Cogeco 2013 Annual Report Download - page 37

36 COGECO CABLE INC. 2013 Management's discussion and analysis (“MD&A”)
FINANCIAL MANAGEMENT
The Corporation has entered into cross-currency swap agreements to set the liability for interest and principal payments on its US$190 million
Senior Secured Notes Series A maturing on October 1, 2015. These agreements have the effect of converting the U.S. interest coupon rate of
7.00% per annum to an average Canadian dollar interest rate of 7.24% per annum. The exchange rate applicable to the principal portion of the
debt has been fixed at $1.0625 per US dollar. The Corporation elected to apply cash flow hedge accounting on these derivative financial instruments.
During fiscal 2013, amounts due under the US$190 million Senior Secured Notes Series A increased by $12.8 million due to the US dollar’s
appreciation relative to the Canadian dollar. The fair value of cross-currency swaps liability decreased by a net amount of $12.5 million, of which
a decrease of $12.8 million offsets the foreign exchange loss on the debt denominated in US dollars. The difference of $0.3 million was recorded
as a decrease of other comprehensive income. During fiscal 2012, amounts due under the US$190 million Senior Secured Notes Series A
increased by $1.2 million due to the US dollar’s appreciation over the Canadian dollar. The fair value of cross-currency swaps liability decreased
by a net amount of $2.7 million, of which $1.2 million offsets the foreign exchange loss on the debt denominated in US dollars.
In addition, on July 22, 2013, Cogeco Cable has entered into interest rate swap agreements to fix the interest rate on US$200 million of its LIBOR
based loans. These agreements have the effect of converting the floating US LIBOR base rate at an average fixed rate of 0.39625% under the
Term Revolving Facility until July 25, 2015. The Corporation elected to apply hedge accounting on these derivative financial instruments. The
sensitivity of the Corporation’s annual financial expense to a variation of 1% in the interest rate applicable to the Revolving and Term Facilities
is approximately $7.6 million based on the outstanding debt at August 31, 2013.
Furthermore, the Corporation’s net investment in foreign subsidiaries is exposed to market risk attributable to fluctuations in foreign currency
exchange rates, primarily changes in the values of the Canadian dollar versus the US dollar and British Pound. This risk was mitigated since the
major part of the purchase prices for Atlantic Broadband and PEER 1 were borrowed directly in US dollars and British Pounds. These debts were
designated as hedges of net investments in foreign operations. At August 31, 2013, the net investment for Atlantic Broadband and for PEER 1
amounted to US$1.1 billion and £72.6 million while long-term debt hedging these net investments amounted to US$842.9 million and £55.6
million, respectively. The exchange rate used to convert the US dollar currency and British Pound currency into Canadian dollars for the statement
of financial position accounts at August 31, 2013 was $1.0530 per US dollar and $1.6318 per British Pound. The impact of a 10% change in the
exchange rate of the US dollar and British Pound into Canadian dollars would change other comprehensive income by approximately $28.0
million.
The Corporation is also impacted by foreign currency exchange rates, primarily changes in the values of the US dollar relative to the Canadian
dollar with regard to purchases of certain equipment, as the majority of customer premise equipment is purchased and subsequently paid in US
dollars. Please consult the “Foreign Exchange Risk” section in Note 20 of the consolidated financial statements for further details.
COMMITMENTS AND GUARANTEES
Cogeco Cable's contractual obligations at August 31, 2013 are shown in the table below:
Years ended August 31, 2014 2015 2016 2017 2018 Thereafter Total
(in thousands of dollars) $$$$$$$
Long-term debt(1) 13,900 26,536 233,555 148,538 685,180 1,819,425 2,927,134
Derivatives financial instruments — — 1,805 ———1,805
Finance leases(2) 1,340 791 — — — — 2,131
Operating lease agreements and other
long-term contracts(3) 43,541 35,603 30,480 27,316 25,795 81,528 244,263
Pension plan liabilities and accrued
employees benefits (4) —————7,275 7,275
Total contractual obligations(5) 58,781 62,930 265,840 175,854 710,975 1,908,228 3,182,608
(1) Includes principal and excludes finance leases.
(2) Includes interest.
(3) The Corporation's significant operating lease agreements are for rented premises and support structures. The Corporation also entered into long-term
commitments with suppliers to provide services that include minimum spend commitments.
(4) The nature of these obligations prevents the Corporation from estimating an annual breakdown.
(5) Annual breakdown excludes pension plan liabilities and accrued employees benefits.
In the normal course of business, Cogeco Cable enters into agreements containing features that meet the criteria for a guarantee.
In connection with the acquisition or sale of businesses or assets, in addition to possible indemnification relating to failure to perform covenants
and breach of representations and warranties, the Corporation has agreed to indemnify the seller or the purchaser against claims related to
events that occurred prior to the date of acquisition or sale. The term and amount of such indemnification will in certain circumstances be limited
by the agreement. The nature of these indemnification agreements prevents the Corporation from estimating the maximum potential liability
required to be paid to guaranteed parties. In management's opinion, the likelihood that a significant liability will be incurred under these obligations
is low. The Corporation has purchased directors and officers' liability insurance with a deductible per loss. As at August 31, 2013 and 2012, no
liability with respect to these indemnifications has been recorded, except for the contingent liabilities for withholding and stamp taxes relating to
fiscal years prior to the acquisition of the Portuguese subsidiary by Cogeco Cable, which pursuant to the acquisition, remains responsible for
these contingent liabilities up to a maximum amount of €5 million under the terms of the sale agreement. For further details, please refer to note
14 of the annual financial statements.