Cogeco 2010 Annual Report Download - page 71

70 COGECO CABLE INC. 2010 Consolidated Financial Statements
The following table is a summary of interest payable on long-term debt (excluding interest on capital leases) that are due for each of the next
five years and thereafter, based on the principal and interest rate prevailing on the current debt at August 31, 2010 and their respective
maturities:
2011 2012 2013 2014 2015 Thereafte
r
Total
$ $ $ $ $ $ $
Interest payments on long-term debt 58,871 47,598 45,343 40,482 24,300 28,910 245,504
Interest payments on derivative financial
instruments 18,130 14,614 14,614 14,614 14,614 1,218 77,804
Interest receipts on derivative financial
instruments (16,449) (14,184) (14,184) (14,184) (14,184) (1,182) (74,367)
60,552 48,028 45,773 40,912 24,730 28,946 248,941
Interest rate risk
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 collection or repayment of these instruments. At August 31, 2010, all of the Corporation’s long-term
debt was at fixed rate, except for the Corporation’s Term Revolving Facility. However, on January 21, 2009, the Corporation entered into a
swap agreement with a financial institution to fix the floating benchmark interest rate with respect to a portion of the Euro-denominated loans
outstanding under the Term Revolving Facility and previously the Term Facility, for a notional amount of €111.5 million which has been reduced
to €95.8 million on July 28, 2009 and to €69.6 million on July 28, 2010. The interest swap rate to hedge the Euro-denominated loans has been
fixed at 2.08% until the maturity of the swap agreement on July 28, 2011. In addition to the interest swap rate of 2.08%, the Corporation will
continue to pay the applicable margin on the revolving loans in accordance with the Term Revolving Facility. The Corporation elected to apply
cash flow hedge accounting on this derivative financial instrument. The sensitivity of the Corporation’s annual financial expense to a variation of
1% in the interest rate applicable to the Term Revolving Facility is approximately $0.3 million based on the current debt at August 31, 2010 and
taking into consideration the effect of the interest rate swap agreement.
Foreign exchange risk
The Corporation is exposed to foreign exchange risk related to its long-term debt denominated in US dollars. In order to mitigate this risk, the
Corporation has established guidelines whereby currency swap agreements can be used to fix the exchange rates applicable to its US dollar
denominated long-term debt. All such agreements are exclusively used for hedging purposes. Accordingly, on October 2, 2008, the Corporation
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 issued on October 1, 2008. These agreements have the effect of converting the US 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. The Corporation elected to apply cash flow hedge accounting on these derivative financial instruments.
The Corporation is also exposed to foreign exchange risk on cash and cash equivalents, bank indebtedness and accounts payable
denominated in US dollars or Euros. At August 31, 2010, cash and cash equivalents denominated in US dollars amounted to US$13,613,000
(US$5,555,000 at August 31, 2009) while accounts payable denominated in US dollars amounted to US$15,850,000 (US$14,997,000 at
August 31, 2009). At August 31, 2010, Euro-denominated cash and cash equivalents amounted to €187,000 (bank indebtedness of €299,000
at August 31, 2009) while there were no accounts payable denominated in Euros (€26,000 at August 31, 2009). Due to their short-term nature,
the risk arising from fluctuations in foreign exchange rates is usually not significant. The impact of a 10% change in the foreign exchange rates
(US dollar and Euros) would change financial expense by approximately $0.2 million.
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. At August 31, 2010, the net investment amounted to €182,104,000
(€183,220,000 at August 31, 2009) while long-term debt denominated in Euros amounted to €90,000,000 (€135,772,000 at August 31, 2009).
The exchange rate used to convert the Euro currency into Canadian dollars for the balance sheet accounts at August 31, 2010 was $1.3515
per Euro compared to $1.5698 per Euro at August 31, 2009. The impact of a 10% change in the exchange rate of the Euro into Canadian
dollars would change financial expense by approximately $0.5 million and other comprehensive income by approximately $12.4 million.
Fair value
Fair value is the amount at which willing parties would accept to exchange a financial instrument based on the current market for instruments
with the same risk, principal and remaining maturity. Fair values are estimated at a specific point in time, by discounting expected cash flows at
rates for debts of the same remaining maturities and conditions. These estimates are subjective in nature and involve uncertainties and matters
of significant judgement, and therefore, cannot be determined with precision. In addition, income taxes and other expenses that would be
incurred on disposition of these financial instruments are not reflected in the fair values. As a result, the fair values are not necessarily the net
amounts that would be realized if these instruments were settled. The Corporation has determined the fair value of its financial instruments as
follows:
a) The carrying amount of cash and cash equivalents, accounts receivable and accounts payable and accrual liabilities approximates fair
value because of the short-term nature of these instruments.