Cogeco 2006 Annual Report Download - page 30

28 COGECO CABLE INC. 2006 Management’s Discussion and Analysis
On the network side, numerous technology advancements will also help reduce capital expenditures in general.
Improvements in compression and multiplexing techniques will continue to occur, as they did signifi cantly in the past few
years, and will allow for more and more video signals to be transmitted within a given bandwidth without signal degradation.
A good part of the increased bandwidth needs, generated by growth in narrowcast digital services such as Internet and
VOD, will be accommodated through further cost effi cient node splitting. Future migration to more advanced DOCSIS
standards will allow for the use of more robust modulation techniques in the return path as well as substantially higher
transmission speeds. Most importantly, the gradual migration of cable systems to all-digital networks will allow operators
to recuperate the bandwidth currently used for analog distribution and use it for digital signal distribution, including HD
television signals. This migration to all-digital systems will take some time to complete and capacity upgrades will require
3 to 4 years. As a result, capacity upgrades will consume relatively less capital than it has been the case in the past.
INCREASE IN DEFERRED CHARGES
Increase in deferred charges rose to $20.6 million in fi scal 2006 compared to $13.4 million in fi scal 2005. The breakdown
of the increase in deferred charges is presented in the table below.
YEARS ENDED AUGUST 31, 2007 2006 2005
(in thousands of dollars) GUIDELINES(1)
$ $ $
EQUIPMENT SUBSIDIES 500 273 1,293
RECONNECT COSTS 17,000 19,954 11,468
NEW SERVICE LAUNCH COSTS AND OTHERS 300 380 621
17,800 20,607 13,382
( 1 ) SEE THE “FISCAL 2007 FINANCIAL GUIDELINES” SECTION ON PAGE 35 FOR FURTHER DISCUSSION.
Equipment subsidies mainly relate to subsidies on sales of digital terminals. During fi scal 2006, a signifi cant reduction in
the increase in deferred charges was recorded, in light of the digital terminal rental program offered to customers since
fi scal 2005. Reconnect costs increase due to the higher-than-anticipated demand for HSI, Digital Telephony and Digital
Television services. New services launch costs consist mainly of marketing costs associated with the launch of Digital Telephony
in new markets.
FREE CASH FLOW AND FINANCING ACTIVITIES
Free cash fl ow of $30.3 million was generated during fi scal 2006, a decrease of $15 million over fi scal 2005 as a result of
increase in capital expenditures and deferred charges, partly offset by an increase in cash fl ow from operations. Furthermore,
deferrred fi nancing costs amounting to $10.1 million are related to the amendment and restatement of a $900 million 5-year
Term Facility with a group of fi nancial institutions.
In fi scal 2006, the increase in cash and cash equivalents of $71.5 million and to the fees related to the new Term Facility
of $900 million, the level of Indebtedness grew by $631.7 million due to the acquisition of Cabovisão, completed in the
fourth quarter, partly offset by generated free cash fl ow of $30.3 million. For the prior year, Indebtedness declined by
$67.6 million essentially due to generated free cash fl ow of $45.3 million and an increase in non-cash operating items
of $23.7 million.
Dividends of $0.16 per share totaling $6.4 million were paid during fi scal year 2006 compared to dividends of $0.10 per share
totaling $4 million the year before.
FINANCIAL POSITION
As at August 31, 2006, the Corporation’s balance sheet includes the assets and liabilities of the recently acquired
subsidiary, Cabovisão. Please refer to section “Cash Flow Analysis” for details.