Cogeco 2010 Annual Report Download - page 25

24 COGECO CABLE INC. 2010 Management’s Discussion and Analysis (MD&A)
Operating costs and management fees
Fiscal 2010 consolidated operating costs increased by $61.3 million, or 8.7%, at $762.3 million. The Canadian operations’ operating costs,
excluding management fees payable to COGECO Inc., rose by $75.2 million, or 14.1%, amounting to $607.1 million. Prior year Canadian
operations’ operating costs included the impact of $19.8 million from the Part II licence fee favourable settlement agreement described below.
European operations’ operating costs amounted to $155.2 million for fiscal 2010 compared to $169 million for 2009, a decrease of
$13.8 million, or 8.2%
Part II licence fees payable to the CRTC had been the subject of litigation between the members of the Canadian Association of Broadcasters
(“CAB”), Videotron and CF Cable TV Inc. as plaintiffs and the Crown as the defendant. Cogeco Cable sought and obtained intervener status in
this proceeding with a view of supporting the position of the plaintiffs and protecting its rights to recover past payments of Part II licence fees.
On October 7, 2009, the parties reached an out-of-court settlement in the matter whereby the Part II licence fees for the 2007 through 2009
fiscal years have been waived by the federal government and all pending proceedings discontinued. Accordingly, in fiscal 2009, the
Corporation reversed its $19.8 million provision for the Part II licence fees payable for the 2007 through 2009 fiscal years. The settlement
agreement also provided that the federal government recommend that the CRTC develop a new, forward-looking fee regime that would be
capped at $100 million per year for the aggregate Part II licence fee liability of broadcasting licencees, to be indexed annually based on the
Consumer price index, which was concluded during fiscal 2010.
Management fees paid to COGECO Inc. amounted to $9 million, the same amount as in fiscal 2009, and are discussed in detail in the “Related
party transactions” section on page 13.
Operating income before amortization and operating margin
Fiscal 2010 consolidated operating income before amortization increased by $2.2 million, or 0.4%, to reach $510.1 million. In fiscal 2010,
operating income before amortization for the Canadian operations rose by $33.7 million, or 7.6%, compared to fiscal 2009 which included the
impact of $19.8 million from the Part II licence fee favourable settlement agreement. Cogeco Cable’s operating margin for the Canadian
operations decreased to 43.7% from 45.1%(1) in the prior year. European operations’ operating income before amortization declined to
$32.6 million for fiscal 2010 corresponding to an operating margin of 17.3% compared to operating income before amortization of $64.1 million
corresponding to an operating margin of 27.5% in fiscal 2009. For further details on the Corporation’s operating results, please refer to the
“Canadian operations” and “European operations” sections on pages 32 and 33, respectively.
Fixed charges
Years ended August 31, 2010 2009
(1)
Change
(in thousands of dollars, except percentages) $$%
A
mortization 258,871 256,077 1.1
Financial expense 64,904 69,709 (6.9)
(1) Certain comparative figures have been reclassified to conform to the current year’s presentation. Financial information has been restated to reflect the
application of the CICA Handbook Section 3064. Please refer to the “Critical accounting policies and estimates” section on page 11 for more details.
Fiscal 2010 amortization expense amounted to $258.9 million compared to $256.1 million in the prior year. Amortization expense increased due
to additional capital expenditures arising from customer premise equipment acquisitions to sustain RGU growth, partly offset by a decrease in
amortization of intangible assets stemming from the impairment loss recorded in fiscal 2009.
Fiscal 2010 financial expense decreased by $4.8 million, or 6.9%, to $64.9 million, mainly as a result of a decrease in Indebtedness. The
average interest rate was 6.2% in fiscal 2010 compared to 5.9% in fiscal 2009. The increase in the average interest rate is discussed in the
“Capital structure” section on page 28.
Reduction of withholding and stamp tax contingent liabilities
At the date of acquisition, the Portuguese subsidiary, Cabovisão, recorded contingent liabilities for withholding and stamp taxes relating to fiscal
years prior to its acquisition by Cogeco Cable. At that date, the amount accrued represented management’s best estimate based on the
information available at that time. Management reviews its estimate periodically to take into consideration payments made relating to these
contingencies as well as newly available information which would allow the Corporation to improve its previous estimate. During fiscal 2009,
Cabovisão received reports from the Portuguese tax authorities with respect to some of the items included in the contingent liabilities.
Accordingly, management revised its estimate of the contingent liabilities to reflect the new information available in these reports, and
determined that a reduction of €10.3 million, equivalent to $16.1 million, of the amounts previously accrued was required at August 31, 2009, in
order to reflect management’s best estimate.
(1) Includes the impact of $19.8 million from the fiscal 2009 Part II licence fee favourable settlement agreement.