Cogeco 2010 Annual Report Download - page 32

Management’s Discussion and Analysis (MD&A) COGECO CABLE INC. 2010 31
The Corporation has also entered into cross-currency swap agreements to set the liability for interest and principal payments on its
US$190 million Senior Secured Notes Series A maturing on October 1, 2015. These agreements have the effect of converting the U.S. interest
coupon rate of 7.00% per annum to an average Canadian dollar interest rate of 7.24% per annum. The exchange rate applicable to the
principal portion of the debt has been fixed at $1.0625 per US dollar. During the current fiscal year, amounts due under the US$190 million
Senior Secured Notes Series A decreased by $5.4 million due to the US dollar’s depreciation relative to the Canadian dollar. The fair value of
cross-currency swaps increased by a net amount of $0.8 million, of which a decrease of $5.4 million offsets the foreign exchange gain on the
debt denominated in US dollars. The difference of $6.3 million was recorded as an increase of other comprehensive income, net of income
taxes. In fiscal 2009, amounts due under the US$190 million Senior Secured Notes Series A increased by $6.2 million due to the US dollar’s
appreciation over the Canadian dollar. The fair value of cross-currency swaps increased by a net amount of $4.2 million, of which an increase
of $6.2 million offsets the foreign exchange loss on the debt denominated in US dollars. The difference of $1.9 million was recorded as a
decrease of other comprehensive income, net of income taxes.
Furthermore, the Corporation’s net investment in self-sustaining foreign subsidiaries is exposed to market risk attributable to fluctuations in
foreign currency exchange rates, primarily changes in the values of the Canadian dollar versus the Euro. This risk is mitigated since the major
part of the purchase price for Cabovisão was borrowed directly in Euros. This debt is designated as a hedge of a net investment in self-
sustaining foreign subsidiaries and, accordingly, the Corporation recorded a foreign exchange loss of $8.2 million in fiscal 2010, compared to a
foreign exchange gain of $8 million in fiscal 2009, which is deferred and recorded in the consolidated statement of comprehensive income. The
exchange rate used to convert the Euro currency into Canadian dollars for the balance sheet accounts as at August 31, 2010 was $1.3515 per
Euro compared to $1.5698 per Euro as at August 31, 2009. The average exchange rate prevailing during fiscal 2010 used to convert the
operating results of the European operations was $1.4316 per Euro compared to $1.5889 per Euro for fiscal 2009. Since the Corporation’s
consolidated financial statements are expressed in Canadian dollars but a portion of its business is conducted in the Euro currency, exchange
rate fluctuations can increase or decrease revenue, operating income before amortization, net income and the carrying value of assets and
liabilities.
The following table shows the Canadian dollar equivalents of the Euro-denominated results of operations. Based on the Corporation’s
fiscal 2010 results of operations, a 10% change in the average exchange rate of the Euro currency into Canadian dollars would increase or
decrease the full-year results by the following amounts:
Year ended August 31, 2010 As reported
Exchange rate
impact
(in thousands of dollars) $ $
Revenue 187,756 18,776
Operating income before amortization 32,567 3,257
Net loss 36,860 3,686
Commitments and guarantees
Cogeco Cable’s contractual obligations as at August 31, 2010 are shown in the table below:
Years ended August 31, 2011 2012 2013 2014 2015 Thereafte
r
Total
(in thousands of dollars) $ $ $ $ $$$
Long-term debt(1) – 175,000 – 421,635 – 356,875 953,510
Capital lease obligations(2) 2,883 2,183 847 35 – – 5,948
Operating lease agreements and other
long-term contracts 23,896 21,758 20,260 16,018 15,252 31,564 128,748
Other long-term obligations(3) – – – – – – 3,624
Total contractual obligations(4) 26,779 198,941 21,107 437,688 15,252 388,439 1,091,830
(1) Includes principal repayments and the impact of swap agreements but excludes capital leases.
(2) Includes principal repayments and financial expense.
(3) Other long-term obligations reflected on Cogeco Cable’s balance sheet include pension plan liabilities and accrued employee benefits. The nature of those
obligations prevents the Corporation from estimating an annual breakdown.
(4) Annual breakdown excludes other long-term obligations.
In the normal course of business, Cogeco Cable enters into agreements containing features that meet the criteria for a guarantee.
In connection with the acquisition or sale of businesses or assets, in addition to possible indemnification relating to failure to perform covenants
and breach of representations and warranties, the Corporation has agreed to indemnify the seller or the purchaser against claims related to
events that occurred prior to the date of acquisition or sale. The term and amount of such indemnification will sometimes be limited by the
agreement. The nature of these indemnification agreements prevents the Corporation from estimating the maximum potential liability required
to be paid to guaranteed parties. In management’s opinion, the likelihood that a significant liability will be incurred under these obligations is
low. The Corporation has purchased directors’ and officers’ liability insurance with a deductible per loss. As at August 31, 2010 and 2009, no
liability associated with these indemnifications has been recorded.