Cogeco 2010 Annual Report Download - page 22

Management’s Discussion and Analysis (MD&A) COGECO CABLE INC. 2010 21
and interest rate swap agreements to fix the liability for interest and principal payments on certain of its long-term debts. 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 net investment in Cabovisão is financed through the Term Revolving Facility. At August 31, 2010, the carrying amount in Euros of the net
investment in the financial statements amounted to €182.1 million, while the Euro-denominated outstanding debt amounted to €90 million. The
impact of the exchange rate fluctuations between the Euro and the Canadian dollar, from the conversion of the net investment and the Euro-
denominated debt outstanding, is deferred in the shareholders’ equity under the caption “Accumulated other comprehensive income”. Since
currency fluctuations may be significant from time to time, the impact on the shareholders’ equity can be material. In addition, Cogeco Cable
has set up a structure involving one of its Canadian subsidiaries and intermediate holding and financing entities located in Luxembourg with a
view to maximizing returns. The objective of this structure is to support the payment of interest of the Euro-denominated debt of the Term
Revolving Facility by the European subsidiaries. There is no certainty that Cabovisão can always support the required interest payments, and
Cabovisão may require additional funding from time to time. Finally, Cogeco Cable is considering various options to extend the Term Revolving
Facility with alternate sources of Euro-denominated financing.
The Corporation is exposed to interest rate risks for both fixed interest rate and floating interest rate instruments. Fluctuations in interest rates
will have an effect on the valuation and the collection or repayment of these instruments which could result in a significant impact on the
Corporation’s financial expense. Considering the interest rate swap in effect at August 31, 2010, 97% of Cogeco Cable’s debt is at fixed interest
rates.
There continues to be some volatility of currency exchange and interest rates in the financial markets, which could lead to an increase in the
level of risk on hedging instruments to which Cogeco Cable is a party, should one or more of the counterparties to these instruments become
financially distressed and unable to meet their obligations.
Market conditions may also have an impact on the Corporation’s defined benefit pension plans as there is no assurance that the actual rate of
return on plan assets will approximate the assumed rate of return used in the most recent actuarial valuation. Market driven changes
may impact the assumptions used in future actuarial valuations and could result in the Corporation being required to make contributions in the
future that differ significantly from the current contributions to the Corporation’s defined benefit pension plans.
Human resources
The employees of Cogeco Cable in the province of Québec are grouped into three units for the purposes of collective agreement negotiations.
The collective agreements with two of these units expired on December 31, 2008, and the third expired on May 31, 2010. Negotiations for the
renewal of these collective agreements are currently under way, but there is no assurance that requisite collective agreements will be renewed
without conflict or disruption to the provision of its services. Cogeco Cable also maintains appropriate relations with its key personnel. The
Corporation’s success depends to a significant extent on its ability to attract and retain its managers and skilled employees in an increasingly
competitive market. The Corporation’s inability or failure to recruit, retain or adequately train its human resources may have a materially
adverse effect on the Corporation’s business and future prospects.
Controlling shareholder and holding structure
Cogeco Cable is controlled by COGECO Inc. (“COGECO”) through the holding of multiple voting shares of Cogeco Cable, and COGECO is in
turn controlled by Gestion Audem Inc., a company controlled by Mr. Henri Audet and members of his family (the “Audet Family”), through the
holding of multiple and subordinate voting shares of COGECO. Both Cogeco Cable and COGECO are reporting issuers with subordinate voting
shares listed on the Toronto Stock Exchange. Pursuant to the Conflicts Agreement in effect between Cogeco Cable and COGECO, all cable
properties must be owned or controlled by Cogeco Cable. COGECO is otherwise free to own and operate any other business or invest as it
deems appropriate. It is possible that situations could arise where the respective interests of the controlling shareholder, COGECO, and other
shareholders of Cogeco Cable, or the respective interests of the Audet Family and other shareholders of COGECO, could differ.