Cogeco 2008 Annual Report Download - page 18

Management’s Discussion and Analysis COGECO CABLE INC. 2008 17
RISKS PERTAINING TO INFORMATION SYSTEMS
Flexible, reliable and cost-effective information systems are an essential requirement for the handling of sophisticated service
options, customer account management, internal controls, provisioning, billing and the rollout of new services. The Corporation uses
different customer relations management tools and databases for its operation respectively in Ontario, Québec and Portugal. The
agreement with Amdocs, the main third-party supplier of customer information systems in Ontario, and the agreement with
Concurrent, the third-party supplier of the VOD information system in Canada, were both renewed in 2008. There is however no
assurance that these or other information systems will be able to adequately meet future business or competitive requirements.
RISKS PERTAINING TO DISASTERS AND OTHER CONTINGENCIES
The Corporation has a disaster recovery plan for dealing with the occurrence of natural disasters, quarantine, power failures,
terrorist acts, intrusions, computer hacking or data corruption, but the operations and facilities of Cabovisão are not yet integrated
into this plan. Cabovisão’s insurance coverage has been integrated into Cogeco Cable’s insurance coverage. The emergency plans
and procedures that are in place cannot provide the assurance that the effect of any disaster can and will be mitigated as planned.
Cogeco Cable is not insured against the loss of data, hacking or malicious interference with its electronic communications and
systems, or against losses resulting from natural disasters. In Canada, it relies on data protection and recovery systems that it has
put in place with third-party service providers. In Portugal, similar arrangements with third parties have not been implemented as yet.
FINANCIAL RISKS
Cable telecommunications is a very capital-intensive business that requires substantial and recurring investment in property, plant,
equipment and customer acquisition. Cogeco Cable depends on capital markets for the availability of additional capital that it must
deploy to support its internal and external growth. There is no assurance that future capital requirements will be met when needed,
or that the cost to secure such needed incremental capital will not increase the Corporation’s weighted average cost of capital.
Through its recent issuance of new Senior Secured Notes on October 1, 2008, Cogeco Cable will be able to repay debt instruments
maturing in 2008 and 2009. The Corporation entered into cross-currency swap agreements to fix the liability for interest and
principal payments on its US-denominated Senior Secured Notes Series A. However, the global financial markets crisis and the
ensuing global economic slowdown may extend further and constrain the Corporation’s ability to meet its future financing
requirements, both internal and external, increase its weighted average cost of capital and cause other cost increases from
counterparties also faced with liquidity problems and higher cost of capital.
Cogeco Cable’s debt financing structure involves the borrowing of money from third parties by Cogeco Cable and the subsequent
investment of equity and debt by the Corporation into its direct and indirect subsidiaries. This financing structure requires that
Cogeco Cable be able to receive upstream flows of funds from its subsidiaries through capital repayments, interest payments,
dividend payments, management fees or other distributions that are sufficient to meet its corporate debt obligations. Future changes
to corporate tax, currency exchange and other legal requirements applicable to the Corporation, or to its direct or indirect
subsidiaries could adversely affect such upstream flows of funds or the effectiveness of the Corporation’s existing debt financing
structure.
The Corporation’s leverage and corporate risk profile is liable to vary from time to time as a result of new developments in its
business activities and the investments required to support internal growth as well as external growth through acquisitions. More
particularly, leverage may fluctuate as the Corporation completes further business acquisitions domestically or abroad, and the risk
profile may differ from one acquisition to the other depending on the characteristics of the acquired business and its relevant market.
The development of new services or additional lines of business, and the acquisition of new business properties, may not
necessarily generate the anticipated results or benefits. There is no assurance that Cogeco Cable will be able to maintain or
increase distributions to shareholders by way of dividends or otherwise.
The acquisition of Cabovisão has been financed through corporate credit facilities of Cogeco Cable. The major part of the purchase
price for the shares of Cabovisão (approximately €461.8 million) was borrowed directly in Euros and a second tranche of
$150 million was initially borrowed in Canadian dollars and subsequently drawn in Euros (€104.6 million). There are no financial
hedging arrangements in effect at this time for currency fluctuation risk on interest payments resulting from these borrowings,
however there is a partially offsetting relationship between the borrowings in Euros and the inter-corporate debt interest payments
and cash distributions in Euros originating from the European subsidiaries. Also, for the purposes of this acquisition, Cogeco Cable
has set up an acquisition structure involving one of its operating Canadian subsidiaries and intermediate holding and financing
entities located in Luxembourg with a view of maximizing returns. The Corporation is still considering various options to extend the
term loan with alternate sources of Euro-denominated financing.
HUMAN RESOURCES
Cogeco Cable maintains appropriate labour relations both in Canada and in Portugal, but there is no assurance that requisite
collective agreements will be established or renewed without conflict or disruption to the provision of its services. Cogeco Cable also