Cogeco 2013 Annual Report Download - page 88

Consolidated financial statements COGECO CABLE INC. 2013 87
Furthermore, the Corporation’s net investment in foreign operations is exposed to market risk attributable to fluctuations in foreign currency
exchange rates, primarily changes in the values of the Canadian dollar versus the US dollar and British Pound. This risk was mitigated since
the major part of the purchase prices for Atlantic Broadband and PEER 1 were borrowed directly in US dollars and British Pounds. At August 31,
2013, the net investment for Atlantic Broadband and for PEER 1 amounted to US$1.1 billion and £72.6 million while long-term debt hedging
these net investments were US$842.9 million and £55.6 million.The exchange rate used to convert the US dollar currency and British Pound
currency into Canadian dollars for the statement of financial position accounts at August 31, 2013 was $1.0530 per US dollar and $1.6318
per British Pound. The impact of a 10% change in the exchange rate of the US dollar and British Pound into Canadian dollars would change
other comprehensive income by approximately $28.0 million.
Fair value of financial instruments
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 judgment 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, trade and other receivables, bank indebtedness, trade and other payables and
balance due on a business combination approximates fair value because of the short-term nature of these instruments.
b) Interest rates under the terms of the Corporation’s term and revolving facilities are based on Bankers’ acceptance, LIBOR, EURIBOR,
bank prime rate loan or US or British Pounds base rate loan plus applicable margin. Therefore, the carrying value approximates fair
value for the term and revolving facilities, since these facilities have conditions similar to those currently available to the Corporation.
c) The fair value of the Senior Secured Debentures Series 1, 2, 3 and 4, Senior Secured Notes Series A and B, Senior Secured Notes,
Senior Unsecured Notes and Senior Unsecured Debenture are based upon current trading values for similar financial instruments.
d) The fair values of finance leases are not significantly different from their carrying amounts.
The carrying value of all the Corporation’s financial instruments approximates fair value, except as otherwise noted in the following table:
At August 31, 2013 2012
Carrying value Fair value Carrying value Fair value
(In thousands of Canadian dollars) $ $ $ $
Long-term debt 2,892,265 2,932,422 1,037,032 1,118,634
All financial instruments recognized at fair value on the consolidated statement of financial position must be measured based on the three
fair value hierarchy levels, which are as follows:
• Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;
• Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e., as prices)
or indirectly (i.e., derived from prices); and
• Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
The Corporation considers that its derivative financial instruments are classified as Level 2 under the fair value hierarchy. The fair value of
derivative financial instruments is estimated using valuation models that reflect projected future cash flows over contractual terms of the
derivative financial instruments and observable market data, such as interest and currency exchange rate curves.
B) CAPITAL MANAGEMENT
The Corporation’s objectives in managing capital are to ensure sufficient liquidity to support the capital requirements of its various businesses,
including growth opportunities. The Corporation manages its capital structure and makes adjustments in light of general economic conditions,
the risk characteristics of the underlying assets and the Corporation’s working capital requirements. Management of the capital structure
involves the issuance of new debt, the repayment of existing debts using cash generated by operations and the level of distribution to
shareholders.
The capital structure of the Corporation is composed of shareholders’ equity, cash and cash equivalents, bank indebtedness, long-term debt,
balance due on a business combination and assets or liabilities related to derivative financial instruments.
The provisions of the financing agreements provide for restrictions on the operations and activities of the Corporation. Generally, the most
significant restrictions relate to permitted investments and dividends on multiple and subordinate voting shares, as well as the incurrence and
maintenance of certain financial ratios primarily linked to the operating income before depreciation and amortization, financial expense and