Cogeco 2006 Annual Report Download - page 37

Management’s Discussion and Analysis COGECO CABLE INC. 2006 35
Investing activities in the fourth quarter 2006 include the acquisition of Cabovisão (Please refer to section “Cash Flow
Analysis” on page 25 for details). Other investing activities related to capital expenditures and deferred charges, including
assets acquired under capital leases, rose from $46.3 million to $53.3 million, mainly due to increased upgrade and
reconstruction activities and purchases of customer premise equipment. Free cash fl ow of $3.4 million was generated, an
increase of $3.2 million compared to the same period last year, as a result of a $10.2 million increase in cash fl ow from
operations, offset by a $7 million increase in capital expenditures and deferred charges.
Indebtedness increased by $607.2 million in the fourth quarter of 2006 due to the Cabovisão acquisition, the increase in cash
and cash equivalents of $71.5 million and the fees related to the new Term Facility of $900 million are partly offset by an
increase in non-cash operating items of $50.5 million. For the same period last year, Indebtedness declined by $45.1 million
mainly due to non-cash operating items of $46.1 million. In addition, a dividend of $0.04 per share for subordinate and
multiple voting shares, totalling $1.6 million, was paid during the fourth quarter of fi scal 2006 and 2005.
FISCAL 2007 FINANCIAL GUIDELINES
The preliminary fi nancial guidelines for fi scal 2007 excluded Cabovisão. In its revised projections, management has
maintained its preliminary fi nancial guidelines for the Canadian operations and included the Cabovisão acquisition guidance.
CANADIAN OPERATIONS
The revenue increase of approximately 10% to 12% should result mainly from expanded penetration of HSI and Digital
Telephony services as well as the full-year impact of the 2006 RGU additions. In addition, rate increases of up to $3 per
customer in Québec and Ontario, thus averaging $2 per basic service customer as well as improved penetration of Digital
Television services and sustained deployment of the Digital Telephony will also contribute to the revenue increase. Cogeco
Cable plans to expand its basic service clientele through effective marketing, competitive product offering and superior
customer service. As the penetration of HSI and Digital Television services increases, the demand for these products will
likely slow down but should be offset by increased demand for the Digital Telephony service. As a result, the Canadian
operations’ operating income before amortization should increase by 6% to 8% to reach $264 million to $267 million, for
an operating margin of about 40%. Amortization of capital assets and deferred charges are expected to increase by $11 million,
as a result of capital expenditures and deferred charges that will be incurred for the RGU growth of fi scal 2007 and the
full year impact of the 2006 RGU growth. Compared to fi scal 2006, capital expenditures and deferred charges for fi scal
2007 will increase, primarily as a result of the full-year of operations of Cabovisão, which should require between $45 million
to $50 million, including $4.4 million for the expected launch of Digital Television and to increases in capital expenditures
for the Canadian operations mainly from a $8.2 million increase in customer premise equipment to serve RGU growth, a
$7.4 million related to Digital Telephony roll-out and network rebuild and, from a $6 million increase in support capital
mainly for improvements in facilities and information systems.
PORTUGUESE OPERATIONS
RGUs should increase by approximately 75,000 essentially equally divided between basic cable, HSI and Telephony
customers. As a result, revenue should reach $215 million to $220 million, using a conversion rate of $1.40 per euro,
while operating income before amortization should amount to between $69 million to $71 million for an operating margin
of approximately 33%. Capital expenditures to support the projected revenue growth including $4.4 million for the expected
launch of the Digital Television service should reach $45 million to $50 million or approximately 22% of projected revenue.
Amortization of capital assets and deferred charges should amount to $54 million.