Cogeco 2010 Annual Report Download - page 14

Management’s Discussion and Analysis (MD&A) COGECO CABLE INC. 2010 13
Transaction costs
Transaction costs are capitalized on initial recognition and presented as a reduction of the related financing, except for transaction costs on the
revolving loan and the swingline facility, which are presented as deferred charges. These costs are amortized over the term of the related
financing using the effective interest rate method, except for transaction costs on the revolving loan and the swingline facility, which are
amortized over the term of the related financing on a straight-line basis.
Derivative financial instruments and hedge accounting
The Corporation uses cross-currency swap and interest rate swap agreements as derivative financial instruments to manage risk in fluctuation
in interest and foreign exchange rates related to its long term debt. All derivatives are measured at fair value with changes in fair value
recorded in the consolidated statements of income unless they are effective cash flow hedging instruments. The changes in fair value of cash
flow hedging derivatives are recorded in other comprehensive income, to the extent effective, until the variability of cash flows relating to the
hedged asset or liability is recognized in the consolidated statements of income. Any hedge ineffectiveness is recognized in the consolidated
statements of income immediately. Accordingly, the Corporation’s cross-currency swap and interest rate swap agreements must be measured
at fair value in the consolidated financial statements. Since these cross-currency swap and interest rate swap agreements are used to hedge
cash flows on Senior Secured Notes Series A denominated in US dollars and a portion of the Euro-denominated loans outstanding under the
Term Revolving Facility and previously the Term Facility, the changes in fair value are recorded in other comprehensive income. The
Corporation does not hold or use any derivative financial instruments for speculative purposes. Net receipts or payments arising from cross-
currency and interest rate swap agreements are recognized as financial expense.
Embedded derivatives
All embedded derivatives that are not closely related to the host contracts are measured at fair value, with changes in fair value recorded in the
consolidated statements of income. At August 31, 2010 and 2009, there were no significant embedded derivatives or non-financial derivatives
that required separate fair value recognition on the consolidated balance sheets.
Contingencies and commitments
The Corporation is subject to various claims and contingencies related to lawsuits, taxes and commitments under contractual and other
commercial obligations. The contractual and other commercial obligations primarily relate to network fees and operating lease agreements for
use of transmission facilities. The Corporation recognizes liabilities for contingencies and commitments when a loss is probable and can be
reasonably estimated based on currently available information. Significant changes in assumptions as to the likelihood and estimates of a loss
could result in the recognition of an additional liability.
Related party transactions
Cogeco Cable is a subsidiary of COGECO Inc. (“COGECO”) which holds 32.3% of the Corporation’s equity shares, representing 82.7% of the
votes attached to the Corporation’s voting shares. As of September 1, 1992, Cogeco Cable executed a management agreement with COGECO
under which the parent company agreed to provide certain executive, administrative, legal, regulatory, strategic and financial planning services
and additional services to the Corporation and its subsidiaries (the “Management Agreement”). These services are provided by COGECO’s
senior executives, including the President and Chief Executive Officer, the Senior Vice President and Chief Financial Officer, the Vice
President, Corporate Affairs, the Vice President, Chief Legal Officer and Secretary and the Vice President and Treasurer. No direct
remuneration is payable to such senior executives by the Corporation. The Corporation granted 33,266 stock options to these senior
executives, who also are COGECO’s senior executives, during the 2010 fiscal year, compared to 29,711 in the 2009 fiscal year. During fiscal
2010, Cogeco Cable charged COGECO an amount of $0.2 million with regards to Cogeco Cable’s options granted to COGECO’s employees
compared to a charge of $0.4 million during fiscal 2009.
Effective October 29, 2009, Cogeco Cable established an Incentive Share Unit Plan for senior executives and designated employees. During,
fiscal 2010, the Corporation granted 9,981 Incentive Share Units (“ISUs”) to COGECO Inc.’s employees and charged COGECO Inc. an amount
of $0.1 million in relation to the ISUs granted.
Under the Management Agreement, the Corporation pays monthly fees equal to 2% of its total revenue to COGECO for the above-mentioned
services. In 1997, the management fee was capped at $7 million per year, subject to annual adjustments based on the increase in the
Consumer Price Index in Canada. Accordingly, for the year ended August 31, 2010, the maximum amount of $9 million was paid to COGECO,
the same amount as was paid in 2009, which represents about 0.7% of the Corporation’s total revenue for fiscal 2010, essentially the same
percentage as in fiscal 2009. The Audit Committee of the Corporation can increase the cap under certain circumstances upon request to that
effect by COGECO. In addition, the Corporation reimburses COGECO’s out-of-pocket expenses incurred with respect to services provided to
the Corporation under the Management Agreement. In fiscal 2011, the management fee has been increased as of September 1, 2010,
pursuant to the Management Agreement by 1.7% for a total amount of $9.2 million, which reflects an adjustment based on the increase in the
Consumer Price Index in Canada during the preceding 12 month period.