Cogeco

Press release details

STRONG PERFORMANCE FOR COGECO LEADS TO AN UPWARD REVISION OF ITS FISCAL 2010 GUIDELINES

Press release
For immediate release
Strong performance for COGECO leads to an
upward revision of its fiscal 2010 guidelines
Montréal, January 13, 2010 Today, COGECO Inc. (TSX: CGO) (“COGECO” or the “Company”) announced its financial
results for the first quarter 2010, ended November 30, 2009.
For the first quarter of fiscal 2010:
Revenue increased by 6.4% to reach $328 million;
Operating income before amortization
(1)
grew by 7.1% to reach $129.3 million;
Net income amounted to $22.7 million. Excluding a favourable income tax adjustment of $29.8 million related to
the reduction of Ontario provincial corporate income tax rates
for the cable subsidiary, adjusted net income
(1)
would have amounted to $13.1 million, an increase of $2.3 million, or 20.9% compared to $10.9 million for the
same quarter of fiscal 2009;
Free cash flow
(1)
reached $67.1 million for the quarter, representing an increase of $45.4 million when compared
to the first quarter of fiscal 2009;
Operating margin
(1)
for the quarter remained the same as the in the prior year at 39.4% compared to 39.1% for
the same quarter of fiscal 2009;
In the cable sector, revenue-generating units (“RGU”)
(2)
grew by 89,785 net additions in the quarter, for a total of
2,982,023 RGU at November 30, 2009.
“COGECO shows signs of good vitality as the economy begins to recover from the recent turmoil. Cogeco Cable’s
financial results for the first quarter of fiscal 2010 exhibit continued RGU, revenue and operating income before
amortization progression. Our Canadian operations have grown at a steady pace, as demonstrated by net additions of
63,172 RGU. In our European operations, the first quarter results evidence that our customer base has begun to stabilize
as a result of the customer retention and acquisition plans implemented in response to the difficult competitive
environment experienced in the prior year, with a growth of 26,613 RGU. As for the radio activities, Rythme FM is still the
first choice in Montréal. Announcers and listeners continue to choose our radio stations. In light of these positive results,
management has revised most of its guidelines for the 2010 fiscal year. Projected RGU growth, revenue, operating
income before amortization, net income and free cash flow have been increased to reflect the favourable financial results
generated in the first quarter of the year”, declared Louis Audet, President and CEO of COGECO.
(1)
The indicated terms do not have standard definitions prescribed by Canadian Generally Accepted Accounting Principles (“GAAP”) and therefore, may not be
comparable to similar measures presented by other companies. For more details, please consult the “Non-GAAP financial measures” section of the
Management’s discussion and analysis.
(2)
Represents the sum of Basic Cable, High Speed Internet (“HSI”), Digital Television and Telephony service customers.
- 2 -
FINANCIAL HIGHLIGHTS
Quarters ended November 30,
2009 2008
(1)
Change
($000, except percentages and per share data) $ $ %
(unaudited) (unaudited)
Operations
Revenue 328,003 308,375 6.4
Operating income before amort iz ati o n
(2)
129,263 120,711 7.1
Operating margin
(2)
39.4% 39.1% –
Operating income 63,562 59,829 6.2
Net income 22,748 10,861 –
Adjusted net income
(2)
13,128 10,861 20.9
Cash Flow
Cash flow from operating activities
(1,410) 26,477 -
Cash flow from operations
(2)
135,518 91,633 47.9
Free cash flow
(2)
67,131 21,771 –
Financial condition
(3)
Total assets
2,673,573 2,670,128 0.1
Indebtedness
(4)
1,123,375 1,064,542 5.5
Shareholders’ Equity 353,483 332,122 6.4
Per Share Data
(5)
Earnings per share
Basic 1.36 0.65 –
Diluted 1.35 0.65 –
Adjusted earnings per share
(2)
Basic 0.79 0.65 21.5
Diluted 0.78 0.65 20.0
(1)
Certain comparative figures have been restated to reflect the applicatio n of the Canadian Institute of Chartered Account ants (“CICA”) Handbook Section 306 4.
Please refer to the “Accounting policies and estimates” section of the Management’s discussion and analysis for more details.
(2)
The indicated terms do not have standardiz ed def inition s prescr ibed by Canadia n Generally Acc epted Accounting Pri nciples (“GAAP ”) and therefo re, may not be
comparable to similar measures presented by other companies. For more details, please consult the “Non-GAAP financial measures” section of the
Management’s discussion and analysis.
(3)
At November 30, 2009 and August 31, 2009.
(4)
Indebtedness is defined as the total of bank indebtedness, principal on long-term debt and obligations under derivative financial instruments.
(5)
Per multiple and subordinate voting share.
FORWARD-LOOKING STATEMENTS
Certain statements in this press release may constitute forward-looking information within the meaning of securities laws.
Forward-looking information may relate to COGECO’s future outlook and anticipated events, business, operations,
financial performance, financial condition or results and, in some cases, can be identified by terminology such as "may ";
"will"; "should"; "expect"; "plan"; "anticipate"; "believe"; "intend"; "estimate"; "predict"; "potential"; "continue"; "foresee",
"ensure" or other similar expressions concerning matters that are not historical facts. In particular, statements regarding
the Company’s future operating results and economic performance and its objectives and strategies are forward-looking
statements. These statements are based on certain factors and assumptions including expected growth, results of
operations, performance and business prospects and opportunities, which COGECO believes are reasonable as of the
current date. While management considers these assumptions to be reasonable based on information currently available
to the Company, they may prove to be incorrect. The Company cautions the reader that the current adverse economic
conditions make forward-looking information and the underlying assumptions subject to greater uncertainty and that,
consequently, they may not materialize, or the results may significantly differ from the Company’s expectations. It is
impossible for COGECO to predict with certainty the impact that the current economic downtown may have on future
results. Forward-looking information is also subject to certain factors, including risks and uncertainties (described in the
“Uncertainties and main risk factors” section of the Company’s 2009 annual Management’s Discussion and Analysis
(MD&A)) that could cause actual results to differ materially from what COGECO currently expects. These factors include
technological changes, changes in market and competition, governmental or regulatory developments, general economic
conditions, the development of new products and services, the enhancement of existing products and services, and the
introduction of competing products having technological or other advantages, many of which are beyond the Company’s
control. Therefore, future events and results may vary significantly from what management currently foresees. The reader
should not place undue importance on forward-looking information and should not rely upon this information as of any
- 3 -
other date. While management may elect to, the Company is under no obligation (and expressly disclaims any such
obligation), and does not undertake to update or alter this information before the next quarter.
This analysis should be read in conjunction with the Companys consolidated financial statements, and the notes thereto,
prepared in accordance with Canadian GAAP and the MD&A included in the Company’s 2009 Annual Report. Throughout
this discussion, all amounts are in Canadian dollars unless otherwise indicated.
MANAGEMENT’S DISCUSSION AND ANALYSIS (MD&A)
CORPORATE STRATEGI ES AND OBJECTIVES
COGECO Inc.’s (“COGECO” or the “Company”) objectives are to maximize shareholder value by increasing profitability
and ensuring continued growth. The strategies employed to reach these objectives, supported by tight controls over costs
and business processes, are specific to each sector. For the cable sector, sustained corporate growth and the continuous
improvement of networks and equipment are the main strategies used. The radio activities focus on continuous
improvement of programming in order to increase market share, and, thereby, profitability. COGECO uses growth of
revenue and operating income before amortization
(1)
, free cash flow
(1)
and revenue-generating units (“RGU”)
(2)
growth in
order to measure its performance against these objectives for the cable sector. Below are the Company’s recent
achievements in furthering the corporate obje ctives.
Cable sector
During the first quarter of fiscal 2010, Cogeco Cable invested approximately $28.7 million in its network infrastructure and
equipment to upgrade its capacity, improve its robustness and extend its territories in order to better serve and increase
its service offerings for new and existing clientele. Furthermore, Cogeco Cable has maintained its vigilance over operating
costs, which increased at the same pace as the growth in revenue despite the increase in operating costs in the European
operations related to customer retention strategies put in place in the second half of fiscal 2009.
Other
Fall’s BBM Canada survey conducted with the Portable People Meter (“PPM”) shows that Rythme FM has maintained its
leadership position with audiences in the adult and female categories in the Montréal and Trois-Rivières markets. The
other Rythme FM stations continue to gain market share. Furthermore, the FM 93 station in Québec City has pr eserved its
position as the preferred station in this very competitive market.
RGU growth and service offerings in the cable se ctor
During the first three months ended November 30, 2009, the number of RGU increased by 89,785, or 3.1%, to reach
2,982,023 RGU, in line to surpass Cogeco Cable’s RGU growth projections of 125,000 net additions issued on
October 29, 2009. In light of this performance, management has revised its guidelines and RGU growth is now expected
to reach 150,000 net additions for the fiscal year ended August 31, 2010, representing an increase of 5% when compared
to the prior year. Please consult the revised proje ctio ns in the “Fiscal 2010 financial guidelines” section for further details.
Revenue, operating income before am ortization
For the first quarter of fiscal 2010, revenue increased by $19.6 million, or 6.4%, to reach $328 million while operating
income before amortization grew by $8.6 million, or 7.1%, to reach $129.3 million. Given the improved performance,
management expects to attain $1,325 million for the 2010 fiscal year, which represents an increase of $40 million when
compared to the projections of $1,285 million issued on October 29, 2009. Management expects to achieve an operating
income before amortization of $512 million for the fiscal year, $26 million higher than the amount of $486 million projected
on October 29, 2009. Please consult the revised projections in the “Fiscal 2010 financial guidelines” section for further
details.
(1)
The indicated terms do not have standardiz ed def inition s prescr ibed by Canadia n Generally Acc epted Accounting Pri nciples (“GA AP”) and ther efore, may not be
comparable to similar measures presented by other companies. For more details, please consult the “Non-GAAP financial measures” section.
(2)
Represent the sum of Basic Cable, High Speed Internet (HSI), Digital Television and Telephony service customers.
- 4 -
Free cash flow
In the first three months of fiscal 2010, COGECO generated free cash flow of $67.1 million compared to $21.8 million for
the same period last year. Free cash flow growth results mainly from the cable sector and is due to an increase in cash
flow from operations
(1)
, including the reduction in current income taxes stemming from modifications made to the
corporate structure and by the decrease in capital expenditures. Management has revised its free cash flow guidelines to
$140 million for the 2010 fiscal year, an increase of $10 million, or 7.7%, when compared to the guideline of $130 million
issued on October 29, 2009. Please consult the revised projections in the “Fiscal 2010 financial guidelines” section for
further details.
OPERATING RESULTS – CONSOLIDATED OVERVIEW
Quarters ended November 30,
2009 2008
(1)
Change
($000, except percentages) $ $ %
(unaudited) (unaudited)
Revenue 328,003 308,375 6.4
Operating costs 198,740 187,664 5.9
Operating income before amort iz ati o n 129,263 120,711 7.1
Operating margin
(2)
39.4% 39.1%
(1)
Certain comparative figures have been restated to reflect the applicatio n of the Canadian Institute of Chartered Account ants (“CICA”) Handbook Section 306 4.
Please refer to the “Accounting policies and estimates” section for more details.
(2)
The indicated terms do not have standardized definitions prescribed by Canadian GAAP and therefore, may not be comparable to similar measures presented by
other companies. For more details, please consult the “Non-GAAP financial measures” section.
Revenue
Fiscal 2010 first-quarter revenue improved, mainly in its cable sector, by $19.6 million, or 6.4%, to reach $328 million.
Cable revenue, driven by increased RGU, the introduction of HSI usage billing and rate increases implemented at the end
of fiscal 2009 in its Canadian operations, went up by $17.9 million, or 6% over the comparable period of the prior year.
Canadian cable operations revenue increased by $27 million, or 11.4%, compared to the same period of last year. The
increase in revenue for the cable sector has however been limited by its European operations whose revenue decreased
by $9.1 million, or 14.6%, compared to the same period of the prior year, mainly due to a lower number of Basic Cable
service customers compared to the same period of last year and to the impact of retention strategies implemented in the
second half of fiscal 2009 in order to reduce customer attrition, partly offset by the strength of the Euro compared to the
Canadian dollar. First-quarter revenue from the European operations in the local currency amounted to €33.7 million, a
decrease of €6.5 million, or 16.1% compared to the same period of the prior year.
Operating costs
For the first three months of fiscal 2010, operating costs increased by $11.1 million to reach $198.7 million, an increase of
5.9% compared to the prior year, mainly due to the cable sector. Operating costs in the Canadian operations increased
due to the servicing of additional RGU and the additional levy amounting to 1.5% of gross Cable Television service
revenue imposed by the Canadian Radio-television and Telecommunications Commission (“CRTC”) in order to finance a
new Local Programming Improvement Fund (“LPIF”) for the benefit of conventional television broadcasters operating local
stations. In Europe, operating costs increased due to marketing initiatives, including the launch of new channels, and the
appreciation of the Euro over the Canadian dollar, partly offset by cost reduction initiatives, such as a headcount reduction
plan.
(1)
The indicated terms do not have standardized definitions prescribed by Canadian GAAP and therefore, may not be comparable to similar measures presented by
other companies. For more details, please consult the “Non-GAAP financial measures” section.
- 5 -
Operating income before amortization and opera ting margin
Operating income before amortization grew, essentially in its cable segment, by $8.6 million, or 7.1%, to reach
$129.3 million in the first quarter of fiscal 2010 compared to the corresponding period of the prior year. The cable sector
contributed to the growth by $6.9 million during the first quarter of the fiscal year. COGECO’s first quarter operating
margin increased to 39.4%, from 39.1% for the same period of the prior year.
FIXED CHARGES
Quarters ended November 30,
2009 2008
(1)
Change
($000, except percentages) $ $ %
(unaudited) (unaudited)
Amortization 65,701 60,882 7.9
Financial expens e
16,277 23,778 (31.5)
(1)
Certain comparative figures have been restated to reflect the application of the CICA Handbook Section 3064. Please refer to the “Accounting policies and
estimates” section for more details.
First-quarter 2010 amor tization amounted to $65.7 million, compared to $60.9 million for the same period of the prior year.
The increase is mainly due to the cable sector and attributable to additional capital expenditures arising from customer
premise equipment acquisitions to sustain RGU and to the appreciation of the Euro currency over the Canadian dollar.
First-quarter financial expense amounted to $16.3 million compared to $23.8 million in the first quarter of the prior year.
The financial expense of the current quarter includes a foreign exchange gain of $0.5 million, compared to a foreign
exchange loss of $3.8 million in the prior year. The loss in the prior year was essentially due to the unusually high US
dollar volatility, as the majority of customer premise equipment is purchased and subsequently paid in US dollars. The
remaining decrease of $3.2 million is mainly attributable to the cable sector and is due to interest rate reductions and a
decrease in Indebtedness (defined as the total of bank indebtedness, principal on long-term debt and obligations under
derivative financial instruments) when compared with the comparable quarter of the previous fiscal year.
INCOME TAXES
Fiscal 2010 first-quarter income tax recovery amounted to $13.8 million which includes, in the cable sector, the impact of
the reduction in corporate income tax rates announced on March 26, 2009 by the Ontario provincial government and
considered substantively enacted on November 16, 2009 (the “reduction of Ontario provincial corporate income tax
rates”). These lower corporate income tax rates reduced future income tax expense by $29.8 million in the first three
months of fiscal 2010. Excluding the effect of this reduction, income tax expense would have amounted to $16 million for
the first three months of fiscal 2010, compared to $9.6 million for the same period of last year. The increase in income tax
expense in fiscal 2010 is mainly due to the improvement in operating income before amortization surpassing that of the
fixed charges in the Canadian operations of the cable sector.
NON-CONTROLLING INTEREST
The non-controlling interest represents a participation of approximately 67.7% in Cogeco Cable’s results. During the first
quarter of fiscal 2010, the income attributable to non-controlling interest amounted to $38.4 million due to the strong cable
sector’s result s. The non-controlling interest for the comparable period of last year amounted to $15.5 million.
- 6 -
NET INCOME
Fiscal 2010 first quarter net income amounted to $22.7 million, or $1.36 per share. Net income for the first quarter of fiscal
2010 includes the favourable impact in the cable sector of $29.8 million from the reduction of Ontario provincial corporate
income tax rates described above. Excluding the impact of the income tax adjustments, adjusted net income
(1)
would have
amounted to $13.1 million, or $0.79 per share
(1)
, compared to $10.9 million, or $0.65 per share in the prior year,
representing increases of 20.9% and 21.5%, respectively. Please consult the “Non-GAAP financial measures” section for
further details. Net income progression for the quarter has resulted from the growth of the financial results in the Canadian
operations of the cable sector, partly offset by the decline in the financial results of the European operations of the cable
sector as previously discussed.
CASH FLOW AND LIQUIDITY
Quarters ended November 30,
2009 2008
(1)
($000) $ $
(unaudited) (unaudited)
Operating activities
Cash flow from operations
(2)
135,518 91,633
Changes in non-cash operating items (136,928) (65,156)
(1,410) 26,477
Investing activities
(3)
(68,226) (68,907)
Financing activities
(3)
47,453 38,776
Effect of exchange rate changes on cash and cash equivalents denominated in
foreign currencies 202 687
Net change in cash and cash equivalents (21,981) (2,967)
Cash and cash equivalents, beginning of period 39,458 37,472
Cash and cash equivalents, end of period 17,477 34,505
(1)
Certain comparative figures have been restated to reflect the application of the CICA Handbook Section 3064. Please refer to the “Accounting policies and
estimates” section for more details.
(2)
Cash flow from operations does not have a standardized definition prescribed by Canadian GAAP and therefore, may not be comparable to similar measures
presented by other companies. For more details, please consult the “Non-GAAP financial measures” section.
(3)
Excludes assets acquired under capital leases.
Fiscal 2010 first quarter cash flow from operations reached $135.5 million, 47.9% higher than the comparable period last
year, primarily due to the cable sector and attributable to the reduction in current income taxes stemming from
modifications made to the corporate structure, the increase in operating income before amortization and the reduction in
financial expense. Changes in non-cash operating items required cash outflows of $136.9 million, mainly as a result of
decreases in accounts payable and accrued liabilities and income tax liabilities and an increase in income taxes
receivable. In the prior year, the cash outflows of $65.2 million were mainly the result of a decrease in accounts payable
and accrued liabilities and in income tax liabilities. The significant decreases in income tax liabilities in both fiscal years
are due to payments made during the first quarter of the current year related to the prior fiscal year.
In the first quarter of fiscal 2010, total capital expenditures amounted to $65.2 million, essentially the same when
compared to $65.7 million for the corresponding period of last year. The most significant variations are due to the
following factors:
A decrease in support capital spending as the prior year included the acquisition of a power generator for the
Canadian data comm unications subsidiary;
An increase in customer premise equipment spending which reflects higher RGU growth and the appreciation of
the Euro over the Canadian dollar.
Deferred charges and others are mainly attributable to reconnect costs. For the first quarter, the increase in deferred
charges and others amounted to $3 million, essentially the same when compared to $3.2 million for the same period of
the prior year.
(1)
The indicated terms do not have standardized definitions prescribed by Canadian GAAP and therefore, may not be comparable to similar measures presented by
other companies. For more details, please consult the “Non-GAAP financial measures” section.
- 7 -
In the first quarter, COGECO generated free cash flows of $67.1 million compared to $21.8 million in the prior year,
representing an increase of $45.4 million. The growth in free cash flow for the quarter is mainly due to an increase in cash
flow from operations, including the reduction in current income taxes stemming from modifications made to the corporate
structure and the decrease in capital expenditures in the cable sector. The aggregate amount of total capital expenditures
and deferred charges and others decreased by $1.5 million for the quarter ended November 30, 2009 compared to the
corresponding period of the prior year due to the factors explained above.
In the first quarter of 2010, Indebtedness affecting cash increased by $56.5 million mainly due to the decrease in non-
cash operating items of $136.9 million and the aggregate dividend payments of $6.3 million described below, partly offset
by the free cash flow of $67.1 million and the decrease in cash and cash equivalents of $22 million. Indebtedness mainly
increased through an increase of $46.3 million in bank indebtedness and a net amount of $14.9 million drawn on the
Cogeco Cable’s revolving loans. In the first quarter of 2009, Indebtedness affecting cash increased by $43.8 million due to
the reduction of non-cash operating items of $65.2 million, partly offset by the free cash flow of $21.8 million.
Indebtedness was increased through the issuance by Cogeco Cable of Senior Secured Notes, Series A and Series B, for
net proceeds of approximately $255 million, net of the repayment of US$150 million Senior Secured Notes Series A and
the related derivative financial instrument for a total of $238.7 million, and by an increase of $23.5 million in bank
indebtedness.
During the first quarter of fiscal 2010, a dividend of $0.10 per share was paid by the Company to the holders of
subordinate and multiple voting shares, totalling $1.7 million, compared to a dividend of $0.08 per share, or $1.3 million
the year before. In addition, dividends paid by a subsidiary to non-controlling interests in the first quarter of fiscal 2010
amounted to $4.6 million, for consolidated dividend payments of $6.3 million.
As at November 30, 2009, the Company had a working capital deficiency of $197.2 million compared to $245.8 million as
at August 31, 2009. The decrease in the deficiency is mainly attributable to the cable sector and due to the reduction in
accounts payable and accrued liabilities stemming from the timing of payments made to suppliers and in income tax
liabilities stemming from income tax payments relating to the 2009 fiscal year, and to an increase in income taxes
receivable as a result of modifications made to the corporate structure. These decreases have been partially offset by the
increase in bank indebtedness and the decreases in cash and cash equivalents resulting from the above mentioned
payments, and by the increase in the current portion of future income tax liabilities also stemming from the modifications
made to the corporate structure. As part of the usual conduct of its business, COGECO maintains a working capital
deficiency due to a low level of accounts receivable as a large portion of the cable subsidiary’s customers pay before their
services are rendered, unlike accounts payable and accrued liabilities, which are paid after products are delivered or
services are rendered, thus enablin g Cogeco Cable to use cash and cash e quivalents to reduce Indebtedness.
At November 30, 2009, Cogeco Cable had used $268.6 million of its $862.5 million Term Facility for a remaining
availability of $593.9 million and the Company had drawn $7.7 million of its $50 million Term Facility, for a remaining
availability of $42.3 million.
On October 1, 2008, the Cogeco Cable completed, pursuant to a private placement, the issuance of US$190 million
Senior Secured Notes Series A maturing October 1, 2015, and $55 million Senior Secured Notes Series B maturing
October 1, 2018. The Senior Secured Notes Series B bear interest at the coupon rate of 7.60% per annum, payable semi-
annually. The Cogeco Cable has entered into cross-currency swap agreements to fix the liability for interest and principal
payments on the Senior Secured Notes Series A in the amount of US$190 million, which bear interest at the coupon rate
of 7.00% per annum, payable semi-annually. Taking into account these agreements, the effective interest rate on the
Senior Secured Notes Series A is 7.24% and the exchange rate applicable to the principal portion of the US dollar-
denominated debt has been fixed at $1.0625 per US dollar.
Transfers of funds from non-wholly owned subs idiaries to COGECO are subject to approval by the subsidiaries’ Board of
Directors and may also be restricted under the terms and conditions of certain debt instruments. In accordance with
applicable corporate and securities laws, significant transfers of funds from COGECO may be subject to approval by
minority shareholders.
FINANCIAL POSITION
Since August 31, 2009, there have been significant changes to the balances of “accounts payable and accrued liabilities”,
“income taxes receivable”, “income tax liabilities”, “future income tax liabilities”, “fixed assets”, “bank indebtedness”, “long-
term debt”, “derivative financial instruments” and “cash and cash equivalents”.
- 8 -
The $72.1 million decrease in accounts payable and accrued liabilities is related to the timing of payments made to
suppliers mostly in the cable sector. The increases of $20.5 million in income taxes receivable and $20.2 million in the
current portion of future income tax liabilities are mainly due to modifications made to the corporate structure in the cable
sector. The $39.2 million decrease in income tax liabilities is due to income tax payments made in the first quarter of the
2010 fiscal year relating to the 2009 fiscal year in the cable sector . The $17.8 million decrease in long-term future income
tax liabilities is mainly due to reduction, in the cable sector, of Ontario provincial corporate income tax rates. The
$6.3 million increase in fixed assets is mainly related to capital expenditures to sustain RGU growth in the cable sector.
The increases of $46.3 million in bank indebtedness, $5.3 million in long-term debt and $5.9 million in net derivative
financial instrument liabilities and the decrease of $22 million in cash and cash equivalents are due to the factors
previously discussed in the “Cash Flow and Liquidity” section and the fluctuations in foreign exchange and interest rates.
A description of COGECO’s share data as at December 31, 2009 is pre se nted in the table below:
Number of shares/options Amount
($000)
Common shares
Multiple voting shares
Subordinate voting shares
1,842,860
14,942,470
12
120,994
Options to purchase subordinate voting shares
Outstanding options
Exercisable options
79,650
79,650
In the normal course of business, COGECO has incurred financial obligations, primarily in the form of long-term debt,
operating and capital leases and guarantees. COGECO’s obligations, discussed in the 2009 Annual Report, have not
materially changed since August 31, 2009.
DIVIDEND DECLARATION
At its January 12, 2010 meeting, the Board of Directors of COGECO declared a quarterly eligible dividend of $0.10 per
share for subordinate and multiple voting shares, payable on February 9, 2010, to shareholders of record on January
26, 2010. The declaration, amount and date of any future dividend will continue to be considered and approved by the
Board of Directors of the Company based upon the Company’s financial condition, results of operations, capital
requirements and such other factors as the Board of Directors, at its sole discretion, deems relevant. There is therefore no
assurance that dividends will be declar ed, and if declared, their amount and frequency may vary.
FINANCIAL MANAGEME NT
During fiscal 2009, the Company’s cable subsidiary, Cogeco Cable, entered into a swap agreement with a financial
institution to fix the floating benchmark interest rate with respect to the Euro-denominated Term Loan facilities for a
notional amount of €111.5 million. The interest rate swap to hedge the Term Loans has been fixed at 2.08% until their
maturity at July 28, 2011. The notional value of the swap will decrease in line with the amortization schedule of the Term
Loans and stood at €95.8 million at November 30, 2009. In addition to the interest rate swap of 2.08%, Cogeco Cable will
continue to pay the applicable margin on these Term Loans in accordance with its Term Facility. In the first three months
of the fiscal year, the fair value of interest rate swap decreased by $0.1 million, which is recorded as a decrease of other
comprehensi ve income net of income taxes.
In the previous fiscal year, Cogeco Cable 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 in 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 xed at $1.0625 per
US dollar. In the first quarter of the 2010 fiscal year, amounts due under the US$190 million Senior Secured Notes
Series A decreased by $7.5 million due to the US dollar’s depreciation compared to the Canadian dollar. The fair value of
cross-currency swaps decreased by a net amount of $5.8 million, of which $7.5 million offsets the foreign exchange gain
on the debt denominated in US dollars. The difference of $1.7 million was recorded as an increase of other
comprehensive income, net of income taxes of $1.1 million.
- 9 -
Cogeco Cable’s net investment in the self-sustaining foreign subsidiary, Cabovisão – Televisão por Cabo, S.A.
(“Cabovisão”), 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 the net investment in self-sustaining
foreign subsidiaries and accordingly, Cogeco Cable realized a foreign exchange gain of $0.6 million in the first three
months of fiscal 2010, which is presented in other comprehensive income. The exchange rate used to convert the Euro
into Canadian dollars for the balance sheet accounts at November 30, 2009 was $1.5852 per Euro compared to $1.5698
per Euro at August 31, 2009. The average exchange rate prevailing during the first quarter used to convert the operating
results of the European operations was $1.5732 per Euro, compared to $1.5462 per Euro for the same period of the prior
year.
The following table shows the Canadian dollar impact of a 10% change in the average exchange rate of the Euro currency
into Canadian dollars on European operating results in the cable sector for the first nine months ended
November 30, 2009:
Quarter ended November 30, 2009 As reported
Exchange rate
impact
($000) $ $
(unaudited) (unaudited)
Revenue 53,005 5,301
Operating income before amort iz ati o n 10,176 1,018
The Company is also impacted by foreign currency exchange rates, primarily changes in the values of the US dollar
relative to the Canadian dollar with regards to purchases of equipment, as the majority of customer premise equipment in
the cable sector is purchased and subsequently paid in US dollars. Please consult the “Fixed charges” section of this
MD&A and the Foreign Exchange Risk section in note 13 of the consolidated financial statements for further detail s.
CABLE SECTOR
CUSTOMER STATISTICS
Net additions % of Penetration
(1)
November 30, Quarters ended November 30, November 30,
2009 2009 2008 2009 2008
RGU 2,982,023 89,785 52,714
Basic Cable service customers
1,132,642 8,357 798
HSI service custome r s 681,381 22,715 14,300 62.8 58.1
Digital Television service customers 633,371 32,220 23,617 56.6 43.0
Telephony service customers 534,629 26,493 13,999 50.8 45.9
(1)
As a percentage of Basic Cable service customers in areas served.
In the cable sector, first quarter RGU net additions were higher than for the same period of last year with a growth of
89,785 compared to 52,714.
The Canadian operations’ net additions to RGU of 63,172 were essentially the same as compared to 65,463 for the same
period of the prior year, and continue to generate RGU growth despite early signs of maturation of some of its services.
The number of net additions for Basic Cable service customers stood at 8,919 compared to 8,833 for the same period of
the prior year, mainly due to the beginning of the school year for college and university students and from expansions in
the network. Telephony service customers grew by 20,641 compared to 18,901 for the same period last year, and the
number of net additions to HSI service stood at 17,506 customers for the quarter, compared to 19,509 customers for the
same period last year. HSI and Telephony net additions continue to stem from the enhancement of the product offering,
the impact of the bundled offer (Cogeco Complete Connection) of Television, HSI and Telephony services, and
promotional activities. Telephony service coverage, as a percentage of homes passed, is now above 90% compared to
87% at November 30, 2008. The Digital Television service net additions stood at 16,106 customers compared to
18,220 customers for the first quarter, and are due to targeted marketing initiatives to improve penetration and to the
continuing strong interest for HD television service.
- 10 -
The European operations net additions have begun to stabilize and reflect the benefits of the Portuguese subsidiary’s
customer retention and acquisition strategies launched at the end of the 2009 fiscal year in order to reduce the customer
attrition brought on by the difficult competitive landscape in Portugal and economic environment in the Iberian Peninsula
throughout the previous fiscal year. The RGU net additions for the first three months of fiscal 2010 amounted to 26,613
compared to net losses of 12,749 for the same period of the previous year. Basic Cable service customers decreased by
562 customers compared to a decrease of 8,035 customers in the comparable period of the prior year. HSI service
customers increased by 5,209 customers compared to a decrease of 5,209 customers in the first three months of fiscal
2009. The number of Digital Television service customers grew by 16,114 customers in the first quarter of the current
fiscal year compared to 5,397 customers in the first quarter of the prior year. Telephony service customers increased by
5,852 customers compared to a loss of 4,902 customers for the same period of the preceding year.
OPERATING RESULTS
Quarters ended November 30,
2009 2008
(1)
Change
($000, except percentages) $ $ %
(unaudited) (unaudited)
Revenue 317,365 299,438 6.0
Operating costs 188,418 177,727 6.0
Management fees – COGECO Inc. 6,341 5,981 6.0
Operating income from before amortization 122,606 115,730 5.9
Operating margin 38.6% 38.6%
(1)
Certain comparative figures have been restated to reflect the application of the CICA Handbook Section 3064. Please refer to the “Accounting policies and
estimates” section for more details.
Revenue
Fiscal 2010 first-quarter revenue improved by $17.9 million, or 6%, to reach $317.4 million when compared to the prior
year. Driven by the introduction of HSI usage billing, RGU growth and the impact of rate increases implemented in the
second half of fiscal 2009 in Ontario, first quarter Canadian operations revenue went up by $27 million, or 11.4% over the
comparable period of the prior year.
Fiscal 2010 first-quarter European operations revenue decreased by $9.1 million, or 14.6%, at $53 million, compared to
the same period of the prior year, mainly due to lower Basic Cable service customers compared to the same period of last
year and to the impact of retention strategies implemented in the second half of fiscal 2009 in order to reduce customer
attrition, partly offset by the strength of the Euro compared to the Canadian dollar. Revenue from the European operations
in the local currency for the first quarte r amounted to €33.7 million, a decrease of €6.5 million, or 16.1%.
Operating costs
For the first three months of fiscal 2010, operating costs, excluding management fees payable to COGECO Inc.,
increased by $10.7 million to reach $188.4 million, an increase of 6% compared to the prior year. Operating costs
increased due to the servicing of additional RGU and the additional levy amounting to 1.5% of gross Cable Television
service revenue imposed by the CRTC in order to finance a new LPIF for the benefit of conventional television
broadcasters operating local stations in Canada, and in Europe, due to marketing initiatives, including the launch of new
channels, and the appreciation of the Euro over the Canadian dollar, partly offset by cost reduction initiatives, such as a
headcount reduction plan.
Operating income before amortization and opera ting margin
Fiscal 2010 first quarter operating income before amortization increased by $6.9 million, or 5.9%, to reach $122.6 million,
as a result of RGU growth and rate adjustments generating additional revenues which outpaced operating cost increases
in the first three months of the year. Cogeco Cable’s first quarter operating margin remained the same when compared to
the prior year, amounting to 38.6%. The operating margin in Canada improved to 42.5% from 40% which offset the
decrease in the European operating ma rgin to 19.2% from 33.5%.
- 11 -
FISCAL 2010 FINANCIAL GUIDELINES
Given the improved performance of the Company during the first quarter, the expected trend for fiscal 2010 and the
Ontario provincial corporate income tax rate reductions announced on March 26, 2009 and considered substantively
enacted on November 16, 2009, management has revised most of its guidelines for the 2010 fiscal year. The Company
now expects revenue to attain $1,325 million and operating income before amortization should reach $512 million. Free
cash flow should generate approximately $140 million and net income of approximately $45 million should b e achieved.
Consolidated
Revised Projections Projections
January 12, 2010 October 29, 2009
Fiscal 2010 Fiscal 2010
(in millions of dollars) $ $
Financial guidelines
Revenue 1,325 1,285
Operating income before amort iz ati o n 512 486
Financial expens e 69 70
Current income taxes (40)
(55)
Net income 45 30
Capital expenditures and increase in deferred charges 341 341
Free cash flow
140 130
Cable sector
Cogeco Cable has revised upwards its guidelines to reflect the HSI usage billing and to charge back the LPIF costs to its
Canadian Cable Television service customers. RGU growth should also increase due to the continued demand for cable
telecommunications services. In addition, the projected foreign currency exchange rate from the Euro to the Canadian
dollar is revised upwards. During the last segment of fiscal 2009, Cabovisão launched new channels and implemented
retention strategies, which combined with new marketing and other operating initiatives, have helped reduce customer
attrition since their implementation. However, Cabovisão is still facing fierce competition in the Portuguese market.
Subsequent to these adjustments, projected revenue and operating income before amortization were revised upwards.
The increase in projected revenue from $1,250 million to $1,290 million should come from both the Canadian and
European operations. The operating income before amortization should increase to $505 million from $481 million and, as
a result, operating margin should increase to 39.1% from 38.5%.
As a result of the revised projections, free cash flow is now expected to reach $135 million from the $125 million initially
projected.
Revised Projections Projections
January 12, 2010 October 29, 2009
(in millions of dollars, except RGU growth and operating margin) Fiscal 2010 Fiscal 2010
Financial guidelines
Revenue 1,290 1,250
Operating income before amort iz ati o n 505 481
Operating margin 39.1% 38.5%
Amortization 273 273
Financial expens e 69 70
Current income taxes (40) (55)
Capital expenditures and increase in deferred charges 341 341
Free cash flow 135 125
RGU growth 150,000 125,000
The exchange rate used for the fiscal 2010 revised projections is $1.55 per Euro compared to $1.50 per Euro for the
October 29, 2009 projections.
- 12 -
CONTROLS AND PRO CEDURES
The President and Chief Executive Officer (“CEO”) and the Senior Vice President and Chief Financial Officer (“CFO”),
together with management, are responsible for establis hing and maintaining adequate disclosure controls and procedures
and internal controls over financial reporting, as defined in NI 52-109. COGECO’s internal control framework is based on
the criteria published in the report “Internal Control-Integrated Framework” issued by the Committee of Sponsoring
Organizations of the Treadway Commission and is designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP.
The CEO and CFO, supported by management, evaluated the design of the Company’s disclosure controls and
procedures and internal controls over financial reporting as of November 30, 2009, and have concluded that they were
adequate.
UNCERTAINTIES AND M AIN RISK FACTORS
There has been no significant change in the uncertainties and main risk factors faced by the Company since
August 31, 2009. A detailed description of the uncertainties and main risk factors faced by COGECO can be found in the
2009 Annual Report.
ACCOUNTING POLICIES AND ESTIMATES
There has been no significant change in COGECO’s accounting policies, estimates and future accounting
pronouncements since August 31, 2009, except as described below. A description of the Company’s policies and
estimates can be found in the 2009 Annual Report.
Goodwill and intangible assets
In February 2008, the CICA issued Section 3064, Goodwill and intangible assets, replacing Section 3062, Goodwill and
other intangible assets and Section 3450, Research and development costs. The new Section established standards for
the recognition, measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of
intangible assets by profit-oriented enterprises. Standards concerning goodwill remained unchanged from the standards
included in the previous Section 3062. The new Section was applicable to interim and annual financial statements relating
to fiscal years beginning on or after October 1, 2008, with retroactive application. The adoption of Section 3064 eliminated
the deferral of new service launch costs which are now recognized as an expense when they are incurred. Reconnect and
additional services activation costs are capitalized up to an amount not exceeding the revenue generated by the
reconnect activity. Consequently, the Company adjusted opening retained earnings on a retroactive basis and the prior
period comparative figures have been restated. The adoption of this new section had the following impact on the
Company’s consolidated financial statements:
Consolidated statement of income
Increase (decrease)
Quarter ended November 30, 2008
($000) $
(unaudited)
Operating costs 3,993
Amortization of deferred charges
(3,181)
Future income tax expens e
(209)
Non-controlling interest (411)
Net income (192)
- 13 -
Consolidated balance shee t s
Increase (decrease) August 31, 2009 September 1, 2008
($000) $ $
(unaudited) (unaudited)
Deferred charges (34,551)
(32,405)
Future income tax liabili ties
(10,229)
(9,624)
Non-controlling interes t (16,428)
(15,376)
Retained earnings (7,894)
(7,405)
FUTURE ACCOUNTING PRO NOUN CEMENTS
Harmonization of Canadian and International accounting standards
Throughout the quarter, the Company has continued its project for the transition from Canadian GAAP to International
Financial Reporting Standards (“IFRS”). The conversion project is progressing according to the established plan and the
Company expects to meet its target dat e for migration. Please refer to the 2009 Annual Report for more details.
NON-GAAP FINANCI AL MEASURES
This section describes non-GAAP financial measures used by COGECO throughout this MD&A. It also provides
reconciliations between these non-GAAP measures and the most comparable GAAP financial measures. These financial
measures do not have standard definitions prescribed by Canadian GAAP and may not be comparable with similar
measures presented by other companies. These measures include “cash flow from operations”, “free cash flow”,
“operating income before amortization”, “operating margin”, “adjusted net income”, and “adjusted earnings per share”.
Cash flow from operations and fr ee cash flow
Cash flow from operations is used by COGECO’s management and investors to evaluate cash flows generated by
operating activities excluding the impact of changes in non-cash operating items. This allows the Company to isolate the
cash flows from operating activities from the impact of cash management decisions. Cash flow from operations is
subsequently used in calculating the non-GAAP measure “free cash flow”. Free cash flow is used by COGECO’s
management and investors to measure COGECO’s ability to repay debt, distribute capital to its shar eholders and finance
its growth.
The most comparable Canadian GAAP financial measure is cash flow from operating activities. Cash flow from operations
is calculated as follows:
Quarters ended November 30,
2009 2008
(1)
($000) $ $
(unaudited) (unaudited)
Cash flow from operating activities (1,410) 26,477
Changes in non-cash operating items 136,928 65,156
Cash flow from operations 135,518 91,633
- 14 -
Free cash flow is calculated as follows:
Quarters ended November 30,
2009 2008
(1)
($000) $ $
(unaudited) (unaudited)
Cash flow from operations 135,518 91,633
Acquisition of fixed assets (65,182) (65,709)
Increase in deferred charges (3,064) (3,214)
Assets acquired under capital leases – as per note 11 c) (141) (939)
Free cash flow 67,131 21,771
(1)
Certain comparative figures have been restated to reflect the application of the CICA Handbook Section 3064. Please refer to the “Accounting policies and
estimates” section for more details.
Operating income before amortization and opera ting margin
Operating income before amortization is used by COGECO’s management and investors to assess the Company’s ability
to seize growth opportunities in a cost effective manner, to finance its ongoing operations and to service its debt.
Operating income before amortization is a proxy for cash flows from operations excluding the impact of the capital
structure chosen, and is one of the key metrics used by the financial community to value the business and its financial
strength. Operating margin is a measure of the proportion of the Company's revenue which is left over, before taxes, to
pay for its fixed costs, such as interest on Indebtedness. Operating margin is calculated by dividing operating income
before amortization by revenue.
The most comparable Canadian GAAP financial measure is operating income. Operating income before amortization and
operating margin are calculated as follows:
Quarters ended November 30,
2009 2008
(1)
($000, except percentages) $ $
(unaudited) (unaudited)
Operating income 63,562 59,829
Amortization 65,701 60,882
Operating income before amortization 129,263 120,711
Revenue 328,003 308,375
Operating margin 39.4% 39.1%
(1)
Certain comparative figures have been restated to reflect the application of the CICA Handbook Section 3064. Please refer to the “Accounting policies and
estimates” section for more details.
- 15 -
Adjusted net income and adjusted earnings per share
Adjusted net income and adjusted earnings per share are used by COGECO’s management and investors to evaluate
what would have been the net income and earnings per share excluding unusual adjustments. This allows the Company
to isolate the unusual adjustments in order to evaluate the net income and earnings per share from ongoing activities.
The most comparable Canadian GAAP financial measures are net income and earnings per share. These above-
mentioned non-GAAP financial measures are calculated as follows:
Quarters ended November 30,
2009 2008
(1)
($000) $ $
(unaudited) (unaudited)
Net income 22,748 10,861
Adjustment for the reduction of Ontario provincial corporate income tax rates (9,620)
Adjusted net income 13,128 10,861
Weighted average number of multiple voting and subordinate voting shares outstanding 16,721,277 16,701,699
Effect of dilutive stock options 6,594 20,386
Effect of dilutive incentive share units 64,053 38,747
Weighted average number of diluted multiple voting and subordinate voting shares outstanding 16,791,924 16,760,832
Adjusted earnings per share
Basic 0.79 0.65
Diluted 0.78 0.65
(1)
Certain comparative figures have been restated to reflect the application of the CICA Handbook Section 3064. Please refer to the “Accounting policies and
estimates” section for more details.
ADDITIONAL INFORMATION
This MD&A was prepared on January 12, 2010. Additional information relating to the Company, including its Annual
Information Form, is available on the SEDAR website at www.sedar.com.
ABOUT COGECO
COGECO is a diversified communications company. Through its Cogeco Cable subsidiary, COGECO provides its
residential customers with Audio, Analogue and Digital Television, as well as HSI and Telephony services using its two-
way broadband cable networks. Cogeco Cable also provides, to its commercial customers, data networking, e-business
applications, video conferencing, hosting services, Ethernet, private line, VoIP, HSI access, dark fibre, data storage, data
security and co-location services and other advanced communication solutions. Through its subsidiary, Cogeco Diffusion
Inc., COGECO owns and operates the Rythme FM radio stations in Montréal, Québec City, Trois-Rivières and
Sherbrooke, as well as the FM 93 radio station in Québec City. COGECO’s subordinate voting shares are listed on the
Toronto Stock Exchange (TSX: CGO). The subordinate voting shares of Cogeco Cable are also listed on the Toronto
Stock Exchange (TSX: CCA).
– 30 –
- 16 -
Source: COGECO Inc.
Pierre Gagné
Senior Vice President and Chief Financial Officer
Tel.: 514-764-4700
Information: Media
Marie Carrier
Director, Corporate Communications
Tel.: 514-764-4700
Analyst Conference Call: Wednesday, January 13, 2010 at 11:00 A.M. (EST)
Media representatives may attend as listeners only.
Please use the following dial-in number to have access to the conference call by dialling
five minutes before the start of the conference:
Canada/USA Access Nu mber: 1 888 300-0053
International Access Number: + 1 647 427-3420
Confirmation Code: 5342110
By Internet at www.cogeco.ca/investors
A rebroadcast of the conference call will be available until January 20, by dialling:
Canada and USA access number: 1 800 642-1687
International access number: + 1 706 645-9291
Confirmation code: 5342110
- 17 -
Supplementary Quarterly Financial Information
(unaudited)
Quarters ended November 30, August 31, May 31, February 28 / 29,
($000, except percentages and per share data) 2009 2008
(1)
2009
(1)
2008
(1)(2)
2009
(1)
2008
(1)(2)
2009
(1)
2008
(1)(2)
Revenue 328,003 308,375 316,284 292,873 316,310 283,878 311,825 271,894
Operating income from contin ui ng op erati ons
before amortization
(2)
129,263 120,711 144,654 117,557 126,624 112,639 123,505 105,893
Operating margin
(2)
39.4% 39.1% 45.7% 40.1% 40.0% 39.7% 39.6% 38.9%
Operating income from contin ui ng op erati ons 63,562 59,829 76,244 58,664 62,623 57,114 60,171 52,769
Impairment of goodwill and intan gi bl e ass ets – – – – 399,648
Net income (loss) from continuing operations 22,748 10,861 14,631 9,332 10,704 9,221 (115,210) 16,296
Net loss from discontinued operations – – – – (425)
Net income (l oss) 22,748 10,861 14,631 9,332 10,704 9,221 (115,210) 15,871
Adjusted net income
(2)(3)
13,128 10,861 7,647 9,332 9,157 9,221 8,741 8,387
Cash flow from operating activities from
continuing operations (1,410) 26,477 177,032 141,590 99,873 108,326 117,322 89,312
Cash flow from operations from continuing
operations
(2)
135,518 91,633 108,744 95,507 92,718 91,501 97,193 81,744
Free cash flow
(2)
67,131 21,771 14,742 20,981 32,416 37,107 32,089 19,374
Earnings (loss) per share
(4)
Basic
Income (loss) from continuing operations 1.36 0.65 0.87 0.56 0.64 0.55 (6.88) 0.98
Loss from discontinued operations – – – – (0.03)
Net income (l oss) 1.36 0.65 0.87 0.56 0.64 0.55 (6.88) 0.95
Adjusted net income
(2)(3)
0.79 0.65 0.46 0.56 0.55 0.55 0.52 0.50
Diluted
Income (loss) from continuing operations 1.35 0.65 0.87 0.56 0.64 0.55 (6.88) 0.97
Loss from discontinued operations – – – – (0.03)
Net income (l oss) 1.35 0.65 0.87 0.56 0.64 0.55 (6.88) 0.95
Adjusted net income
(2)(3)
0.78 0.65 0.46 0.56 0.55 0.55 0.52 0.50
(1)
Certain comparativ e figures have been restated to reflect the application of the Canadian Institute of Chartered Accountants (“ CICA”) Handbook Section 3064.
Please refer to the “Accounting policies and estimates” section of the Management’s discussion and analysis for more details.
(2)
Certain comparative figures have been reclassified to reflect the reclassification of foreign exchange gains or losses from operating costs to financial expense.
(3)
The indicated terms do not have standardiz ed def inition s prescr ibed by Canadia n Generally Acc epted Accounting Pri nciples (“GAAP ”) and therefo re, may not be
comparable to similar measures presented by other companies. For more details, please consult the “Non-GAAP financial measures” section of the
Management’s discussion and analysis.
(4)
Per multiple and subordinate voting share.
SEASONAL VARIATIONS
Cogeco Cable’s operating results are not generally subject to material seasonal fluctuations. However, the loss in Basic
Cable service customers is usually greater, and the addition of HSI service customers is generally lower, in the second
half of the fiscal year as a result of a decrease in economic activity due to the beginning of the vacation period, the end of
the television seasons, and students leaving their campuses at the end of the school year. Cogeco Cable offers its
services in several university and college towns such as Kingston, Windsor, St. Catharines, Hamilton, Peterborough,
Trois-Rivières and Rimouski in Canada, and Aveiro, Covilhã, Evora, Guarda and Coimbra in Portugal. Furthermore, the
operating margin in the third and fourth quarters is generally higher as the maximum amount payable to COGECO under
the management agreement is usually reached in the second quarter of the year. As part of the management agreement
between Cogeco Cable and COGECO, Cogeco Cable pays management fees to COGECO equivalent to 2% of its
revenue subject to an annual maximum amount, which is adjusted annually to reflect the increase in the Canadian
Consumer Price index. For fiscal 2009, the maximum amount of $9 million was attained in the second quarter and
therefore, no management fees were paid in the third or fourth quarters of the 2009 fiscal year. For the current fiscal year,
the maximum amount has been set at $9 million.
- 18 -
Cable Sector Customer Statistics
(unaudited)
November 30, 2009 August 31, 2009
Homes passed
Ontario 1,052,470 1,049,818
Québec 518,163 515,327
Canada 1,570,633 1,565,145
Portugal
(1)
905,197 905,129
Total 2,475,830 2,470,274
Homes connected
(2)
Ontario 667,017 658,690
Québec 288,535 285,944
Canada 955,552 944,634
Portugal 268,202 269,022
Total 1,223,754 1,213,656
Revenue-generating units
Ontario 1,526,556 1,483,324
Québec 696,479 676,539
Canada 2,223,035 2,159,863
Portugal 758,988 732,375
Total 2,982,023 2,892,238
Basic Cable service customers
Ontario 604,028 597,651
Québec 269,696 267,154
Canada 873,724 864,805
Portugal 258,918 259,480
Total 1,132,642 1,124,285
High Speed Internet service customers
Ontario 387,497 374,906
Québec 145,061 140,146
Canada 532,558 515,052
Portugal 148,823 143,614
Total 681,381 658,666
Digital Television service customers
Ontario 336,270 326,227
Québec 178,234 172,171
Canada 514,504 498,398
Portugal 118,867 102,753
Total 633,371 601,151
Telephony service customer s
Ontario 198,761 184,540
Québec 103,488 97,068
Canada 302,249 281,608
Portugal 232,380 226,528
Total 534,629 508,136
(1)
Cogeco Cable is currently assessing the number of homes passed.
(2)
Includes Basic Cable service customers and HSI and Telephony service customers who do not subscribe to other cable services.
- 19 -
COGECO INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three months ended November 30,
(In thousands of dollars, except per share data)
2009
2008
$
$
(restated, see note 1)
Revenue
328,003
308,375
Operating costs
198,740
187,664
Operating income before amortization
129,263
120,711
Amortization (note 3)
65,701
60,882
Operating income
63,562
59,829
Financial expense (note 4)
16,277
23,778
Income before income taxes and the following items
47,285
36,051
Income taxes (note 5)
(13,818)
9,639
Loss on dilution resulting from the issuance of shares by a subsidiary
26
Non-controlling interest
38,355
15,525
Net income
22,748
10,861
Earnings per share (note 6)
Basic
1.36
0.65
Diluted
1.35
0.65
- 20 -
COGECO INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
Three months ended November 30,
(In thousands of dollars)
2009
2008
$
$
(restated, see note 1)
Net income
22,748
10,861
Other comprehensive income
Unrealized gains (losses) on derivative financial instruments designated as cash flow hedges, net of
income taxes recovery of $2,141,000 and non-controlling interest of $2,551,000 (income taxes
expense of $3,387,000 and non-controlling interest of $17,451,000 in 2008)
(1,218)
8,338
Reclassification to net income of realized losses (gains) on derivative financial instruments
designated as cash flow hedges, net of income taxes recovery of $1,007,000 and non-controlling
interest of $4,386,000 (income taxes expense of $4,323,000 and non-controlling interest of
$19,211,000 in 2008)
2,093
(9,180)
Unrealized gains on translation of a net investment in self-sustaining foreign subsidiaries, net of non-
controlling interest of $1,844,000 ($4,114,000 in 2008)
882
1,966
Unrealized losses on translation of long-term debts designated as hedges of a net investment in self-
sustaining foreign subsidiaries, net of non-controlling interest of $1,415,000 ($2,273,000 in 2008)
(676)
(1,086)
1,081
38
Comprehensive income
23,829
10,899
- 21 -
COGECO INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(unaudited)
Three months ended November 30,
(In thousands of dollars) 2009 2008
$ $
(restated, see note 1)
Balance at beginning, as reported 211,922 295,808
Changes in accounting policies (note 1) (7,894) (7,405)
Balance at beginning, as restated 204,028 288,403
Net income 22,748 10,861
Dividends on multiple voting shares (184) (147)
Dividends on subordinate voting shares (1,494) (1,192)
Balance at end 225,098 297,925
- 22 -
COGECO INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(In thousands of dollars) November 30, 2009 August 31, 2009
$ $
(restated, see note 1)
Assets
Current
Cash and cash equivalents (note 11 b)) 17,477 39,458
Accounts receivable 71,659 66,076
Income taxes receivable 25,766 5,228
Prepaid expenses 15,941 14,805
Future income tax assets 4,934 4,275
135,777 129,842
Investments 739 739
Fixed assets 1,312,049 1,305,769
Deferred charges 23,912 24,062
Intangible assets (note 7) 1,046,581 1,047,774
Goodwill (note 7) 149,615 153,695
Derivative financial instruments 4,236
Future income tax assets 4,900 4,011
2,673,573 2,670,128
Liabilities and Shareholders' equity
Liabilities
Current
Bank indebtedness 46,740 416
Accounts payable and accrued liabilities 183,171 255,281
Income tax liabilities 2,154 41,358
Deferred and prepaid revenue 36,059 33,877
Current portion of long-term debt (note 8) 44,693 44,706
Future income tax liabilities 20,209
333,026 375,638
Long-term debt (note 8) 1,024,573 1,019,258
Derivative financial instruments 3,842 2,168
Deferred and prepaid revenue and other liabilities 12,918 12,900
Pension plan liabilities and accrued employees benefits 11,379 10,453
Future income tax liabilities 216,934 234,710
1,602,672 1,655,127
Non-controlling interest 717,418 682,879
Shareholders' equity
Capital stock (note 9) 121,006 121,006
Treasury shares (note 9) (2,896) (1,847)
Contributed surplus 2,866 2,607
Retained earnings 225,098 204,028
Accumulated other comprehensive income (note 10) 7,409 6,328
353,483 332,122
2,673,573 2,670,128
- 23 -
COGECO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended November 30,
(In thousands of dollars)
2009 2008
$ $
(restated, see note 1)
Cash flow from operating activities
Net income 22,748 10,861
Adjustments for:
Amortization (note 3)
65,701 60,882
Amortization of deferred transaction costs and discounts on long-term debt
762 717
Future income taxes (note 5)
6,404 2,615
Non-controlling interest
38,355 15,525
Loss on dilution resulting from the issuance of shares by a subsidiary
26
Stock-based compensation
708 89
Loss on disposal of fixed assets
98 223
Other
742 695
135,518 91,633
Changes in non-cash operating items (note 11 a)) (136,928) (65,156)
(1,410) 26,477
Cash flow from investing activities
Acquisition of fixed assets (note 11 c)) (65,182) (65,709)
Increase in deferred charges (3,064) (3,214)
Other 20 16
(68,226) (68,907)
Cash flow from financing activities
Increase in bank indebtedness 46,324 23,459
Net increase under the term facilities 11,425 5,294
Issuance of long-term debt, net of discounts and transaction costs 254,771
Repayment of long-term debt and settlement of derivative financial instrument (1,224) (239,747)
Acquisition of treasury shares (note 9) (1,049)
Dividends on multiple voting shares (184) (147)
Dividends on subordinate voting shares (1,494) (1,192)
Issuance of shares by a subsidiary non-controlling interest 278
Acquisition of treasury shares by a subsidiary from non-controlling interest (note 9) (1,744)
Dividends paid by a subsidiary to non-controlling interest (4,601) (3,940)
47,453 38,776
Effect of exchange rate changes on cash and cash equivalents denominated in foreign currencies 202 687
Net change in cash and cash equivalents (21,981) (2,967)
Cash and cash equivalents at beginning 39,458 37,472
Cash and cash equivalents at end 17,477 34,505
See supplemental cash flow information in note 11.
- 24 -
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2009
(unaudited)
(amounts in tables are in thousands of dollars, except number of shares and per share data)
1. Basis of Presentation
In the opinion of management, the accompanying unaudited interim consolidated financial statements, prepared in
accordance with Canadian generally accepted accounting principles, present fairly the financial position of
COGECO Inc. (“the Company”) as at November 30, 2009 and August 31, 2009 as well as its results of operations and
its cash flows for the three month periods ended November 30, 2009 and 2008.
While management believes that the disclosures presented are adequate, these unaudited interim consolidated
financial statements and notes should be read in conjunction with COGECO Inc.’s annual consolidated financial
statements for the year ended August 31, 2009. These unaudited interim consolidated financial statements follow the
same accounting policies as the most recent annual consolidated financial statements, except for the adoption of the
new accounting policies described below.
Goodwill and intangible assets
In February 2008, the CICA issued Section 3064, Goodwill and intangible assets, replacing Section 3062,
Goodwill and other intangible assets and Section 3450, Research and development costs. The new Section
establishes standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its
initial recognition and of intangible assets by profit-oriented enterprises. Standards concerning goodwill remained
unchanged from the standards included in the previous Section 3062. The new Section was applicable to interim and
annual financial statements relating to fiscal years beginning on or after October 1, 2008, with retroactive
application. The adoption of Section 3064 eliminated the deferral of new service launch costs which are now
recognized as an expense when they are incurred. Reconnect and additional services activation costs ar e capitalized
up to an amount not exceeding the revenue generated by the reconnect activity. Consequently, the Company
adjusted opening retained earnings on a retroactive basis and the prior period comparative figures have been
restated. The adoption of this new section had the following impacts on the Company’s consolidated financial
statements.
Consolidated statement of income
Three months ended November 30, 2008
Increase (decrease) $
Operating costs 3,993
Amortization of deferred charges (3,181)
Future income tax expense (209)
Non-controlling interest (411)
Net income (192)
Consolidated balance shee ts
August 31, 2009 September 1, 2008
Increase (decrease) $ $
Deferred charges (34,551) (32,405)
Future income tax liabilities (10,229) (9,624)
Non-controlling interest (16,428) (15,376)
Retained earnings (7,894) (7,405)
- 25 -
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2009
(unaudited)
(amounts in tables are in thousands of dollars, except number of shares and per share data)
2. Segmented Information
The Company’s activities are divided into two business segments: Cable and other. The Cable segment is comprised
of Cable Television, High Speed Internet, Telephony and other telecommunications services, and the other segment
is comprised of radio and head office activities, as well as eliminations. The Cable segment’s activities are carried out
in Canada and in Europe.
The principal financi al information per business segment is pre se nted in the tables below:
Cable Other and eliminations Consolidated
Three months ended November 30, 2009
2008
2009
2008
2009
2008
$
$
$
$
$
$
(restated)
(restated)
(restated)
Revenue 317,365
299,438
10,638
8,937
328,003
308,375
Operating costs 194,759
183,708
3,981
3,956
198,740
187,664
Operating income before amortization 122,606
115,730
6,657
4,981
129,263
120,711
Amortization 65,565
60,746
136
136
65,701
60,882
Operating income 57,041
54,984
6,521
4,845
63,562
59,829
Financial expense 16,141
23,394
136
384
16,277
23,778
Income taxes (15,766)
8,645
1,948
994
(13,818)
9,639
Loss on dilution resulting from the
issuance of shares by a subsidiary
26
26
Non-controlling interest 38,355
15,525
38,355
15,525
Net income 18,311
7,394
4,437
3,467
22,748
10,861
Total assets
(1)
2,632,154
2,630,912
41,419
39,216
2,673,573
2,670,128
Fixed assets
(1)
1,308,488
1,302,238
3,561
3,531
1,312,049
1,305,769
Intangible assets
(1)
1,021,241
1,022,434
25,340
25,340
1,046,581
1,047,774
Goodwill
(1)
149,615
153,695
149,615
153,695
Acquisition of fixed assets
(2)
65,157
66,606
166
42
65,323
66,648
(1)
At November 30, 2009 and August 31, 2009.
(2)
Includes capital leases that are excluded from the consolidated statements of cash flows.
- 26 -
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2009
(unaudited)
(amounts in tables are in thousands of dollars, except number of shares and per share data)
2. Segmented Information (continued)
The following tables set out certain geog raphic market information based on client location:
Three months ended November 30,
2009 2008
$ $
Revenue
Canada 274,998 246,311
Europe 53,005 62,064
328,003 308,375
November 30, 2009 August 31, 2009
$ $
Fixed assets
Canada 1,025,914 1,015,298
Europe 286,135 290,471
1,312,049 1,305,769
Intangible assets
Canada 1,046,581 1,047,774
Europe
1,046,581 1,047,774
Goodwill
Canada 116,243 116,243
Europe 33,372 37,452
149,615 153,695
3. Amortization
Three months ended November 30,
2009 2008
$ $
(restated)
Fixed assets 61,701 54,406
Deferred charges 2,807 2,607
Intangible assets 1,193 3,869
65,701 60,882
- 27 -
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2009
(unaudited)
(amounts in tables are in thousands of dollars, except number of shares and per share data)
4. Financial expense
Three months ended November 30,
2009 2008
$ $
Interest on long-term debt 15,901 20,270
Foreign exchange losses (gains) (488) 3,784
Amortization of deferred transaction costs 407 407
Other 457 (683)
16,277 23,778
5. Income Taxes
Three months ended November 30,
2009 2008
$ $
(restated)
Current (20,222) 7,024
Future 6,404 2,615
(13,818) 9,639
The following table provides the reconciliation between Canadian statutory federal and provincial income taxes and
the consolidated income ta x expense:
Three months ended November 30,
2009 2008
$ $
(restated)
Income before income taxes 47,285 36,051
Combined income tax rate 31.43% 32.46%
Income taxes at combined income tax rate 14,862 11,702
Adjustments for losses or income subject to lower or higher tax rates
(2,422) (194)
Decrease in future income taxes as a result of decrease in substantively enacted tax rates (29,782)
Utilization of pre-acquisition tax losses 4,432
Income taxes arising from non-deductible expenses 209 117
Effect of foreign income tax rate differences 247 (1,604)
Other (1,364) (382)
Income taxes at effective income tax rate (13,818) 9,639
- 28 -
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2009
(unaudited)
(amounts in tables are in thousands of dollars, except number of shares and per share data)
6. Earnings per Share
The following table provides the reconciliation between basic and diluted ea rnings (loss) per share:
Three months ended November 30,
2009 2008
$ $
(restated)
Net income 22,748 10,861
Weighted average number of multiple voting and subordinate voting shares outstanding 16,721,277 16,701,699
Effect of dilutive stock options
(1)
6,594 20,386
Effect of dilutive incentive share units 64,053 38,747
Weighted average number of diluted multiple voting and subordinate voting shares outstanding 16,791,924 16,760,832
Earnings per share
Basic 1.36 0.65
Diluted 1.35 0.65
(1)
For the three month period ended November 30, 2009, 32,782 stock options (32,782 in 2008) were excluded from the calculation of diluted earnings per
share as the exercise price of the options was greater than the average share price of the subordinate voting shares.
7. Goodwill and Other Intangible Assets
November 30, 2009 August 31, 2009
$ $
Customer relationships 31,689 32,882
Broadcasting licenses
25,120 25,120
Customer base
989,772 989,772
1,046,581 1,047,774
Goodwill
149,615 153,695
1,196,196 1,201,469
- 29 -
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2009
(unaudited)
(amounts in tables are in thousands of dollars, except number of shares and per share data)
7. Goodwill and Other Intangible Assets (continued)
a) Intangible assets
During the first three months, intangible assets variations were as follows:
Customer
relationships
Broadcasting
licenses
Customer
Base
Total
$ $ $ $
Balance as at August 31, 2009 32,882 25,120 989,772 1,047,774
Amortization (1,193) (1,193)
Balance as at November 30, 2009 31,689 25,120 989,772 1,046,581
b) Goodwill
During the first three months, goodwill variation was as follows:
$
Balance as at August 31, 2009 153,695
Recognition of pre-acquisition tax losses (4,432)
Foreign currency translation adjustment 352
Balance as at November 30, 2009 149,615
On November 25, 2009, Cogeco Cable Inc.’s subsidiary, Cabovisão-Televisão por Cabo, S.A., received approval to
its request for preservation of tax losses for the years preceeding the 2006 taxation year. Accordingly, the recognition
of these pre-acquisition tax losses in the three month period ended November 30, 2009, has reduced goodwill by
approximately $4.4 million.
- 30 -
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2009
(unaudited)
(amounts in tables are in thousands of dollars, except number of shares and per share data)
8. Long-Term Debt
Maturity
Interest rate November 30, 2009 August 31, 2009
% $ $
Parent company
Term Facility 2011
3.02
(1)
5,905 9,382
Obligations under capital leases 2013
6.61 – 9.29 86 91
Subsidiaries
Term Facility
Term loan – €78,413,625 2011
1.19
(1)(2)
123,949 122,674
Term loan – €17,358,700 2011
1.19
(1)(2)
27,423 27,142
Revolving loan – €40,000,000 2011
1.19
(1)
63,408 62,792
Revolving loan 2011
2.25 15,000
Senior Secured Notes Series B 2011
7.73 174,582 174,530
Senior Secured Notes
Series A – US$190 million 2015
7.00 199,169 206,606
Series B 2018
7.60 54,584 54,576
Senior Secured Debentures Series 1 2014
5.95 296,922 296,860
Senior Unsecured Debenture 2018
5.94 99,791 99,786
Obligations under capital leases 2013
6.73 – 9.93 8,422 9,496
Other
25 29
1,069,266 1,063,964
Less current portion 44,693 44,706
1,024,573 1,019,258
(1)
Interest rate on debt as at November 30, 2009, including stamping fees.
(2)
On January 21, 2009, the Company’s subsidiary, Cogeco Cable Inc., entered into a swap agreement with a financial institution to fix the floating benchmark
interest rate with respect to the Euro-denominated Term Loan facilities for a notional amount of €111.5 million. The interest swap rate to hedge the Term
Loans has been fixed at 2.08% until their maturity on July 28, 2011. The notional value of the swap will decrease in line with the amortization schedule of the
Term Loans. In addition to the interest swap rate of 2.08%, the Company’s subsidiary will continue to pay the applicable margin on these Term Loans in
accordance with the Term Facility.
- 31 -
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2009
(unaudited)
(amounts in tables are in thousands of dollars, except number of shares and per share data)
9. Capital Stock
Authorized, an unlimited number
Preferred shares of first and second rank, could be issued in series and non-voting, except when specified in the
Articles of Incorporation of the Company or in the Law.
Multiple voting shares, 20 votes per share.
Subordinate voting share, 1 vote per share.
Issued
November 30, 2009 August 31, 2009
$ $
1,842,860 multiple voting shares 12 12
14,942,470 subordinate voting shares 120,994 120,994
121,006 121,006
Stock-based plans
The Company offers, for the benefit of its employees and those of its subsidiaries, an Employee Stock Purchase Plan
and a Stock Option Plan for certain executives, which are described in the Company’s annual consolidated financial
statements. During the first three months of 2010 and 2009, no stock options were granted to employees by
COGECO Inc. However, the Company’s subsidiary, Cogeco Cable Inc., granted 63,695 stock options
(133,381 in 2008) with an exercise price of $31.82 ($34.46 in 2008), of which 33,266 stock options (29,711 in 2008)
were granted to COGECO Inc.’s employees. As a result, a compensation expense of $337,000 ($101,000 in 2008)
was recorded for the three month period ended November 30, 2009.
The weighted average fair value of stock options granted by the Company’s subsidiary, Cogeco Cable Inc., for the
three month period ended November 30, 2009 was $8.11 ($8.96 in 2008) per option. The weighted average fair value
was estimated at the grant date for purposes of determining stock-based compensation expense using the binomial
option pricing model base d on the following assumptions:
2009 2008
% %
Expected dividend yield
1.49 1.40
Expected volatility
29 29
Risk-free interest rate
2.67 4.22
Expected life in years
4.8 4.0
- 32 -
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2009
(unaudited)
(amounts in tables are in thousands of dollars, except number of shares and per share data)
9. Capital Stock (continued)
At November 30, 2009, the Company had outstanding stock options providing for the subscription of 79,650
subordinate voting shares. These stock options can be exercised at various prices ranging from $20.95 to $37.50 and
at various dates up to October 1 9, 2011.
The Company also offers a senior executive and designated employee incentive share unit plan (the “Incentive Share
Unit Plan”) which is described in the Company’s annual consolidated financial statements. Effective October 29, 2009,
the Company’s subsidiary, Cogeco Cable Inc., established a similar plan for senior executives and designated
employees. During the first three months of 2010, the Company granted 41,571 (17,702 in 2008) and Cogeco Cable
Inc. granted 55,094 Incentive Share Units. The Company and its subsidiary instructed the trustee to purchase 41,571
and 55,094 subordinate voting shares on the stock market. These shares were purchased in November 2009 for cash
considerations aggregating $1,049,000 ($326,000 in 2008) and $1,744,000, respectively, and are held in trust for
participants until they are completely vested. The Trusts, considered as variable interest entities, are consolidated in
the Company’s financial statements with the value of the acquired shar es presented as treasury shares in reduction of
capital stock or non-controlling interest. A compensation expense of $187,000 ($108,000 in 2008) was recorded for
the three month period ended November 30, 2009 related to these plans.
The Company and its subsidiary, Cogeco Cable Inc., offer deferred share unit plans (“DSU Plans”) which are
described in the Company’s annual consolidated financial statements. During the first quarter of 2010, the Company
and its subsidiary did not award any deferred share unit to the participants in connection with the DSU Plans. A
compensation expense of $184,000 (reduction of expense of $120,000 in 2008) was recorded for the three month
period ended Novem ber 30, 2009 for the liabilities related to these p lans.
10. Accumulated Other Comprehensive Income
Translation of a net
investment in self-
sustaining foreign
subsidiaries
Cash flow hedges
Total
$ $ $
Balance as at August 31, 2009 7,634 (1,306) 6,328
Other comprehensive income 206 875 1,081
Balance as at November 2009 7,840 (431) 7,409
- 33 -
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2009
(unaudited)
(amounts in tables are in thousands of dollars, except number of shares and per share data)
11. Statements of Cash Flows
a) Changes in non-cash operating items
Three months ended November 30,
2009 2008
$ $
Accounts receivable (5,494) (3,189)
Income taxes receivable (20,514) (2,885)
Prepaid expenses (1,105) 1,337
Accounts payable and accrued liabilities (72,789) (44,644)
Income tax liabilities (39,224) (17,001)
Deferred and prepaid revenue and other liabilities 2,198 1,226
(136,928) (65,156)
b) Cash and cash equivalents
November 30, 2009 August 31, 2009
$ $
Cash 7,173 23,760
Cash equivalents
(1)
10,304 15,698
17,477 39,458
(1)
Term deposit of €6,500,000, 0.30%, maturing on December 4, 2009 (€10,000,000, 0.67%, maturing on September 14, 2009 at August 31, 2009).
c) Other information
Three months ended November 30,
2009 2008
$ $
Fixed asset acquisitions through capital leases 141 939
Financial expense paid 21,047 21,751
Income taxes paid 39,517 26,916
- 34 -
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2009
(unaudited)
(amounts in tables are in thousands of dollars, except number of shares and per share data)
12. Employees Future Benefits
The Company and its Canadian subsidiaries offer their employees contributory defined benefit pension plans, a
defined contribution pension plan or collective registered retirement savings plans, which are described in the
Company’s annual con solidated financial statements. The total expenses related to these plans are as follows:
Three months ended November 30,
2009 2008
$ $
Contributory defined benefit pension plans 870 747
Defined contribution pension plan and collective registered retirement savings plans 1,126 923
1,996 1,670
13. Financial and Capital Management
a) Financial management
Management’s objectives are to protect COGECO Inc. and its subsidiaries against material economic exposures and
variability of results and against certain financial risks including credit risk, liquidity risk, interest rate risk and foreign
exchange risk.
Credit risk
Credit risk represents the risk of financial loss for the Company if a customer or counterparty to a financial asset fails
to meet its contractual obligations. The Company is exposed to credit risk arising from the derivative financial
instruments, cash and cash equivalents and trade accounts receivable, the maximum exposure of which is
represented by the carrying amounts reported on the balance sheet.
Credit risk from the derivative financial instruments arises from the possibility that counterparties to the cross-currency
swap and interest rate swap agreements may default on their obligations in instances where these agreements have
positive fair values for the Company. The Company reduces this risk by completing transactions with financial
institutions that carry a credit rating equal to or superior to its own credit rating. The Company assesses the
creditworthiness of the counterparties in order to minimize the risk of counter parties default under the agreements. At
November 30, 2009, management believes that the credit risk relating to its swaps is minimal, since the lowest credit
rating of the counterparties to the agree m ents is “A”.
Cash and cash equivalents consist mainly of highly liquid investments, such as money market deposits. The
Company has deposited the cash and cash equivalents with reputable financial institutions, from which management
believes the risk of loss to be remote.
- 35 -
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2009
(unaudited)
(amounts in tables are in thousands of dollars, except number of shares and per share data)
13. Financial and Capital Management (continued)
The Company is also exposed to credit risk in relation to its trade accounts receivable. In the current global economic
environment, the Company’s credit exposure is higher but it is difficult to predict the impact this could have on the
Company’s accounts receivable balances. To mitigate such risk, the Company continuously monitors the financial
condition of its customers and reviews the credit history or worthiness of each new major customer. At November 30,
2009, no customer balance represents a significant portion of the Company’s consolidated trade receivables. The
Company establishes an allowance for doubtful accounts based on specific credit risk of its customers by examining
such factors as the number of overdue days of the customer’s balance outstanding as well as the customer’s
collection history. The Company believes that its allowance for doubtful accounts is sufficient to cover the related
credit risk. The Company has credit policies in place and has established various credit controls, including credit
checks, deposits on accounts and advan ce billing, and has also established procedur es to suspend the availability of
services when customers have fully utilized approved credit limits or have violated existing payment terms. Since the
Company has a large and diversified clientele dispersed throughout its market area in Canada and Portugal, there is
no significant concentration of credit risk. The following table provides further details on the Company’s accounts
receivable balances:
November 30, 2009 August 31, 2009
$ $
Trade accounts receivable 81,815 75,044
Allowance for doubtful accounts
(16,779) (17,261)
65,036 57,783
Other accounts receivable
6,623 8,293
71,659 66,076
The following table provides further details on trade accounts receivable, net of allowance for doubtful accounts.
Trade accounts receivable past due is defined as amount outstanding beyond normal credit terms and conditions for
the respective customers. A large portion of Cogeco Cable Inc.’s customers are billed in advance and are required to
pay before their services are rendered. The Company considers amount outstanding at the due date as trade
accounts receivable past due.
November 30, 2009 August 31, 2009
$ $
Net trade accounts receivable not past due 46,434 43,136
Net trade accounts receivable past due
18,602 14,647
65,036 57,783
- 36 -
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2009
(unaudited)
(amounts in tables are in thousands of dollars, except number of shares and per share data)
13. Financial and Capital Management (continued)
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. The
Company manages liquidity risk through the management of its capital structure and access to different capital
markets. It also manages liquidity risk by continuously monitoring actual and projected cash flows to ensure sufficient
liquidity to meet its obligations when due. At November 30, 2009, the available amount of the Company’s Term
Facilities was $636.2 million. Management believes that the committed Term Facilities will, until their maturities in July
2011 and December 2011, provide sufficient liquidity to manage its long-term debt maturities and support working
capital requirements.
The following table summarizes the contractual maturities of the financial liabilities and related capital amo unts:
2010 2011 2012 2013 2014 Thereafter Total
$ $ $ $ $ $ $
Bank indebtedness 46,740 46,740
Accounts payable and accrued liabilities 183,171 183,171
Long-term debt
(1)
56,443 173,809 181,000 300,000 355,564 1,066,816
Derivative financial instruments
Cash outflows (Canadian dollar) 201,875 201,875
Cash inflows (Canadian dollar
equivalent of US dollar)
(200,564)
(200,564)
Obligations under capital leases
(2)
2,892 3,339 2,324 915 41 9,511
289,246 177,148 183,324 915 300,041 356,875 1,307,549
(1)
Principal excluding obligations under capital leases.
(2)
Including interest.
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 amount and interest rate prevailing on the
current debt at November 30, 2009 and their respective maturities:
2010 2011 2012 2013 2014 Thereafter Total
$ $ $ $ $ $ $
Interest payments on long-term debt 43,690 57,606 44,313 42,005 37,543 53,054 278,211
Interest payments on derivative
financial instruments
14,081 17,473 14,614 14,614 14,614 15,831 91,227
Interest receipts on derivative financial
instruments
(11,841) (15,241) (14,039) (14,039) (14,039) (15,209) (84,408)
45,930 59,838 44,888 42,580 38,118 53,676 285,030
- 37 -
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2009
(unaudited)
(amounts in tables are in thousands of dollars, except number of shares and per share data)
13. Financial and Capital Management (continued)
Interest rate risk
The Company is exposed to interest rate risks for both fixed interest rate and oating interest rate instruments.
Fluctuations in interest rates will have an effect on the valuation and collection or repayment of these instruments. At
November 30, 2009, all of the Company’s long-term debt was at fixed rate, except for the Company’s Term Facilities.
However, on January 21, 2009, the Company’s subsidiary, Cogeco Cable Inc., entered into a swap agreement with a
financial institution to fix the floating benchmark interest rate with respect to the Euro-denominated Term Loan
facilities for a notional amount of €111.5 million. The interest swap rate to hedge the Term Loans has been fixed at
2.08% until their maturity on July 28, 2011. The notional value of the swap will decrease in line with the amortization
schedule of the Term Loans. In addition to the interest swap rate of 2.08%, the Company’s subsidiary will continue to
pay the applicable margin on these Term Loans in accordance with the Term Facility. The Company’s subsidiary
elected to apply cash flow hedge accounting on this derivative financial instrument. The sensitivity of the Company’s
annual financial expense to a variation of 1% in the interest rate applicable to the Term Facilities is approximately
$0.8 million based on the current debt at November 30, 2009 and taking into consideration the effect of the interest
rate swap agreement.
Foreign exchange risk
The Company is exposed to foreign exchange risk related to its long-term debt denominated in US dollars. In order to
mitigate this risk, the Company has established guidelines whereby currency swap agreemen ts 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 Company’s subsidiary, Cogeco Cable Inc., 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 Company’s subsidiary elected to apply
cash flow hedge accounting on these derivative financial instruments.
The Company is also exposed to foreign exchange risk on cash and cash equivalents, bank indebtedness and
accounts payable denominated in US dollars or Euros. At November 30, 2009, cash and cash equivalents
denominated in US dollars amounted to US$2,309,000 (US$5,555,000 at August 31, 2009) while accounts payable
denominated in US dollars amounted to US$4,014,000 (US$14,997,000 at August 31, 2009). At November 30, 2009,
Euro-denominated cash and cash equivalents amounted to €607,000 (bank indebtedness of €299,000 at August 31,
2009) while accounts payable denominated in Euros amounted to €146,000 (€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 $0.1 million.
Furthermore, Cogeco Cable Inc.’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-Televisão por Cabo,
S.A. was borrowed directly in Euros. At November 30, 2009, the net investment amounted to €175,302,000
(€183,220,000 at August 31, 2009) while long-term debt denominated in Euros amounted to €135,772,000
(€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 November 30, 2009 was $1.5852 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 $2 million.
- 38 -
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2009
(unaudited)
(amounts in tables are in thousands of dollars, except number of shares and per share data)
13. Financial and Capital Management (continued)
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 carrying values of obligations under capital leases approximate the fair value of these nancial instruments due to
their terms.
November 30, 2009 August 31, 2009
Carrying value
Fair value Carrying value Fair value
$ $ $ $
Long-term debt 1,069,266 1,160,418 1,063,964 1,126,449
b) Capital management
The Company’s objectives in managing capital are to ensure su fficient liquidity to support the capital requirements of
its various businesses, including growth opportunities. The Company manages its capital structure and makes
adjustments in light of general economic conditions, the risk characteristics of the underlying assets and the
Company’s working capital requirements. Management of the capital structure involves the is suance of new debt, the
repayment of existing debts using cash g enerated by operations and the level of distribution to shareholders.
The capital structure of the Company is composed of shareholders’ equity, bank indebtedness, long-term debt and
assets or liabilities related to derivative financial instru ments.
The provisions under the Term Facilities provide for restrictions on the operations and activities of the Company.
Generally, the most significant restrictions relate to permitted investments and dividends on multiple and subordinate
voting shares, as well as incurrence and maintenance of certain financial ratios primarily linked to the operating
income before amortization, financial expense and total indebtedness. At November 30, 2009, and August 31, 2009,
the Company was in compliance with all debt covenants and was not subject to any other externally imposed capital
requirements.
- 39 -
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2009
(unaudited)
(amounts in tables are in thousands of dollars, except number of shares and per share data)
13. Financial and Capital Management (continued)
The following table summarizes certain of the key ratios used to monitor and manage the Company’s capital structure:
November 30, 2009 August 31, 2009
(restated)
Net indebtedness
(1)
/ Shareholders’ equity 3.1 3.1
Net indebtedness
(1)
/ Operating income before amortization
(2)
2.1 2.0
Operating income before amortization
(2)
/ Financial expense
(2)
8.3 7.3
(1)
Net indebtedness is defined as the total of bank indebtedness, principal on long-term debt and obligations under derivative financial instruments, less cash
and cash equivalents.
(2)
Calculation based on operating income before amortization for the last twelve month period ended November 30, 2009, and August 31, 2009.
14. Comparative Figures
Certain comparative figures have been reclas sified to conform to the current year’s presentation.