Cogeco 2005 Annual Report Download - page 28

In fiscal 2005, Dominion Bond Rating Service (DBRS) raised its
outlook, while Standard & Poor’s Ratings Services (S&P) confirmed
its stable outlook on Cogeco Cable’s ratings. DBRS has raised
its outlook to positive on the Senior Secured Debentures and Notes’
BB(high) rating and on the Second Secured Debentures’ BB rating
based on good growth in the number of HSI service customers
in a competitive environment and on the use of Free Cash Flow
to reduce the debt. S&P rates the Senior Secured Debentures
and Notes and the Second Secured Debentures one notch higher
than DBRS at BBB- and BB+, respectively. With continued growth
in Free Cash Flow, Cogeco Cable is well positioned to reduce its
financial leverage, which should at least maintain its debt ratings.
Based on anticipated Free Cash Flow for fiscal 2006, refinancings
are not expected before fiscal 2007.
Foreign Exchange Management
The Corporation has established guidelines whereby currency swap
agreements and foreign exchange forward contracts can be used
to manage risks associated with fluctuations in exchange rates
related to its US-dollar denominated long-term debt and its
purchases of programming content and home terminal equipment
denominated in US dollars. All such agreements and contracts
are exclusively used for hedging purposes. In order to minimize
the risk of counter-party default, Cogeco Cable completes
transactions with financial institutions that carry a credit rating
equal or superior to A+.
Cogeco Cable has entered into cross-currency swap agreements
to fix the liability for interest and principal payments on its
US$150 million Senior Secured Notes. These agreements have
the effect of converting the US interest coupon rate of 6.83%
per annum to an average Canadian dollar fixed interest rate
of 7.254% per annum. The exchange rate applicable to the
principal portion of the debt has been fixed at CDN$1.5910.
Amounts due under the US$150 million Senior Secured Notes
Series A declined by CDN$18.9 million in fiscal 2005 due to the
strengthening of the Canadian dollar. Since the Senior Secured
Notes Series A are fully hedged, the decline is fully offset by an
increase in deferred credit described in Note 8e) on page 44.
This $60.6 million deferred credit represents the difference
between the year-end exchange rate and the exchange rate
on the cross-currency swap agreements, which determines
the liability for interest and principal payments on the Senior
Secured Notes Series A.
In June 2003, Cogeco Cable entered into foreign exchange forward
contracts to hedge a portion of anticipated purchases in US dollars
for fiscal 2003 and 2004. At August 31, 2004 and 2005, no forward
contracts were outstanding.
Commitments and Guarantees
In the normal course of business, Cogeco Cable enters into
agreements containing features that meet the criteria for a
guarantee. In connection with the sale of businesses or assets,
the Corporation has agreed to indemnify the purchaser against
claims related to events, which occurred prior to the sale. Under
the terms of the Senior Secured Notes and the Second Secured
Debentures, Cogeco Cable has agreed to indemnify the other
parties against changes in regulation relative to withholding
taxes. The nature of the indemnification agreements prevents
the Corporation from estimating the maximum potential liability
it could be required to pay. As at August 31, 2005, no liability
has been recorded associated with these indemnifications.
Supplementary information on guarantees is presented
in Note 14 on page 52.
26
Cogeco Cable Inc. 2005
Management’s Discussion and Analysis
Cogeco Cable’s contractual obligations as at August 31, 2005 are shown in the table below:
Years ended August 31, 2006 2007 2008 2009 2010 Thereafter Total
(in thousands of dollars) $$$$$$$
Long-term debt
(1)
0 125,000 0 388,650 0 175,000 688,650
Capital lease obligations
(2)
1,547 1,351 975 381 5 0 4,259
Operating leases and others 15,876 13,336 13,161 11,665 10,754 10,836 75,628
Other long-term obligations
(3)
223,156
Total contractual obligations
(4)
17,423 139,687 14,136 400,696 10,759 185,836 991,693
(1)
Includes principal repayments and the impact of cross-currency swap agreements but excludes capital leases.
(2)
Includes principal repayments and financial expense.
(3)
Other long-term liabilities reflected on Cogeco Cable’s balance sheet include deferred and prepaid income, pension plan liabilities and accrued
employee benefits and future income tax liabilities. The nature of those obligations prevents the Corporation from estimating an annual breakdown.
(4)
Annual breakdown excludes other long-term obligations.