canada. To help attain the universal service objective, the CRTC will begin to shift the focus of its regulatory frameworks from wireline voice services to broadband Internet access services. As such, the following services which form part of the universal service objective are hereby basic telecommunications services within the meaning of subsection 46.5(1) of the Telecommunications Act: • fixed and mobile wireless broadband Internet access services; and • fixed and mobile wireless voice services. local voice serving areas Designated high cost received approximately $100 million in subsidies in 2016 collected by a 0.53% levy on wireline and wireless voice services revenue. In its decision, the CRTC determined that the current local voice subsidy will be phased out except where reliable broadband Internet access service is unavailable and a follow-up proceeding will occur in 2017 to establish the specifics of the phase-out of the subsidy. M A N A G E M E N T ’ S D I I S C U S S O N A N D A N A L Y S I S guiding principles, fund design, and assessment criteria to be set in a follow-up proceeding to take place in 2017. Implementation will occur thereafter with a maximum funding level of $100 million in the first year of implementation, increasing by $25 million annually over the following four years to reach an annual cap of $200 million, with the incremental increases in years four and five contingent on a review of the fund in the third year to ensure it is being managed efficiently and is achieving its intended purpose. Funds will be generated by extending a percent of revenue levy on wireline and wireless Internet and texting revenue. The CRTC noted that the revenue percent charge at the $200 million annual cap in year five would be approximately the same as the current revenue percent charge. The CRTC also established regulatory measures to address: • issues related to wireless services accessibility for persons with disabilities; and • online tools for consumers to easily manage their data usage. CANADIAN ANTI-SPAM LEGISLATION Canada’s anti-spam legislation was passed into law on December 15, 2010 and came into force on July 1, 2014, with the exception of those sections of the Act related to the unsolicited installation of computer programs or software, which came into force on January 15, 2015. A private right of action comes into place under the legislation effective July 1, 2017. We believe we are in compliance with this legislation. BILL C-43 On October 23, 2014, Bill C-43 was introduced by the federal government. Amongst other items, it makes amendments to the Broadcasting Act and the Telecommunications Act to prohibit charging subscribers for paper bills. Bill C-43 also provides the CRTC with the authority to assess Administrative Monetary Penalties for any contraventions of the Telecommunications Act, regulations, or CRTC decisions. The Bill was passed into law on December 16, 2014 and these amendments became effective immediately. We believe we are in compliance with this legislation. WIRELESS 600 MHZ SPECTRUM LICENCE BAND On August 14, 2015, ISED Canada released a decision regarding the reallocation of spectrum licences in the 600 MHz band for mobile services. Canada will reallocate the same amount of spectrum licences as the US, following the US 600 MHz incentive auction that began in 2016 and continues in progress. TV channels currently using the 600 MHz band spectrum that will be auctioned for mobile services will be given a new channel in the new allotment plan and will be provided with a minimum of 18 months to complete the transition. Certain Rogers over-the-air TV channels will need to be transitioned. No decision has been made regarding transition funding of affected TV channels or whether ISED Canada will use an incentive auction format. Additional consultations are expected before the Canadian auction of this spectrum, which is expected to occur in the next two to three years. To assist in extending broadband into under-served rural and the CRTC will establish a new broadband remote locations, the fund including funding mechanism with the specifics of 3.5 GHZ BAND POLICY CHANGES In December 2014, ISED Canada released its policy changes to the 3.5 GHz spectrum band. Rogers has a 50% interest in the Inukshuk 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 83 MANAGEMENT’S DISCUSSION AND ANALYSIS Wireless Partnership which holds (on average) between 100-175 MHz of 3.5 GHz spectrum in most major urban markets in Canada. The 3.5 GHz band will be reallocated for mobile services (it is currently only licensed for fixed wireless access in Canada). The establishment of a new band plan and licensing framework for mobile services will be the subject of a future consultation. The band will eventually be relicensed on a flexible-use basis whereby licensees will be permitted to determine the extent to which they will implement fixed and/or mobile services in the band in a given geographic area. Until the future consultation is completed and the related decisions are released, all existing licences that will be renewed will be limited to the provision of fixed services. Licences will be renewed where licensees have satisfied all of their conditions of licence and renewed licences will have a one-year term. On completion of the consultation process and release of related decisions, renewed licensees will have a high expectation of receiving new licences for 10 or 20 years (depending on consultation outcome). Spectrum associated with existing licences that are not renewed by ISED Canada will be made available on a first-come, first-served basis using an application process. LEGISLATION REGARDING WHOLESALE DOMESTIC WIRELESS ROAMING RATES On June 19, 2014, the federal government enacted legislation to cap wholesale domestic wireless roaming rates carriers can charge to one another at amounts no higher than the average rates carriers charge their own retail customers. The legislation also provided the CRTC with the power to set domestic roaming rates between carriers, regardless of the formula. The CRTC conducted a review into wireless roaming rates and the state of wireless wholesale competition with a public hearing, which concluded in early October 2014. On May 5, 2015, the CRTC released its decision on the regulatory framework for wholesale mobile wireless services (Telecom Regulatory Policy 2015-177). The CRTC determined it is necessary to regulate the rates that Rogers Communications and two of its competitors (Bell Mobility and Telus Communications) charge other Canadian wireless carriers for domestic GSM-based wholesale roaming. The CRTC directed Rogers, Bell, and Telus to each file proposed cost-based tariffs for wholesale roaming on November 4, 2015. Pending its final determination on the the CRTC approved, on an interim basis, a proposed tariffs, maximum rate for each of GSM-based voice, text, and data wholesale roaming provided by Bell, Rogers, and Telus across their respective networks to other Canadian wireless carriers. This rate is equal to the highest rate charged by each of Rogers, Bell, and Telus to any other Canadian wireless carrier for each of GSM-based voice, text, and data wholesale roaming as of the date of the decision. These rates were replaced when the CRTC gave interim approval to the proposed cost-based tariffs filed by the carriers on December 3, 2015 and made these interim rates effective November 23, 2015. The CRTC process to establish final rates remains underway. The CRTC further determined that it is not appropriate to mandate wholesale MVNO access. the CRTC determined that Finally, the regulatory measures established in the decision would remain in place for a minimum of 84 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT five years, during which time the CRTC will monitor competitive conditions in the mobile wireless market. reviews spectrum licence transfers, TRANSFERS, DIVISIONS, AND SUBORDINATE LICENSING OF SPECTRUM LICENCES ISED Canada released Framework Relating to In June 2013, Transfers, Divisions and Subordinate Licensing of Spectrum Licences for Commercial Mobile Spectrum. The Framework lays out the criteria ISED Canada will consider and the processes it will including use when it prospective transfers that could arise from purchase or sale options and other agreements. Key items to note are that: • ISED Canada will review all spectrum transfer requests, and will not allow any that result in “undue spectrum concentration” and reduced competition. Decisions will be made on a case-by-case basis and will be issued publicly to increase transparency; and • licensees must ask for a review within 15 days of entering into any agreement that could lead to a prospective transfer. ISED Canada will review the agreement as though the licence transfer that could arise from it has been made. This timing did not apply to agreements such as Rogers’ AWS agreements with Shaw and Quebecor made before the Framework was released. CRTC WIRELESS CODE In June 2013, the CRTC issued its Wireless Code. The Wireless Code imposes several obligations on wireless carriers, including maximum contract term length, roaming bill caps, device unlocking requirements, and contract summaries. It also lays out the rules for device subsidies and early cancellation fees. Under the code, if a customer cancels a contract early, carriers can only charge the outstanding balance of the device subsidy they received, which decreases by an equal amount every month over no more than 24 months. This effectively makes the maximum contract length two years. The CRTC committed to a review of the Wireless Code’s effectiveness within three years of its implementation. In Telecom Notice of Consultation CRTC 2016-293, released on July 28, 2016, the CRTC called for comments on the effectiveness of the Wireless Code and how the Wireless Code should be updated to reflect the evolution of the wireless market since the Wireless Code’s implementation. An oral hearing began on February 6, 2017. TOWER SHARING POLICY In March 2013, ISED Canada released Revised Frameworks for Mandatory Roaming and Antenna Tower and Site Sharing, concluding a consultation initiated in 2012. It sets out the current rules for tower and site sharing, among other things. The key terms of the tower and site sharing rules are: • all holders of and broadcasting certificates must share towers and antenna sites, where technically feasible, at commercial rates; and spectrum licences, radio licences, • the timeframe for negotiating agreements is 60 days, after which arbitration according to ISED Canada arbitration rules will begin. In Telecom Regulatory Policy 2015-177 released in May 2015, the CRTC determined that it would not mandate or require general wholesale tariffs for tower and site sharing. At the same time, it determined that its existing powers and processes are sufficient to address tower and site sharing disputes related to rates, terms, and M A N A G E M E N T ’ S D I I S C U S S O N A N D A N A L Y S I S conditions. As a result, carriers may use the arbitration process established by ISED Canada, or they may request the CRTC to intervene in the event that tower and site sharing negotiations fail. CABLE DIFFERENTIAL PRICING RELATED TO INTERNET DATA PLANS On May 18, 2016, the CRTC initiated a proceeding (Telecom Notice of Consultation CRTC 2016-192) to examine the policy issues surrounding the use of differential pricing practices by Canadian ISPs related to the provision of Internet data plans. This proceeding stems from an application made by several parties concerning the pricing practices used by Videotron when offering its Unlimited Music service to its mobile wireless customers. The CRTC intends to establish a clear and transparent regulatory policy regarding differential pricing practices for Internet data plans. The oral hearing commenced the week of October 31, 2016 and concluded on November 4, 2016. A decision is expected in the first quarter of 2017. (Telecom Decision CRTC 2016-117). WHOLESALE INTERNET COSTING AND PRICING On March 31, 2016, the CRTC released its decision on the review of costing inputs and the application process for existing wholesale high-speed access services that provide for a single provincial point of interconnection, but which are not available over FTTH access facilities The CRTC determined that wholesale telecom rates paid by competitive telecom providers were no longer appropriate, and required all wholesale high-speed access service providers to file new cost studies with proposed rates for final approval. The CRTC further determined that all wholesale Internet rates that were currently approved were to be made interim as of the date of the decision. The CRTC will assess the extent to which, if at all, retroactivity will apply when new cost studies are submitted in support of revised wholesale high-speed access service rates. On June 30, 2016, we filed our new cost studies with the CRTC, which detail our proposed rates. On October 6, 2016, the CRTC issued Telecom Order 2016-396, significantly reducing existing interim rates for the capacity charge tariff component of wholesale high-speed access service pending approval of final rates. The interim rate reductions took effect immediately. The CRTC will assess the extent to which, if at all, retroactivity will apply when wholesale high-speed access service rates are set on a final basis. The process established by the CRTC to set final rates requires final written submissions by May 31, 2017, after which the CRTC will make a determination. On July 22, 2015, the CRTC released its decision on the regulatory framework for wholesale wireline services (Telecom Regulatory Policy 2015-326). The CRTC determined that wholesale high-speed access services, which are used to support retail competition for services, such as local phone, television, and Internet access, would continue to be mandated. The provision of provincially aggregated services, however, would no longer be mandated and would be phased out in conjunction with the implementation of a disaggregated service with connections at telephone company central offices and cable company head-ends. The requirement to implement disaggregated wholesale high-speed access services will include making them available over FTTH access facilities. Regulated rates will continue to be based on long-run increment cost studies. On September 20, 2016, the CRTC released a follow-up decision (Telecom Decision CRTC 2016-379) to Telecom Regulatory Policy 2015-326, addressing the technical implementation of new, disaggregated, high-speed access TPIA, a service that will provide access to FTTH facilities as ordered in the CRTC’s July 22, 2015 ruling. The decision is consistent with the positions submitted by Rogers in our filings. Proposed tariffs and supporting cost studies for the new service were filed on January 9, 2017. CRTC REVIEW OF LOCAL AND COMMUNITY PROGRAMMING On September 14, 2015, the CRTC announced a proceeding to review the policy framework for local and community programming (Broadcasting Notice of Consultation 2015-421). Comments were due October 29, 2015 and an oral hearing concluded on February 3, 2016. On June 15, 2016, the CRTC released its decision regarding local and community television policy (Broadcasting Regulatory Policy CRTC 2016-224). The CRTC created a new model for BDU contributions to Canadian programming set to take effect on September 1, 2017. Annual contributions will remain at 5% of annual gross broadcasting revenues; however, of that amount, in all licensed cable systems, up to 1.5% (rather than the previous 2%) can be used to fund community channel programming. Of this revenue, 0.3% must now go to a newly-created Independent Local News Fund for independently-owned local TV stations, and the remaining funding will continue to go to the Canada Media Fund and independent production funds. This decision will provide the flexibility for BDUs that operate community channels in large markets (Montreal, Toronto, Edmonton, Calgary, and Vancouver) to now direct their community channel revenues from those markets to fund either community channel programming in smaller markets, or to fund local news on TV stations (such as City, in the case of Rogers), should they wish to do so. CRTC REVIEW OF WHOLESALE WIRELINE TELECOMMUNICATIONS SERVICES In October 2013, the CRTC initiated its planned review of the telecommunications essential services rulings it released in March 2008. The review determined which wireline services, and under what terms and conditions, facilities-based telecommunications carriers must make available to other telecommunications service providers, such as resellers. Extensive submissions were filed during 2014 leading to a two-week public hearing that concluded on December 4, 2014. TELEVISION SERVICES DISTRIBUTION On October 24, 2013, the CRTC launched a broad-based public consultation (Let’s Talk TV) on the subject of television. The consultation covered three broad themes, asking what consumers think about: • the television programming available to them; • the reception of television programming from service providers and other sources; and • whether they have enough information to make informed choices and seek solutions if they are not satisfied. 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 85 MANAGEMENT’S DISCUSSION AND ANALYSIS In November 2014, the CRTC released its first decision arising from the Let’s Talk TV hearing ordering the elimination of the 30-day cancellation provision for cable, Internet, and phone services, effective January 23, 2015. On January 29, 2015, the CRTC released decisions requiring local stations to continue over-the-air transmission under the same regulatory regime currently in place and maintaining simultaneous substitution requirements, except the NFL Super Bowl, beginning in 2017. In a related decision released the same day, the CRTC found that it would be an undue preference under the Telecommunications Act for a vertically integrated company that offers a Mobile TV service to exempt this service from standard monthly wireless data caps and usage charges generally applicable to its wireless service. for consisting of Canadian local channels, national mandatory services, community and provincial legislature channels, and the US 4+1 networks. We also offer smaller, reasonably priced packages of specialty and premium channels. On December 1, 2016, we began offering all specialty and premium channels on an “à la carte” basis as well. On May 24, 2016, the CRTC released a notice of consultation (Broadcasting Notice of Consultation CRTC 2016-197) stating that a hearing will be held in consideration of the license renewal including Rogers. The hearing, which applications of BDUs, commenced on September 7, 2016, reviewed the practices of all BDU licensees in regard to the small basic service and flexible packaging requirements described above that came into effect on March 1, 2016. On March 19, 2015, the CRTC released the third of its decisions related to its Let’s Talk TV proceeding. The CRTC ordered distributors to offer customers an option for a small basic service consisting only of Canadian local channels (local radio is optional), national mandatory services, community and provincial legislature channels, and, should they wish, US 4+1 networks beginning March 1, 2016. The retail rate for this entry-level service will be capped at $25 per month (excluding equipment). The CRTC adopted phased-in requirements for selling channels to customers “à la carte” and as part of “pick-packs”. All channels above the basic tier must be offered on an à la carte basis or in smaller, reasonably priced packages by March 1, 2016. By December 1, 2016, they must be offered in both forms. As a BDU, we will be permitted to continue to offer our existing basic service and programming packages. The CRTC will also revise its existing “preponderance” rule so that consumers will have to be offered, but will not have to receive, a majority of Canadian services. The CRTC also proposed several changes to the Wholesale Code (formerly the Vertical Integration (VI) Code) addressing, amongst other matters, penetration-based rate cards and minimum guarantees. All licensed programmers and BDUs will be required to comply with the Wholesale Code, which came into effect on January 22, 2016. The March 19 decision also addressed rules for distribution of foreign services authorized for distribution in Canada, including requirements that foreign services make their channels available “à la carte” and in “pick-packs” or in smaller pre-assembled packages and abide by the Wholesale Code. Access rules for VI-owned services and independent services, channel packaging, and buy-through rules for multicultural services were also addressed. to govern certain aspects of On March 26, 2015, in the final decision related to Let’s Talk TV, the CRTC announced plans to establish a Television Service Provider (TVSP) Code of Conduct the relationship between TVSPs and their customers as well as to allow consumers to complain to the CCTS about their providers. On January 8, 2016, the CRTC issued the final version of the TVSP Code, which will come into effect on September 1, 2017. This decision also introduced new requirements related to the provision of service to persons with disabilities for both BDUs and broadcasters. On March 1, 2016, the first phase of the CRTC’s small basic $25 per month (excluding equipment) television service mandate came into effect. Effective March 1, 2016, we offer a small basic service 86 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT BDU licences renewing Rogers’ On November 21, 2016, the CRTC released Broadcasting Decision CRTC 2016-458, from December 1, 2016 to November 30, 2017. In the decision, the CRTC established what it called a set of best practices for BDUs that serve to promote choice for Canadians and stated that it will monitor all of these practices, including how BDUs promote and offer the small basic service and pick-and-pay and small package options, and will take any necessary remedial action when it examines the renewal of the licenses for BDUs again in 2017 for a full renewal term. MEDIA COPYRIGHT RETRANSMISSION OF DISTANT SIGNALS Pursuant to section 31(2) of the Copyright Act, television service providers are permitted to retransmit programming within distant over-the-air television signals as part of a compulsory licensing the programming are regime. Rates for established through negotiation or set by the Copyright Board. Distributors and content providers were unable to agree on a new rate for the distribution of distant signals after the expiration of the current agreement in 2013. A proceeding was initiated by the Copyright Board, which began on November 23, 2015. The proceeding continued into 2016 with a decision expected in 2017. the distribution of The Collectives (content providers) have proposed a royalty rate that is approximately double the current rate, which, if certified, would have a significant financial impact on Rogers with additional costs of approximately $30 million per year. LICENCE RENEWALS In a proceeding initiated by Broadcasting Notice of Consultation CRTC 2016-225 released June 15, 2016, Rogers sought renewal of our group-based licences (six City over-the-air English stations, Sportsnet 360, VICELAND, G4Tech, Outdoor Life, FX, and FXX), our television licences, and our five over-the-air ethnic OMNI mainstream sports Sportsnet and Sportsnet One licences. We also sought approval of an application seeking a new licence to operate a discretionary service called OMNI Regional, which would operate pursuant to a section 9(1)(h) order granting it mandatory carriage on the basic service with a regulated affiliation fee. An oral hearing was held during the week of November 28, 2016, a final written reply was filed on January 9, 2017, and a decision is expected in the second quarter of 2017. Other Information ACCOUNTING POLICIES CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS liabilities, revenue, and expenses, and our Management makes judgments, estimates, and assumptions that affect how accounting policies are applied, the amounts we report in assets, related disclosure about contingent assets and liabilities. Significant changes in our assumptions, including those related to our future business plans and cash flows, could materially change the amounts we record. Actual results could be different from these estimates. to our business operations and These estimates are critical understanding our results of operations. We may need to use additional judgment because of the sensitivity of the methods and assumptions used in determining the asset, liability, revenue, and expense amounts. ESTIMATES FAIR VALUE We use estimates to determine the fair value of assets acquired and liabilities assumed in an acquisition, using the best available information, including information from financial markets. These estimates include key assumptions such as discount rates, attrition rates, and terminal growth rates for performing discounted cash flow analyses. USEFUL LIVES We depreciate the cost of property, plant and equipment over their estimated useful lives by considering industry trends and company- specific factors, including changing technologies and expectations for the in-service period of certain assets at the time. We reassess our estimates of useful lives annually, or when circumstances change, to ensure they match the anticipated life of the technology from a revenue-producing perspective. If technological change happens more quickly, or in a different way, than anticipated, we might have to reduce the estimated life of property, plant and equipment, which could result in a higher depreciation expense in future periods or an impairment charge to write down the value. We monitor and review our depreciation rates and asset useful lives at least once a year and change them if they are different from our previous estimates. We recognize the effect of changes in estimates in net income prospectively. CAPITALIZING DIRECT LABOUR, OVERHEAD, AND INTEREST Certain direct labour, overhead, and interest costs associated with the acquisition, construction, development, or improvement of our networks are capitalized to property, plant and equipment. The M A N A G E M E N T ’ S D I I S C U S S O N A N D A N A L Y S I S capitalized amounts are calculated based on estimated costs of projects that are capital in nature, and are generally based on a per-hour rate. interest costs are capitalized during development and construction of certain property, plant and equipment. Capitalized amounts increase the cost of the asset and result in a higher depreciation expense in future periods. In addition, IMPAIRMENT OF ASSETS Indefinite-life intangible assets (including goodwill and spectrum and/or broadcast licences) are assessed for impairment on an annual basis, or more often if events or circumstances warrant, and finite-life assets (including property, plant and equipment and other intangible assets) are assessed for impairment if events or circumstances warrant. The recoverable amount of a cash generating unit (CGU) involves significant estimates such as future cash flows, If key estimates differ unfavourably in the future, we could experience impairment charges that could decrease net income. terminal growth rates, and discount rates. FINANCIAL INSTRUMENTS The fair values of our derivatives are recorded using an estimated credit-adjusted mark-to-market valuation. If the derivatives are in an asset position (i.e. the counterparty owes Rogers), the credit spread for the bank counterparty is added to the risk-free discount rate to determine the estimated credit-adjusted value. If the derivatives are in a liability position (i.e. Rogers owes the counterparty), our credit spread is added to the risk-free discount rate. The estimated credit- adjusted value of derivatives requires assessment of the credit risk of the parties to the instruments and the instruments’ discount rates. For all derivative instruments where hedge accounting is applied, we are required to ensure that the hedging relationships meet hedge effectiveness criteria both retrospectively and prospectively. Hedge effectiveness testing requires the use of both judgments and estimates. PENSION BENEFITS When we account for defined benefit pension plans, assumptions are made in determining the valuation of benefit obligations. Assumptions and estimates include the discount rate, the rate of future compensation increase, and the mortality rate. Changes to these primary assumptions and estimates would affect the pension expense, pension asset and liability, and other comprehensive income. Changes in economic conditions, including financial markets and interest rates, may also have an impact on our pension plan as there is no assurance that the plan will be able to earn the assumed rate of return. Market-driven changes may also result in changes in the discount rates and other variables that could require us to make contributions in the future that differ significantly from the current contributions and assumptions incorporated into the actuarial valuation process. 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 87 MANAGEMENT’S DISCUSSION AND ANALYSIS The table below shows what the impact of an increase or decrease in the primary assumptions and estimates on our accrued benefit obligation and pension expense for 2016 would be: We amortize the cost of intangible assets with finite lives over their estimated useful lives. We review their useful lives, residual values, and the amortization methods at least once a year. (In millions of dollars) Discount rate Impact of 0.5% increase Impact of 0.5% decrease Rate of future compensation increase Impact of 0.25% increase Impact of 0.25% decrease Mortality rate Impact of 1 year increase Impact of 1 year decrease Increase (decrease) in accrued benefit obligation Increase (decrease) in pension expense (174) 199 18 (18) 48 (49) (21) 23 4 (4) 5 (5) STOCK-BASED COMPENSATION Stock Option Plans Our employee stock option plans attach cash-settled share appreciation rights (SARs) to all new and previously granted options. The SAR feature allows the option holder to elect to receive a cash payment equal to the intrinsic value of the option, instead of exercising the option and acquiring Class B Non-Voting shares. We measure stock-based compensation to employees at fair value. We determine the fair value of options using our Class B Non-Voting share price and option pricing models, and record all outstanding stock options as liabilities. The liability is marked to market each period and is amortized to expense using a graded vesting approach over the period during which employee services are rendered, or over the period to the date an employee is eligible to retire, whichever is shorter. The expense in each period is affected by the change in the price of our Class B Non-Voting shares during the period. Restricted share unit and deferred share unit plans We recognize outstanding RSUs and DSUs as liabilities, measuring the liabilities and compensation costs based on the awards’ fair values, which are based on the market price of the Class B Non-Voting shares, and recognizing them as charges to operating costs over the vesting period of the awards. If an award’s fair value changes after it has been granted and before the exercise date, we recognize the resulting changes in the liability as a charge to operating costs in the year the change occurs. For RSUs, the payment amount is established on the vesting date. For DSUs, the payment amount is established on the exercise date. JUDGMENTS USEFUL LIVES AND DEPRECIATION AND AMORTIZATION METHODS We make significant for depreciating our property, plant and equipment that we believe most accurately represent the consumption of benefits derived from those assets and are most representative of the economic substance of the intended use of the underlying assets. in choosing methods judgments 88 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT We do not amortize intangible assets with indefinite lives (spectrum, broadcast licences, and certain brand names) as there is no foreseeable limit to the period over which these assets are expected to generate net cash inflows for us. We make judgments to determine that these assets have indefinite lives, analyzing all relevant factors, including the expected usage of the asset, the typical life cycle of the asset, and anticipated changes in the market demand for the products and services the asset helps generate. After review of the competitive, legal, regulatory, and other factors, it is our view that these factors do not limit the useful lives of our spectrum and broadcast licences. Judgment is also applied in choosing methods for amortizing our intangible assets and program rights that we believe most accurately represent the consumption of those assets and are most representative of the economic substance of the intended use of the underlying assets. The testing. allocation of goodwill to CGUs or groups of CGUs for IMPAIRMENT OF ASSETS We make judgments in determining CGUs and the allocation of the purpose of goodwill impairment involves considerable management judgment in determining the CGUs (or groups of CGUs) that are expected to benefit from the synergies of a business combination. A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Goodwill and indefinite-life intangible assets are allocated to CGUs (or groups of CGUs) based on the level at which management monitors goodwill, which is not higher than an operating segment. SEGMENTS We make significant judgments in determining our operating segments. These are components that engage in business activities from which they may earn revenue and incur expenses, for which operating results are regularly reviewed by our chief operating decision makers to make decisions about resources to be allocated and to assess component performance, and for which discrete financial information is available. HEDGE ACCOUNTING We make significant financial assumptions for effectiveness valuation models. instruments qualify for hedge accounting, judgments in determining whether our including INCOME TAXES AND OTHER TAXES We accrue income and other tax provisions based on information currently available in each of the jurisdictions in which we operate. While we believe we have paid and provided for adequate amounts of tax, our business is complex and significant judgment is required in interpreting how tax legislation and regulations apply to us. Our tax filings are subject to audit by the relevant government revenue authorities and the results of the government audit could materially change the amount of our actual income tax expense, taxes payable or income tax payable or receivable, other M A N A G E M E N T ’ S D I I S C U S S O N A N D A N A L Y S I S receivable, and deferred income tax assets and liabilities and could, in certain circumstances, result in the assessment of interest and penalties. liabilities. Our CONTINGENCIES is involved in the determination of Considerable judgment contingent is based on information judgment currently known to us, and the probability of the ultimate resolution of the contingencies. If it becomes probable that a contingent liability will result in an outflow of economic resources, we will record a provision in the period the change in probability occurs. The amount of the loss involves judgment based on information available at that time. Any provision recognized for a contingent liability could be material to our consolidated financial position and results of operations. TRANSACTIONS WITH RELATED PARTIES We have entered into certain transactions in the normal course of business with related parties in which we have an equity interest. The amounts received from or paid to these parties were as follows: (In millions of dollars) Revenue Purchases Years ended December 31 2016 2015 % Chg 177 215 115 170 54% 26% We have entered into business transactions with companies whose partners or senior officers are Directors of RCI, which include: • the non-executive chairman of a law firm that provides a portion of the Company’s legal services; • the chairman of a company that provides printing services to the Company; and • the chairman and chief executive officer of a firm to which the Company pays commissions for insurance coverage (ceased as a related party effective April 2015). (In millions of dollars) Years ended December 31 2016 2015 Printing, legal services, and commission paid on premiums for insurance coverage 27 31 In addition, during the year ended December 31, 2016, we announced a strategic change across our publishing business such that we will focus on digital content through the Internet and mobile applications. As a result, we have sold select publishing titles to the aforementioned printing services company for $5 million. We have also entered into certain transactions with our controlling shareholder and companies it controls. These transactions are subject to formal agreements approved by the Audit and Risk Committee. Total amounts paid to these related parties generally reflect the charges to Rogers for occasional business use of aircraft, net of other administrative services, and were less than $1 million for each of 2016 and 2015. These transactions are measured at the amount agreed to by the related parties, which are also reviewed by the Audit and Risk Committee. The amounts owing are unsecured, interest-free, and due for payment in cash within one month from the date of the transaction. ACCOUNTING CHANGES Change in accounting policy for measurement of deferred income taxes Following the November 2016 publication of the IFRS Interpretations Committee’s agenda decision addressing the expected manner of recovery of intangible assets with indefinite useful lives for the purposes of measuring deferred tax, we have retrospectively changed our related accounting policy. The IFRS Interpretations Committee observed that in applying International Accounting Standard 12, an entity determines its expected manner of recovery of the carrying amount of the intangible asset with an indefinite useful life, and reflects the tax consequences that follow from that expected manner of recovery. Previously, we measured deferred taxes on temporary differences arising from the portion of indefinite-life intangible assets with no initial associated underlying tax basis using a capital gains tax rate based upon the notion that recovery would result solely from sales of the assets. Consequently, we have adopted an accounting policy to measure deferred taxes on temporary differences arising from indefinite-life intangible assets based upon the tax consequences that follow from the expected manner of recovery of the assets. The accounting policies set out in the notes to our consolidated statements have been applied in preparing the financial consolidated financial statements as at and for the year ended December 31, 2016 and the comparative information presented in the consolidated financial statements as at and for the year ended December 31, 2015. In preparing our opening and comparative Income, Consolidated amended Consolidated Statements of Statements of Comprehensive Income, Consolidated Statements of Financial Position, and Consolidated Statements of Changes in Shareholders’ Equity, we have amended certain amounts reported in previously issued financial statements. Adjustments to the Consolidated Statements of Income for the year ended December 31, 2015 (In millions of dollars, except per share amounts) ended December 31, 2015 Adjustments Previously reported for the year Amended for the year ended December 31, 2015 Other (income) expense Income tax expense Net income Earnings per share Basic Diluted (32) 466 1,381 28 11 (39) $ 2.68 $ 2.67 ($0.07) ($0.07) (4) 477 1,342 $ 2.61 $ 2.60 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 89 MANAGEMENT’S DISCUSSION AND ANALYSIS Adjustments to the Consolidated Statements of Financial Position as at January 1, 2015 (In millions of dollars) Goodwill 1 Total assets 1 Deferred tax liabilities Shareholders’ equity Total liabilities and shareholders’ equity Previously reported as at January 1, 2015 Adjustments Amended as at January 1, 2015 3,883 26,522 1,769 5,481 26,522 14 14 84 (70) 14 3,897 26,536 1,853 5,411 26,536 1 The adjustment relating to total assets and goodwill was recognized entirely within our Media reportable segment. Adjustments to the Consolidated Statements of Financial Position as at December 31, 2015 (In millions of dollars) Goodwill 1 Total assets 1 Deferred tax liabilities Shareholders’ equity Total liabilities and shareholders’ equity Previously reported as at December 31, 2015 Adjustments as at January 1, 2015 Adjustments for the year ended December 31, 2015 Amended as at December 31, 2015 3,891 29,175 1,943 5,745 29,175 14 14 84 (70) 14 – – 39 (39) – 3,905 29,189 2,066 5,636 29,189 1 The adjustment relating to total assets and goodwill was recognized entirely within our Media reportable segment. Adoption of amendments to IFRS We adopted the following IFRS amendments in 2016. • Amendments to IAS 16, Property, Plant and Equipment and IAS 38, Intangible Assets that introduced a rebuttable presumption that revenue-based amortization methods for intangible assets is inappropriate. We adopted the amendment prospectively beginning on January 1, 2016. the use of • Amendments to IFRS 11, Joint Arrangements requiring business combination accounting to be applied to acquisitions of interests in a joint operation that constitute a business. We adopted the amendment on a prospective basis for acquisitions on or after January 1, 2016, in accordance with the transitional provisions. The adoption of these amendments did not have a material effect on our financial statements. RECENT ACCOUNTING PRONOUNCEMENTS The IASB has issued the following new standards that will become effective in a future year and will or could have an impact on our consolidated financial statements in future periods: • IFRS 15, Revenue from Contracts with Customers (IFRS 15) – IFRS 15 will supersede all existing standards and interpretations in IFRS relating to revenue, including IAS 18, Revenue and IFRIC 13, Customer Loyalty Programmes. IFRS 15 introduces a single model for recognizing revenue from contracts with customers. This standard applies to all contracts including certain with customers, with only some exceptions, contracts accounted for under other IFRSs. The standard requires revenue to be recognized in a manner that depicts the transfer of promised goods or services to a customer and at an amount that reflects the consideration expected to be received in exchange for transferring those goods or services. This is achieved by applying the following five steps: 1. 2. identify the contract with a customer; identify the performance obligations in the contract; 90 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT 3. determine the transaction price; 4. allocate the transaction price to the performance obligations in the contract; and recognize revenue when (or as) performance obligation. the entity satisfies a 5. IFRS 15 also provides guidance relating to the treatment of contract acquisition and contract fulfillment costs. the application of this new standard will have We expect significant impacts on our reported results, specifically with regards to the timing of recognition and classification of revenue, and the treatment of costs incurred in acquiring customer contracts. The timing of recognition and classification of revenue will be affected because IFRS 15 requires the estimation of total consideration over the contract term at contract inception and allocation of consideration to all performance obligations in the contract based on their relative stand-alone selling prices. We anticipate this will most significantly affect our Wireless arrangements that bundle equipment and service together into in an increase to monthly service fees, which will equipment revenue recognized at contract inception and a decrease to service revenue recognized over the course of the contracts. result The treatment of costs incurred in acquiring customer contracts will be impacted as IFRS 15 requires certain contract acquisition costs (such as sales commissions) to be recognized as an asset and amortized into operating expenses over time. Currently, such costs are expensed as incurred. In addition, certain new assets and liabilities will be recognized Financial Position. on our Consolidated Statements of Specifically, a contract asset or contract liability will be recognized to account for any timing differences between the revenue recognized and the amounts billed to the customer. We believe significant judgments will need to be made when defining the enforceable rights and obligations of a contract, in determining whether a promise to deliver goods or services is considered distinct, and to determine when the customer obtains control of the distinct good or service. The standard is effective for annual periods beginning on or after January 1, 2018. We are required to retrospectively apply IFRS 15 to all contracts that are not complete on the date of initial application. We intend to make a policy choice to restate each prior period presented and recognize the cumulative effect of initially applying IFRS 15 as an adjustment to the opening balance of equity at the earliest period presented, subject to certain practical expedients we anticipate we will adopt. the beginning of We have a team dedicated to ensuring our compliance with IFRS 15. This team has also been responsible for determining system requirements, ensuring our data collection is appropriate, and communicating the upcoming changes with various stakeholders. team is assisting in the this development of new internal controls that will help ensure the system runs as intended and the related results are accurate. In addition, We are implementing a new revenue recognition system to enable us to comply with the requirements of IFRS 15 on a contract-by-contract basis, including appropriately allocating revenue between different performance obligations within individual contracts for certain revenue streams. We expect to begin a parallel run under both IAS 18 and IFRS 15 using this system in 2017. We will have detailed data validation processes that will continue throughout the course of 2017. As a result, we are continuing to assess the impact of this standard on our consolidated financial statements and it is not yet possible to make a reliable estimate of its impact. We expect to disclose the estimated financial effects of the adoption of IFRS 15 in our 2017 consolidated financial statements. loss model Instruments: • IFRS 9, Financial Instruments (IFRS 9) – In July 2014, the IASB issued the final publication of the IFRS 9 standard, which will supersede IAS 39, Financial recognition and measurement (IAS 39). IFRS 9 includes revised guidance on the classification and measurement of financial instruments, a new expected credit for calculating impairment on financial assets, and the new hedge accounting guidance. Under IFRS 9, financial assets will be classified and measured based on the business model in which they are held and the characteristics of their contractual cash flows. The new hedge accounting standard will align hedge accounting more closely with risk management. IFRS 9 does not fundamentally change the types of hedging relationships or the requirement to measure and recognize ineffectiveness, however it will provide more hedging to qualify for hedge strategies used for risk management accounting and introduce more judgment to assess the effectiveness of a hedging relationship. It also carries forward the financial guidance on recognition and derecognition of instruments from IAS 39. The standard is effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. We are assessing the impact of this standard on our consolidated financial statements. M A N A G E M E N T ’ S D I I S C U S S O N A N D A N A L Y S I S • IFRS 16, Leases (IFRS 16) – In January 2016, the IASB issued the final publication of the IFRS 16 standard, which will supersede the current IAS 17, Leases (IAS 17) standard. IFRS 16 introduces a single accounting model for lessees and for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee will be required to recognize a right-of-use asset, representing its right to use the underlying asset, and a lease liability, representing its obligation to make lease payments. The accounting treatment for lessors will remain largely the same as under IAS 17. The standard is effective for annual periods beginning on or after January 1, 2019, with early adoption permitted, but only if the entity is also applying IFRS 15. We have the option to either: • apply IFRS 16 with full retrospective effect; or • recognize the cumulative effect of initially applying IFRS 16 as initial to opening equity at the date of an adjustment application. this We are assessing the impact of standard on our consolidated financial statements; however, we believe that the result will be a significant increase to assets and liabilities, as we will be required to record a right-of-use asset and a corresponding lease liability on our Consolidated Statements of Financial Position, as well as a decrease to operating costs, an increase to finance costs (due to accretion of the lease liability) and an increase to depreciation and amortization (due to amortization of the right-of-use asset). KEY PERFORMANCE INDICATORS We measure the success of our strategy using a number of key performance indicators, which are outlined below. We believe these key performance indicators allow us to appropriately measure our performance against our operating strategy as well as against the results of our peers and competitors. The following key performance indicators are not measurements in accordance with IFRS and should not be considered alternatives to net income or any other measure of performance under IFRS. SUBSCRIBER COUNT We determine the number of subscribers to our services based on active subscribers. When subscribers are deactivated, either voluntarily or involuntarily for non-payment, they are considered deactivations in the period the services are discontinued. Wireless • A wireless subscriber telephone number. is represented by each identifiable • We report wireless subscribers in two categories: postpaid and prepaid. Postpaid and prepaid include voice-only subscribers, data-only subscribers, and subscribers with service plans integrating both voice and data. • Wireless prepaid subscribers are considered active for a period of 180 days from the date of their last revenue-generating usage. 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 91 MANAGEMENT’S DISCUSSION AND ANALYSIS Cable • Cable Television and Internet subscribers are represented by a dwelling unit; Cable Phone subscribers are represented by line counts. • When there is more than one unit in one dwelling, such as an apartment building, each tenant with cable service is counted as an individual subscriber, whether the service is invoiced separately or included in the tenant’s rent. Institutional units, like hospitals or hotels, are each considered one subscriber. • Cable Television, Internet, and Phone subscribers include only those subscribers who have service installed and operating, and who are being billed accordingly. CAPITAL INTENSITY Capital intensity allows us to compare the level of our additions to property, plant and equipment to that of other companies within the same industry. Our additions to property, plant and equipment do not include expenditures on spectrum licences. We calculate intensity by dividing additions to property, plant and capital equipment by revenue. For Wireless, capital intensity is calculated using total service revenue. We use it to evaluate the performance of our assets and when making decisions about additions to property, plant and equipment. We believe that certain investors and analysts use capital intensity to measure the performance of asset purchases and construction in relation to revenue. SUBSCRIBER CHURN Subscriber churn is a measure of the number of subscribers that deactivated during a period as a percentage of the total subscriber base, usually calculated on a monthly basis. Subscriber churn measures our success in retaining our subscribers. We calculate it by dividing the number of Wireless subscribers that deactivated (usually in a month) by the aggregate numbers of subscribers at the beginning of the period. When used or reported for a period greater than one month, subscriber churn represents the sum of the number of subscribers deactivating for each period incurred divided by the sum of the aggregate number of subscribers at the beginning of each period incurred. POSTPAID AVERAGE REVENUE PER ACCOUNT Postpaid average revenue per account (ARPA) helps us identify trends and measure our success in attracting and retaining multiple-device accounts. A single Wireless postpaid account typically provides subscribers with the advantage of allowing for the pooling of plan attributes across multiple devices and on a single bill. Each Wireless postpaid account is typically represented by an identifiable billing account number. A single Wireless postpaid account may include more than one identifiable telephone number and receive monthly Wireless services for a variety of connected devices including smartphones, basic phones, tablets, and other devices. Wireless postpaid accounts under our various brand names are considered separate accounts. We calculate Wireless postpaid ARPA by dividing total Wireless postpaid service revenue (monthly) by the average number of Wireless postpaid accounts for the same time period. BLENDED AVERAGE REVENUE PER USER Blended average revenue per user (ARPU) helps us identify trends and measure our success in attracting and retaining higher value subscribers. We calculate blended ARPU by dividing service revenue (monthly) by the average total number of Wireless subscribers for the same time period. DIVIDEND PAYOUT RATIOS We calculate the dividend payout ratio by dividing dividends declared for the year by net income or free cash flow for the year. We use dividends as a percentage of net income and free cash flow to conduct analysis and assist with determining the dividends we should pay. RETURN ON ASSETS We use return on assets to measure our efficiency in using our assets to generate net income. We calculate return on assets by dividing net income for the year by total assets as at year-end. TOTAL SERVICE REVENUE Commencing in the fourth quarter of 2016, we began disclosing total service revenue as one of our key performance indicators. We use total service revenue to measure our core business performance from the provision of services to our customers separate from revenue from the sale of equipment we have acquired from device manufacturers and resold. Included in this metric is our retail revenue from TSC and the Toronto Blue Jays, which are also core to our business. We calculate total service revenue by subtracting equipment revenue in Wireless, Cable, Business Solutions, and Corporate from total revenue 1. 1 See note 5 to our 2016 Audited Consolidated Financial Statements. (In millions of dollars) Revenue Deduct: Wireless equipment revenue Cable equipment revenue Business Solutions equipment revenue Corporate equipment revenue Years ended December 31 2016 2015 13,702 13,414 658 6 6 5 749 8 4 4 Total service revenue 13,027 12,649 92 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT M A N A G E M E N T ’ S D I I S C U S S O N A N D A N A L Y S I S NON-GAAP MEASURES We use the following non-GAAP measures. These are reviewed regularly by management and our Board in assessing our performance and making decisions regarding the ongoing operations of our business and its ability to generate cash flows. Some or all of these measures may also be used by investors, lending institutions, and credit rating agencies as indicators of our operating performance, of our ability to incur and service debt, and as measurements to value companies in the telecommunications sector. These are not recognized measures under GAAP and do not have standard meanings under IFRS, so may not be reliable ways to compare us to other companies. Non-GAAP measure Why we use it Adjusted operating profit Adjusted operating profit margin • To evaluate the performance of our businesses, and when making decisions about the ongoing operations of the business and our ability to generate cash flows. • We believe that certain investors and analysts use adjusted operating profit to measure our ability to service debt and to meet other payment obligations. • We also use it as one component in determining short-term incentive compensation for all management employees. Adjusted net income Adjusted basic and diluted earnings per share • To assess the performance of our businesses before the effects of the noted items, because they affect the comparability of our financial results and could potentially distort the analysis of trends in business performance. Excluding these items does not imply that they are non-recurring. Free cash flow • To show how much cash we have available to repay debt and reinvest in our company, which is an important indicator of our financial strength and performance. • We believe that some investors and analysts use free cash flow to value a business and its underlying assets. Adjusted net debt • To conduct valuation-related analysis and make decisions about capital structure. • We believe this helps investors and analysts analyze our enterprise and equity value and assess our leverage. Adjusted net debt / adjusted operating profit • To conduct valuation-related analysis and make decisions about capital structure. • We believe this helps investors and analysts analyze our enterprise and equity value and assess our leverage. Most comparable IFRS financial measure Net income Net income Basic and diluted earnings per share Cash provided by operating activities Long-term debt Long-term debt divided by net income How we calculate it Adjusted operating profit: Net income add (deduct) income tax expense (recovery), other expense (income), finance costs, restructuring, acquisition and other, depreciation and amortization, stock-based compensation, and impairment of assets and related onerous contract charges. Adjusted operating profit margin: Adjusted operating profit divided by revenue (service revenue for Wireless). Adjusted net income: Net income add (deduct) stock-based compensation, restructuring, acquisition and other, impairment of assets and related onerous contract charges, loss (gain) on sale or wind down of investments, (gain) on acquisitions, loss on non-controlling interest purchase obligations, loss on repayment of long-term debt, and income tax adjustments on these items, including adjustments as a result of legislative changes. Adjusted basic and diluted earnings per share: Adjusted net income divided by basic and diluted weighted average shares outstanding. Adjusted operating profit deduct additions to property, plant and equipment net of proceeds on disposition, interest on borrowings net of capitalized interest, and cash income taxes. Total long-term debt add (deduct) current portion of long-term debt, deferred transaction costs and discounts, net debt derivative (assets) liabilities, credit risk adjustment related to net debt derivatives, bank advances (cash and cash equivalents), and short- term borrowings. Adjusted net debt (defined above) divided by 12-month trailing adjusted operating profit (defined above). 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 93 MANAGEMENT’S DISCUSSION AND ANALYSIS RECONCILIATION OF ADJUSTED OPERATING PROFIT AND ADJUSTED OPERATING PROFIT MARGIN RECONCILIATION OF ADJUSTED EARNINGS PER SHARE Years ended December 31 2016 2015 1,481 1,479 Years ended December 31 (In millions of dollars, except per share amounts; number of shares outstanding in millions) (In millions of dollars) Net income 1 Add (deduct): Income tax expense 1 Other (income) expense 1 Finance costs Restructuring, acquisition and other Depreciation and amortization Impairment of assets and related onerous contract charges Stock-based compensation 2016 835 324 191 761 160 2,276 484 61 2015 1,342 477 (4) 774 111 2,277 – 55 Adjusted basic earnings per share: Adjusted net income 1 Divided by: weighted average number of shares outstanding 515 515 Adjusted basic earnings per share 1 $ 2.88 $ 2.87 Adjusted diluted earnings per share: Adjusted net income 1 Divided by: diluted weighted average number 1,481 1,479 of shares outstanding 517 517 Adjusted diluted earnings per share 1 $ 2.86 $ 2.86 Adjusted operating profit 1 5,092 5,032 Basic earnings per share: 1 As a result of the IFRS Interpretations Committee’s agenda decision relating to IAS 12 Income Taxes, certain amounts have been retrospectively amended. See “Accounting Policies” for more information. (In millions of dollars, except percentages) 2016 2015 Years ended December 31 Adjusted operating profit margin: Adjusted operating profit Divided by: total revenue Adjusted operating profit margin 5,092 13,702 5,032 13,414 37.2% 37.5% RECONCILIATION OF ADJUSTED NET INCOME Net income 1 Divided by: weighted average number of shares outstanding Basic earnings per share 1 Diluted earnings per share: 835 515 1,342 515 $ 1.62 $ 2.61 Net income 1 Divided by: diluted weighted average number of shares outstanding 835 517 1,342 517 Diluted earnings per share 1 $ 1.62 $ 2.60 1 As a result of the IFRS Interpretations Committee’s agenda decision relating to IAS 12 Income Taxes, certain amounts have been retrospectively amended. See “Accounting Policies” for more information. Years ended December 31 RECONCILIATION OF FREE CASH FLOW (In millions of dollars) Net income 1 Add (deduct): Stock-based compensation Restructuring, acquisition and other Loss on repayment of long-term debt Net loss on divestitures pertaining to investments Gain on acquisition of Mobilicity 1 Loss on non-controlling interest purchase obligation Loss on wind down of shomi Impairment of assets and related onerous contract charges Income tax impact of above items Income tax adjustment, legislative tax change 2016 835 61 160 – 11 – – 140 484 (213) 3 2015 1,342 55 111 7 – (74) 72 – – (40) 6 Adjusted net income 1 1,481 1,479 1 As a result of the IFRS Interpretations Committee’s agenda decision relating to IAS 12 Income Taxes, certain amounts have been retrospectively amended. See “Accounting Policies” for more information. (In millions of dollars) Cash provided by operating activities Add (deduct): Additions to property, plant and equipment Interest on borrowings, net of capitalized interest Restructuring, acquisition and other Interest paid Change in non-cash working capital Other adjustments Years ended December 31 2016 3,957 2015 3,747 (2,352) (2,440) (740) 160 756 (14) (62) (732) 111 771 302 (83) Free cash flow 1,705 1,676 RECONCILIATION OF DIVIDEND PAYOUT RATIO OF FREE CASH FLOW (In millions of dollars, except percentages) 2016 2015 Years ended December 31 Dividend payout ratio of free cash flow: Dividends declared during the year Divided by: free cash flow Dividend payout ratio of free cash flow 988 1,705 58% 988 1,676 59% 94 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT RECONCILIATION OF ADJUSTED NET DEBT AND ADJUSTED NET DEBT / ADJUSTED OPERATING PROFIT (In millions of dollars) Current portion of long-term debt Long-term debt Deferred transaction costs and discounts Add (deduct): Net debt derivative assets Credit risk adjustment related to net debt derivatives Short-term borrowings Bank advances (cash and cash equivalents) As at December 31 2016 750 15,330 117 16,197 2015 1,000 15,870 111 16,981 (1,683) (2,028) (57) 800 71 (152) 800 (11) Adjusted net debt 15,328 15,590 As at December 31 (In millions of dollars, except ratios) 2016 2015 Adjusted net debt / adjusted operating profit Adjusted net debt Divided by: trailing 12-month adjusted operating profit Adjusted net debt / adjusted operating profit 15,328 15,590 5,092 3.0 5,032 3.1 M A N A G E M E N T ’ S D I I S C U S S O N A N D A N A L Y S I S 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 95 MANAGEMENT’S DISCUSSION AND ANALYSIS SUMMARY OF FINANCIAL RESULTS OF LONG-TERM DEBT GUARANTOR Our outstanding public debt, $2.9 billion bank credit and letter of credit facilities, and derivatives are unsecured obligations of RCI, as obligor, and RCCI, as either co-obligor or guarantor, as applicable. The following table sets forth the selected unaudited consolidated summary financial information for RCI for the periods identified below, presented with a separate column for: (i) RCI, (ii) RCCI, (iii) our non-guarantor subsidiaries on a combined basis, (iv) consolidating adjustments, and (v) the total consolidated amounts. Years ended December 31 RCI 1, 2 RCCI 1, 2, 3, 4 Non-guarantor subsidiaries 1, 2, 4 Consolidating adjustments 1, 2 Total (In millions of dollars, unaudited) 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 Selected Statements of Income data measure: Revenue Net Income (loss) 5 10 835 24 1,342 11,746 674 11,489 1,439 2,173 990 2,099 1,104 (227) (1,664) (198) 13,702 835 (2,543) 13,414 1,342 As at December 31 RCI 1, 2 RCCI 1, 2, 3, 4 Non-guarantor subsidiaries 1, 2, 4 Consolidating adjustments 1, 2 Total (In millions of dollars, unaudited) 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 Selected Statements of Financial Position data measure: Current assets Non-current assets 5 Current liabilities Non-current liabilities 5 22,831 28,812 25,712 17,159 23,891 27,161 24,024 17,928 19,665 38,448 25,190 2,084 19,322 36,862 25,951 1,719 9,780 5,805 5,558 75 8,331 8,250 5,609 281 (49,706) (47,293) (51,347) (1,358) 2,570 (48,922) (45,706) 25,772 5,113 (50,567) (1,392) 17,960 2,622 26,567 5,017 18,536 1 For the purposes of this table, investments in subsidiary companies are accounted for by the equity method. 2 Amounts recorded in current liabilities and non-current liabilities for RCCI do not include any obligations arising as a result of being a guarantor or co-obligor, as the case may be, under any of RCI’s long-term debt. 3 On January 1, 2016, Fido Solutions Inc., a subsidiary of RCI, transferred its partnership interest in RCP to Rogers Cable and Data Centres Inc. (RCDCI), a subsidiary of RCI, leaving RCDCI as the sole partner of RCP, thereby causing RCP to cease to exist (the dissolution). RCDCI became the owner of all the assets and assumed all the liabilities previously held by RCP. Subsequent to the reorganization, RCDCI changed its name to Rogers Communications Canada Inc. (RCCI). 4 The financial information for RCCI and our non-guarantors subsidiaries is presented on a pro-forma basis as if the dissolution of RCP had occurred on January 1, 2015. 5 As a result of the IFRS Interpretations Committee’s agenda decision relating to IAS 12 Income Taxes, certain amounts have been retrospectively amended. See “Accounting Policies” for more information. 96 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT M A N A G E M E N T ’ S D I I S C U S S O N A N D A N A L Y S I S FIVE-YEAR SUMMARY OF CONSOLIDATED FINANCIAL RESULTS (In millions of dollars, except per share amounts, subscriber count results, churn, ARPA, ARPU, percentages, and ratios) 2016 2015 2014 2013 2012 As at or years ended December 31 Income and cash flow: Revenue Wireless Cable Business Solutions Media Corporate items and intercompany eliminations Total revenue Adjusted operating profit 1 Wireless Cable Business Solutions Media Corporate items and intercompany eliminations Total adjusted operating profit Net income from continuing operations 2 Net income 2 Adjusted net income from continuing operations 1,2 Cash provided by operating activities Free cash flow 1 Additions to property, plant and equipment Earnings per share from continuing operations 2 Basic Diluted Earnings per share 2 Basic Diluted Adjusted earnings per share 1,2 Basic Diluted Statements of Financial Position: Assets Property, plant and equipment, net Goodwill 2 Intangible assets Investments Other assets Total assets Liabilities and Shareholders’ Equity Long-term liabilities 2 Current liabilities Total liabilities 2 Shareholders’ equity 2 Total liabilities and shareholders’ equity Subscriber count results (000s) 3 Wireless subscribers Internet subscribers Television subscribers Phone subscribers Additional Wireless metrics 3 Postpaid churn (monthly) Postpaid ARPA (monthly) 4 Blended ARPU (monthly) Additional consolidated metrics Revenue growth Adjusted operating profit growth Dividends declared per share Dividend payout ratio of net income 2,3 Dividend payout ratio of free cash flow 1,3 Return on assets 2,3 Adjusted net debt / adjusted operating profit 1 Total service revenue 3,5 7,916 3,449 384 2,146 (193) 13,702 3,285 1,674 123 169 (159) 5,092 835 835 1,481 3,957 1,705 2,352 $ 1.62 $ 1.62 $ 1.62 $ 1.62 $ 2.88 $ 2.86 10,749 3,905 7,130 2,174 4,384 28,342 17,960 5,113 23,073 5,269 28,342 10,274 2,145 1,820 1,094 1.23% $117.37 $ 60.42 2% 1% $ 1.92 118% 58% 2.9% 3.0 13,027 7,651 3,465 377 2,079 (158) 13,414 3,239 1,658 116 172 (153) 5,032 1,342 1,342 1,479 3,747 1,676 2,440 $ 2.61 $ 2.60 $ 2.61 $ 2.60 $ 2.87 $ 2.86 10,997 3,905 7,243 2,271 4,773 29,189 18,536 5,017 23,553 5,636 29,189 9,877 2,048 1,896 1,090 1.27% $110.74 $ 59.71 4% 0% $ 1.92 74% 59% 4.6% 3.1 12,649 7,305 3,467 382 1,826 (130) 12,850 3,246 1,665 122 131 (145) 5,019 1,341 1,341 1,532 3,698 1,437 2,366 $ 2.60 $ 2.56 $ 2.60 $ 2.56 $ 2.97 $ 2.96 10,655 3,897 6,588 1,898 3,498 26,536 16,205 4,920 21,125 5,411 26,536 9,450 2,011 2,024 1,150 1.27% $106.41 $ 59.41 1% 1% $ 1.83 70% 66% 5.1% 2.9 7,270 3,475 374 1,704 (117) 12,706 3,157 1,718 106 161 (149) 4,993 1,669 1,669 1,769 3,990 1,548 2,240 $ 3.24 $ 3.22 $ 3.24 $ 3.22 $ 3.43 $ 3.42 10,255 3,765 3,211 1,487 4,897 23,615 14,410 4,606 19,016 4,599 23,615 9,503 1,961 2,127 1,153 1.24% $ 59.58 2% 3% $ 1.74 54% 58% 7.1% 2.3 7,280 3,358 351 1,620 (123) 12,486 3,063 1,605 89 190 (113) 4,834 1,725 1,693 1,781 3,421 1,649 2,142 $ 3.32 $ 3.30 $ 3.26 $ 3.24 $ 3.43 $ 3.41 9,576 3,215 2,951 1,484 2,392 19,618 12,918 3,002 15,920 3,698 19,618 9,437 1,864 2,214 1,074 1.29% $ 59.79 1% 2% $ 1.58 48% 50% 8.6% 2.3 1 Adjusted operating profit, adjusted net income, adjusted basic and diluted earnings per share, free cash flow, adjusted net debt, adjusted net debt / adjusted operating profit, and dividend payout ratio of free cash flow are non-GAAP measures and should not be considered substitutes or alternatives for GAAP measures. These are not defined terms under IFRS, and do not have standard meanings, so may not be a reliable way to compare us to other companies. See “Non-GAAP Measures” for information about these measures, including how we calculate them. 2 As a result of the IFRS Interpretations Committee’s agenda decision relating to IAS 12 Income Taxes, certain amounts have been retrospectively amended. See “Accounting Policies” for more information. Adjustments relating to the IFRS Interpretation Committee’s agenda decision relating to IAS 12 Income Taxes also applied to periods prior to January 1, 2015 and have been retrospectively amended. 3 As defined. See “Key Performance Indicators”. 4 Postpaid ARPA has not been presented for periods prior to 2014. We commenced reporting postpaid ARPA as a key performance indicator in the first quarter of 2015. See “Key Performance Indicators”. 5 Total service revenue has not been presented for periods prior to 2015. We commenced reporting service revenue as a key performance indicator in the fourth quarter of 2016. See “Key Performance Indicators”. 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 97 CONSOLIDATED FINANCIAL STATEMENTS Management’s Responsibility for Financial Reporting December 31, 2016 responsibilities; and to review MD&A, The Audit and Risk Committee meets regularly with management, as well as the internal and external auditors, to discuss internal controls over the financial reporting process, auditing matters, and financial reporting issues; to satisfy itself that each party is properly discharging its the consolidated financial statements, and the external auditors’ report. The Audit and Risk Committee reports its findings to the Board of Directors for its consideration when approving the consolidated financial statements for issuance to the shareholders. The Audit and Risk Committee also considers the engagement or re-appointment of the external auditors before submitting its recommendation to the Board of Directors for review and for shareholder approval. The consolidated financial statements have been audited by KPMG LLP, the external auditors, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States) on behalf of the shareholders. Our internal control over financial reporting as at December 31, 2016 has been audited by KPMG, LLP, in accordance with the standards of the Public Company Accountability Oversight Board (United States). KPMG LLP has full and free access to the Audit and Risk Committee. February 9, 2017 Alan D. Horn, CPA, CA Interim President and Chief Executive Officer Anthony Staffieri, FCPA, FCA Chief Financial Officer The accompanying consolidated financial statements of Rogers Communications Inc. and its subsidiaries and all the information in are the Management’s Discussion and Analysis responsibility of management and have been approved by the Board of Directors. (MD&A) Management has prepared the consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. The consolidated financial statements include certain amounts that are based on management’s best estimates and judgments and, in respects, Rogers their opinion, present Communications Inc.’s financial position, results of operations, and cash flows. Management has prepared the financial information presented elsewhere in MD&A and has ensured that it is consistent with the consolidated financial statements. in all material fairly, Management has developed and maintains a system of internal controls that further enhances the integrity of the consolidated financial statements. The system of internal controls is supported by the and includes management communication to employees about its policies on ethical business conduct. function internal audit Management believes these internal controls provide reasonable assurance that: • transactions are properly authorized and recorded; • financial records are reliable and form a proper basis for the preparation of consolidated financial statements; and • the assets of Rogers Communications Inc. and its subsidiaries are properly accounted for and safeguarded. The Board of Directors is responsible for overseeing management’s responsibility for financial reporting and is ultimately responsible for reviewing and approving the consolidated financial statements. The Board of Directors carries out this responsibility through its Audit and Risk Committee. 98 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT 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 Report of Independent Registered Public Accounting Firm To the Shareholders of Rogers Communications Inc. We have audited the accompanying consolidated financial statements of Rogers Communications Inc., which comprise the consolidated statements of financial position as at December 31, 2016 and December 31, 2015, the consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management’s Responsibility for the Consolidated Financial Statements the preparation and fair responsible for Management is presentation of in these consolidated financial accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. statements Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or In making those risk assessments, we consider internal error. control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Rogers Communications Inc. as at December 31, 2016 and December 31, 2015, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. Comparative Information Without modifying our opinion, we draw attention to Note 2(d) to the consolidated financial statements which indicates that the comparative ended December 31, 2015 has been adjusted to reflect the retrospective adoption of a new accounting policy. information presented for year the Other Matter We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Rogers Communications Inc.’s internal control over financial reporting as of December 31, 2016, based on the criteria established in Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 9, 2017 expressed an unmodified (unqualified) opinion on the effectiveness of Rogers Communications Inc.’s internal control over financial reporting. Internal Control – Chartered Professional Accountants, Licensed Public Accountants February 9, 2017 Toronto, Canada 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 99 CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm To the Board of Directors of Rogers Communications Inc. We have audited Rogers Communications Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Rogers Communications Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting included in Management’s Discussion and Analysis for the year ended December 31, 2016. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for in accordance with generally accepted external purposes accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are in accordance with authorizations of being made only management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Rogers Communications Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). We also have audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial position of Rogers Communications Inc. as of December 31, 2016 and December 31, 2015, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the years ended December 31, 2016 and December 31, 2015, and our report dated February 9, 2017 expressed an unqualified opinion on those consolidated financial statements. Chartered Professional Accountants, Licensed Public Accountants February 9, 2017 Toronto, Canada 100 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT Consolidated Statements of Income (In millions of Canadian dollars, except per share amounts) Years ended December 31 Revenue Operating expenses: Operating costs Depreciation and amortization Impairment of assets and related onerous contract charges Restructuring, acquisition and other Finance costs Other expense (income) Income before income tax expense Income tax expense Net income for the year Earnings per share: Basic Diluted The accompanying notes are an integral part of the consolidated financial statements. 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 Note 2016 2015 see note 2(d) 5 13,702 13,414 6 7, 8 7 9 10 11 12 8,671 2,276 484 160 761 191 1,159 324 835 8,437 2,277 – 111 774 (4) 1,819 477 1,342 13 13 $ 1.62 $ 1.62 $ 2.61 $ 2.60 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 101 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statements of Comprehensive Income (In millions of Canadian dollars) Years ended December 31 Net income for the year Other comprehensive loss: Items that will not be reclassified to income: Defined benefit pension plans: Remeasurements Related income tax recovery (expense) Items that will not be reclassified to net income Items that may subsequently be reclassified to income: Available-for-sale investments: Increase (decrease) in fair value Reclassification to net income for gain on sale of investment Related income tax recovery (expense) Available-for-sale investments Cash flow hedging derivative instruments: Unrealized (loss) gain in fair value of derivative instruments Reclassification to net income of loss (gain) on debt derivatives Reclassification to net income of loss on repayment of long-term debt Reclassification to net income or property, plant and equipment of gain on expenditure derivatives Reclassification to net income for accrued interest Related income tax recovery (expense) Cash flow hedging derivative instruments Equity-accounted investments: Share of other comprehensive (loss) income of equity-accounted investments, net of tax Reclassification to net income of realized other comprehensive income for equity- accounted investments Equity-accounted investments Items that may subsequently be reclassified to net income Other comprehensive loss for the year Comprehensive income for the year The accompanying notes are an integral part of the consolidated financial statements. Note 2016 2015 see note 2(d) 835 1,342 22 16 (101) 27 (74) 90 (39) (7) 44 (336) 255 – (80) (69) 66 (164) (8) (15) (23) (143) (217) 618 24 (6) 18 (143) – 20 (123) 1,524 (1,307) 7 (148) (58) (65) (47) 23 – 23 (147) (129) 1,213 102 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT Consolidated Statements of Financial Position (In millions of Canadian dollars) As at December 31 Assets Current assets: Cash and cash equivalents Accounts receivable Inventories Other current assets Current portion of derivative instruments Total current assets Property, plant and equipment Intangible assets Investments Derivative instruments Other long-term assets Deferred tax assets Goodwill Total assets Liabilities and shareholders’ equity Current liabilities: Bank advances Short-term borrowings Accounts payable and accrued liabilities Income tax payable Current portion of provisions Unearned revenue Current portion of long-term debt Current portion of derivative instruments Total current liabilities Provisions Long-term debt Derivative instruments Other long-term liabilities Deferred tax liabilities Total liabilities Shareholders’ equity Total liabilities and shareholders’ equity Guarantees Commitments and contingent liabilities Subsequent events 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 Note 2016 2015 see note 2(d) – 1,949 315 215 91 2,570 10,749 7,130 2,174 1,708 98 8 3,905 28,342 71 800 2,783 186 134 367 750 22 5,113 33 15,330 118 562 1,917 23,073 5,269 28,342 11 1,792 318 303 198 2,622 10,997 7,243 2,271 1,992 150 9 3,905 29,189 – 800 2,708 96 10 388 1,000 15 5,017 50 15,870 95 455 2,066 23,553 5,636 29,189 14 15 16 7 8 17 16 12 8 18 19 20 16 19 20 16 21 12 23 27 28 23 The accompanying notes are an integral part of the consolidated financial statements. On behalf of the Board of Directors: Alan D. Horn, CPA, CA Director John H. Clappison, FCPA, FCA Director 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 103 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statements of Changes in Shareholders’ Equity (In millions of Canadian dollars, except number of shares) Class A Voting shares Class B Non-voting shares Year ended December 31, 2016 Amount (000s) Amount Number of shares Number of shares (000s) Retained earnings Available-for- sale financial assets reserve Hedging reserve Equity investment hedging reserve Total shareholders’ equity Balances, January 1, 2016 (note 2(d)) 72 112,439 402 402,308 4,474 Net income for the year Other comprehensive income (loss): Defined benefit pension plans, net of tax Available-for-sale investments, net of tax Derivative instruments accounted for as hedges, net of tax Share of equity-accounted investments, net of tax Total other comprehensive income (loss) Comprehensive income for the year Transactions with shareholders recorded directly in equity: Dividends declared Shares issued on exercise of stock options Share class exchange Total transactions with shareholders – – – – – – – – – – – – – – – – – – – – (27) (27) – – – – – – – – 3 – 3 – – – – – – – – 61 27 88 835 (74) – – – (74) 761 (988) – – (988) 598 – – 44 – – 44 44 – – – – 57 33 – – – (164) – (164) (164) – – – – – – – – (23) (23) (23) – – – – 5,636 835 (74) 44 (164) (23) (217) 618 (988) 3 – (985) Balances, December 31, 2016 72 112,412 405 402,396 4,247 642 (107) 10 5,269 Class A Voting shares Class B Non-voting shares Year ended December 31, 2015 Amount (000s) Amount Number of shares Number of shares (000s) Balances, January 1, 2015 (note 2(d)) 72 112,448 402 402,298 Net income for the year (note 2(d)) Other comprehensive income (loss): Defined benefit pension plans, net of tax Available-for-sale investments, net of tax Derivative instruments accounted for as hedges, net of tax Share of equity-accounted investments, net of tax Total other comprehensive income (loss) Comprehensive income for the year Transactions with shareholders recorded directly in equity: Dividends declared Share class exchange Shares issued on exercise of stock options Total transactions with shareholders – – – – – – – – – – – – – – – – – – – (9) – (9) – – – – – – – – – – – Available-for- sale financial assets reserve Hedging reserve Equity investment hedging reserve Total shareholders’ equity 721 – – (123) – – (123) (123) – – – – 104 10 – – – (47) – (47) (47) – – – – – – – – 23 23 23 – – – – 5,411 1,342 18 (123) (47) 23 (129) 1,213 (988) – – (988) Retained earnings 4,102 1,342 18 – – – 18 1,360 – – – – – – – – 9 1 10 (988) – – (988) Balances, December 31, 2015 (note 2(d)) 72 112,439 402 402,308 4,474 598 57 33 5,636 The accompanying notes are an integral part of the consolidated financial statements. 104 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT 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 Consolidated Statements of Cash Flows (In millions of Canadian dollars) Years ended December 31 Operating activities: Net income for the year Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization Program rights amortization Finance costs Income tax expense Stock-based compensation Post-employment benefits contributions, net of expense Net loss on divestitures pertaining to investments Loss on wind down of shomi Impairment of assets and related onerous contract charges Gain on acquisition of Mobilicity Other Cash provided by operating activities before changes in non-cash working capital items, income taxes paid, and interest paid Change in non-cash operating working capital items Cash provided by operating activities before income taxes paid and interest paid Income taxes paid Interest paid Cash provided by operating activities Investing activities: Additions to property, plant and equipment Additions to program rights Changes in non-cash working capital related to property, plant and equipment and intangible assets Acquisitions and other strategic transactions, net of cash acquired Other Cash used in investing activities Financing activities: Net repayments on short-term borrowings Net (repayment) issuance of long-term debt Net (payment) proceeds on settlement of debt derivatives and forward contracts Transaction costs incurred Dividends paid Other Cash used in financing activities Change in cash and cash equivalents Cash and cash equivalents, beginning of year (Bank advances) cash and cash equivalents, end of year Note 2016 2015 see note 2(d) 835 1,342 7, 8 8 10 12 24 22 11 7 25 29 7 8 8, 17, 25 18 29 29 2,276 71 761 324 61 (3) 11 140 484 – 34 4,994 14 5,008 (295) (756) 3,957 (2,352) (46) (103) – 45 (2,456) – (538) (45) (17) (988) 5 (1,583) (82) 11 (71) 2,277 87 774 477 55 (16) – – – (74) 82 5,004 (302) 4,702 (184) (771) 3,747 (2,440) (64) (116) (1,077) (70) (3,767) (42) 754 129 (9) (977) – (145) (165) 176 11 Cash and cash equivalents are defined as cash and short-term deposits that have an original maturity of less than 90 days, less bank advances. As at December 31, 2015, the balance of cash and cash equivalents was comprised of cash and demand deposits. The accompanying notes are an integral part of the consolidated financial statements. 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 105 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Notes to Consolidated Financial Statements We, us, our, Rogers, Rogers Communications, and the Company refer to Rogers Communications Inc. and its subsidiaries. RCI refers to the legal entity Rogers Communications Inc., not including its subsidiaries. RCI also holds interests in various investments and ventures. Page Note Page Note 106 107 110 110 112 113 114 116 120 120 120 120 122 122 123 Nature of the Business Note 1 Significant Accounting Policies Note 2 Capital Risk Management Note 3 Segmented Information Note 4 Revenue Note 5 Operating Costs Note 6 Property, Plant and Equipment Note 7 Intangible Assets and Goodwill Note 8 Restructuring, Acquisition and Other Note 9 Note 10 Finance Costs Note 11 Other Expense (Income) Income Taxes Note 12 Note 13 Earnings Per Share Note 14 Accounts Receivable Inventories Note 15 NOTE 1: NATURE OF THE BUSINESS 123 131 132 132 133 136 136 140 140 143 144 145 146 147 Note 16 Financial Risk Management and Financial Instruments Investments Note 17 Short-Term Borrowings Note 18 Provisions Note 19 Note 20 Long-Term Debt Note 21 Other Long-Term Liabilities Post-Employment Benefits Note 22 Shareholders’ Equity Note 23 Stock-Based Compensation Note 24 Note 25 Business Combinations Note 26 Related Party Transactions Note 27 Guarantees Note 28 Commitments and Contingent Liabilities Note 29 Supplemental Cash Flow Information On January 1, 2016, Fido Solutions Inc., a subsidiary of RCI, transferred its partnership interest in Rogers Communications Partnership (RCP) to Rogers Cable and Data Centres Inc. (RCDCI), a subsidiary of RCI, leaving RCDCI as the sole partner of RCP, thereby causing RCP to cease to exist. RCDCI became the owner of all the assets and assumed all the liabilities previously held by RCP. Subsequent to the reorganization, RCDCI changed its name to Rogers Communications Canada Inc. (RCCI). During the year ended December 31, 2016, Wireless, Cable, and Business Solutions were operated by our wholly-owned subsidiary, RCCI (2015 – RCP), and certain other wholly-owned subsidiaries. Media was operated by our wholly-owned subsidiary, Rogers Media Inc., and its subsidiaries. See note 4 for more information about our reportable operating segments. STATEMENT OF COMPLIANCE We prepared our consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Our Board of Directors authorized these consolidated financial statements for issue on February 9, 2017. is Inc. Rogers Communications a diversified Canadian communications and media company. Substantially all of our operations and sales are in Canada. RCI is incorporated in Canada and its registered office is located at 333 Bloor Street East, Toronto, Ontario, M4W 1G9. RCI’s shares are publicly traded on the Toronto Stock Exchange (TSX: RCI.A and RCI.B) and on the New York Stock Exchange (NYSE: RCI). We report our results of operations in four reportable segments. Each segment and the nature of its business is as follows: Segment Wireless Cable Principal activities Wireless telecommunications operations for Canadian consumers and businesses. Cable telecommunications operations, including Internet, television, and telephony (phone) services for Canadian consumers and businesses. Business Solutions Network connectivity through our fibre Media network and data centre assets to support a range of voice, data, networking, hosting, and cloud-based services for the enterprise, public sector, and carrier wholesale markets. A diversified portfolio of media properties, including sports media and entertainment, television and radio broadcasting, specialty channels, multi-platform shopping, digital media, and publishing. 106 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (a) BASIS OF PRESENTATION All amounts are in Canadian dollars unless otherwise noted. Our functional currency is the Canadian dollar. We prepare the consolidated financial statements on a historical cost basis, except for: • certain financial instruments as disclosed in note 16, which are measured at fair value; • the net deferred pension liability, which is measured as described in note 22; and • liabilities for stock-based compensation, which are measured at fair value as disclosed in note 24. (b) BASIS OF CONSOLIDATION Subsidiaries are entities we control. We include the financial statements of our subsidiaries in our consolidated financial statements from the date we gain control of them until our control ceases. We eliminate all intercompany transactions and balances between our subsidiaries on consolidation. (c) FOREIGN CURRENCY TRANSLATION We translate amounts denominated in foreign currencies into Canadian dollars as follows: • monetary assets and monetary liabilities – at the exchange rate in effect as at the date of the Consolidated Statements of Financial Position; • non-monetary assets, non-monetary liabilities, and related the historical depreciation and amortization expenses – at exchange rates; and • revenue and expenses other than depreciation and amortization – at the average rate for the month in which the transaction was recognized. N O 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 (d) CHANGES IN ACCOUNTING POLICIES ADOPTED IN 2016 Change in accounting policy for measurement of deferred income taxes Following the November 2016 publication of the IFRS Interpretations Committee’s agenda decision addressing the expected manner of recovery of intangible assets with indefinite useful lives for the purposes of measuring deferred tax, we have retrospectively changed our related accounting policy. The IFRS Interpretations Committee observed that in applying International Accounting Standard 12, an entity determines its expected manner of recovery of the carrying amount of the intangible asset with an indefinite useful life, and reflects the tax consequences that follow from that expected manner of recovery. Previously, we measured deferred taxes on temporary differences arising from the portion of indefinite-life intangible assets with no initial associated underlying tax basis using a capital gains tax rate based upon the notion that recovery would result solely from sales of the assets. Consequently, we have adopted an accounting policy to measure deferred taxes on temporary differences arising from indefinite-life intangible assets based upon the tax consequences that follow from the expected manner of recovery of the assets. The accounting policies set out in these notes to our consolidated financial statements have been applied in preparing the consolidated financial statements as at and for the year ended December 31, 2016 and the comparative information presented in these consolidated financial statements as at and for the year In preparing our opening and ended December 31, 2015. Income, comparative amended Consolidated Statements of Income, of Consolidated Consolidated Statements of Financial Position, and Consolidated Statements of Changes in Shareholders’ Equity, we have amended certain amounts reported in previously issued financial statements. Comprehensive Statements Adjustments to the Consolidated Statements of Income for the year ended December 31, 2015 (In millions of dollars, except per share amounts) December 31, 2015 Adjustments Note Previously reported for the year ended Other (income) expense Income tax expense Net income Earnings per share Basic Diluted (32) 466 1,381 28 11 (39) $ 2.68 $ 2.67 ($0.07) ($0.07) 11 12 13 13 Amended for the year ended December 31, 2015 (4) 477 1,342 $ 2.61 $ 2.60 Adjustments to the Consolidated Statements of Financial Position as at January 1, 2015 (In millions of dollars) Goodwill 1 Total assets 1 Deferred tax liabilities Shareholders’ equity Total liabilities and shareholders’ equity Previously reported as at January 1, 2015 Adjustments Note Amended as at January 1, 2015 3,883 26,522 1,769 5,481 26,522 8 12 14 14 84 (70) 14 3,897 26,536 1,853 5,411 26,536 1 The adjustment relating to total assets and goodwill was recognized entirely within our Media reportable segment. 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 107 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Adjustments to the Consolidated Statements of Financial Position as at December 31, 2015 (In millions of dollars) Goodwill 1 Total assets 1 Deferred tax liabilities Shareholders’ equity Total liabilities and shareholders’ equity Previously reported as at December 31, 2015 Adjustments as at January 1, 2015 Adjustments for the year ended December 31, 2015 Note Amended as at December 31, 2015 3,891 29,175 1,943 5,745 29,175 14 14 84 (70) 14 8 12 – – 39 (39) – 3,905 29,189 2,066 5,636 29,189 1 The adjustment relating to total assets and goodwill was recognized entirely within our Media reportable segment. Adoption of amendments to IFRS We adopted the following IFRS amendments in 2016. • Amendments to IAS 16, Property, Plant and Equipment and introduced a rebuttable IAS 38, presumption that revenue-based amortization methods for intangible assets is inappropriate. We adopted the amendment prospectively beginning on January 1, 2016. Intangible Assets the use of that • Amendments to IFRS 11, Joint Arrangements requiring business combination accounting to be applied to acquisitions of interests in a joint operation that constitute a business. We adopted the amendment on a prospective basis for acquisitions on or after January 1, 2016, in accordance with the transitional provisions. The adoption of these amendments did not have a material effect on our financial statements. our financial preparing consolidated (e) ADDITIONAL SIGNIFICANT ACCOUNTING POLICIES, ESTIMATES, AND JUDGMENTS When statements, management makes judgments, estimates, and assumptions that affect how accounting policies are applied and the amounts we report as assets, liabilities, revenue, and expenses. Our significant accounting policies, estimates, and judgments are identified in this note. Furthermore, the following information is disclosed throughout the notes as identified in the table below: • information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment to the amounts recognized in the consolidated financial statements; • information about judgments made in applying accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements; and • information on our significant accounting policies. Note Topic Page Accounting Policy Use of Estimates Use of Judgments 4 5 7 8 12 13 14 15 16 17 19 22 24 25 28 Reportable Segments Revenue Recognition Property, Plant and Equipment Intangible Assets and Goodwill Income Taxes Earnings Per Share Accounts Receivable Inventories Financial Instruments Investments Provisions Post-Employment Benefits Stock-Based Compensation Business Combinations Commitments and Contingent Liabilities 110 112 114 116 120 122 122 123 123 131 132 136 140 143 146 X X X X X X X X X X X X X X X X X X X X X X X X X X X X 108 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT (f) RECENT ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED The IASB has issued the following new standards that will become effective in a future year and will or could have an impact on our consolidated financial statements in future periods: • IFRS 15, Revenue from Contracts with Customers (IFRS 15) – IFRS 15 will supersede all existing standards and interpretations in IFRS relating to revenue, including IAS 18, Revenue and IFRIC 13, Customer Loyalty Programmes. IFRS 15 introduces a single model for recognizing revenue from contracts with customers. This standard applies to all contracts with customers, with only some exceptions, including certain contracts accounted for under other IFRSs. The standard requires revenue to be recognized in a manner that depicts the transfer of promised goods or services to a customer and at an amount that reflects the consideration expected to be received in exchange for transferring those goods or services. This is achieved by applying the following five steps: identify the contract with a customer; identify the performance obligations in the contract; 1. 2. 3. determine the transaction price; 4. allocate the transaction price to the performance obligations in the contract; and recognize revenue when (or as) the entity satisfies a performance obligation. 5. IFRS 15 also provides guidance relating to the treatment of contract acquisition and contract fulfillment costs. the application of this new standard will have We expect significant impacts on our reported results, specifically with regards to the timing of recognition and classification of revenue, and the treatment of costs incurred in acquiring customer contracts. The timing of recognition and classification of revenue will be affected because IFRS 15 requires the estimation of total consideration over the contract term at contract inception and allocation of consideration to all performance obligations in the contract based on their relative stand-alone selling prices. We anticipate this will most significantly affect our Wireless arrangements that bundle equipment and service together into monthly service fees, which will in an increase to equipment revenue recognized at contract inception and a decrease to service revenue recognized over the course of the contracts. result The treatment of costs incurred in acquiring customer contracts will be impacted as IFRS 15 requires certain contract acquisition costs (such as sales commissions) to be recognized as an asset and amortized into operating expenses over time. Currently, such costs are expensed as incurred. In addition, certain new assets and liabilities will be recognized Financial Position. on our Consolidated Statements of Specifically, a contract asset or contract liability will be recognized to account for any timing differences between the revenue recognized and the amounts billed to the customer. N O 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 We believe significant judgments will need to be made when defining the enforceable rights and obligations of a contract, in determining whether a promise to deliver goods or services is considered distinct, and to determine when the customer obtains control of the distinct good or service. The standard is effective for annual periods beginning on or after January 1, 2018. We are required to retrospectively apply IFRS 15 to all contracts that are not complete on the date of initial application. We intend to make a policy choice to restate each prior period presented and recognize the cumulative effect of initially applying IFRS 15 as an adjustment to the opening balance of equity at the beginning of the earliest period presented, subject to certain practical expedients we anticipate we will adopt. We have a team dedicated to ensuring our compliance with IFRS 15. This team has also been responsible for determining system requirements, ensuring our data collection is appropriate, and communicating the upcoming changes with various stakeholders. In addition, this team is assisting in the development of new internal controls that will help ensure the system runs as intended and the related results are accurate. We are implementing a new revenue recognition system to enable us to comply with the requirements of IFRS 15 on a contract-by-contract basis, including appropriately allocating revenue between different performance obligations within individual contracts for certain revenue streams. We expect to begin a parallel run under both IAS 18 and IFRS 15 using this system in 2017. We will have detailed data validation processes that will continue throughout the course of 2017. As a result, we are continuing to assess the impact of this standard on our consolidated financial statements and it is not yet possible to make a reliable estimate of its impact. We expect the adoption of IFRS 15 in our 2017 consolidated financial statements. to disclose the estimated financial effects of Instruments: • IFRS 9, Financial Instruments (IFRS 9) – In July 2014, the IASB issued the final publication of the IFRS 9 standard, which will supersede IAS 39, Financial recognition and measurement (IAS 39). IFRS 9 includes revised guidance on the classification and measurement of financial instruments, a new expected credit loss model for calculating impairment on financial assets, and the new hedge accounting guidance. Under IFRS 9, financial assets will be classified and measured based on the business model in which they are held and the characteristics of their contractual cash flows. The new hedge accounting standard will align hedge accounting more closely with risk management. IFRS 9 does not fundamentally change the types of hedging relationships or the requirement to measure and recognize ineffectiveness, however it will provide more hedging strategies used for risk management to qualify for hedge accounting and introduce more judgment to assess the effectiveness of a hedging relationship. It also carries forward the guidance on recognition and derecognition of financial instruments from IAS 39. The standard is effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. We are assessing the impact of this standard on our consolidated financial statements. 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 109 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IAS 17, Leases (IAS 17) standard. • IFRS 16, Leases (IFRS 16) – In January 2016, the IASB issued the final publication of the IFRS 16 standard, which will supersede the current IFRS 16 introduces a single accounting model for lessees and for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee will be required to recognize a right-of-use asset, representing its right to use the underlying asset, and a lease liability, representing its obligation to make lease payments. The accounting treatment for lessors will remain largely the same as under IAS 17. The standard is effective for annual periods beginning on or after January 1, 2019, with early adoption permitted, but only if the entity is also applying IFRS 15. We have the option to either: • apply IFRS 16 with full retrospective effect; or NOTE 3: CAPITAL RISK MANAGEMENT Our objectives in managing capital are to ensure we have sufficient liquidity to meet all of our commitments and to execute our business plan. We define capital that we manage as shareholders’ equity and indebtedness (including current portion of our long- term debt, long-term debt, and short-term borrowings). repay debt and/or short-term borrowings, We manage our capital structure, commitments, and maturities and make adjustments based on general economic conditions, financial markets, operating risks, our investment priorities, and working capital requirements. To maintain or adjust our capital structure, we may, with approval from our Board of Directors, issue or issue shares, repurchase shares, pay dividends, or undertake other activities as deemed appropriate under the circumstances. The Board of Directors reviews and approves the annual capital and operating budgets, as well as any material transactions that are not part of the ordinary course of business, including proposals for acquisitions or other major financing transactions, investments, or divestitures. NOTE 4: SEGMENTED INFORMATION ACCOUNTING POLICY Reportable segments We determine our reportable segments based on, among other things, how our chief operating decision makers, the Chief Executive Officer and Chief Financial Officer of RCI, regularly review our operations and performance. They review adjusted operating profit as the key measure of profit for the purpose of assessing performance for each segment and to make decisions about the allocation of resources. Adjusted operating profit is defined as income before stock-based compensation, depreciation and amortization, restructuring, acquisition and other, finance costs, impairment of assets and related onerous contract charges, other expense (income), and income tax expense. We follow the same accounting policies for our segments as those described in the notes to our consolidated financial statements. We account for transactions between reportable segments in the same way we account for transactions with external parties and eliminate them on consolidation. 110 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT • recognize the cumulative effect of initially applying IFRS 16 as an adjustment to opening equity at the date of initial application. We are assessing the impact of this standard on our consolidated financial statements; however, we believe that the result will be a significant increase to assets and liabilities, as we will be required to record a right-of-use asset and a corresponding lease liability on our Consolidated Statements of Financial Position, as well as a decrease to operating costs, an increase to finance costs (due to accretion of the lease liability) and an increase to depreciation and amortization (due to amortization of the right-of-use asset). We monitor debt leverage ratios as part of the management of liquidity and shareholders’ return to sustain future development of the business, conduct valuation-related analyses, and make decisions about capital. The wholly-owned subsidiary through which our Rogers Platinum MasterCard and Fido MasterCard programs are operated is regulated by the Office of the Superintendent of Financial Institutions, which requires that a minimum level of regulatory capital be maintained. Rogers’ subsidiary was in compliance with that requirement as at December 31, 2016 and 2015. The capital requirements are not material to the Company as at December 31, 2016 or December 31, 2015. With the exception of the Rogers Platinum MasterCard and the Fido MasterCard programs and the subsidiary through which they are operated, we are not subject to externally imposed capital requirements. Our overall strategy for capital risk management has not changed since December 31, 2015. USE OF ESTIMATES AND JUDGMENT JUDGMENTS We make significant judgments in determining our operating segments. These are components that engage in business activities from which they may earn revenue and incur expenses, for which operating results are regularly reviewed by our chief operating decision makers to make decisions about resources to be allocated and assess component performance, and for which discrete financial information is available. EXPLANATORY INFORMATION Our reportable segments are Wireless, Cable, Business Solutions, and Media (see note 1). All four segments operate substantially in Canada. Corporate items and eliminations include our interests in businesses that are not reportable operating segments, corporate administrative functions, and eliminations of inter-segment revenue and costs. Segment results include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. N O 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 13,702 8,610 5,092 61 2,276 484 160 761 191 1,159 2,352 3,905 13,414 8,382 5,032 55 2,277 111 774 (4) 1,819 2,440 3,905 Corporate items and eliminations Consolidated totals Business Solutions 384 261 123 Media 2,146 1,977 169 (193) (34) (159) INFORMATION BY SEGMENT Year ended December 31, 2016 (In millions of dollars) Revenue Operating costs 1 Adjusted operating profit Stock-based compensation 1 Depreciation and amortization Impairment of assets and related onerous contract charges Restructuring, acquisition and other Finance costs Other expense Income before income tax expense Additions to property, plant and equipment Goodwill Total assets Note Wireless Cable 5 24 7, 8 7 9 10 11 7,916 4,631 3,285 3,449 1,775 1,674 702 1,160 14,074 1,085 1,379 5,288 146 429 62 937 357 – 1,219 2,474 5,287 28,342 Corporate items and eliminations Consolidated totals (158) (5) (153) 1 Included in Operating costs on the Consolidated Statements of Income. Year ended December 31, 2015 (In millions of dollars) Revenue Operating costs 1 Adjusted operating profit Stock-based compensation 1 Depreciation and amortization Restructuring, acquisition and other Finance costs Other income 2 Income before income tax expense 2 Business Solutions 377 261 116 Media 2,079 1,907 172 Note Wireless Cable 7,651 4,412 3,239 3,465 1,807 1,658 5 24 7, 8 9 10 11 Additions to property, plant and equipment Goodwill 2 Total assets 2 866 1,160 14,543 1,030 1,379 6,007 187 429 60 937 297 – 1,338 2,579 4,722 29,189 1 Included in Operating costs on the Consolidated Statements of Income. 2 As a result of the IFRS Interpretations Committee’s agenda decision relating to IAS 12 Income Taxes, certain amounts have been retrospectively amended. See note 2(d). 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 111 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5: REVENUE ACCOUNTING POLICY Revenue recognition We recognize revenue when we can estimate its amount, have delivered on our obligations within the revenue-generating arrangements, and are reasonably assured that we can collect it. Revenue is recognized net of discounts. Source of revenue Monthly subscriber fees for: • wireless airtime and data services; • cable, telephony, and Internet services; • network services; • media subscriptions; and • rental of equipment How we recognize revenue • As the service is provided Revenue from roaming, long distance, pay per use, and other optional or non-subscription services and other sales of products Revenue from the sale of wireless and cable equipment • As the service is provided or product is delivered • When the equipment is delivered and accepted by the independent dealer or subscriber in a direct sales channel Equipment subsidies related to providing equipment to new and existing subscribers • Equipment subsidies are recognized as a reduction of equipment revenue when the equipment is activated Activation fees charged to subscribers in Wireless • As part of equipment revenue upon activation of the Advertising revenue Monthly subscription revenue received by television stations for subscriptions from cable and satellite providers Toronto Blue Jays revenue from home game admission and concessions Toronto Blue Jays revenue from the Major League Baseball Revenue Sharing Agreement which redistributes funds between member clubs based on each club’s relative revenue Revenue from Toronto Blue Jays, radio, and television broadcast agreements equipment • These fees do not meet the criteria as a separate unit of accounting • When the advertising airs on our radio or television stations, is featured in our publications, or displayed on our digital properties • When the services are delivered to cable and satellite providers’ subscribers • When the related games are played during the baseball season and when goods are sold • When the amount can be determined • At the time the related games are aired Revenue from sublicensing of program rights • Over the course of the applicable season Awards granted to customers loyalty programs, which are considered a separately identifiable component of the sales transactions through customer • Estimate the portion of the original sale to allocate to the award credit based on the fair value of the future goods and services that can be obtained when the credit is redeemed • Defer the allocated amount as unearned revenue until the awards are redeemed by the customer and we provide the goods or services • Recognize revenue based on the redemption of award credits relative to the award credits that we expect to be redeemed Interest income on credit card receivables • As it is earned (i.e. upon the passage of time) using the effective interest method 112 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT Multiple deliverable arrangements We offer some products and services as part of multiple deliverable arrangements. We recognize these as follows: • divide the products and services into separate units of accounting, as long as the delivered elements have stand-alone value to customers and we can determine the fair value of any undelivered elements objectively and reliably; then • measure and allocate the arrangement consideration among the accounting units based on their relative fair values and recognize revenue related to each unit when the relevant criteria are met for each unit individually; however • when an amount allocated to a delivered item is contingent upon the delivery of additional items or meeting specified performance conditions, the amount allocated to the delivered item is limited to the non-contingent amount, as applicable. Unearned revenue We recognize payments we receive in advance of providing goods and services as unearned revenue. Advance payments include subscriber deposits, cable installation fees, ticket deposits related to Toronto Blue Jays ticket sales, and amounts subscribers pay for services and subscriptions that will be provided in future periods. N O 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 EXPLANATORY INFORMATION (In millions of dollars) 2016 2015 Years ended December 31 Wireless: Service revenue Equipment sales Total Wireless Cable: Internet Television Phone Service revenue Equipment sales Total Cable Business Solutions: Next generation Legacy Service revenue Equipment sales Total Business Solutions Media: Advertising Subscription Retail Other 7,258 658 7,916 1,495 1,562 386 3,443 6 3,449 307 71 378 6 384 870 474 325 477 6,902 749 7,651 1,343 1,669 445 3,457 8 3,465 288 85 373 4 377 866 440 308 465 Total Media 2,146 2,079 Corporate items and intercompany eliminations Total revenue (193) (158) 13,702 13,414 NOTE 6: OPERATING COSTS (In millions of dollars) 2016 2015 Years ended December 31 Cost of equipment sales and direct sales channel subsidies Merchandise for resale Other external purchases Employee salaries and benefits and stock-based compensation Total operating costs 1,954 209 4,435 2,073 8,671 1,849 202 4,411 1,975 8,437 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 113 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7: PROPERTY, PLANT AND EQUIPMENT ACCOUNTING POLICY Recognition and measurement, including depreciation We measure property, plant and equipment upon initial recognition at cost and begin recognizing depreciation when the asset is ready for its intended use. Subsequently, property, plant and equipment is carried at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes: • the cost of materials and direct labour; • costs directly associated with bringing the assets to a working condition for their intended use; • expected costs of decommissioning the items and restoring the sites on which they are located (see note 19); and • borrowing costs on qualifying assets. We depreciate property, plant and equipment over its estimated useful life by charging depreciation expense to net income as follows: Asset Basis Estimated useful life Buildings Cable and wireless network Computer equipment and Diminishing balance 5 to 40 years 3 to 30 years Straight-line 4 to 10 years Straight-line software Customer premise equipment Straight-line Straight-line Leasehold improvements 3 to 5 years Over shorter of estimated useful life or lease term Equipment and vehicles Diminishing balance 3 to 20 years We recognize all costs related to subscriber acquisition and retention in net income as incurred, except connection and installation costs that relate to the cable network, which are capitalized and depreciated over the expected life of the Cable customer. We calculate gains and losses on the disposal of property, plant and equipment by comparing the proceeds from the disposal with the item’s carrying amount and recognize the gain or loss in net income. We capitalize development expenditures if they meet the criteria for recognition as an asset and amortize them over their expected useful lives once the assets to which they relate are available for use. We expense research expenditures, maintenance costs, and training costs as incurred. Impairment testing We test non-financial assets with finite useful lives for impairment whenever an event or change in circumstances indicates that their carrying amounts may not be recoverable. The asset is impaired if the recoverable amount is less than the carrying amount. If we cannot estimate the recoverable amount of an individual asset because it does not generate independent cash inflows, we test the entire cash generating unit (CGU) for impairment. 114 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT A CGU is the smallest identifiable group of assets that generates cash inflows largely independent of the cash inflows from other assets or groups of assets. Recognition and measurement of an impairment charge An item of property, plant and equipment, an intangible asset, or goodwill is impaired if the recoverable amount is less than the carrying amount. The recoverable amount of a CGU or asset is the higher of its: • fair value less costs to sell; and • value in use. If our estimate of the asset’s or CGU’s recoverable amount is less than its carrying amount, we reduce its carrying amount to the recoverable amount and recognize the loss in net income immediately. We reverse a previously recognized impairment loss if our estimate of the recoverable amount of a previously impaired asset or CGU has increased such that the impairment recognized in a previous is recognized by increasing the year has reversed. The reversal asset’s or CGU’s carrying amount to our new estimate of its recoverable amount. The carrying amount of the asset or CGU subsequent to the reversal cannot be greater than its carrying amount if we had not recognized an impairment loss in previous years. USE OF ESTIMATES AND JUDGMENTS ESTIMATES Components of an item of property, plant and equipment may have different useful lives. We make significant estimates when determining depreciation rates and asset useful lives, which require taking into account company-specific factors, such as our past experience and expected use, and industry trends, such as technological advancements. We monitor and review residual values, depreciation rates, and asset useful lives at least once a year and change them if they are different from our previous estimates. We recognize the effect of changes in estimates in net income prospectively. We use estimates to determine certain costs that are directly attributable to self-constructed assets. These estimates primarily include certain internal and external direct labour, overhead, and interest costs associated with the acquisition, construction, development, or betterment of our networks. Furthermore, we use estimates in determining the recoverable amount of property, plant and equipment. The determination of the recoverable amount for the purpose of impairment testing requires the use of significant estimates, such as: • future cash flows; • terminal growth rates; and • discount rates. We estimate value in use for impairment tests by discounting estimated future cash flows to their present value. We estimate the discounted future cash flows for periods of up to five years, depending on the CGU, and a terminal value. The future cash flows are based on our estimates and expected future operating results of the CGU after considering economic conditions and a general outlook for the CGU’s industry. Our discount rates consider market rates of return, debt to equity ratios and certain risk premiums, among other things. The terminal value is the value attributed to the CGU’s operations beyond the projected time period of the cash flows using a perpetuity rate based on expected economic conditions and a general outlook for the industry. We determine fair value less costs to sell in one of the following two ways: • Analyzing discounted cash flows – we estimate the discounted future cash flows for periods of five to ten years, depending on the CGU, and a terminal value, similar to the value in use methodology described above, while applying assumptions consistent with those a market participant would make. Future cash flows are based on our estimates of expected future operating results of the CGU. Our estimates of future cash flows, terminal values, and discount rates consider similar factors to EXPLANATORY INFORMATION those described above for value in use estimates. • Using a market approach – we estimate the recoverable amount the CGU using multiples of operating performance of of comparable entities and precedent transactions in that industry. We make certain assumptions when deriving expected future cash flows, which may include assumptions pertaining to discount and terminal growth rates. These assumptions may differ or change quickly depending on economic conditions or other events. It is therefore possible that future changes in assumptions may negatively affect future valuations of CGUs and goodwill, which could result in impairment losses. judgments JUDGMENTS We make significant for depreciating our property, plant and equipment that we believe most accurately represent the consumption of benefits derived from those assets and are most representative of the economic substance of the intended use of the underlying assets. in choosing methods N O 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 (In millions of dollars) December 31, 2016 December 31, 2015 December 31, 2014 Land and buildings Cable and wireless networks Computer equipment and software Customer premise equipment Leasehold improvements Equipment and vehicles Total property, plant and equipment Accumulated depreciation Net carrying amount Accumulated depreciation Cost (375) (13,035) (2,424) (1,156) (193) (720) 687 998 7,073 20,900 1,872 5,294 404 1,658 264 423 449 1,311 (347) (13,579) (3,421) (1,197) (175) (868) Net carrying amount 651 7,321 1,873 461 248 443 Cost 942 19,588 4,960 1,543 383 1,236 Accumulated depreciation (319) (12,387) (3,353) (988) (151) (799) Net carrying amount 623 7,201 1,607 555 232 437 (17,903) 10,749 30,584 (19,587) 10,997 28,652 (17,997) 10,655 Cost 1,062 20,108 4,296 1,560 457 1,169 28,652 The tables below summarize the changes in the net carrying amounts of property, plant and equipment during 2016 and 2015. (In millions of dollars) December 31, 2015 Land and buildings Cable and wireless networks Computer equipment and software Customer premise equipment Leasehold improvements Equipment and vehicles Total property, plant and equipment 1 Includes disposals, reclassifications, and other adjustments. Net carrying amount 651 7,321 1,873 461 248 443 10,997 Additions Depreciation Impairment Other 1 64 1,173 732 240 46 97 2,352 (28) (1,216) (522) (296) (30) (91) (2,183) – (205) (207) – – – (412) – – (4) (1) – – (5) December 31, 2016 Net carrying amount 687 7,073 1,872 404 264 449 10,749 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 115 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions of dollars) December 31, 2014 December 31, 2015 Land and buildings Cable and wireless network Computer equipment and software Customer premise equipment Leasehold improvements Equipment and vehicles Total property, plant and equipment Net carrying amount Additions Acquisitions from business combinations Depreciation Other 1 Net carrying amount 623 7,201 1,607 555 232 437 10,655 57 1,322 691 245 37 88 2,440 – 15 1 – 1 – 17 (29) (1,217) (426) (339) (25) (81) (2,117) – – – – 3 (1) 2 651 7,321 1,873 461 248 443 10,997 (In millions of dollars) Impairment of property, plant and equipment Onerous contracts and other Total impairment of assets and related onerous contract charges Year ended December 31, 2016 412 72 484 The $484 million charge relates to a change in strategic direction such that we have discontinued the internal development of our IPTV product. We have determined there is no significant salvage value for any of the assets that were impaired as determined based upon fair value less costs of disposal. The onerous contracts charges primarily represent the remaining contractual liabilities for the development of our IPTV product and were recognized in accounts payable and accrued liabilities. All related charges impacted our Cable segment. During the year ended December 31, 2015, we did not record an impairment charge. Finite useful lives We amortize intangible assets with finite useful lives into depreciation and amortization on the Consolidated Statements of Income, except programming rights which are amortized into operating costs on the Consolidated Statements of Income, on a straight-line basis over their estimated useful lives as noted in the table below. We monitor and review the useful lives, residual values, and amortization methods at least once a year and change them if from our previous estimates. We recognize the effects of changes in estimates in net income prospectively. they are different Intangible asset Estimated useful life Customer relationships Roaming agreements 3 to 10 years 12 years 1 Includes disposals, reclassifications, and other adjustments. Property, plant and equipment not yet in service and therefore not depreciated as at December 31, 2016 was $949 million (2015 – $1,017 million). During 2016, capitalized interest pertaining to property, plant and equipment was recognized at a weighted average rate of approximately 3.9% (2015 – 4.0%). In 2016, we performed an analysis to identify fully depreciated assets that had been disposed of. This resulted in an adjustment to cost and accumulated depreciation of $3,557 million. The disposals had nil impact on the Consolidated Statements of Income. IMPAIRMENT OF ASSETS AND RELATED ONEROUS CONTRACT CHARGES During the year ended December 31, 2016, we recorded a total charge of $484 million for asset impairment and onerous contracts related to our Internet Protocol television (IPTV) product. NOTE 8: INTANGIBLE ASSETS AND GOODWILL ACCOUNTING POLICY RECOGNITION AND MEASUREMENT, INCLUDING AMORTIZATION We measure intangible assets upon initial recognition at cost unless they are acquired through a business combination, in which case they are measured upon initial recognition at fair value. We begin recognizing amortization for intangible assets with finite useful lives when the asset is ready for its intended use. Upon commencement of amortization, the asset is carried at cost less accumulated amortization and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of a separately-acquired intangible asset comprises: • its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates; and • any directly attributable cost of preparing the asset for its intended use. Indefinite useful lives We do not amortize intangible assets with indefinite lives, including spectrum licences, broadcast licences, and certain brand names. 116 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT N O 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 Acquired program rights Program rights are contractual rights we acquire from third parties to broadcast programs, including rights to broadcast live sporting events. We recognize them at cost less accumulated amortization and accumulated impairment losses. We capitalize program rights on the Consolidated Statements of Financial Position when the licence period begins and the program is available for use and amortize them to other external purchases in operating costs on the Consolidated Statements of the expected exhibition period. If programs are not scheduled, we consider the related program rights to be impaired and write them off. Otherwise, we test them for impairment as intangible assets with finite useful lives. Income over The costs for multi-year sports and television broadcast rights agreements are recognized in operating expenses during the applicable seasons based on the pattern in which the rights are aired or are expected to be consumed. To the extent that prepayments are made at the commencement of a multi-year contract towards future years’ rights fees, these prepayments are recognized as intangible assets and amortized to operating expenses over the contract term. To the extent that prepayments are made for annual contractual fees within a season, they are included in other current assets – prepaid expenses on our Consolidated Statements of Financial Position as the rights will be consumed within the next twelve months. Goodwill We recognize goodwill arising from business combinations when the fair value of the separately identifiable assets we acquired and liabilities we assumed is lower than the consideration we paid (including the recognized amount of the non-controlling interest, if any). If the fair value of the consideration transferred is lower than the separately identified assets and liabilities, we that of immediately recognize the difference as a gain in net income. IMPAIRMENT TESTING lives for impairment We test intangible assets with finite useful whenever an event or change in circumstances indicates that their carrying amounts may not be recoverable. We test indefinite-life intangible assets and goodwill for impairment once per year as at October 1, or more frequently if we identify indicators of impairment. If we cannot estimate the recoverable amount of an individual intangible asset because it does not generate independent cash inflows, we test the entire CGU for impairment. Goodwill is allocated to CGUs (or groups of CGUs) based on the level at which management monitors goodwill, which cannot be higher than an operating segment. The allocation of goodwill is made to CGUs (or groups of CGUs) that are expected to benefit from the synergies of the business combination from which the goodwill arose. Recognition and measurement of an impairment charge is impaired if the recoverable An intangible asset or goodwill amount is less than the carrying amount. The recoverable amount of a CGU or asset is the higher of its: • fair value less costs to sell; and • value in use. We reverse a previously recognized impairment loss, except in respect of goodwill, if our estimate of the recoverable amount of a previously impaired asset or CGU has increased such that the impairment recognized in a previous year has reversed. The reversal is recognized by increasing the asset’s or CGU’s carrying its recoverable amount. The amount to our new estimate of carrying amount of the asset or CGU subsequent to the reversal cannot be greater if we had not than its carrying amount recognized an impairment loss in previous years. USE OF ESTIMATES AND JUDGMENTS ESTIMATES We use estimates in determining the recoverable amount of intangible assets and goodwill. The determination of the recoverable amount for the purpose of impairment testing requires the use of significant estimates, such as: • future cash flows; • terminal growth rates; and • discount rates. We estimate value in use for impairment tests by discounting estimated future cash flows to their present value. We estimate the discounted future cash flows for periods of up to five years, depending on the CGU, and a terminal value. The future cash flows are based on our estimates and expected future operating results of the CGU after considering economic conditions and a general outlook for the CGU’s industry. Our discount rates consider market rates of return, debt to equity ratios and certain risk premiums, among other things. The terminal value is the value attributed to the CGU’s operations beyond the projected time period of the cash flows using a perpetuity rate based on expected economic conditions and a general outlook for the industry. We determine fair value less costs to sell in one of the following two ways: • Analyzing discounted cash flows – we estimate the discounted future cash flows for periods of five to ten years, depending on the CGU, and a terminal value, similar to the value in use methodology described above, while applying assumptions consistent with those a market participant would make. Future cash flows are based on our estimates of expected future operating results of the CGU. Our estimates of future cash flows, terminal values, and discount rates consider similar factors to those described above for value in use estimates. • Using a market approach – we estimate the recoverable amount the CGU using multiples of operating performance of of comparable entities and precedent transactions in that industry. We make certain assumptions when deriving expected future cash flows, which may include assumptions pertaining to discount and terminal growth rates. These assumptions may differ or change quickly depending on economic conditions or other events. It is therefore possible that future changes in assumptions may negatively affect future valuations of CGUs and goodwill, which could result in impairment losses. If our estimate of the asset’s or CGU’s recoverable amount is less than its carrying amount, we reduce its carrying amount to the recoverable amount and recognize the loss in net income immediately. 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 117 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUDGMENTS We make significant judgments that affect the measurement of our intangible assets and goodwill. After review of the competitive, legal, regulatory, and other factors, it is our view that these factors do not limit the useful lives of our spectrum and broadcast licences. Judgment is applied when deciding to designate our spectrum and broadcast licences as assets with indefinite useful lives since we believe the licences are likely to be renewed for the foreseeable future such that there is no limit to the period that these assets are expected to generate net cash inflows. We make judgments to determine that these assets have indefinite lives, analyzing all relevant factors, including the expected usage of the asset, the typical life cycle of the asset, and anticipated changes in the market demand for the products and services the asset helps generate. Judgment is also applied in choosing methods for amortizing our intangible assets and program rights that we believe most accurately represent the consumption of those assets and are most representative of the economic substance of the intended use of the underlying assets. Finally, we make judgments in determining CGUs and the allocation of goodwill to CGUs or groups of CGUs for the purpose of impairment testing. EXPLANATORY INFORMATION (In millions of dollars) December 31, 2016 December 31, 2015 December 31, 2014 Cost prior to impairment losses Accumulated amortization Accumulated impairment losses Net carrying amount Cost prior to impairment losses Accumulated amortization Accumulated impairment losses Net carrying amount Cost prior to impairment losses Accumulated amortization Accumulated impairment losses Net carrying amount Indefinite-life intangible assets: Spectrum licences Broadcast licences Brand names Finite-life intangible assets: Customer relationships Roaming agreements Marketing agreements Acquired program rights Total intangible assets Goodwill 1 Total intangible assets and 6,416 329 420 1,609 524 10 289 9,597 4,126 – – (270) (1,470) (524) (10) (75) (2,349) – – (99) (14) 6,416 230 136 – – – (5) 139 – – 209 (118) 7,130 (221) 3,905 6,416 324 420 1,609 523 10 332 9,634 4,126 – – (270) (1,414) (488) (10) (91) (2,273) – – (99) (14) 6,416 225 136 – – – (5) 195 35 – 236 (118) 7,243 (221) 3,905 5,576 324 420 1,620 523 10 343 8,816 4,118 – – (255) (1,339) (444) (10) (62) (2,110) – – 5,576 225 151 (99) (14) – – – (5) 281 79 – 276 (118) 6,588 (221) 3,897 goodwill 13,723 (2,349) (339) 11,035 13,760 (2,273) (339) 11,148 12,934 (2,110) (339)10,485 1 As a result of the IFRS Interpretations Committee’s agenda decision relating to IAS 12 Income Taxes, certain amounts have been retrospectively amended. See note 2(d). The tables below summarize the changes in the net carrying amounts of intangible assets and goodwill in 2016 and 2015. (In millions of dollars) Spectrum licences Broadcast licences Brand names Customer relationships Roaming agreements Acquired program rights Total intangible assets Goodwill 1 Total intangible assets and goodwill December 31, 2015 Net carrying amount 1 Net additions Amortization 2 Other 3 Net carrying amount December 31, 2016 6,416 225 136 195 35 7,007 236 7,243 3,905 11,148 – – – – – – 46 46 – 46 – – – (58) (35) (93) (71) (164) – (164) – 5 – 2 – 7 (2) 5 – 5 6,416 230 136 139 – 6,921 209 7,130 3,905 11,035 1 As a result of the IFRS Interpretations Committee’s agenda decision relating to IAS 12 Income Taxes, certain amounts have been retrospectively amended. See note 2(d). 2 Of the $164 million of total amortization, $71 million related to acquired program rights is included in Other external purchases in Operating costs (see note 6), and $93 million in depreciation and amortization on the Consolidated Statements of Income. 3 Includes disposals, write-downs, reclassifications, and other adjustments. In 2016, there were no acquisitions from business combinations. 118 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT N O 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 (In millions of dollars) December 31, 2014 December 31, 2015 Net carrying amount 1 Acquisitions from business combinations Net additions Amortization 2 Other 3 Net carrying amount 3 Spectrum licences Broadcast licences Brand names Customer relationships Roaming agreements Acquired program rights Total intangible assets Goodwill 1 5,576 225 151 281 79 6,312 276 6,588 3,897 Total intangible assets and goodwill 10,485 458 – – 19 – 477 – 477 8 485 381 – – – – 381 64 445 – 445 – – (15) (101) (44) (160) (87) (247) – (247) 1 – – (4) – (3) (17) (20) – (20) 6,416 225 136 195 35 7,007 236 7,243 3,905 11,148 1 As a result of the IFRS Interpretations Committee’s agenda decision relating to IAS 12 Income Taxes, certain amounts have been retrospectively amended. See note 2(d). 2 Of the $247 million of total amortization, $87 million related to acquired program rights is included in Other external purchases in Operating costs (see note 6), and $160 million in depreciation and amortization on the Consolidated Statements of Income. 3 Includes disposals, write-downs, reclassifications, and other adjustments including a write-off of certain programming rights following a reorganization of the OMNI television stations (see note 9). CHANGE IN ACCOUNTING ESTIMATE Effective January 1, 2016, we made a change in accounting estimates relating to the useful lives of certain brand name assets. We determined that these assets have an indefinite useful life as we believe the brands are core to our long-term going concern. As a result of this change in estimate, we ceased recording amortization on these assets effective January 1, 2016 on a prospective basis. 2015 SPECTRUM LICENCE ACQUISITIONS 2500 MHz spectrum licence auction We participated in the 2500 MHz spectrum licence auction in Canada during 2015. We were awarded 41 spectrum licences consisting of 20 MHz blocks of contiguous, paired spectrum in major geographic markets in Canada. Upon acquisition, we recognized the spectrum licences as intangible assets of $27 million, which included $3 million of directly attributable costs. Shaw spectrum licences We obtained 20 MHz of contiguous, paired AWS-1 spectrum licences from Shaw Communications Inc. (Shaw) after exercising a previously acquired option and paying the final $100 million installment ($250 million was previously paid in 2013). Upon acquisition, we recognized the spectrum licences as intangible assets of $352 million, which included $2 million of directly attributable costs. Subsequent to exercising the option, certain non-contiguous spectrum licences acquired from Shaw were transferred to WIND Mobile Corp. for nominal cash proceeds. (WIND) Data & Audio-Visual Enterprises Wireless Inc. (Mobilicity) spectrum licences We obtained $458 million of AWS-1 spectrum licences through our acquisition of Mobilicity as described in note 25, and recognized the licences of $458 million as intangible assets upon acquisition. ANNUAL IMPAIRMENT TESTING For purposes of testing goodwill for impairment, our CGUs, or groups of CGUs, correspond to our operating segments as disclosed in note 4. The table below is an overview of the methods and key assumptions we used in 2016 to determine recoverable amounts for CGUs or groups of CGUs, with indefinite-life intangible assets or goodwill that we consider significant. (In millions of dollars, except periods used and rates) Carrying value of goodwill Carrying value of indefinite-life intangible assets Recoverable amount method Period of projected cash flows (years) Terminal growth rates (%) Pre-tax discount rates (%) Wireless Cable Media 1,160 1,379 937 6,549 Value in use – Value in use 233 Fair value less cost to sell 5 5 5 0.5 1.0 2.0 7.9 7.6 9.2 Our fair value measurement for Media is classified as Level 3 in the fair value hierarchy. We did not recognize an impairment charge related to our goodwill or intangible assets in 2016 or 2015 because the recoverable amounts of the CGUs exceeded their carrying values. 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 119 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9: RESTRUCTURING, ACQUISITION AND OTHER During the year ended December 31, 2016, we incurred $160 million (2015 – $111 million) in restructuring, acquisition and other expenses. These expenses in 2016 primarily consisted of severance costs associated with the targeted restructuring of our employee base and costs related to the wind down of and changes to certain businesses. In 2015, these expenses were incurred primarily as a result of the targeted restructuring of our employee base, a reorganization of our OMNI the acquisition of Mobilicity, and the purchase of our interest in Glentel. television stations, NOTE 10: FINANCE COSTS (In millions of dollars) Note 2016 2015 Years ended December 31 Interest on borrowings Interest on post-employment benefits liability Loss on repayment of long-term debt Loss on foreign exchange Change in fair value of derivative 22 16 20 instruments Capitalized interest Other Total finance costs 758 761 9 – 13 (16) (18) 15 11 7 11 3 (29) 10 761 774 NOTE 11: OTHER EXPENSE (INCOME) (In millions of dollars) Losses from associates and joint ventures Gain on acquisition of Mobilicity 1 Net loss on divestitures pertaining to investments Other investment income Total other expense (income) Years ended December 31 Note 2016 2015 see note 2(d) 17 25 216 – 11 (36) 191 99 (74) – (29) (4) 1 As a result of the IFRS Interpretations Committee’s agenda decision relating to IAS 12 Income Taxes, certain amounts have been retrospectively amended. See note 2(d). NOTE 12: INCOME TAXES ACCOUNTING POLICY Income tax expense includes both current and deferred taxes. We recognize income tax expense in net income unless it relates to an item recognized directly in equity or other comprehensive income. We provide for income taxes based on all of the information that is currently available. Current tax expense is tax we expect to pay or receive based on our taxable income or loss during the year. We calculate the current tax expense using tax rates enacted or substantively enacted as at the reporting date, including any adjustment to taxes payable or receivable related to previous years. Deferred tax assets and liabilities arise from temporary differences between the carrying amounts of the assets and liabilities we recognize on our Consolidated Statements of Financial Position 120 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT In 2016, we announced the decision to wind down our shomi joint venture. As a result of this decision, we recognized a net loss of $140 million, which is recorded in losses from associates and joint ventures, associated with the writedown of the investment and the estimated cost of our share of the remaining contractual obligations of shomi (most significantly video content costs). See note 19 for more information about the provision related to our share of the remaining contractual obligations based on our best estimate of the expected future costs. A $72 million loss related to our share of the change in the fair value of an obligation relating to one of our joint ventures has been recognized in losses from associates and joint ventures for the year ended December 31, 2015. and their respective tax bases. We calculate deferred tax assets and liabilities using enacted or substantively enacted tax rates that will apply in the years in which the temporary differences are expected to reverse. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax assets and liabilities and they relate to income taxes levied by the same authority on: • the same taxable entity; or • different taxable entities where these entities intend to settle current tax assets and liabilities on a net basis or the tax assets and liabilities will be realized and settled simultaneously. We recognize a deferred tax asset for unused losses, tax credits, and deductible temporary differences to the extent it is probable that future taxable income will be available to use the asset. CHANGE IN ACCOUNTING POLICY In November 2016, the IFRS Interpretation Committee issued clarifications to IAS 12 that provide guidance on the expected application of tax rates related to the recovery of an indefinite-life intangible asset for the purposes of measuring deferred tax. We have retrospectively changed our related accounting policy (see note 2d). USE OF ESTIMATES AND JUDGMENTS JUDGMENTS We make significant judgments in interpreting tax rules and regulations when we calculate income tax expense. We make judgments to evaluate whether we can recover a deferred tax asset based on our assessment of existing tax laws, estimates of future profitability, and tax planning strategies. EXPLANATORY INFORMATION (In millions of dollars) Current tax expense: Total current tax expense Deferred tax (recovery) expense: (Reversal) origination of temporary differences Revaluation of deferred tax balances due to legislative changes Total deferred tax (recovery) expense Total income tax expense Years ended December 31 2016 2015 see note 2(d) 386 (65) 3 (62) 324 234 237 6 243 477 N O 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 The table below shows the difference between income tax expense computed by applying the statutory income tax rate to income before income tax expense and the income tax expense for the year. (In millions of dollars, except rates) Statutory income tax rate Income before income tax expense Computed income tax expense Increase (decrease) in income tax expense resulting from: Non-deductible stock-based compensation Non-deductible portion of equity losses Income tax adjustment, legislative tax change Non-taxable gain on acquisition Non-taxable portion of capital gain Other Years ended December 31 2016 26.6% 1,159 308 2015 see note 2(d) 26.5% 1,819 482 5 18 3 – (7) (3) 5 11 6 (20) – (7) Total income tax expense Effective income tax rate 324 28.0% 477 26.2% DEFERRED TAX ASSETS AND LIABILITIES (In millions of dollars) Deferred tax assets Deferred tax liabilities Net deferred tax liability As at December 31 2016 2015 see note 2(d) 8 (1,917) (1,909) 9 (2,066) (2,057) The table below summarizes the movement of net deferred tax assets and liabilities during 2016 and 2015. Deferred tax assets (liabilities) (In millions of dollars) Property, plant and equipment and inventory Goodwill and other intangibles Stub period income and partnership reserve Investments Non-capital loss carryforwards January 1, 2016 (Expense) recovery in net income (Expense) recovery in other comprehensive income December 31, 2016 (921) (26) – (947) (844) (109) – (953) (178) 178 – – (61) 7 (7) (61) 32 (8) – 24 Deferred tax assets (liabilities) (In millions of dollars) Property, plant and equipment and inventory Goodwill and other intangibles Stub period income and partnership reserve Investments Non-capital loss carryforwards January 1, 2015 (see note 2(d)) (Expense) recovery in net income (Expense) recovery in other comprehensive income Acquisitions December 31, 2015 (see note 2(d)) (889) (32) – – (921) (632) (116) – (96) (844) (313) 135 – – (178) (80) – 19 – (61) 54 (197) – 175 32 Other Total (85) 20 93 28 (2,057) 62 86 (1,909) Other Total 16 (33) (70) 2 (85) (1,844) (243) (51) 81 (2,057) 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 121 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS We have not recognized deferred tax assets for the following items: (In millions of dollars) Capital losses in Canada that can be applied against future capital gains Tax losses in foreign jurisdictions that expire between 2023 and 2035 Deductible temporary differences in foreign jurisdictions Total unrecognized temporary differences As at December 31 2016 2015 1 36 14 51 31 34 49 114 NOTE 13: EARNINGS PER SHARE ACCOUNTING POLICY We calculate basic earnings per share by dividing the net income or loss attributable to our Class A and Class B shareholders by the weighted average number of Class A and Class B shares outstanding during the year. We calculate diluted earnings per share by adjusting the net income or loss attributable to Class A and Class B shareholders and the weighted average number of Class A and Class B shares outstanding for the effect of all dilutive potential common shares. We use the treasury stock method for calculating diluted earnings per share, which considers the impact of employee stock options and other potentially dilutive instruments. Options with tandem stock appreciation rights or cash payment alternatives are accounted for as cash-settled awards. As these awards can be exchanged for common shares of the Company, they are considered potentially dilutive and are included in the calculation of the Company’s diluted net earnings per share if they have a dilutive impact in the period. There are taxable temporary differences associated with our investments in Canadian domestic subsidiaries. We do not recognize deferred tax liabilities for temporary differences because we are able to control the timing of the reversal and the reversal is not probable in the foreseeable future. Reversing these taxable temporary differences are not expected to result in any significant tax implications. EXPLANATORY INFORMATION Years ended December 31 (In millions of dollars, except per share amounts) 2016 2015 see note 2(d) Numerator (basic) – Net income for the year 835 1,342 Denominator – Number of shares (in millions): Weighted average number of shares outstanding – basic Effect of dilutive securities (in millions): Employee stock options and restricted share units Weighted average number of shares outstanding – diluted 515 2 517 515 2 517 Earnings per share: Basic Diluted $ 1.62 $ 1.62 $ 2.61 $ 2.60 For the twelve months ended December 31, 2016, there were nil options out of the money (2015 – 1,107,344). These options were excluded from the calculation of the effect of dilutive securities because they were anti-dilutive. NOTE 14: ACCOUNTS RECEIVABLE ACCOUNTING POLICY We initially recognize accounts receivable on the date they originate. We measure accounts receivable initially at fair value, and subsequently at amortized cost, with changes recognized in net income. We measure an impairment loss for accounts receivable as the excess of the carrying amount over the present value of future cash flows we expect to derive from it, if any. The excess is allocated to an allowance for doubtful accounts and recognized as a loss in net income. EXPLANATORY INFORMATION (In millions of dollars) Customer accounts receivable Other accounts receivable Allowance for doubtful accounts Total accounts receivable As at December 31 2016 2015 1,455 553 (59) 1,329 549 (86) 1,949 1,792 122 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT N O 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 NOTE 15: INVENTORIES ACCOUNTING POLICY We measure inventories, including handsets and merchandise for resale, at the lower of cost (determined on a first-in, first-out basis) and net realizable value. We will reverse a previous write down to net realizable value, not to exceed the original recognized cost, if the inventories later increase in value. EXPLANATORY INFORMATION (In millions of dollars) Wireless handsets and accessories Other finished goods and merchandise Total inventories As at December 31 2016 2015 236 79 315 238 80 318 Cost of equipment sales and merchandise for resale includes $2,088 million (2015 – $1,966 million) of inventory costs. NOTE 16: FINANCIAL RISK MANAGEMENT AND FINANCIAL INSTRUMENTS ACCOUNTING POLICY Recognition We initially recognize cash and cash equivalents, accounts receivable, debt securities, and accounts payable and accrued liabilities on the date they originate. All other financial assets and financial liabilities are initially recognized on the trade date when we become a party to the contractual provisions of the instrument. Classification and measurement We measure financial instruments by grouping them into classes upon initial recognition, based on the purpose of the individual instruments. We initially measure all financial instruments at fair value plus, in the case of our financial instruments not classified as fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issuance of the financial instruments. The classifications and methods of measurement subsequent to initial recognition of our financial assets and financial liabilities are as follows: Financial instrument Financial assets Cash and cash equivalents Accounts receivable Investments, available-for-sale Financial liabilities Bank advances Short-term borrowings Accounts payable Accrued liabilities Long-term debt Derivatives 3 Debt derivatives Bond forwards Expenditure derivatives Equity derivatives Categorization Measurement method Loans and receivable Loans and receivable Available-for-sale 1 Other financial liabilities Other financial liabilities 2 Other financial liabilities Other financial liabilities Other financial liabilities 2 Held-for-trading 4 Held-for-trading 4 Held-for-trading 4 Held-for-trading 5 Amortized cost Amortized cost Fair value Amortized cost Amortized cost Amortized cost Amortized cost Amortized cost Fair value Fair value Fair value Fair value 1 Subsequently measured at fair value with changes recognized in other comprehensive income. The net change subsequent to initial recognition, in the case of investments, is reclassified into net income upon disposal of the investment or when the investment becomes impaired. 2 Subsequently measured at amortized cost using the effective interest method. 3 The derivatives can be in an asset or liability position at a point in time historically or in the future. 4 For derivatives designated as cash flow hedges for accounting purposes, the ineffective portion of the hedge is recognized immediately into net income. 5 Subsequent changes are offset against stock-based compensation expense or recovery in operating costs. Offsetting financial assets and financial liabilities We offset financial assets and financial liabilities and present the net amount on the Consolidated Statements of Financial Position when we have a legal right to offset them and intend to settle on a net basis or realize the asset and liability simultaneously. 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 123 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Derivative instruments We use derivative instruments to manage risks related to certain activities in which we are involved. They include: Derivative The risk they manage Types of derivative instruments Debt derivatives Bond forwards Expenditure derivatives • Impact of fluctuations in foreign exchange rates on principal and interest payments for US dollar- denominated long-term debt • Impact of fluctuations in market interest rates on forecasted interest payments for expected long- term debt • Impact of fluctuations in foreign exchange rates on forecasted US dollar-denominated expenditures • Cross-currency interest rate exchange agreements • Forward foreign exchange agreements (from time to time as necessary) • Forward interest rate agreements • Forward foreign exchange agreements Equity derivatives • Impact of fluctuations in share price on stock-based • Total return swap agreements compensation expense We use derivatives only to manage risk, and not for speculative purposes. When we designate a derivative instrument as a hedging instrument for accounting purposes, we first determine that the hedging instrument will be highly effective in offsetting the changes in fair value or cash flows of the item it is hedging. We then formally document the relationship between the hedging instrument and hedged item, including the risk management objectives and strategy and the methods we will use to assess the ongoing effectiveness of the hedging relationship. We assess, on a quarterly basis, whether each hedging instrument continues to be highly effective in offsetting the changes in the fair value or cash flows of the item it is hedging. We assess host contracts in order to identify embedded derivatives requiring separation from the host contracts and account for these embedded derivatives as separate derivatives when we first become a party to a contract. Hedging reserve The hedging reserve represents the accumulated change in fair value of the derivative instruments to the extent they were effective hedges for accounting purposes, less accumulated amounts reclassified into net income. Deferred transaction costs We defer transaction costs associated with issuing long-term debt and direct costs we pay to lenders to obtain revolving credit facilities and amortize them using the effective interest method over the life of the related instrument. Available-for-sale financial assets reserve The available-for-sale financial assets reserve represents the the available-for-sale accumulated change in fair investments, less accumulated impairment losses related to the investments and accumulated amounts reclassified into net income upon disposal of investments. value of Impairment testing We consider a financial asset to be impaired if there is objective evidence that one or more events have had a negative effect on its estimated future cash flows and the effect can be reliably estimated. Financial assets that are significant in value are tested for impairment individually. All other financial assets are assessed collectively based on the nature of each asset. We measure impairment for financial assets as follows: • loans and receivables – we measure an impairment loss for loans and receivables as the excess of the carrying amount of the asset over the present value of future cash flows we expect to derive from it, if any. The difference is allocated to an allowance for doubtful accounts and recognized as a loss in net income. • available-for-sale financial assets – we measure an impairment loss of available-for-sale financial assets as the excess of the cost to acquire the asset (less any impairment loss we have previously recognized) over its current fair value, if any. The difference is reclassified from the available-for-sale reserve in equity to net income. USE OF ESTIMATES AND JUDGMENTS ESTIMATES Fair value estimates related to our derivatives are made at a specific point in time based on relevant market information and information about the underlying financial instruments. These estimates require assessment of the credit risk of the parties to the instruments and the instruments’ discount rates. These fair values and underlying estimates are also used in the tests of effectiveness of our hedging relationships. instruments qualify JUDGMENTS judgments in determining whether our We make significant financial for hedge accounting. These judgments include assessing whether the forecasted transactions designated as hedged items in hedging relationships will materialize as forecasted, whether the hedging relationships designated as effective hedges for accounting purposes continue to qualitatively be effective, and determining the methodology to determine the fair values used in testing the effectiveness of hedging relationships. 124 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT EXPLANATORY INFORMATION We are exposed to credit risk, liquidity risk, and market risk. Our primary risk management objective is to protect our income, cash flows, and ultimately, shareholder value. We design and implement the risk management strategies discussed below to ensure our risks and the related exposures are consistent with our business objectives and risk tolerance. The table below shows our risk exposure by financial instrument. Financial instrument Financial Risks Financial assets Cash and cash equivalents Credit and foreign exchange Accounts receivable Credit and foreign exchange Investments, available-for-sale Market Financial liabilities Bank advances Short-term borrowings Accounts payable Accrued liabilities Long-term debt Derivatives 1 Debt derivatives Bond forwards Expenditure derivatives Equity derivatives Liquidity Liquidity and interest Liquidity Liquidity Liquidity, foreign exchange, and interest Credit, liquidity, and foreign exchange Credit, liquidity, and interest Credit, liquidity, and foreign exchange Credit, liquidity, and market 1 Derivatives can be in an asset or liability position at a point in time historically or in the future. CREDIT RISK Credit risk represents the financial loss we could experience if a counterparty to a financial instrument, from whom we have an amount owing, failed to meet its obligations under the terms and conditions of its contracts with us. Our credit risk exposure is primarily attributable to our accounts receivable and to our debt and expenditure derivatives. Our broad customer base limits the concentration of this risk. Our accounts receivable on the Consolidated Statements of Financial Position are net of allowances for doubtful accounts, which management estimates based on prior experience and an assessment of the current economic environment. We believe that our allowance for risk doubtful accounts sufficiently reflects the related credit associated with our accounts receivable. As at December 31, 2016, $541 million (2015 – $461 million) of gross accounts receivable are considered past due, which is defined as amounts outstanding beyond normal credit terms and conditions for the respective customers. N O 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 The table below provides an aging of our customer accounts receivable. (In millions of dollars) Customer accounts receivables (net of allowance for doubtful accounts) Less than 30 days past billing date 30-60 days past billing date 61-90 days past billing date Greater than 90 days past billing date Total As at December 31 2016 2015 849 298 134 115 759 305 113 66 1,396 1,243 The activity related to our allowance for doubtful accounts is as follows: (In millions of dollars) Balance, beginning of year Allowance for doubtful accounts expense Net use Balance, end of year Years ended December 31 2016 86 54 (81) 59 2015 98 66 (78) 86 We use various controls and processes, such as credit checks, deposits on account, and billing in advance, to mitigate credit risk. We monitor and take appropriate action to suspend services when customers have fully used their approved credit limits or violated terms. While our credit controls and established payment processes have been effective in managing credit risk, they cannot eliminate credit risk and there can be no assurance that these controls will continue to be effective or that our current credit loss experience will continue. Credit risk related to our debt derivatives, bond forwards, expenditure derivatives, and equity derivatives arises from the possibility that the counterparties to the agreements may default on their obligations. We assess the creditworthiness of the counterparties to minimize the risk of counterparty default, and do not require collateral or other security to support the credit risk associated with these derivatives. Counterparties to the entire portfolio of our derivatives are financial institutions with a Standard & Poor’s rating (or the equivalent) ranging from A+ to AA-. LIQUIDITY RISK Liquidity risk is the risk that we will not be able to meet our financial obligations as they fall due. We manage liquidity risk by managing our commitments and maturities, capital structure, and financial leverage (see note 3). We also manage liquidity risk by continually monitoring actual and projected cash flows to ensure we will have sufficient liquidity to meet our liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to our reputation. 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 125 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The tables below set out the undiscounted contractual maturities of our financial liabilities and the receivable components of our derivatives as at December 31, 2016 and 2015. December 31, 2016 (In millions of dollars) Carrying amount Contractual cash flows Less than 1 year Bank advances Short-term borrowings Accounts payable and accrued liabilities Long-term debt Other long-term financial liabilities Expenditure derivative instruments: Cash outflow (Canadian dollar) Cash inflow (Canadian dollar equivalent of US dollar) Equity derivative instruments Debt derivative instruments accounted for as hedges: Cash outflow (Canadian dollar) Cash inflow (Canadian dollar equivalent of US dollar) 1 Debt derivative instruments not accounted for as hedges: Cash outflow (Canadian dollar) Cash inflow (Canadian dollar equivalent of US dollar) 1 Bond forwards Net carrying amount of derivatives (asset) 71 800 2,783 16,080 18 – – – – – – – – (1,659) 71 800 2,783 16,197 18 (1,708) 1,732 8 7,417 (8,996) 201 (201) (51) 1 to 3 years – – – 3,081 12 (468) 483 – 71 800 2,783 750 – (1,240) 1,249 8 – – 1,435 (1,880) 201 (201) – – – (51) 4 to 5 years More than 5 years – – – 2,350 3 – – – – – – – – – – – 10,016 3 – – – 5,982 (7,116) – – – 1 Represents Canadian dollar equivalent amount of US dollar inflows matched to an equal amount of US dollar maturities in long-term debt for debt derivatives. 18,093 18,271 4,421 2,612 2,353 8,885 December 31, 2015 (In millions of dollars) Carrying amount Contractual cash flows Less than 1 year Short-term borrowings Accounts payable and accrued liabilities Long-term debt Other long-term financial liabilities Expenditure derivative instruments: Cash outflow (Canadian dollar) Cash inflow (Canadian dollar equivalent of US dollar) Equity derivative instruments Debt derivative instruments: Cash outflow (Canadian dollar) Cash inflow (Canadian dollar equivalent of US dollar) 1 Bond forwards: Cash outflow Cash inflow Net carrying amount of derivatives (asset) 800 2,708 16,870 28 – – – – – – – (2,080) 800 2,708 16,981 28 1,415 (1,578) 15 6,746 (8,581) 91 – 800 2,708 1,000 – 1,025 (1,163) 15 – – – – 1 to 3 years – – 3,188 19 390 (415) – 1,435 (1,938) 91 – 4 to 5 years More than 5 years – – 1,800 5 – – 10,993 4 – – – – – – – – – – 5,311 (6,643) – – 18,326 18,625 4,385 2,770 1,805 9,665 1 Represents Canadian dollar equivalent amount of US dollar inflows matched to an equal amount of US dollar maturities in long-term debt for debt derivatives. The tables below show net interest payments over the life of the long-term debt, including the impact of the associated debt derivatives, as at December 31, 2016 and 2015. December 31, 2016 (in millions of dollars) Less than 1 year 1 to 3 years 4 to 5 years More than 5 years Net interest payments 727 1,294 1,033 5,832 December 31, 2015 (in millions of dollars) Less than 1 year 1 to 3 years 4 to 5 years More than 5 years Net interest payments 714 1,313 1,042 6,025 126 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT N O 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 MARKET RISK Market risk is the risk that changes in market prices, such as fluctuations in the market prices of our available-for-sale investments, our share price, foreign exchange rates, and interest rates, will affect our income, cash flows, or the value of our financial instruments. The derivative instruments we use to manage this risk are described in this note. The table below summarizes a sensitivity analysis for significant exposures with respect to our publicly-traded investments, equity derivatives, expenditure derivatives, and senior notes as at December 31, 2016 and 2015 with all other variables held constant. It shows how net income and other comprehensive income would have been affected by changes in the relevant risk variables. Market price risk – publicly-traded investments We manage risk related to fluctuations in the market prices of our investments in publicly-traded companies by regularly reviewing publicly available information related to these investments to ensure that any risks are within our established levels of risk tolerance. We do not engage in risk management practices such as hedging, derivatives, or short selling with respect to our publicly- traded investments. Market price risk – Rogers Class B shares Our liability related to stock-based compensation is marked to market each period. Stock-based compensation expense is affected by the change in the price of our Class B Non-Voting shares during the life of an award, including stock options, RSUs, and DSUs. We use equity derivatives from time to time to manage our exposure in our stock-based compensation liability. With respect to our stock-based compensation, as a result of our equity derivatives, a one dollar change in the price of a Rogers Class B Non-Voting share would not have a material effect on net income. Foreign exchange and interest rates We use debt derivatives to manage risks from fluctuations in foreign exchange rates associated with our US dollar-denominated debt instruments. We designate the debt derivatives related to our senior notes and senior debentures as hedges for accounting purposes against the foreign exchange risk associated with specific debt instruments. We use expenditure derivatives to manage the foreign exchange risk in our operations, designating them as hedges for certain of our forecasted operational and capital expenditures. As at December 31, 2016, all of our US dollar- denominated long-term debt was hedged against fluctuations in foreign exchange rates using debt derivatives. With respect to our long-term debt, as a result of our debt derivatives, a one cent change in the Canadian dollar relative to the US dollar would have no effect on net income. A portion of our accounts receivable and accounts payable and accrued liabilities is denominated in US dollars. Due to the short- term nature of these receivables and payables, they carry no significant market risk from fluctuations in foreign exchange rates as at December 31, 2016. We are exposed to risk of changes in market interest rates due to this has on interest expense for our short-term the impact borrowings, bank credit facilities, and our $250 million floating rate senior unsecured notes. As at December 31, 2016, 91.2% of our outstanding long-term debt and short-term borrowings was at fixed interest rates (2015 – 90.3%). (Change in millions of dollars) 2016 2015 2016 2015 Other comprehensive income Net income Share price of publicly-traded investments $1 change Expenditure derivatives – change in foreign exchange rate $0.01 change in Cdn$ relative to US$ Short-term borrowings 1% change in interest rates Senior notes (floating) 1% change in interest rates Bank credit facilities (floating) 1% change in interest rates – – 6 2 2 – – 6 2 4 14 14 9 – – – 8 – – – DERIVATIVE INSTRUMENTS As at December 31, 2016, all of our US dollar-denominated long- term debt instruments were hedged against fluctuations in foreign exchange rates for accounting purposes. The tables below show our derivatives net asset (liability) position. As at December 31, 2016 Notional amount (US$) Exchange rate Notional amount (Cdn$) Fair value (Cdn$) (In millions of dollars, except exchange rates) Debt derivatives accounted for as cash flow hedges: As assets As liabilities 5,200 1,500 1.0401 1.3388 5,409 2,008 1,751 (68) Debt derivatives not accounted for as hedges: As liabilities Net mark-to-market debt derivative asset Bond forwards accounted for as cash flow hedges: As liabilities Expenditure derivatives accounted for as cash flow hedges: As assets As liabilities Net mark-to-market expenditure derivative liability Equity derivatives not accounted for as hedges: As assets Net mark-to-market asset 150 1.3407 201 – 1,683 900 (51) 990 300 1.2967 1.4129 1,284 424 40 (21) 19 270 8 1,659 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 127 During 2016, we entered into and settled debt derivatives related to our credit facility borrowings as follows: (In millions of dollars, except exchange rates) Debt derivatives entered Debt derivatives settled Net cash received As at December 31, 2016 Notional (US$) Exchange rate Notional (Cdn$) 8,683 8,533 1.31 1.31 11,360 11,159 8 We did not enter into or settle any debt derivatives related to our credit facility borrowing in 2015. We entered into new debt derivatives in 2016 and 2015 to hedge foreign currency risk associated with the principal and interest components of the US dollar-denominated senior notes issued on November 4, 2016 and December 8, 2015 (see note 20). The table below shows debt derivatives we entered into to hedge senior notes issued during 2016 and 2015. (In millions of dollars, except for coupon and interest rates) Effective date December 8, 2015 December 8, 2015 US$ Hedging effect Principal/ notional amount (US$) 500 700 300 Fixed hedged Cdn$ interest rate 1 Maturity date Coupon rate 2026 2.900% 2.834% 2025 2044 3.625% 5.000% 3.566% 5.145% Equivalent Cdn$ 671 937 401 1 Converting from a fixed US$ coupon rate to a weighted average Cdn$ fixed rate. The table below shows debt derivatives that matured in conjunction with the repayment or repurchase of the related senior notes during 2015 (see note 20). (In millions of dollars) Maturity date Notional amount (US$) Net cash (proceeds) settlement (Cdn$) March 15, 2015 March 15, 2015 Total 550 280 830 (106) (48) (154) Upon the repayment of the related senior notes in March 2015, a $7 million non-cash loss, which was previously deferred in the hedging reserve, was recognized in net income (see note 10). This loss relates to transactions in 2013 wherein contractual foreign exchange rates on the related debt derivatives were renegotiated to then-current rates. As at December 31 November 4, 2016 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As at December 31, 2015 Notional amount (US$) Exchange rate Notional amount (Cdn$) Fair value (Cdn$) (In millions of dollars, except exchange rates) Debt derivatives accounted for as cash flow hedges: As assets As liabilities 5,900 300 1.0755 1.3367 6,345 401 2,032 (4) Net mark-to-market asset debt derivatives Bond forwards accounted for as cash flow hedges: As liabilities Expenditure derivatives accounted for as cash flow hedges: 2,028 – – 1,400 (91) As assets 1,140 1.2410 1,415 158 Equity derivatives not accounted for as hedges: As liabilities – – 286 (15) Net mark-to-market asset 2,080 The table below shows derivative instruments assets and derivative instruments liabilities reflected on our Consolidated Statements of Financial Position. (In millions of dollars) Current asset Long-term asset Current liability Long-term liability Net mark-to-market asset 2016 91 1,708 1,799 (22) (118) (140) 1,659 2015 198 1,992 2,190 (15) (95) (110) 2,080 As at December 31, 2016, US$6.7 billion notional amount of our outstanding debt derivatives have been designated as hedges for accounting purposes (2015 – US$6.2 billion). As at December 31, 2016, 100% of our currently outstanding bond forwards and expenditure derivatives have been designated as hedges for accounting purposes (2015 – 100%). In 2016, we recognized a $5 million increase to net income related to hedge ineffectiveness (2015 – $3 million decrease). Debt derivatives We use cross-currency interest exchange agreements to manage risks from fluctuations in foreign exchange rates associated with our US dollar-denominated debt facility borrowings. We designate the debt derivatives related to our senior notes and debentures as hedges for accounting purposes against the foreign exchange risk associated with specific debt instruments. We do not designate the debt derivatives related to our credit facility borrowings as hedges for accounting purposes. instruments and credit 128 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT N O 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 Bond forwards During 2016 or 2015, we did not enter into any new bond forwards. The table below shows the bond forwards we have entered into to hedge the underlying Government of Canada (GoC) 10-year rate for anticipated future debt that were outstanding as at December 31, 2016 and 2015. (In millions of dollars, except interest rates) GoC term (years) Effective date Maturity date 1 Notional amount Hedged GoC interest rate as at December 31, 2016 Hedged GoC interest rate as at December 31, 2015 1 10 10 30 Total December 2014 December 2014 December 2014 January 4, 2017 April 30, 2018 December 31, 2018 500 500 400 1,400 – 2.52% 2.62% 2.34% 2.23% 2.52% 2016 2015 – 500 400 900 500 500 400 1,400 1 Bond forwards with maturity dates beyond December 31, 2016 are subject to GoC rate re-setting from time to time. The $500 million due April 2018 was extended in April 2016 to reset in April 2017. The $400 million due December 2018 was extended in December 2016 to reset in January 2018. On November 4, 2016, we exercised a $500 million notional bond forward due January 4, 2017 in relation to the issuance of the US$500 million senior notes due 2026 and paid $53 million to settle the derivative. The amount paid represents the fair value of the bond forward at the time of settlement and will be recycled into finance costs from the hedging reserve using the effective interest rate method over the life of the US$500 million senior notes due 2026. On December 8, 2015, we exercised a $500 million notional bond forward due December 31, 2015 in relation to the issuance of the US$700 million senior notes due 2025 and paid $25 million to settle the derivative. The amount paid represents the fair value of the bond forward at the time of settlement and will be recycled into finance costs from the hedging reserve using the effective interest rate method over the life of the US$700 million senior notes due 2025. Expenditure derivatives The table below shows the expenditure derivatives into which we entered during 2016 and 2015 to manage foreign exchange risk related to certain forecasted expenditures. (In millions of dollars, except exchange rates) Expenditure derivatives entered Expenditure derivatives settled Years ended December 31 2016 Notional (US$) Exchange rate Notional (Cdn$) Notional (US$) Exchange rate 990 840 1.33 1.22 1,318 1,025 990 810 1.28 1.11 2015 Notional (Cdn$) 1,266 902 As at December 31, 2016, we had US$1,290 million of expenditure derivatives outstanding (2015 – US$1,140 million), at an average rate of $1.32/US$ (2015 – $1.24/US$), with terms to maturity ranging from January 2017 to December 2018 (2015 – January 2016 to December 2017). Our outstanding expenditure derivatives maturing in 2017 are hedged at an average exchange rate of $1.33/US$. Equity derivatives We have equity derivatives to hedge market price appreciation risk associated with RCI Class B Non-Voting shares that have been granted under our stock-based compensation programs for stock options, restricted share units (RSUs), and deferred share units (DSUs) (see note 24). The equity derivatives were originally entered into at a weighted average price of $50.37 with terms to maturity of one year, extendible for further one-year periods with the consent of the hedge counterparties. In 2016, we executed extension agreements for each of our equity derivative contracts under substantially the same committed terms and conditions with revised expiry dates of April 2017 (from April 2016). The equity derivatives have not been designated as hedges for accounting purposes. As at December 31, 2016, we had equity derivatives outstanding for 5.4 million (2015 – 5.7 million) RCI Class B shares with a weighted average price of $50.30 (2015 – $50.37). In August 2016, we settled 0.3 million equity derivatives at a weighted average price of $58.16 as a result of a reduction in the number of share-based compensation units outstanding. During 2016, we recognized a recovery, net of interest receipts, of $33 million (2015 – $22 million recovery), in stock-based compensation expense related to the change in fair value of our equity derivative contracts net of received payments. As at December 31, 2016, the fair value of the equity derivatives was an asset of $8 million (2015 – $15 million liability), which is included in current portion of derivative instruments. 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 129 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FAIR VALUES OF FINANCIAL INSTRUMENTS The carrying value of cash and cash equivalents, accounts receivable, short-term borrowings, and accounts payable and accrued liabilities approximate their fair values because of the short-term nature of these financial instruments. We determine the fair value of each of our publicly-traded investments using quoted market values. We determine the fair value of our private investments by using implied valuations from follow-on financing rounds, third party sale negotiations, or market- based approaches. These are applied appropriately to each investment depending on its future operating and profitability prospects. The fair values of each of our public debt instruments are based on the year-end estimated market yields. We determine the fair values of our debt derivatives and expenditure derivatives using an estimated credit-adjusted mark-to-market valuation by discounting cash flows to the measurement date. In the case of debt derivatives and expenditure derivatives in an asset position, the credit spread for the financial institution counterparty is added to the risk-free discount rate to determine the estimated credit-adjusted value for The table below shows the financial instruments carried at fair value. (In millions of dollars) Financial assets Available-for-sale, measured at fair value: Investments in publicly-traded companies Held-for-trading: Debt derivatives accounted for as cash flow hedges Expenditure derivatives accounted for as cash flow hedges Equity derivatives not accounted for as cash flow hedges Total financial assets Financial liabilities Held-for-trading: Debt derivatives accounted for as cash flow hedges Bond forwards accounted for as cash flow hedges Expenditure derivatives accounted for as cash flow hedges Equity derivatives not accounted as cash flow hedges Total financial liabilities The fair value of our long-term debt is estimated as follows. (In millions of dollars) these debt derivatives and expenditure each derivative. For derivatives in a liability position, our credit spread is added to the risk-free discount rate for each derivative. The fair values of our equity derivatives are based on the quoted market value of RCI’s Class B Non-Voting shares. Our disclosure of the three-level fair value hierarchy reflects the significance of the inputs used in measuring fair value: • financial assets and financial liabilities in Level 1 are valued by referring to quoted prices in active markets for identical assets and liabilities; • financial assets and financial liabilities in Level 2 are valued using inputs based on observable market data, either directly or indirectly, other than the quoted prices; • Level 3 valuations are based on inputs that are not based on observable market data. There were no material financial instruments categorized in Level 3 as at December 31, 2016 and 2015 and there were no transfers between Level 1, Level 2, or Level 3 during the respective periods. As at December 31 Carrying value Fair value (Level 1) Fair value (Level 2) 2016 2015 2016 2015 2016 2015 1,047 966 1,047 966 – – 1,751 2,032 158 – 40 8 – – – – – – 1,751 40 8 2,032 158 – 2,846 3,156 1,047 966 1,799 2,190 68 51 21 – 4 91 – 15 140 110 – – – – – – – – – – 68 51 21 – 4 91 – 15 140 110 As at December 31 2016 2015 Carrying amount Fair value 1 Carrying amount Fair value 1 Long-term debt (including current portion) 16,080 17,628 16,870 18,252 1 Long-term debt (including current portion) is measured at Level 2 in the three-level fair value hierarchy, based on year-end trading values. We did not have any non-derivative held-to-maturity financial assets during the years ended December 31, 2016 and 2015. 130 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT NOTE 17: INVESTMENTS ACCOUNTING POLICY Investments in publicly-traded and private companies We classify our investments in companies where we have no control or significant influence as available-for-sale investments and account for them as follows: • publicly-traded companies – at fair value based on publicly quoted prices; and • private companies – at fair value using implied valuations from follow-on financing rounds, third party sale negotiations, or market-based approaches. Investments in associates and joint arrangements An entity is an associate when we have significant influence over the entity’s financial and operating policies but do not control the entity. We are generally presumed to have significant influence over an entity when we hold more than 20% of the voting power. A joint arrangement exists when there is a contractual agreement that establishes joint control over activities and requires unanimous consent for strategic financial and operating decisions. We classify our interests in joint arrangements into one of two categories: • joint ventures – when we have the rights to the net assets of the arrangement; and • joint operations – when we have the rights to the assets and obligations for the liabilities related to the arrangement. We use the equity method to account for our investments in associates and joint ventures; we recognize our proportionate interest in the assets, liabilities, revenue, and expenses of our joint operations. We recognize our investments in associates and joint ventures initially at cost and then increase or decrease the carrying amounts based on our share of each entity’s income or loss after initial recognition. Distributions we receive from these entities reduce the carrying amounts of our investments. We eliminate unrealized gains and losses from our investments in associates or joint ventures against our investments, up to the amount of our interest in the entities. Impairment in associates and joint ventures At the end of each reporting period, we assess whether there is objective evidence that impairment exists in our investments in associates and joint ventures. If objective evidence exists, we compare the carrying amount of the investment to its recoverable amount and recognize the excess over the recoverable amount, if any, as a loss in net income. N O 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 INVESTMENTS, AVAILABLE-FOR-SALE Publicly-traded companies We hold a number of interests in publicly-traded companies. This year we recognized realized losses of nil and unrealized gains of $81 million (2015 – nil of realized losses and $164 million of unrealized losses) with corresponding amounts in net income and other comprehensive income, respectively. INVESTMENTS, ASSOCIATES, AND JOINT VENTURES We have interests in a number of associates and joint ventures, some of which include: Maple Leaf Sports and Entertainment Limited (MLSE) MLSE, a sports and entertainment company, owns and operates the Air Canada Centre, the NHL’s Toronto Maple Leafs, the NBA’s Toronto Raptors, MLS’ Toronto FC, the AHL’s Toronto Marlies, and other assets. We, along with BCE Inc. (BCE), jointly own an indirect net 75% equity interest in MLSE with our portion representing a 37.5% equity interest in MLSE is in MLSE. Our accounted for as a joint venture using the equity method. investment shomi shomi is a joint venture equally owned by Rogers and Shaw and previously operated a premium subscription video-on-demand service offering movies and television series for viewing online and through cable set-top boxes. Our investment in shomi is accounted for as a joint venture using the equity method. In 2016, we announced the decision to wind down our shomi joint venture (see note 11). Glentel In 2015, we completed our purchase of 50% of the common shares of Glentel Inc. (Glentel) from BCE for cash consideration of $473 million such that Glentel is jointly owned by us and BCE. Glentel is a large, multicarrier mobile phone retailer with several hundred Canadian wireless retail distribution outlets. Our investment in Glentel is accounted for as a joint venture using the equity method. The following table provides summary financial information on all our associates and joint ventures and our portions thereof. As at or years ended December 31 EXPLANATORY INFORMATION (In millions of dollars) Investments in: Publicly-traded companies Private companies Investments, available-for-sale Investments, associates and joint ventures Total investments (In millions of dollars) Current assets Long-term assets Current liabilities Long-term liabilities As at December 31 Total net assets 2016 2015 Our share of net assets 1,047 169 1,216 958 2,174 966 212 1,178 1,093 2,271 Revenue Expenses Total net loss Our share of net loss 2016 518 3,391 (1,186) (1,082) 1,641 834 1,596 (2,027) (431) (216) 2015 1,024 3,295 (935) (1,221) 2,163 1,086 1,958 (2,178) (220) (99) 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 131 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS One of our joint ventures has a non-controlling interest that has a right to require our joint venture to purchase that non-controlling interest at a future date at fair value. During 2015, we recognized a $72 million loss relating to our share of the change in the fair value of this obligation (see note 11). NOTE 18: SHORT-TERM BORROWINGS We participate in an accounts receivable securitization program with a Canadian financial institution that allows us to sell certain trade receivables into the program. As at December 31, 2016, the proceeds of the sales were committed up to a maximum of $1,050 million (2015 – $1,050 million). Effective January 1, 2015, we amended the terms of the accounts receivable securitization program, increasing the maximum potential proceeds under the program from $900 million to $1,050 million. Effective July 8, 2016, we extended the term of the program from January 1, 2018 to January 1, 2019. We continue to service and retain substantially all of the risks and rewards relating to the accounts receivables we sold, and therefore, the receivables remain recognized on our Consolidated Statements of Financial Position and the funding received is recognized as short-term borrowings. The buyer’s interest in these trade receivables ranks ahead of our interest. The program restricts us from using the receivables as collateral for any other purpose. The buyer of our trade receivables has no claim on any of our other assets. Below is a summary of receivable securitization program. the activity relating to our accounts (In millions of dollars) (In millions of dollars) 2016 2015 Short-term borrowings from buyer Twelve months ended December 31 Trade accounts receivable sold to buyer as security Overcollateralization As at December 31 2016 2015 1,460 (800) 1,359 (800) 660 559 Short-term borrowings Proceeds received on short-term borrowings Repayment of short- term borrowings Net (repayments) proceeds received on short-term borrowings 295 (295) 294 (336) – (42) NOTE 19: PROVISIONS ACCOUNTING POLICY Decommissioning and restoration costs We use network and other assets on leased premises in some of our business activities. We expect to exit these premises in the future and therefore make provisions for the costs associated with decommissioning the assets and restoring the locations to their original standards when we have a legal or constructive obligation to do so. We calculate these costs based on a current estimate of the costs that will be incurred, project those costs into the future based on management’s best estimates of future trends in prices, inflation, and other factors, and discount them to their present value. We revise our forecasts when business conditions or technological requirements change. When we recognize a decommissioning liability, we recognize a in property, plant and equipment and corresponding asset depreciate the asset based on the corresponding asset’s useful life following our depreciation policies for property, plant and equipment. We recognize the accretion of the liability as a charge to finance costs on the Consolidated Statements of Income. Restructuring We make provisions for restructuring when we have approved a detailed and formal restructuring plan and either the restructuring has started or management has announced the plan’s main features to the employees affected by it. Restructuring obligations 132 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT that have uncertain timing or amounts are recognized as provisions; otherwise they are recognized as accrued liabilities. All charges are recognized in restructuring, acquisition and other on the Consolidated Statements of Income (see note 9). Onerous contracts We make provisions for onerous contracts when the unavoidable costs of meeting our obligation under a contract exceed the benefits we expect to realize from it and where significant judgment is required in determining the amount of unavoidable costs. We measure these provisions at the present value of the lower of the expected cost of terminating the contract or the expected cost of continuing with the contract. We recognize any impairment loss on the assets associated with the contract before we make the provision. USE OF ESTIMATES AND JUDGMENTS ESTIMATES We recognize a provision when a past event creates a legal or constructive obligation that can be reasonably estimated and is likely to result in an outflow of economic resources. We recognize a provision even when the timing or amount of the obligation may be uncertain, which can require us to use significant estimates. EXPLANATORY INFORMATION (In millions of dollars) Liabilities shomi Other Total Decommissioning December 31, 2015 Additions Adjustments to existing provisions Reversals Amounts used December 31, 2016 Current Long-term 40 – 1 – (6) 35 5 30 – 119 20 60 – 119 – – (7) 112 112 – – – 1 – (13) 20 167 17 134 – 3 33 Decommissioning and restoration costs Cash outflows associated with our decommissioning liabilities are generally expected to occur at the decommissioning dates of the NOTE 20: LONG-TERM DEBT assets to which they relate, which are long-term in nature. The timing and extent of restoration work that will be ultimately required for these sites is uncertain. shomi In 2016, we announced the decision to wind down our shomi joint venture. shomi is equally owned by Rogers and Shaw. We are therefore responsible for our portion of any remaining contractual liabilities (most significantly video content costs) incurred by the venture. We have recognized a provision related to our share of the remaining obligations based on our best estimate of the expected future costs. Other Other provisions include various legal claims, which are expected to be settled within five years. N O 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 (In millions of dollars, except interest rates) Due date Principal amount Bank credit facilities Bank credit facilities Senior notes Senior notes Senior notes Senior notes Senior notes Senior notes Senior notes Senior notes Senior notes Senior notes Senior notes Senior notes Senior notes Senior notes Senior debentures 1 Senior notes Senior notes Senior notes Senior notes Senior notes Senior notes Senior notes Deferred transaction costs and discounts Less current portion Total long-term debt 2016 2017 2017 2018 2019 2019 2020 2021 2022 2023 2023 2024 2025 2026 2032 2038 2039 2040 2041 2043 2043 2044 US 100 150 1,000 500 250 US 1,400 400 500 900 1,450 600 500 850 600 700 500 200 350 500 800 400 500 US US 650 US 1,050 US US US US US US Interest rate Floating Floating 5.800% 3.000% Floating 6.800% 2.800% 5.380% 4.700% 5.340% 4.000% 3.000% 4.100% 4.000% 3.625% 2.900% 8.750% 7.500% 6.680% 6.110% 6.560% 4.500% 5.450% 5.000% As at December 31 2016 100 201 – 500 250 1,880 400 500 900 1,450 600 671 1,141 600 940 671 269 470 500 800 400 671 873 1,410 2015 500 – 1,000 500 250 1,938 400 500 900 1,450 600 692 1,176 600 969 – 277 484 500 800 400 692 900 1,453 16,197 (117) (750) 16,981 (111) (1,000) 15,330 15,870 1 Senior debentures originally issued by Rogers Cable Inc. which are unsecured obligations of RCI and for which RCCI was an unsecured guarantor as at December 31, 2016 and for which RCP was an unsecured guarantor as at December 31, 2015. 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 133 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Each of the above senior notes and debentures are unsecured and, as at December 31, 2016, were guaranteed by RCCI (2015 – RCP), ranking equally with all of RCI’s other senior notes, debentures, bank credit facilities, and letter of credit facilities. We use derivatives to hedge the foreign exchange risk associated with the principal and interest components of all of our US dollar-denominated senior notes and debentures (see note 16). Effective January 1, 2016, as a result of the dissolution of RCP (see note 1), RCP is no longer a guarantor or co-obligor, as applicable, for the Company’s bank credit and letter of credit facilities, senior notes and debentures, and derivative instruments. RCI continues to be the obligor in respect of each of these, while RCCI is either a co-obligor or guarantor for the senior notes and debentures and a guarantor, as applicable, for the bank credit and letter of credit facilities and derivative instruments. In 2015, we entered into a new bank credit facility (non-revolving credit facility) that provides access to $1.0 billion of non-revolving borrowings, in addition to our existing $2.5 billion revolving credit facility (revolving credit facility). The non-revolving credit facility has no scheduled principal repayments prior to maturity. The interest rate charged on borrowings under the non-revolving credit facility falls within the range of pricing indicated for our revolving credit facility. Our $2.5 billion revolving credit facility is available on a fully revolving basis until maturity and there are no scheduled reductions prior rate charged on to maturity. The interest borrowings from the revolving credit facility ranges from nil to 1.25% per annum over the bank prime rate or base rate, or 0.85% to 2.25% (1.00% to 2.25% prior to April 2014) over the bankers’ acceptance rate or London Inter-Bank Offered Rate. WEIGHTED AVERAGE INTEREST RATE Our effective weighted average rate on all debt and short-term borrowings, as at December 31, 2016, including the effect of all of the associated debt derivative instruments and the exercised bond forward, was 4.72% (2015 – 4.82%). BANK CREDIT AND LETTER OF CREDIT FACILITIES During the years ended December 31, 2016 and 2015, we had the following activity relating to our revolving and non-revolving bank credit facilities: (In millions of dollars, except exchange rates) Issuance of long-term debt in US dollars Issuance of long-term debt in Canadian dollars Total long-term debt issued Year ended December 31, 2016 Notional (US$) Exchange rate Notional (Cdn$) 2,188 1.31 2,877 1,140 4,017 Repayment of long-term debt in US dollars (2,038) 1.32 (2,686) (1,540) (4,226) Effective April 1, 2016, we amended our $2.5 billion revolving credit facility to, among other things, extend the maturity date from July 2019 to September 2020. At the same time, we also amended the $1.0 billion non-revolving credit facility to, among other things, extend the maturity date from April 2017 to April 2018. As a result of the repayments made during the year, we reduced the amount of borrowings available under our non-revolving credit facility from $1.0 billion to $301 million. As at December 31, 2016, we had $0.3 billion ($0.1 billion and US$0.2 billion) drawn under our revolving and non-revolving credit facilities (2015 – $0.5 billion). We have entered into debt derivatives related to the US dollar-denominated portion of these borrowings to convert all the interest and principal payment obligations to Canadian dollars (see note 16) as at December 31, 2016. As at December 31, 2016, we had available liquidity of $2.4 billion revolving and (2015 – $3 billion) under our $2.9 billion of non-revolving credit and letter of credit facilities (2015 – $3.6 billion), of which we had utilized approximately $0.1 billion (2015 – $0.1 billion) related to outstanding letters of credit and $0.4 billion of borrowings (2015 – $0.5 billion). SENIOR NOTES AND DEBENTURES Interest is paid on our senior notes as follows: • semi-annually on all of our fixed rate senior notes and debentures; and • quarterly on our floating rate senior notes. Year ended December 31, 2015 Notional (US$) Exchange rate Notional (Cdn$) We have the option to redeem each of our fixed rate senior notes and debentures, in whole or in part, at any time, if we pay the premiums specified in the corresponding agreements. – – – – 6,025 (5,525) Repayment of long-term debt in Canadian dollars Total long-term debt repaid (In millions of dollars, except exchange rates) Issuance of long-term debt in Canadian dollars Repayment of long-term debt in Canadian dollars 134 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT Issuance of senior notes The table below provides a summary of the senior notes that we issued in 2016 and 2015. (In millions of dollars, except interest rates and discounts) Date Issued 2016 issuances Principal amount Due date Interest rate Discount/ premium at issuance Total gross proceeds 1 (Cdn$) Transaction costs and discounts 2 (Cdn$) November 4, 2016 US 500 2026 2.900% 98.354% 671 2015 issuances December 8, 2015 December 8, 2015 Total for 2015 US US 700 300 2025 2044 3.625% 5.000% 99.252% 101.700% 937 401 1,338 17 13 1 Gross proceeds before transaction costs and discounts (see note 29). 2 Transaction costs and discounts are included as deferred transaction costs and discounts in the carrying value of the long-term debt, and recognized in net income using the effective interest method. Concurrent with the 2016 and 2015 issuances, we entered into debt derivatives to convert all interest and principal payment obligations to Canadian dollars (see note 16). Repayment of senior notes and related derivative settlements The table below provide a summary of the repayment of our senior notes during 2016 and 2015. PRINCIPAL REPAYMENTS The table below shows the principal repayments on our long-term debt due in each of the next five years and thereafter as at December 31, 2016. N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S (In millions of dollars) Maturity date 2016 repayments May 26, 2016 2015 repayments March 15, 2015 March 15, 2015 Total for 2015 Notional amount (US$) Notional amount (Cdn$) – 1,000 550 280 830 702 357 1,059 (In millions of dollars) 2017 2018 2019 2020 2021 Thereafter Total long-term debt 750 2,181 900 900 1,450 10,016 16,197 There were no debt derivatives associated with the 2016 repayment. The associated debt derivatives the 2015 repayments were settled at maturity (see note 16). for FOREIGN EXCHANGE We recognized $13 million in net foreign exchange losses in 2016 (2015 – $11 million in net losses). These losses were primarily attributed to the US dollar-denominated borrowings under our bank credit facilities that were not hedged for accounting purposes. These losses were offset by the change in fair value of derivatives which were primarily a result of our debt derivatives that were used to offset the foreign exchange risk related to these US dollar-denominated borrowings. Both the foreign exchange loss and the offsetting gain in the change in fair value of derivatives are recognized in finance costs on the Consolidated Statements of Income. 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 135 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TERMS AND CONDITIONS As at December 31, 2016 and 2015, we were in compliance with all financial covenants, the terms and conditions of our long-term debt agreements. There were no financial leverage covenants in effect other than those under our bank credit and letter of credit facilities. financial ratios, and all of The 8.75% debentures due in 2032 contain debt incurrence tests and restrictions on additional investments, sales of assets, and payment of dividends, all of which are suspended in the event the NOTE 21: OTHER LONG-TERM LIABILITIES As at December 31 (In millions of dollars) Note 2016 2015 Deferred pension liability Supplemental executive retirement plan Stock-based compensation Other 22 22 24 404 296 62 64 32 56 50 53 Total other long-term liabilities 562 455 NOTE 22: POST-EMPLOYMENT BENEFITS ACCOUNTING POLICY Post-employment benefits – Defined Benefit Pension Plan We offer contributory and non-contributory defined benefit pension plans that provide employees with a lifetime monthly pension on retirement. We separately calculate our net obligation for each defined benefit pension plan by estimating the amount of future benefits employees have earned in return for their service in the current and prior years and discounting those benefits to determine their present value. We accrue our pension plan obligations as employees provide the services necessary to earn the pension. We use a discount rate based on market yields on high quality corporate bonds at the measurement date to calculate the accrued pension benefit obligation. Remeasurements of the accrued pension benefit obligation are determined at the end of the year and include actuarial gains and losses, returns on plan assets, and any change in the effect of the asset ceiling. These are recognized in other comprehensive income and retained earnings. The cost of pensions is actuarially determined and takes into account the following assumptions and methods for pension accounting related to our defined benefit pension plans: • expected rates of salary increases for calculating increases in future benefits; • mortality rates for calculating the life expectancy of plan members; and • past service costs from plan amendments are immediately expensed in net income. We recognize our net pension expense for our defined benefit pension plans and contributions to defined contribution plans as an employee benefit expense in operating costs on the 136 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT two of three specified credit public debt securities are assigned investment-grade ratings by at least rating agencies. As at December 31, 2016, these public debt securities were assigned an investment-grade rating by each of the three specified credit rating agencies and, accordingly, these restrictions have been suspended as long as the investment-grade ratings are maintained. Our other senior notes do not have any of these restrictions, regardless of the related credit ratings. The repayment dates of certain debt agreements can also be accelerated if there is a change in control of RCI. Consolidated Statements of Income in the periods the employees provide the related services. Post-employment benefits – Defined Contribution Pension Plan On July 1, 2016, we closed the Defined Benefit Pension Plan to new members and introduced a Defined Contribution Pension Plan. This change did not impact current members and any employee enrolled in the Defined Benefit Pension Plan will continue to earn pension benefits and credited service in those plans. We recognize a pension expense in relation to our contributions to the Defined Contribution Pension Plan when the employee provides service to the Company. Termination benefits We recognize termination benefits as an expense when we are committed to a formal detailed plan to terminate employment before the normal retirement date and it is not realistic that we will withdraw it. USE OF ESTIMATES AND JUDGMENTS ESTIMATES Detailed below are the significant assumptions used in the actuarial calculations used to determine the amount of the defined benefit pension obligation and related expense. Significant estimates are involved in determining pension-related balances. Actuarial estimates are based on projections of employees’ compensation levels at retirement. Maximum retirement benefits are primarily based on career average earnings, subject to certain adjustments. The most recent actuarial valuations were completed as at January 1, 2016. the time of Principal actuarial assumptions Weighted average of significant assumptions: Defined benefit obligation Discount rate Rate of compensation increase Mortality rate Pension expense Discount rate Rate of compensation increase Mortality rate 2016 2015 4.1% 4.3% 3.0% CIA Private with CPM B Scale 3.0% CIA Private with CPM B Scale 4.3% 4.1% 3.0% CIA Private with CPM B Scale 3.0% CIA Private with CPM B Scale Sensitivity of key assumptions In the sensitivity analysis shown below, we determine the defined benefit obligation for our funded plans using the same method used to calculate the defined benefit obligation we recognize on the Consolidated Statements of Financial Position. We calculate sensitivity by changing one assumption while holding the others constant. This leads to limitations in the analysis as the actual change in defined benefit obligation will likely be different from that shown in the table, since it is likely that more than one assumption will change at a time, and that some assumptions are correlated. Increase (decrease) in accrued benefit obligation Increase (decrease) in pension expense (In millions of dollars) 2016 2015 2016 2015 Discount rate Impact of 0.5% increase Impact of 0.5% decrease (174) 199 (146) 167 (21) 23 (18) 19 Rate of future compensation increase Impact of 0.25% increase Impact of 0.25% decrease Mortality rate Impact of 1 year increase Impact of 1 year decrease 18 (18) 48 (49) 18 (18) 39 (41) 4 (4) 5 (5) 3 (3) 4 (4) EXPLANATORY INFORMATION We sponsor a number of contributory and non-contributory pension arrangements for employees, including defined benefit and defined contributions plans. We do not provide any non-pension post-retirement benefits. We also provide unfunded supplemental pension benefits to certain executives. N O 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 The Rogers Defined Benefit Pension Plan provides a defined pension based on years of service and earnings, with no increases in retirement for inflation. The plan was closed to new members on July 1, 2016. Participation in the plan was voluntary and enrolled employees are required to make regular contributions into the plan. In 2009 and 2011, we purchased group annuities for our then retirees. Accordingly, the current plan members are primarily active Rogers employees as opposed to retirees. An unfunded supplemental pension plan is provided to certain senior executives to provide benefits in excess of amounts that can be provided from the defined benefit pension plan under the Income Tax Act (Canada)’s maximum pension limits. We also sponsor smaller defined benefit pension plans in addition to the Rogers Defined Benefit Pension Plan. The Pension Plan for Employees of Rogers Communications Inc. and the Rogers Pension Plan for Selkirk Employees are closed legacy defined benefit pension plans. The Pension Plan for Certain Federally Regulated Employees of Rogers Cable Communications Inc. is similar to the main pension plan but only federally regulated employees from the Cable business were eligible to participate; this plan was closed to new members on July 1, 2016. In addition to the defined benefit pension plans, we also provide various defined contribution plans to certain groups of employees of the Company and to employees hired after March 31, 2016 who choose to join. Additionally, we provide other tax-deferred savings arrangements, including a Group RRSP and a Group TFSA program which are accounted for as deferred contribution arrangements. The Pension Committee of the Board of Directors oversees the administration of our registered pension plans, which includes the following principal areas: • overseeing the funding, administration, communication and investment management of the plans; • selecting and monitoring the performance of all third parties including audit, performing duties in respect of the plans, actuarial and investment management services; • proposing, considering and approving amendments; • proposing, considering and approving amendments to the Statement of Investment Policies and Procedures; • reviewing management and actuarial reports prepared in respect of the administration of the pension plans; and • reviewing and approving the audited financial statements of the pension plan funds. The assets of the defined benefit pension plans are held in segregated accounts isolated from our assets. They are invested and managed following all applicable regulations and the Statement of Investment Policies and Procedures with the objective of having adequate funds to pay the benefits promised by the plan. Investment and market return risk is managed by: • contracting professional investment managers to execute the Investment investment strategy following the Statement of Policies and Procedures and regulatory requirements; • specifying the kinds of investments that can be held in the plans and monitoring compliance; • using asset allocation and diversification strategies; and • purchasing annuities from time to time. 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 137 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The funded pension plans are registered with the Office of the Superintendent of Financial Institutions and are subject to the Federal Pension Benefits Standards Act. The two defined contribution plans are registered with the Financial Services Commission of Ontario, subject to the Ontario Pension Benefits Act. The plans are also registered with the Canada Revenue Agency and are subject to the Income Tax Act (Canada). The benefits provided under the plans and the contributions to the plans are funded and administered in accordance with all applicable legislation and regulations. The defined benefit pension plans are subject to certain risks inadequate plan surplus, related to contribution increases, unfunded obligations, and market return, which we rates of mitigate through the governance described above. Any significant changes to these items may affect our future cash flows. The table below sets out the estimated present value of accrued plan benefits and the estimated market value of the net assets available to provide these benefits for our funded plans. (In millions of dollars) 2016 2015 Years ended December 31 Accrued benefit obligations, beginning of year Service cost Interest cost Benefits paid Contributions by employees Remeasurements, recognized in other comprehensive loss (income) and equity Accrued benefit obligations, end of 1,713 119 75 (70) 35 1,592 98 65 (46) 32 134 (28) year 2,006 1,713 The table below shows the effect of the asset ceiling. (In millions of dollars) 2016 2015 Years ended December 31 (In millions of dollars) Plan assets, at fair value Accrued benefit obligations Deficiency of plan assets over accrued benefit obligations Effect of asset ceiling limit Net deferred pension liability Consists of: Deferred pension asset Deferred pension liability Net deferred pension liability The table below shows our pension fund assets. (387) – (387) 17 (404) (387) (281) (3) (284) 12 (296) (284) (In millions of dollars) Plan assets, beginning of year Interest income Remeasurements, return (loss) on plan assets recognized in other comprehensive (loss) income and equity Contributions by employees Contributions by employer Benefits paid Administrative expenses paid from plan assets 2016 1,432 68 2015 1,285 56 32 35 125 (70) (3) (10) 32 118 (46) (3) Plan assets, end of year 1,619 1,432 As at December 31 2016 2015 1,619 (2,006) 1,432 (1,713) Asset ceiling, beginning of year Interest Remeasurements, change in asset ceiling (excluding interest income) Asset ceiling, end of year (3) – 3 – (7) (1) 5 (3) Plan assets are comprised mainly of pooled funds that invest in common stocks and bonds that are traded in an active market. The table below shows the fair value of the total pension plan assets by major category. (In millions of dollars) Equity securities Debt securities Other – cash Years ended December 31 Total fair value of plan assets As at December 31 2016 2015 990 625 4 873 554 5 1,619 1,432 119 7 126 3 129 98 9 107 3 110 The table below shows our net pension expense. Net interest cost is included in finance costs and other pension expenses are included in salaries and benefits expense in operating costs on the Consolidated Statements of Income. (In millions of dollars) 2016 2015 Years ended December 31 Plan cost: Service cost Net interest cost Net pension expense Administrative expense The table below shows the accrued benefit obligations arising from funded obligations. Total pension cost recognized in net income 138 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT N O 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 Net interest cost, a component of the plan cost above is included in finance costs and is outlined as follows: ALLOCATION OF PLAN ASSETS Years ended December 31 (In millions of dollars) 2016 2015 Interest income on plan assets Interest cost on plan obligation Net interest cost recognized in finance costs (68) 75 7 (56) 65 9 Equity securities: Domestic International Debt securities Other – cash Total Allocation of plan assets 2016 2015 Target asset allocation percentage 12.4% 48.8% 38.5% 0.3% 19.7% 7% to 17% 41.3% 33% to 48% 38.7% 30% to 50% 0% to 2% 0.3% 100.0% 100.0% The remeasurement recognized in other comprehensive income, is determined as follows: (In millions of dollars) 2016 2015 Years ended December 31 Return (loss) on plan assets (excluding interest income) Change in financial assumptions Change in demographic assumptions Effect of experience adjustments Change in asset ceiling Remeasurement recognized in other comprehensive (loss) income and equity 32 (69) – (65) 3 (10) 45 – (17) 4 (99) 22 We also provide supplemental unfunded pension benefits to certain executives. The table below includes our accrued benefit obligations, pension expense included in employee salaries and benefits, net interest cost and other comprehensive income. (In millions of dollars) 2016 2015 Years ended December 31 Accrued benefit obligation, beginning of year Pension expense included in employee salaries and benefits expense Net interest cost recognized in finance costs Remeasurement recognized in other comprehensive (income) loss Benefits paid Accrued benefit obligation, end of year 56 5 2 2 (3) 62 56 3 2 (2) (3) 56 We also have defined contribution plans with total pension expense of $3 million in 2016 (2015 – $3 million), which is included in employee salaries and benefits expense. Plan assets consist primarily of pooled funds that invest in common stocks and bonds. The pooled funds have investments in our equity securities and corporate bonds. As a result, approximately $2 million (2015 – $3 million) of plan assets are indirectly invested in our own securities under our defined benefit plan. We make contributions to the plans to secure the benefits of plan members and invest in permitted investments using the target ranges established by our Pension Committee, which reviews actuarial assumptions on an annual basis. The table below shows the actual contributions to the plans. (In millions of dollars) Employer contribution Employee contribution Total contribution Years ended December 31 2016 125 35 160 2015 118 32 150 We estimate our 2017 employer contributions to our funded plans to be $144 million. The actual value will depend on the results of the 2017 actuarial funding valuations. The average duration of the defined benefit obligation as at December 31, 2016 is 19 years (2015 – 19 years). Actual net return on plan assets was $97 million in 2016 (2015 – $44 million). We have recognized a cumulative loss in other comprehensive income and retained earnings of $380 million as at December 31, 2016 (2015 – $306 million). 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 139 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 23: SHAREHOLDERS’ EQUITY CAPITAL STOCK Share class Preferred shares Number of shares authorized for issue 400 million Class A Voting shares 112,474,388 Voting rights • None Features • Without par value • Issuable in series, with rights and terms of each series to be fixed by our Board of Directors prior to the issue of any series • Without par value • Each share can converted Class B Non-Voting share into be one • Each share entitled to 50 votes Class B Non-Voting shares 1.4 billion • Without par value • None RCI’s Articles of Continuance under the Company Act (British Columbia) impose restrictions on the transfer, voting, and issue of the Class A Voting and Class B Non-Voting shares to ensure that we remain qualified to hold or obtain licences required to carry on certain of our business undertakings in Canada. We are authorized to refuse to register transfers of any of our shares to any person who is not a Canadian in order to ensure that Rogers remains qualified to hold the licences referred to above. DIVIDENDS We declared and paid the following dividends on our outstanding Class A Voting and Class B Non-Voting shares: The holders of Class A shares are entitled to receive dividends at the rate of up to five cents per share but only after dividends at the rate of five cents per share have been paid or set aside on the Class B shares. Class A Voting and Class B Non-Voting shares therefore participate equally in dividends above $0.05 cents per share. On January 26, 2017, the Board of Directors declared a quarterly dividend of $0.48 per Class A Voting share and Class B Non-Voting share, to be paid on April 3, 2017, to shareholders of record on March 13, 2017. Date declared Date paid January 27, 2016 April 18, 2016 August 11, 2016 October 20, 2016 April 1, 2016 July 4, 2016 October 3, 2016 January 3, 2017 January 28, 2015 April 21, 2015 August 13, 2015 October 22, 2015 April 1, 2015 July 2, 2015 October 1, 2015 January 4, 2016 Dividend per share (dollars) 0.48 0.48 0.48 0.48 1.92 0.48 0.48 0.48 0.48 1.92 NOTE 24: STOCK-BASED COMPENSATION ACCOUNTING POLICY Stock option plans Cash-settled share appreciation rights (SARs) are attached to all stock options granted under our employee stock option plan. This feature allows the option holder to choose to receive a cash payment equal to the intrinsic value of the option (the amount by which the market price of the Class B Non-Voting share exceeds the exercise price of the option on the exercise date) instead of exercising the option to acquire Class B Non-Voting shares. We classify all outstanding stock options with cash settlement features 140 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT as liabilities and carry them at their fair value, determined using the Black-Scholes option pricing model or trinomial option pricing models, depending on the nature of the share-based award. We remeasure the fair value of the liability each period and amortize it to operating costs using graded vesting, either over the vesting period or to the date an employee is eligible to retire (whichever is shorter). Restricted share unit (RSU) and deferred share unit (DSU) plans We recognize outstanding RSUs and DSUs as liabilities, measuring the liabilities and compensation costs based on the awards’ fair values, which are based on the market price of the Class B Non-Voting shares, and recognizing them as charges to operating costs over the vesting period of the awards. If an award’s fair value changes after it has been granted and before the exercise date, we recognize the resulting changes in the liability as a charge to operating costs in the year the change occurs. For RSUs, the payment amount is established as of the vesting date. For DSUs, the payment amount is established as of the exercise date. Employee share accumulation plan Employees voluntarily participate in the share accumulation plan by contributing a specified percentage of their regular earnings. We match employee contributions up to a certain amount and recognize our contributions as a compensation expense in the year we make them. Expenses relating to the employee share accumulation plan are included in operating costs. USE OF ESTIMATES AND JUDGMENTS ESTIMATES Significant management estimates are used to determine the fair value of stock options, RSUs, and DSUs. The table below shows the weighted average fair value of stock options granted during 2016 and 2015, and the principal assumptions used in applying the Black-Scholes model for non-performance-based options and trinomial option pricing models for performance-based options to determine their fair value at grant date. Years ended December 31 2016 2015 Weighted average fair value $ 6.20 $ 4.65 Risk-free interest rate Dividend yield Volatility of Class B Non-Voting shares Weighted average expected life Weighted average time to vest Weighted average time to expiry Employee exit rate Suboptimal exercise factor Lattice steps 0.5% 3.7% 21.3% n/a 2.4 years 9.9 years 3.9% 1.5 50 1.1% 4.5% 22.0% n/a 2.4 years 9.9 years 3.9% 1.5 50 Volatility has been estimated based on the actual trading statistics of our Class B Non-Voting shares. N O 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 EXPLANATORY INFORMATION The table below is a summary of our stock-based compensation expense, which is included in employee salaries and benefits expense. (In millions of dollars) 2016 2015 Years ended December 31 Stock options Restricted share units Deferred share units Equity derivative effect, net of interest receipt Total stock-based compensation expense 17 45 32 (33) 61 18 40 19 (22) 55 As at December 31, 2016, we had a total liability recognized at its fair value of $189 million (2015 – $157 million) related to stock- based compensation, including stock options, RSUs, and DSUs. The current portion of this is $125 million (2015 – $107 million) and is included in accounts payable and accrued liabilities. The long- term portion of this is $64 million (2015 – $50 million) and is included in other long-term liabilities (see note 21). The total intrinsic value of vested liabilities, which is the difference between the strike price of the share-based awards and the trading price of the RCI Class B Non-Voting shares for all vested share- based awards, as at December 31, 2016 was $61 million (2015 – $56 million). We paid $69 million in 2016 (2015 – $73 million) to holders of stock options, RSUs, and DSUs upon exercise using the cash settlement feature, representing a weighted average share price on the date of exercise of $51.70 (2015 – $46.63). STOCK OPTIONS Options to purchase our Class B Non-Voting shares on a one-for-one basis may be granted to our employees, directors, and the Board of Directors or our Management officers by Compensation Committee. There are 65 million options authorized under various plans, and each option has a term of seven to ten years. The vesting period is generally graded vesting over the Management Compensation Committee may adjust the vesting terms on the grant date. The exercise price is equal to the fair market value of the Class B Non-Voting shares, determined as the five-day average before the grant date as quoted on the TSX. four years; however Performance options We granted 420,035 performance-based options in 2016 (2015 – 496,200) to certain key executives. These options vest on a graded basis over four years provided that certain targeted stock prices are met on or after each anniversary date. As at December 31, 2016, we had 2,268,102 performance options (2015 – 3,688,612) outstanding. 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 141 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Summary of stock options The table below is a summary of the stock option plans, including performance options. Year ended December 31, 2016 Year ended December 31, 2015 (In number of units, except prices) Number of options exercise price Number of options Weighted average Outstanding, beginning of year Granted Exercised Forfeited Outstanding, end of year Exercisable, end of year 4,873,940 1,054,530 (1,811,727) (384,219) 3,732,524 1,770,784 $41.47 $49.95 $40.45 $47.80 $43.70 $40.39 5,759,786 1,289,430 (1,978,149) (197,127) 4,873,940 2,457,005 Weighted average exercise price $38.71 $44.77 $35.40 $43.49 $41.47 $38.57 The table below shows the range of exercise prices, the weighted average exercise price and the weighted average remaining contractual life as at December 31, 2016. Range of exercise prices $34.29 – $34.99 $35.00 – $39.99 $40.00 – $44.99 $45.00 – $49.96 Options outstanding Weighted average remaining contractual life (years) Options exercisable Weighted average exercise price Number exercisable Weighted average exercise price 0.92 2.13 4.87 7.05 4.71 $34.38 $37.96 $43.99 $49.33 510,845 452,075 496,637 311,227 $43.70 1,770,784 $34.38 $37.96 $43.78 $48.36 $40.39 Number outstanding 510,845 452,075 1,541,154 1,228,450 3,732,524 Unrecognized stock-based compensation expense as at December 31, 2016 related to stock-option plans was $3 million (2015 – $7 million), and will be recognized in net income over the next four years as the options vest. Years ended December 31 (In number of units) 2016 2015 Outstanding, beginning of year Granted and reinvested dividends Exercised Forfeited 2,484,405 763,364 (826,918) (183,766) 2,765,255 798,074 (822,972) (255,952) Outstanding, end of year 2,237,085 2,484,405 at Unrecognized stock-based compensation December 31, 2016 related to these RSUs was $35 million (2015 – $41 million) and will be recognized in net income over the next three years as the RSUs vest. expense as DEFERRED SHARE UNITS The DSU plan allows directors, certain key executives, and other senior management to receive certain types of compensation in DSUs. Under the terms of the plan, DSUs are issued to the participant and the units issued cliff vest over a period of up to three years from the grant date. to elect RESTRICTED SHARE UNITS The RSU plan allows employees, directors, and officers to participate in the growth and development of Rogers. Under the terms of the plan, RSUs are issued to the participant and the units issued vest over a period of up to three years from the grant date. On the vesting date, we will redeem all of the participants’ RSUs in cash or by issuing one Class B Non-Voting share for each RSU. We have reserved 4,000,000 Class B Non-Voting shares for issue under this plan. Performance RSUs We granted 98,889 performance-based RSUs in 2016 (2015 – 114,979) to certain key executives. The number of units that vest and will be paid three years from the grant date will be within 50% the initial number granted based upon the to 150% of achievement of certain annual and cumulative three-year non-market targets. Summary of RSUs The table below is a summary of the RSUs outstanding, including performance RSUs. 142 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT Performance DSUs We granted 328,206 performance-based DSUs in 2016 (2015 – 443,139) to certain key executives. The number of units that vest and will be paid three years from the grant date will be within 50% the initial number granted based upon the to 150% of certain annual and cumulative three-year achievement of non-market targets. Summary of DSUs The table below is a summary of the DSUs outstanding, including performance DSUs. Years ended December 31 (In number of units) 2016 2015 Outstanding, beginning of year Granted and reinvested dividends Exercised Forfeited 1,770,871 972,894 (132,620) (214,687) 826,891 1,324,169 (257,677) (122,512) Outstanding, end of year 2,396,458 1,770,871 Unrecognized stock-based compensation at December 31, 2016 related to these DSUs was $30 million expense as (2015 – $26 million) and will be recognized in net income over the next three years as the executive DSUs vest. All other DSUs are fully vested. EMPLOYEE SHARE ACCUMULATION PLAN Participation in the plan is voluntary. Employees can contribute up to 10% of their regular earnings through payroll deductions (up to an annual maximum of $25,000). The plan administrator purchases our Class B Non-Voting shares on a monthly basis on the open market on behalf of the employee. At the end of each month, we make a contribution of 25% to 50% of the employee’s contribution that month, and the plan administrator uses this amount to purchase additional shares on behalf of the employee. We recognize our contributions made as a compensation expense. Compensation expense related to the employee share accumulation plan was $41 million in 2016 (2015 – $38 million). EQUITY DERIVATIVES We have entered into equity derivatives to hedge a portion of our stock-based compensation expense (see note 16) and recognized a $33 million gain (2015 – $22 million gain) in stock-based compensation expense for these derivatives. N O 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 NOTE 25: BUSINESS COMBINATIONS ACCOUNTING POLICY for business combinations using the acquisition We account method of accounting. Only acquisitions that result in our gaining control over the acquired businesses are accounted for as business combinations. We calculate the fair value of the consideration paid as the sum of the fair value at the date of acquisition of the assets we transferred and the equity interests we issued, less the liabilities we assumed to acquire the subsidiary. USE OF ESTIMATES AND JUDGMENTS ESTIMATES We use estimates to determine the fair values of assets acquired and liabilities assumed, using the best available information, including information from financial markets. These estimates include key assumptions such as discount rates, attrition rates, and terminal growth rates for performing discounted cash flow analyses. We measure goodwill as the fair value of the consideration transferred less the net recognized amount of the identifiable assets acquired and liabilities assumed, which are generally measured at fair value as of the acquisition date. When the excess is negative, a gain on acquisition is recognized immediately in net income. We expense the transaction costs associated with acquisitions as we incur them. CHANGE IN ACCOUNTING POLICY In November 2016, the IFRS Interpretations Committee issued clarifications to IAS 12 Income Taxes that provide guidance on the application of tax rates related to the expected method of recovery of an indefinite-life intangible asset for the purposes of measuring deferred tax (see note 2(d)). As a result of the clarifications, we have retrospectively changed our related accounting policy, including the measurement of the gain on acquisition of Mobilicity in 2015. EXPLANATORY INFORMATION We did not make any acquisitions that resulted in business combinations in 2016. We made several acquisitions in 2015, which we describe below. Goodwill recognized in the 2015 dealer tax purposes; goodwill store acquisitions was deductible for tax-deductible. recognized on all other acquisitions was not Goodwill represents the expected operational synergies with the business acquired and/or intangible assets that do not qualify to be recognized separately. 2015 ACQUISITIONS Mobilicity In July 2015, we completed the acquisition of 100% of the outstanding common shares of Mobilicity for cash consideration of $443 million. Mobilicity provided wireless telecommunication services to Canadians in Toronto, Ottawa, Calgary, Edmonton, and Vancouver to its prepaid subscribers and owned AWS-1 spectrum licences. 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 143 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Subsequent to the acquisition of Mobilicity, Rogers and WIND undertook an AWS-1 spectrum licence asset exchange in Southern Ontario to create an additional 10 MHz of contiguous, paired AWS-1 spectrum for Rogers. In addition, Rogers transferred certain non-contiguous AWS-1 spectrum licences previously held by Mobilicity in British Columbia, Alberta, and various regions in Ontario to WIND for nominal cash proceeds. Prior to the date of acquisition, Mobilicity was protected under the Companies’ Creditors Arrangement Act and the acquisition date fair value of the net identifiable assets exceeded the consideration paid, resulting in a gain on acquisition of $74 million (see note 2(d)). This acquisition provided an enhanced spectrum licence position and tax losses to the Company. Other In 2015, we completed other individually immaterial acquisitions for total cash consideration of $33 million. Final fair values of assets acquired and liabilities assumed The table below summarizes the final fair values of the assets acquired and liabilities assumed for all the acquisitions described above. (In millions of dollars) Mobilicity Other Total Fair value of consideration transferred Net identifiable asset or liability: Current assets Property, plant and equipment Spectrum licences Customer relationships 1 Deferred tax assets Current liabilities Other liabilities Deferred tax liabilities 2 Fair value of net identifiable assets acquired and liabilities assumed (Gain on acquisition) goodwill 2 Acquisition transaction costs 443 5 11 458 – 175 (31) (8) (93) 517 (74) 16 33 3 6 – 19 – (2) – (1) 25 8 – 476 8 17 458 19 175 (33) (8) (94) 542 16 1 Customer relationships are amortized over a period of seven years. 2 As a result of the IFRS Interpretations Committee’s agenda decision relating to IAS 12 Income Taxes, certain amounts have been retrospectively amended. See note 2(d). NOTE 26: RELATED PARTY TRANSACTIONS CONTROLLING SHAREHOLDER Our ultimate controlling shareholder is the Rogers Control Trust (the Trust), which holds voting control of RCI. The beneficiaries of the Trust are members of the Rogers family. Certain directors of RCI represent the Rogers family. We entered into certain transactions with private Rogers family holding companies controlled by the Trust. These transactions were recognized at the amount agreed to by the related parties 144 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT The table below shows the incremental revenue and net loss before taxes for the Mobilicity acquisition since the date of acquisition to December 31, 2015. (In millions of dollars) Incremental revenue Net loss before taxes 1 1 Includes acquisition transaction costs of $16 million. Mobilicity 30 17 PRO FORMA DISCLOSURES If the Mobilicity acquisition had occurred on January 1, 2015, we estimate our incremental revenue from the acquisition would have been $59 million and income before income tax expense would have decreased by $17 million for the year ended December 31, 2015. The pro forma disclosures are based on estimates and assumptions we believe are reasonable. The information provided is not necessarily an indication of what our consolidated financial results will be in the future. and are subject to the terms and conditions of formal agreements approved by the Audit and Risk Committee. The totals received or paid were less than $1 million for each of 2016 and 2015. TRANSACTIONS WITH KEY MANAGEMENT PERSONNEL Key management personnel include the directors and our most senior corporate officers, who are primarily responsible for planning, directing, and controlling our business activities. N O 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 Compensation The compensation expense for key management for employee services was included in employee salaries and benefits as follows: (In millions of dollars) 2016 2015 Years ended December 31 In addition, during the year ended December 31, 2016, we announced a strategic change across our publishing business such that we will focus on digital content through the Internet and mobile applications. As a result, we have sold select publishing titles to the aforementioned printing services company for $5 million. Salaries and other short-term employee benefits Post-employment benefits Stock-based compensation 1 Total compensation 12 5 30 47 SUBSIDIARIES, ASSOCIATES, AND JOINT ARRANGEMENTS We have the following material operating subsidiaries as at December 31, 2016 and 2015: • Rogers Communications Canada Inc. (see note 1); and • Rogers Media Inc. 13 3 20 36 1 Stock-based compensation does not include the effect of changes in fair value of RCI Class B Non-Voting shares or equity derivatives. Transactions We have entered into business transactions with companies whose partners or senior officers are Directors of RCI, which include: • the non-executive chairman of a law firm that provides a portion of our legal services; • the chairman of a company that provides printing services to the Company; and • the chairman and chief executive officer of a firm to which the Company pays commissions for insurance coverage (ceased as a related party effective April 2015). We recognize these transactions at the amount agreed to by the related parties, which are also reviewed by the Audit and Risk Committee. The amounts owing are unsecured, interest-free, and due for payment in cash within one month from the date of the transaction. The following table summarizes related party activity for the business transactions described above. We have 100% ownership interest in these subsidiaries. Our subsidiaries are incorporated in Canada and have the same reporting period for annual financial statements reporting. When necessary, adjustments are made to conform the accounting policies of the subsidiaries to those of RCI. There are no significant restrictions on the ability of subsidiaries, joint arrangements, and associates to transfer funds to Rogers as cash dividends or to repay loans or advances, subject to the approval of other shareholders where applicable. the following business transactions with our We carried out associates and joint arrangements. Transactions between us and our subsidiaries have been eliminated on consolidation and are not disclosed in this note. (In millions of dollars) Revenue Purchases Years ended December 31 2016 177 215 2015 115 170 Outstanding balances at year-end are unsecured, interest-free, and settled in cash. Years ended December 31 Outstanding balance as at December 31 2016 2015 2016 2015 27 31 3 3 (In millions of dollars) Accounts receivable Accounts payable and accrued liabilities As at December 31 2016 2015 70 32 56 30 (In millions of dollars) Printing, legal services, and commission paid on premiums for insurance coverage NOTE 27: GUARANTEES We had the following guarantees as at December 31, 2016 and 2015 as part of our normal course of business: BUSINESS SALE AND BUSINESS COMBINATION AGREEMENTS As part of transactions involving business dispositions, sales of assets, or other business combinations, we may be required to pay counterparties for costs and losses incurred as a result of breaches of intellectual property right infringement, loss or damages to property, environmental liabilities, changes in laws and regulations (including tax legislation), litigation against the counterparties, contingent liabilities of a disposed business, or reassessments of previous tax filings of the corporation that carries on the business. representations and warranties, SALES OF SERVICES As part of transactions involving sales of services, we may be required to make payments to counterparties as a result of breaches of representations and warranties, changes in laws and the regulations (including tax legislation), or litigation against counterparties. PURCHASES AND DEVELOPMENT OF ASSETS As part of transactions involving purchases and development of assets, we may be required to pay counterparties for costs and losses incurred as a result of breaches of representations and loss or damages to property, changes in laws and warranties, regulations (including tax legislation), or litigation against the counterparties. 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 145 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INDEMNIFICATIONS We indemnify our directors, officers, and employees against claims reasonably incurred and resulting from the performance of their services to Rogers. We have liability insurance for our directors and officers and those of our subsidiaries. No amount has been accrued in the Consolidated Statements of Financial Position relating to these types of indemnifications or guarantees as at December 31, 2016 or 2015. Historically, we have not made any significant payments under these indemnifications or guarantees. NOTE 28: COMMITMENTS AND CONTINGENT LIABILITIES ACCOUNTING POLICY Contingent liabilities are liabilities of uncertain timing or amount and are not recognized until we have a present obligation as a result of a past event, it is probable that we will experience an outflow of resources embodying economic benefits to settle the obligation, and a reliable estimate can be made of the amount of the obligation. We disclose our contingent liabilities unless the possibility of an outflow of resources in settlement is remote. USE OF ESTIMATES AND JUDGMENTS JUDGMENTS We are exposed to possible losses related to various claims and lawsuits against us for which the outcome is not yet known. We therefore make significant in determining the probability of loss when we assess contingent liabilities. judgments EXPLANATORY INFORMATION COMMITMENTS The table and paragraphs below show the future minimum payments for our contractual commitments that are not recognized as liabilities as at December 31, 2016: (In millions of dollars) Operating leases Player contracts 1 Purchase obligations 2 Program rights 3 Total commitments Less than 1 Year 159 161 422 510 1,252 1-3 Years 4-5 Years 235 165 359 1,083 1,842 109 18 153 1,067 1,347 After 5 Years 94 – 105 2,421 2,620 Total 597 344 1,039 5,081 7,061 1 Player contracts are Toronto Blue Jays players’ salary contracts into which we have entered and are contractually obligated to pay. 2 Purchase obligations are the contractual obligations under service, product, and handset contracts to which we have committed for at least the next five years. 3 Program rights are the agreements into which we have entered to acquire broadcasting rights for sports broadcasting programs and films for periods in excess of one year at contract inception. Operating leases are for network sites, office premises, and retail outlets across the country. The majority of the lease terms range from five to fifteen years. Rent expense for 2016 was $223 million (2015 – $219 million). In addition, as at December 31, 2016, our contractual commitments were $241 million for the acquisition of property, plant and equipment and $233 million for the acquisition of intangible assets. In addition, as at December 31, 2016, our contractual commitments related to all of our associates and joint ventures were $524 million, which are not included in the above table. CONTINGENT LIABILITIES We have the following contingent liabilities as at December 31, 2016: System Access Fee – Saskatchewan In 2004, a class action was commenced against providers of wireless the Class Actions Act communications (Saskatchewan). The class action relates to the system access fee wireless carriers charge to some of their customers. The plaintiffs are seeking unspecified damages and punitive damages, which would effectively be a reimbursement of all system access fees collected. in Canada under In 2007, the Saskatchewan Court granted the plaintiffs’ application to have the proceeding certified as a national, “opt-in” class action where affected customers outside Saskatchewan must take specific steps to participate in the proceeding. In 2008, our motion to stay the proceeding based on the arbitration clause in our wireless service agreements was granted. The Saskatchewan Court directed that its order, in respect of the certification of the action, would exclude customers who are bound by an arbitration clause from the class of plaintiffs. In 2009, counsel for the plaintiffs began a second proceeding under the Class Actions Act (Saskatchewan) asserting the same claims as the original proceeding. If successful, this second class action would be an “opt-out” class proceeding. This second proceeding was ordered conditionally stayed in 2009 on the basis that it was an abuse of process. In 2013, the plaintiffs applied for an order to be allowed to proceed with the second system access fee class action. However, the court denied this application and the second action remains conditionally stayed. At the time the Saskatchewan class action was commenced in 2004, corresponding claims were filed in multiple jurisdictions across Canada, although the plaintiffs took no active steps. The appeal courts in several provinces dismissed the corresponding 146 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT N O 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 claims as an abuse of process. The claims in all provinces other than Saskatchewan have now been dismissed or discontinued. We have not recognized a liability for this contingency. 911 Fee In June 2008, a class action was launched in Saskatchewan against providers of wireless communications services in Canada. It involves allegations of breach of contract, misrepresentation, and false advertising, among other things, in relation to the 911 fee that had been charged by us and the other wireless telecommunication providers in Canada. The plaintiffs are seeking unspecified damages and restitution. The plaintiffs intend to seek an order class action in certifying the proceeding as a national Saskatchewan. We have not this contingency. recognized a liability for of wireless communications Cellular Devices In July 2013, a class action was launched in British Columbia against and providers manufacturers of wireless devices. The class action relates to the alleged adverse health effects incurred by long-term users of cellular devices. The plaintiffs are seeking unspecified damages and punitive damages, effectively equal to the reimbursement of the portion of revenue the defendants have received that can reasonably be attributed to the sale of cellular phones in Canada. We have not recognized a liability for this contingency. in Canada Income Taxes We provide for income taxes based on all of the information that is currently available and believe that we have adequately provided these items. The calculation of applicable taxes in many cases, however, requires significant judgment (see note 12) in interpreting tax rules and regulations. Our tax filings are subject to audits, which could materially change the amount of current and deferred income tax assets and liabilities and provisions, and could, in certain circumstances, result in the assessment of interest and penalties. is subject Outcome of Proceedings the proceedings and claims against us, The outcome of all to future including the matters described above, resolution that includes the uncertainties of litigation. It is not possible for us to predict the result or magnitude of the claims due to the various factors and uncertainties involved in the legal process. Based on information currently known to us, we believe it is not probable that these proceedings and claims, individually or in total, will have a material financial adverse effect on our business, condition. If it becomes probable that we will be held liable for claims against us, we will recognize a provision during the period in which the change in probability occurs, which could be material to Income or Consolidated our Consolidated Statements of Statements of Financial Position. the ultimate resolution of any of results, or financial NOTE 29: SUPPLEMENTAL CASH FLOW INFORMATION CHANGE IN NON-CASH OPERATING WORKING CAPITAL ITEMS The following two tables provide details on the net cash issuance and repayment of long-term debt. Years ended December 31 Years ended December 31 (In millions of dollars) 2016 2015 (In millions of dollars) Accounts receivable Inventories Other current assets Accounts payable and accrued liabilities Unearned revenue Total change in non-cash working capital (141) 3 (12) 182 (18) (185) (66) (23) 33 (61) Net issuance of senior notes Borrowings under bank credit facilities Discount on bank credit facilities Total proceeds on issuance of long-term debt items 14 (302) Note 20 20 2016 671 4,017 – 2015 1,338 6,025 (25) 4,688 7,338 Years ended December 31 CASH PROVIDED BY FINANCING ACTIVITIES (In millions of dollars) Note 2016 2015 The following table summarizes net issuance (repayment) of long- term debt. Net repayment of senior notes Repayment of bank credit Years ended December 31 Total repayment of long-term facilities 20 20 (1,000) (1,059) (4,226) (5,525) (In millions of dollars) Note 2016 2015 debt (5,226) (6,584) Proceeds on issuance of long-term debt Repayment of long-term debt Net (repayment) issuance of long- 4,688 (5,226) 7,338 (6,584) term debt 20 (538) 754 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 147 (In millions of dollars) Note 2016 2015 Years ended December 31 Payments on termination of US$550 million debt derivatives Payments on termination of US$280 million debt derivatives Payments on termination of forward contracts Payments on debt derivatives related to credit facility borrowings Total gross payments on debt derivatives and forward contracts 20 20 16 – – (596) (309) (53) (25) 16 (11,159) – (11,212) (930) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes net cash (payments) proceeds on debt derivatives and forward contracts. Years ended December 31 (In millions of dollars) Note 2016 Proceeds on debt derivatives Payments on debt derivatives and forward contracts Net (payment) proceeds on settlement of debt derivatives and forward contracts 11,167 2015 1,059 (11,212) (930) 16 (45) 129 The following two tables provide details on the gross proceeds (payments) on debt derivatives and forward contracts. (In millions of dollars) Note 2016 2015 Years ended December 31 Proceeds on termination of US$550 million debt derivatives Proceeds on termination of US$280 million debt derivatives Proceeds on debt derivatives related to credit facility borrowings Total gross proceeds on debt derivatives 20 20 – – 702 357 16 11,167 – 11,167 1,059 148 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT Notes N O T E S 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 149 Glossary of selected industry terms and helpful links 3G (Third Generation Wireless): The third generation of mobile phone standards and technology. A key aim of 3G standards was to enable mobile broadband data speeds above 384 Kbps. 3G networks enable network operators to offer users a wider range of more advanced services while achieving greater network capacity through improved spectral efficiency. Advanced services include video and multimedia messaging and broadband wireless data, all in a mobile environment. 3.5G (Enhanced Third Generation Wireless): Evolutionary upgrades to 3G services that provide significantly enhanced broadband wireless data performance to enable multi- megabit data speeds. The key 3.5G technologies in North America are HSPA and CDMA EV-DO. 4G (Fourth Generation Wireless): A technology that offers increased voice, video and multimedia capabilities, a higher network capacity, improved spectral efficiency, and high-speed data rates over current 3G benchmarks. 4K - Ultra-High Definition Video: Denotes a specific television display resolution of 4096 x 2160 pixels. 1920 x 1080 resolution full HD televisions present an image of around 2 megapixels, while the 4K generation of screens delivers an 8 megapixel image. ARPA (Average Revenue per Account): This business performance measure expressed as a dollar rate per month includes all the revenue generated by an account as opposed to a user or device so that a customer who has many devices will typically have a higher ARPA than a customer with only one device. ARPU (Average Revenue per User): This business performance measure, expressed as a dollar rate per month, is predominantly used in the wireless and cable industries to describe the revenue generated per customer per month. ARPU is an indicator of a wireless or cable business’ operating performance. AWS (Advanced Wireless Services): The wireless telecommunications spectrum band that is used for wireless voice, data, messaging services, and multimedia. Bandwidth: Bandwidth can have two different meanings: (1) a band or block of radio frequencies measured in cycles per second, or Hertz; (2) an amount or unit of capacity in a telecommunications transmission network. In general terms, bandwidth is the available space to carry a signal. The greater the bandwidth, the greater the information- carrying capacity. BDU (Broadcast Distribution Undertaking): An undertaking for the reception of broadcasting and the retransmission thereof by radio waves or other means of telecommunication to more than one permanent or temporary residence or dwelling unit or to another such undertaking. Bps (Bits per Second): A measurement of data transmission speed used for measuring the amount of data that is transferred in a second between two telecommunications points or within network devices. Kbps (kilobits per second) is thousands of bps; Mbps (megabits per second) is millions of bps; Gbps (gigabits per second) is billions of bps; and Tbps (terabits per second) is trillions of bps. Broadband: Communications services which allows for the high-speed transmission of voice, data, and video simultaneously at rates of 1.544 Mbps and above. BYOD (Bring Your Own Device): Refers to the action that customers are able to sign up for wireless services on a personally purchased device as opposed to the traditional means of acquiring one through a term contract. Cable Telephony (Phone): The transmission of real- time voice communications over a cable network. Churn: This business performance measure is used to describe the disconnect rate of customers to a telecommunications service. It is a measure of customer turnover and is often at least partially reflective of service quality and competitive intensity. It is usually expressed as a percentage and calculated as the number of subscriber units disconnecting in a period divided by the average number of units on the network in the same period. CLEC (Competitive Local Exchange Carrier): A telecommunications provider company that competes with other, already established carriers, generally the ILEC. Cloud Computing: The ability to run a program or application on many connected computers simultaneously as the software, data and services reside in data centres. CPE (Customer Premise Equipment): Telecommunications hardware, such as modems or set-top boxes, that is located at the home or business of a customer. CRTC (Canadian Radio-television and Telecommunications Commission): The federal regulator for radio and television broadcasters and cable TV and telecommunications companies in Canada. Data Centre: A facility used to house computer systems and associated components, such as telecommunications and storage systems. It generally includes redundant or backup power supplies, redundant data communications connections, environmental controls (e.g., air conditioning, fire suppression), and security controls. DOCSIS (Data Over Cable Service Interface Specification): A non-proprietary industry standard developed by CableLabs that allows for equipment interoperability from the headend to the CPE. The latest version (DOCSIS 3.0/3.1) enables bonding of multiple channels to allow for 250 Mbps or greater transmission speeds depending upon how many channels are bonded together. DSL (Digital Subscriber Line): A family of broadband technologies that offers always-on, high-bandwidth (usually asymmetrical) transmission over an existing twisted-pair copper telephone line. DSL shares the same phone line as the telephone service but it uses a different part of the phone line’s bandwidth. Fibre Optics: A method for the transmission of information (voice, video or data) in which light is modulated and transmitted over hair-thin filaments of glass called fibre optic cables. The bandwidth capacity of fibre optic cable is much greater than that of copper wire and light can travel relatively long distances through glass without the need for amplification. FTTH (Fibre-to-the-Home): Represents fibre optic cable that reaches the boundary of the living space, such as a box on the outside wall of a home. GSM (Global System for Mobile): A TDMA- based technology and a member of the “second generation” (2G) family of mobile protocols that is deployed widely around the world, especially at the 850, 900, 1800, and 1900 MHz frequency bands. HDR (High Dynamic Range): An imaging technique used to reproduce a greater dynamic range of luminosity than is possible with standard digital imaging or photographic techniques. Homes Passed: Total number of homes which have the potential for being connected to a cable system in a defined geographic area. Hosting (Web Hosting): The business of housing, serving, and maintaining files for one or more websites or email accounts. Using a hosting service allows many companies to share the cost of a high-speed Internet connection for serving files, as well as other Internet infrastructure and management costs. Hotspot: A Wi-Fi access point in a public place such as a café, train station, airport, commercial office property, or conference centre. HSPA (High Speed Packet Access): HSPA is an IP-based packet-data enhancement technology that provides high-speed broadband packet data services over 3G networks. HSPA+ provides high- speed broadband packet data services at even faster speeds than HSPA over 4G networks. HUp (Hardware Upgrade): When an existing wireless customer upgrades to a new wireless device, this is referred to as a HUP or Hardware UPgrade. ICT (Information and Communications Technology): A term that includes any communication device or application, such as radio, television, cellular phones, computer and network hardware and software, satellite systems, and so on, as well as the various services and applications associated with them, such as videoconferencing. ILEC (Incumbent Local Exchange Carrier): The dominant telecommunications company providing local telephone service in a given geographic area when competition began. Typically an ILEC is the traditional phone company and original local exchange carrier in a given market. IoT (Internet of Things): The concept of connecting everyday objects and devices (e.g., appliances and cellular phones) to the Internet and each other. This allows them to sense their environment and communicate between themselves, allowing for the seamless flow of data. IP (Internet Protocol): The packet-based computer network protocol that all machines on the Internet must know so they can communicate with one another. IP is basically a set of data switching and routing rules that specify how information is cut up into packets and how they are addressed for delivery between computers. IPTV (Internet Protocol Television): A system where a digital television signal is delivered using Internet Protocol. Unlike broadcasting, viewers receive only the stream of content they have requested (by surfing channels or ordering video on demand). 150 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT G L O S S A R Y ISED Canada (Innovation, Science and Economic Development Canada): The Canadian federal government department responsible for, amongst other things, the regulation, management, and allocation of radio spectrum and establishing technical requirements for various wireless systems. ISP (Internet Service Provider): A provider of Internet access service to consumers and/or businesses. LAN (Local Area Network): A network created via linked computers within a small area, such as a single site or building. LTE (Long-Term Evolution): A fourth generation cellular wireless technology (also known as 4G) which has evolved and enhanced the UMTS/HSPA+ mobile phone standards. LTE improves spectral efficiency, lowers costs, improves services, and, most importantly, allows for higher data rates. LTE technology is designed to deliver speeds up to 150 Mbps with further increases over time. LTE Advanced: A mobile communication standard which represents a major enhancement of the LTE standard. With a peak data rate of 1 Gbps, LTE Advanced also offers faster switching between power states and improved performance at the cell edge. M2M (Machine to Machine): The wireless inter-connection of physical devices or objects that are seamlessly integrated into an information network to become active participants in business processes. Services are available to interact with these ‘smart objects’ over the Internet, query, change their state and to capture any information associated with them. Near-net: Customer location(s) adjacent to network infrastructure allowing connectivity to the premises to be extended with relative ease. Off-net: Customer location(s) where network infrastructure is not readily available, necessitating the use of a third-party leased access for connectivity to the premises. On-net: Customer location(s) where network infrastructure is in place to provide connectivity to the premises without further builds or third party leases. An on-net customer can be readily provisioned. OTT (Over-the-Top): Audio, visual, or alternative media distributed via the Internet or other non-traditional media. Penetration: The degree to which a product or service has been sold into, or adopted by, the base of potential customers or subscribers in a given geographic area. This value is typically expressed as a percentage. POPs (Persons of Population): A wireless industry term for population or number of potential subscribers in a market, a measure of the market size. A POP refers to one person living in a population area, which, in whole or in substantial part, is included in the coverage areas. Postpaid: A conventional method of payment for wireless service where a subscriber pays a fixed monthly fee for a significant portion of services. Usage (e.g. long distance) and overages are billed in arrears, subsequent to consuming the services. The fees are usually arranged on a term contract basis. Prepaid: A method of payment for wireless service that allows a subscriber to prepay for a set amount of airtime in advance of actual usage. Generally, a subscriber’s prepaid account is debited at the time of usage so that actual usage cannot exceed the prepaid amount until an additional prepayment is made. PVR (Personal Video Recorder): A consumer electronics device or application software that records video in a digital format. The term includes set-top boxes with direct-to-disk recording facility, which enables video capture and playback to and from a hard disk. Set-Top Box: A standalone device that receives and decodes programming so that it may be displayed on a television. Set-top boxes may be used to receive broadcast, cable, and satellite programming. Spectrum: A term generally applied to electromagnetic radio frequencies used in the transmission of sound, data and video. Various portions of spectrum are designated for use in cellular service, television, FM radio, and satellite transmissions. SVOD (Subscription Video on Demand): Offers, for a monthly charge, access to specific programming with unlimited viewing on an on-demand basis. TPIA (Third-Party Internet Access): Wholesale high-speed access services of large cable carriers that enable independent service providers to offer retail Internet services to their own end-users. TSU (Total Service Unit or Cable TSU): In the cable TV industry, this refers to television, Internet, and cable telephony subscribers. A subscriber that has purchased television and Internet services is counted as two TSUs. A subscriber that has purchased television, Internet, and cable telephony services is counted as three TSUs, etc. VOD (Video on Demand): A cable service that allows a customer to select and view movies and shows at any time from a library of thousands of titles. VoIP (Voice over IP): The technology used to transmit real-time voice conversations in data packets over a data network using Internet Protocol. Such data networks include telephone company networks, cable TV networks, wireless networks, corporate intranets, and the Internet. VoLTE (Voice over LTE): A platform to provide voice services to wireless customers over LTE wireless networks. The LTE standard only supports packet switching as it is all IP-based technology. Voice calls in GSM are circuit switched, so with the adoption of LTE, carriers are required to re-engineer their voice call network, while providing continuity for traditional circuit-switched networks on 2G and 3G networks. Wi-Fi: The commercial name for a networking technology standard for wireless LANs that essentially provide the same connectivity as wired networks, but at lower speeds. Wi-Fi allows any user with a Wi-Fi-enabled device to connect to a wireless access point. Helpful links Canadian Radio-Television and Telecommunications Commission (CRTC) The CRTC is an independent public organization that regulates and supervises the Canadian broadcasting and telecommunications systems. It reports to Parliament through the Minister of Canadian Heritage. www.crtc.gc.ca Innovation, Science and Economic Development Canada (ISED Canada) ISED Canada is a ministry of the federal government whose mission is to foster a growing, competitive, knowledge-based Canadian economy. It also works with Canadians throughout the economy and in all parts of the country to improve conditions for investment, improve Canada’s innovation performance, increase Canada’s share of global trade, and build an efficient and competitive marketplace. www.ic.gc.ca Federal Communications Commission (FCC) The FCC is an independent United States government agency. The FCC was established by the Communications Act of 1934 and is charged with regulating interstate and international communications by radio, television, wire, satellite, and cable. The FCC’s jurisdiction covers the 50 states, the District of Columbia, and U.S. territories. www.fcc.gov Canadian Wireless Telecommunications Association (CWTA) The CWTA is the industry trade organization and authority on wireless issues, developments, and trends in Canada. It represents wireless service providers as well as companies that develop and produce products and services for the industry, including handset and equipment manufacturers, content and application creators, and business-to- business service providers. www.cwta.ca The Wireless Association (CTIA) The CTIA is an international non-profit membership organization, founded in 1984, representing wireless carriers and their suppliers, as well as providers and manufacturers of wireless data services and products. The CTIA advocates on their behalf before all levels of government. www.ctia.org GSM Association (GSMA) The GSMA is a global trade association representing nearly 800 operators with more than 250 companies in the broader mobile ecosystem, including handset and device makers, software companies, equipment providers, and Internet companies, as well as organizations in adjacent industry sectors. In addition, more than 180 manufacturers and suppliers support the Association’s initiatives as associate members. The GSMA works on projects and initiatives that address the collective interests of the mobile industry, and of mobile operators in particular. www.gsma.com Commission for Complaints for Telecommunications Services (CCTS) An independent organization dedicated to working with consumers and service providers to resolve complaints about telephone and Internet services. Its structure and mandate were approved by the CRTC. www.ccts-cprst.ca For a more comprehensive glossary of industry and technology terms, go to rogers.com/glossary 2016 ANNUAL REPORT ROGERS COMMUNICATIONS INC. 151 Corporate and shareholder information CORPORATE OFFICES Rogers Communications Inc. 333 Bloor Street East, Toronto, ON M4W 1G9 416-935-7777 CUSTOMER SERVICE AND PRODUCT INFORMATION 888-764-3771 or rogers.com SHAREHOLDER SERVICES If you are a registered shareholder and have inquiries regarding your account, wish to change your name or address, or have questions about lost stock certificates, share transfers, estate settlements or dividends, please contact our transfer agent and registrar: CST Trust Company P.O. Box 700, Postal Station B Montreal, QC H3B 3K3, Canada 416-682-3860 or 800-387-0825 inquiries@canstockta.com Duplicate Mailings If you receive duplicate shareholder mailings from Rogers Communications, please contact CST Trust Company as detailed above to consolidate your accounts. INVESTOR RELATIONS Institutional investors, securities analysts and others requiring additional financial information can visit rogers.com/investors or contact us at: 888-935-7777 or 416-935-7777 (outside North America) or investor.relations@rci.rogers.com CORPORATE PHILANTHROPY For information relating to Rogers’ various philanthropic endeavours, refer to the “About Rogers” section of rogers.com SUSTAINABILITY Rogers is committed to continuing to grow responsibly and we focus our social and environmental sustainability efforts where we can make the most meaningful impacts on both. To learn more, please visit rogers.com/csr STOCK EXCHANGE LISTINGS Toronto Stock Exchange (TSX): RCI.B – Class B Non-Voting shares (CUSIP # 775109200) RCI.A – Class A Voting shares (CUSIP # 775109101) New York Stock Exchange (NYSE): RCI – Class B Non-Voting shares (CUSIP # 775109200) DEBT SECURITIES For details of the public debt securities of the Rogers companies, please refer to the “Debt Securities” section under rogers.com/investors INDEPENDENT AUDITORS KPMG LLP ON-LINE INFORMATION Rogers is committed to open and full financial disclosure and best practices in corporate governance. We invite you to visit the Investor Relations section of rogers.com/investors where you will find additional information about our business, including events and presentations, news releases, regulatory filings, governance practices, corporate social responsibility and our continuous disclosure materials, including quarterly financial releases, annual information forms and management information circulars. You may also subscribe to our news by email or RSS feeds to automatically receive Rogers news releases electronically. DIRECT DEPOSIT SERVICE Shareholders may have dividends deposited directly into accounts held at financial institutions. To arrange direct deposit service, please contact CST Trust Company as detailed earlier on this page. CAUTION REGARDING FORWARD-LOOKING INFORMATION AND OTHER RISKS This annual report includes forward-looking statements about the financial condition and prospects of Rogers Communications that involve significant risks and uncertainties that are detailed in the “Risks and Uncertainties Affecting our Businesses” and “About Forward- Looking Information” sections of the MD&A contained herein, which should be read in conjunction with all sections of this annual report. The fibre used in the manufacture of the stock comes from well-managed forests, controlled sources and recycled wood or fibre. This annual report is recyclable. 2,355 litres of water saved 19 kg solid waste not created 52 kg CO2 of net greenhouse gases prevented 1,000,000 BTUs energy not consumed © 2017 Rogers Communications Inc. Other registered trademarks that appear are the property of the respective owners. Design: Ove Brand | Design, a division of Publicis Canada 152 ROGERS COMMUNICATIONS INC. 2016 ANNUAL REPORT COMMON STOCK TRADING AND DIVIDEND INFORMATION Closing Price RCI.b on TSX 2016 High Low Close Dividends Declared per Share $52.66 $46.15 $52.00 $0.48 First Quarter Second Quarter $53.01 $48.34 $52.30 $0.48 Third Quarter $58.99 $52.30 $55.66 $0.48 Fourth Quarter $56.07 $50.15 $51.79 $0.48 Shares Outstanding at December 31, 2016 112,411,992 Class A 402,396,133 Class B 2017 Expected Dividend Dates Record Date*: Payment Date*: March 13, 2017 June 12, 2017 September 15, 2017 December 11, 2017 * Subject to Board approval April 3, 2017 July 4, 2017 October 3, 2017 January 2, 2018 Unless indicated otherwise, all dividends paid by Rogers Communications are designated as “eligible” dividends for the purposes of the Income Tax Act (Canada) and any similar provincial legislation. DIVIDEND REINVESTMENT PLAN (DRIP) Rogers offers a convenient dividend reinvestment program for eligible shareholders to purchase additional Rogers Communications shares by reinvesting their cash dividends without incurring brokerage fees or administration fees. For plan information and enrolment materials or to learn more about Rogers’ DRIP, please visit https:// www.canstockta.com/en/InvestorServices/ Dividend_Reinvestment_Plans/Overview_ Of_DRIPs/ or contact CST Trust Company as detailed earlier on this page. ELECTRONIC DELIVERY OF SHAREHOLDER MATERIALS Registered shareholders can receive electronic notice of financial reports and proxy materials by registering at https://www.canstockta.com/ en/InvestorServices/Delivery_of_Investor_ Materials/Electronic_Consent. This approach gets information to shareholders faster than conventional mail and helps Rogers protect the environment and reduce printing and postage costs. GLOSSARY OF TERMS For a comprehensive glossary of industry and technology terms, go to rogers.com/glossary Facebook facebook.com/rogers Twitter twitter.com/rogersbuzz Google + google.com/+Rogers LinkedIn linkedin.com/company/ rogers-communications The best is yet to come. Wireless Cable Media rogers.com 

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