Cogeco 2011 Annual Report Download - page 27

26 COGECO CABLE INC. 2011 Management’s Discussion and Analysis (MD&A)
Financial risks
Cable telecommunications is a very capital-intensive business that requires substantial and recurring investment in property, plant, equipment
and customer acquisition. Cogeco Cable depends on capital markets for the availability of additional capital that it must deploy to support its
internal and external growth. There is no assurance that future capital requirements will be met when needed, or that the cost to secure such
needed incremental capital will not increase the Corporation’s weighted average cost of capital. The Corporation entered into cross-currency
and interest rate swap agreements to fix the liability for interest and principal payments on certain of its long-term debts. The volatility of global
financial markets may 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. 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.
However, the inter-company debt of Cabovisao and accrued interest thereon was replaced by equity in the capital of Cabovisao, considering
Cabovisao’s inability to make the required interest payments in the foreseeable future. Cabovisão may require additional capital funding from
time to time as available free cash flow from its operations in Portugal may not be sufficient to support its capital or operating needs. Finally,
Cogeco Cable continues to evaluate various options to extend the Term Revolving Facility with alternate sources of Euro-denominated
financing.
The Corporation is exposed to interest rate risks for fixed interest rate instruments as they mature, and for floating interest rate instruments in
the normal course. The Corporation’s debt is however very predominantly subject to fixed rates and its debt maturities are staggered over
several years.
Market conditions may 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
Cogeco Cable maintains satisfactory labour relations with its unionized employees and no collective agreements are outstanding. Cogeco
Cable also maintains satisfactory 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.