Cogeco 2009 Annual Report Download - page 46

Management’s discussion and analysis COGECO CABLE INC. 2009 45
In February 2008, the CICA issued Section 3064, Goodwill and intangible assets, replacing Section 3062, Goodwill and other
intangible assets and Section 3450, Research and development costs. The new Section establishes standards for the recognition,
measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of intangible assets by profit-oriented
enterprises. The new Section will be applicable for the Corporation as of the 2010 fiscal year, with retroactive application. The
adoption of this section on September 1, 2008 will require the restatement of the Corporation’s fiscal 2009 financial results for
comparative purposes, which will increase operating costs by $16.5 million, decrease amortization of deferred charges by
$14.4 million, decrease future income tax expense by $0.6 million for a decrease in net income of $1.6 million for the 2009 fiscal
year. The pro-forma fiscal 2009 results in the table below reflect this restatement. Please consult the “Adoption of new accounting
standards” section for further details.
The fiscal 2010 projections represent the preliminary projections for fiscal 2010 issued on July 9, 2009, adjusted to reflect the impact
of the application of CICA Section 3064. The application of this section will reduce the projected operating income before
amortization by approximately $19 million. After consideration of the related decrease in amortization expense of $12 million and
income taxes of $2 million, the net income projection for fiscal 2010 has been reduced by $5 million to $80 million.
Fiscal 2010 consolidated revenue should increase by approximately 2.6% compared to the pro-forma fiscal 2009 results. The
Canadian operations revenue should increase as a result of additional RGU from expanded penetration of the HSI, Digital Television
and Telephony services in fiscal 2010. Canadian operations will also benefit from the impact of rate increases implemented in fiscal
2009 in Ontario, averaging $1.00 per Basic Cable service customer. Cogeco Cable plans to expand its Canadian Basic Cable
Service clientele through consistently effective marketing, competitive product offerings and superior customer service. As the
penetration of HSI, Telephony and Digital Television services increase, the demand for these products should slow, reflecting early
signs of maturity. Revenue from European operations should decrease, mainly from the impact of the significant decline in Basic
Cable, HSI, and Telephony service customers in fiscal 2009 which expected to continue in fiscal 2010, although to a lesser extent,
and from the impact of retention strategies implemented in fiscal 2009. Digital Television service is still under deployment and
should continue to generate net additions in fiscal 2010. European operations revenue should reflect attrition and the influence of
the expected fluctuations in the value of the Euro compared to the Canadian dollar. For fiscal 2009, the foreign exchange rate was
approximately $1.5889 per Euro while for fiscal 2010, it is anticipated that the Euro should be converted at a rate of approximately
$1.50 per Euro.
The operating cost increase of approximately 8.3% over the pro-forma fiscal 2009 results should come both from the Canadian and
European operations. The Canadian operating cost increase is mainly attributable to servicing additional RGU, to inflation and salary
increases as well as to the new Local Programming Improvement Fund for which payments are required as of September 2009. The
increase in operating costs for the 2010 fiscal year also reflects the impact of the Part II licence fee settlement agreement in fiscal
2009. The European operating cost increases are essentially due to new marketing initiatives and the launch of new channels partly
offset by the cost reductions associated with the decrease in headcount.
For fiscal 2010, consolidated operating income before amortization should decrease to $481 million due to the increase in operating
costs, including the impact of the $19.8 million Part II licence fee settlement agreement in fiscal 2009, which is expected to outpace
the growth in revenue. Cogeco Cable expects to achieve an operating margin of approximately 38.5%.
Cogeco Cable expects the amortization of capital assets and deferred charges to increase by $17 million when compared to the pro-
forma fiscal 2009 results, mainly due to capital expenditures and the increase in deferred charges related to RGU additions and
other initiatives in fiscal 2009 and 2010. In addition, cash flows from operations will finance capital expenditures and the increase in
deferred charges, expected to amount to $341 million, an increase of $52 million compared to pro-forma fiscal 2009 results. The
increase in capital expenditures is mainly due to customer premise equipment required to support RGU growth, to scalable
infrastructure for product enhancements and the deployment of new technologies, and to support capital to improve business
information systems and facility requirements. The Corporation expects to generate free cash flow in the order of $125 million, an
increase of approximately $30 million compared to the pro-forma fiscal 2009 results mainly due to anticipated income tax recoveries
of approximately $55 million resulting from modifications to the corporate structure, offsetting the decrease in operating income
before amortization and the increase in capital expenditures. Generated free cash flow should be used primarily to reduce
Indebtedness, thus improving the Corporation’s leverage ratios. Despite the anticipated decrease in Indebtedness, financial expense
will remain the same at $70 million due to an increase in the average cost of indebtedness from the issuances, on October 1, 2008
of US$190 million Senior Secured Notes Series A bearing interest at an effective rate of 7.24% and $55 million Senior Secured
Notes Series B bearing interest at the coupon rate of 7.60% per annum, and on June 9, 2009 of Senior Secured Debentures Series
1 for $300 million with a coupon rate of 5.95%. As a result, net income of approximately $80 million should be achieved.