Cogeco Cable Inc.
TSX : CCA

Cogeco Cable Inc.

July 14, 2015 18:49 ET

Cogeco Cable Inc. Releases Its Financial Results for Fiscal 2015 Third Quarter

- Third quarter revenue increased by 4%, or $20 million, to reach $516.4 million;

- Adjusted EBITDA(1) increased by $10.4 million, or 4.5%, to reach $239.8 million;

- The Corporation's wholly-owned American subsidiary, Atlantic Broadband, entered into a definitive agreement on June 8, 2015, to purchase MetroCast Communications of Connecticut, LLC; and

- Cogeco Cable announces its fiscal 2016 preliminary financial guidelines and expects adjusted EBITDA to grow between 4% to 7% and free cash flow between 15% to 25%.

MONTRÉAL, QUÉBEC--(Marketwired - July 14, 2015) - Today, Cogeco Cable Inc. (TSX:CCA) ("Cogeco Cable" or the "Corporation") announced its financial results for the third quarter of fiscal 2015, ended May 31, 2015.

For the third quarter and first nine months of fiscal 2015:

  • Third-quarter revenue increased by $20.0 million, or 4.0%, to reach $516.4 million mainly driven by growth of 19.4% in the American cable services segment as a result of favorable exchange rates compared to last year, Primary service unit ("PSU")(2) growth as well as rate increases. For the nine-month period ended May 31, 2015, revenue increased by $65.5 million, or 4.5% to reach over $1.5 billion driven by growth of 0.7% in the Canadian cable services segment, 17.7% in the American cable services segment and 3.2% in the Enterprise data services segment. Revenue increased mainly from the improvement in the American and the Canadian cable services segments combined with favorable foreign exchange rates for our foreign operations compared to last year;

  • Adjusted EBITDA increased by $10.4 million, or 4.5%, to reach $239.8 million compared to the third quarter of fiscal 2014 mainly as a result of the improvement of the American cable services segment combined with favorable foreign exchange rate. For the first nine months, adjusted EBITDA increased by $27.4 million, or 4.1%, to reach $689.9 million compared to the first nine months of the prior year. The progression resulted mainly from the improvement of all the operating segments as well as the favorable foreign exchange rates for our foreign operations compared to the same period of last year;

  • Operating margin(1) increased from 46.2% to 46.4% in the third quarter mainly as a result of the improvement in the Enterprise data services segment. Operating margin slightly decreased to 45.3% from 45.5% in the first nine months compared to the same periods of the prior year mainly as a result of the higher proportion of the American cable services segment which generates lower margin, partly offset by the improvement in the Canadian cable services and the Enterprise data services segments;

  • Third-quarter profit for the period amounted to $64.1 million, or $1.31 per share, compared to $35.5 million, or $0.73 per share in fiscal 2014, an increase of 80.6%. For the first nine months of fiscal 2015, profit for the period amounted to $179.8 million, or $3.68 per share, compared to $145.6 million, or $2.99 per share for the comparable period of last year, representing an increase of 23.5%. Profit progression for both periods is mainly due to the improvement in adjusted EBITDA combined with last year's impairment of property, plant and equipment of $32.2 million, partly offset by increases in financial expense and income taxes;

  • Third-quarter free cash flow(1) decreased by $15.3 million, or 16.8%, to reach $75.8 million compared to $91.1 million in the third quarter of fiscal 2014. For the nine-month period ended May 31, 2015, free cash flow decreased by $38.6 million to reach $213.9 million compared to $252.5 million for the same period of fiscal 2014. The decline for both periods is mainly due to the increases in acquisitions of property, plant and equipment and in financial expense, partly offset by the improvement of adjusted EBITDA. The increase in capital expenditures is essentially attributable to the construction by Cogeco Data Services of all remaining pods (pods 2, 3 and 4) at the Barrie, Ontario data centre and of pod 1 at a new data centre in Montréal, Québec;

  • Fiscal 2015 third-quarter cash flow from operating activities reached $197.3 million compared to $184.4 million, representing an increase of $12.8 million, or 7.0%, compared to fiscal 2014 third-quarter. The variation for the quarter is mainly due to the improvement in adjusted EBITDA and in changes in non-cash operating activities. For the first nine months, cash flow from operating activities decreased by $11.6 million to reach $417.6 million compared to $429.2 million for the same period of fiscal 2014. The decrease for the period is mainly attributable to the decrease in changes in non-cash operating activities and the increase in financial expense paid, partly offset by the improvement of adjusted EBITDA;

  • A quarterly eligible dividend of $0.35 per share was paid to the holders of subordinate and multiple voting shares, representing an increase of $0.05 per share, or 16.7%, compared to a dividend of $0.30 per share paid in the third quarter of fiscal 2014. Dividend payments in the first nine months totaled $1.05 per share in fiscal 2015 compared to$0.90 in the comparable period of fiscal 2014;

  • The Corporation released its fiscal 2016 preliminary financial guidelines and expects adjusted EBITDA to grow between 4% to 7% and free cash flow between 15% to 25% while the capital intensity should range between 20% and 20.5%;

  • At its July 14, 2015 meeting, the Board of Directors of Cogeco Cable declared a quarterly eligible dividend of $0.35 per share for multiple voting and subordinate voting shares payable on August 11, 2015;

  • On July 14, 2015, Cogeco Cable Inc. and its parent company, COGECO Inc. ("COGECO"), amended the Management Services Agreement in place since 1993, which was amended once eighteen years ago in 1997. The amendment takes into account the significant expansion of the business activities of Cogeco Cable in recent years, both by virtue of internal growth and its several acquisitions and a better alignment of management fees with the costs, time and resources committed by COGECO to provide such services to the Corporation. Starting in fiscal 2016, Cogeco Cable Inc. will pay monthly fees equal to 0.85% of its consolidated revenue to COGECO;

  • On June 8, 2015, Atlantic Broadband, a wholly-owned subsidiary of Cogeco Cable Inc., entered into an agreement with MetroCast Communications of Connecticut, LLC ("MetroCast Connecticut") and its parent Harron Communications, L.P. to acquire substantially all of the assets of MetroCast Connecticut which serves about 23,000 Television, 22,000 High Speed Internet and 8,000 Telephony customers. The transaction is valued at US$200 million, subject to customary closing adjustments, and expected to be financed through non-recourse debt financing at Atlantic Broadband. The transaction is subject to usual closing conditions, regulatory approvals and other customary conditions. The Corporation expects the transaction to close around September 1, 2015; and

  • As a part of a process initiated in the previous months, the Corporation announced, on May 5, 2015, the restructuring of its Enterprise data services segment by combining the strengths of its two subsidiaries Cogeco Data Services and Peer 1 Hosting. This combination represents a growth opportunity for Cogeco Cable by bringing the teams and capabilities together and therefore, positioning it to increase operational efficiencies, streamline the product offerings and leverage the global footprint. The restructuring process should result in estimated annual costs savings of $10 million. In addition, the Corporation revised its financial guidelines for the 2015 fiscal year to reflect the integration and restructuring costs estimated at $15 million of which $6.7 million was recognized for the first nine months ended May 31, 2015. Expected profit for the year was decreased by $10 million to reach $250 million and free cash flow by $15 million to reach $275 million to reflect such costs.

(1) The indicated terms do not have standard definitions prescribed by IFRS and therefore, may not be comparable to similar measures presented by other companies. For more details, please consult the "Non-IFRS financial measures" section of the Management's discussion and analysis ("MD&A").
(2) Represents the sum of Television, High Speed Internet ("HSI") and Telephony service customers.

"Our results are in line with expectations for the third quarter of fiscal year 2015," declared Louis Audet, President and Chief Executive Officer of Cogeco Cable Inc. "We continue to focus on expanding our service offering and on improving our customer experience while maintaining a rigorous cost control discipline in how we leverage our spending as well as continuing to seize on growth opportunities. We are also excited to continue our strategic expansion in the United States through our Atlantic Broadband subsidiary's recent agreement to purchase Metrocast Connecticut. In our Enterprise Data Services segment, we have positioned ourselves for growth this past quarter, by joining the forces of our Cogeco Data Services and Peer 1 Hosting subsidiaries, building on our current strengths in this thriving sector," concluded Louis Audet.

ABOUT COGECO CABLE

Cogeco Cable Inc. (corpo.cogeco.com) is a telecommunications corporation. It is the 11th largest cable operator in North America operating in Canada under the Cogeco Cable Canada name in Québec and Ontario, and in the United States under the Atlantic Broadband name in Western Pennsylvania, South Florida, Maryland/Delaware and South Carolina. Its two-way broadband fibre networks provide to its residential and business customers analogue and digital television, high speed Internet and telephony services. Through its combined subsidiaries, Cogeco Data Services and Peer 1 Hosting, Cogeco Cable Inc. provides to its business customers a suite of information technology services (data transport, colocation, cloud and managed services and dedicated hosting), with 20 data centres as well as more than 50 points-of-presence in North America and Europe. Cogeco Cable Inc.'s subordinate voting shares are listed on the Toronto Stock Exchange (TSX:CCA).

Analyst Conference Call: Wednesday, July 15, 2015 at 11:00 a.m. (Eastern Daylight Time)
Media representatives may attend as listeners only.
Please use the following dial-in number to have access to the conference call by dialing five minutes before the start of the conference:
Canada/United States Access Number: 1 800-524-8950
International Access Number: + 1 416-260-0113
Confirmation Code: 1551128
By Internet at corpo.cogeco.com/cca/en/investors/
A rebroadcast of the conference call will be available until July 21, 2015, by dialing:
Canada and United States access number: 1 888-203-1112
International access number: + 1 647-436-0148
Confirmation code: 1551128

SHAREHOLDERS' REPORT

Three and nine-month periods ended May 31, 2015

FINANCIAL HIGHLIGHTS

(in thousands of dollars, except percentages and per share data) Three months ended May 31, Nine months ended May 31,
2015 2014 Change 2015 2014 Change
$ $ % $ $ %
Operations
Revenue 516,426 496,448 4.0 1,522,897 1,457,436 4.5
Adjusted EBITDA(1) 239,763 229,389 4.5 689,887 662,527 4.1
Operating margin(1) 46.4 % 46.2 % - 45.3 % 45.5 % -
Impairment of property, plant and equipment - 32,197 (100.0 ) - 32,197 (100.0 )
Profit for the period 64,149 35,514 80.6 179,764 145,593 23.5
Cash Flow
Cash flow from operating activities 197,279 184,435 7.0 417,596 429,173 (2.7 )
Cash flow from operations(1) 179,563 175,595 2.3 523,194 502,872 4.0
Acquisitions of property, plant and equipment, intangible and other assets
103,718

84,452

22.8

309,274

250,347

23.5
Free cash flow(1) 75,845 91,143 (16.8 ) 213,920 252,525 (15.3 )
Financial Condition(2)
Property, plant and equipment 1,883,871 1,830,971 2.9
Total assets 5,462,456 5,173,741 5.6
Indebtedness(3) 2,924,245 2,744,746 6.5
Shareholders' equity 1,677,807 1,508,256 11.2
Capital intensity(1) 20.1 % 17.0 % - 20.3 % 17.2 % -
Per Share Data(4)
Earnings per share
Basic 1.31 0.73 79.5 3.68 2.99 23.1
Diluted 1.30 0.72 80.6 3.64 2.96 23.0
(1) The indicated terms do not have standardized definitions prescribed by International Financial Reporting Standards ("IFRS") and therefore, may not be comparable to similar measures presented by other companies. For more details, please consult the "Non-IFRS financial measures" section of the Management Discussion and Analysis ("MD&A").
(2) At May 31, 2015 and August 31, 2014.
(3) Indebtedness is defined as the aggregate of bank indebtedness, principal on long-term debt and derivative financial instruments.
(4) Per multiple and subordinate voting share.

MANAGEMENT'S DISCUSSION AND ANALYSIS ("MD&A")

Three and nine-month periods ended May 31, 2015

FORWARD-LOOKING STATEMENTS

Certain statements in this Management's Discussion and Analysis ("MD&A") may constitute forward-looking information within the meaning of securities laws. Forward-looking information may relate to Cogeco Cable'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 Corporation'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 Cable believes are reasonable as of the current date. While management considers these assumptions to be reasonable based on information currently available to the Corporation, they may prove to be incorrect. The Corporation cautions the reader that the economic downturn experienced over the past few years makes 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 Corporation's expectations. It is impossible for Cogeco Cable to predict with certainty the impact that the current economic uncertainties 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 Corporation's 2014 annual MD&A) that could cause actual results to differ materially from what Cogeco Cable currently expects. These factors include namely risks pertaining to markets and competition, technology, regulatory developments, operating costs, information systems, disasters or other contingencies, financial risks related to capital requirements, human resources, controlling shareholder and holding structure, many of which are beyond the Corporation'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 other date. While management may elect to, the Corporation is under no obligation and does not undertake to update or alter this information at any particular time, except as may required by law.

All amounts are stated in Canadian dollars unless otherwise indicated. This report should be read in conjunction with the Corporation's condensed interim consolidated financial statements and the notes thereto for the three and nine-month periods ended May 31, 2015, prepared in accordance with the International Financial Reporting Standards ("IFRS") and the MD&A included in the Corporation's 2014 Annual Report.

CORPORATE OBJECTIVES AND STRATEGIES

Cogeco Cable Inc.'s ("Cogeco Cable" or the "Corporation") objectives are to increase profitability and create shareholder value. To achieve these objectives, the Corporation has developed strategies that focus on expanding its service offerings and enhancing its existing services or bundles, improving the networks, improving customer experience and business processes as well as keeping a sound capital management and a strict control over spending. In addition to sustain the organic growth, the Corporation continues to seek growth opportunities by acquisition. The Corporation measures its performance, with regard to these objectives by monitoring adjusted EBITDA(1), operating margin(1), free cash flow(1) and capital intensity(1).

KEY PERFORMANCE INDICATORS

ADJUSTED EBITDA AND OPERATING MARGIN

For the nine-month period ended May 31, 2015, adjusted EBITDA increased by 4.1% to reach $689.9 million compared to the same period of fiscal 2014 and operating margin slightly decreased to 45.3% from 45.5%. Progression in the adjusted EBITDA is mainly attributable to the improvement of all the operating segments combined with favorable foreign exchange rates benefiting our foreign operations compared to the same period of last year. Cogeco Cable's operating margin slightly decreased essentially due to the higher proportion of the American cable services segment which generates lower operating margin, partly offset by the improvement in the Canadian cable services and the Enterprise data services segments.

FREE CASH FLOW

For the nine-month period ended May 31, 2015, Cogeco Cable reported free cash flow of $213.9 million, a decrease of $38.6 million compared to $252.5 million for the same period of the previous fiscal year. The decrease is mostly attributable to the increases in acquisitions of property, plant and equipment and in financial expense, partly offset by the improvement of adjusted EBITDA. In addition, as a result of the restructuring of its Enterprise data services segment and the associated costs, the Corporation revised its free cash flow projections from $290 million to $275 million. For further details, please consult the fiscal 2015 revised projections in the "Fiscal 2015 revised financial guidelines" section.

CAPITAL INTENSITY AND ACQUISITIONS OF PROPERTY, PLANT AND EQUIPMENT, INTANGIBLE AND OTHER ASSETS

During the nine-month period ended May 31, 2015, the acquisitions of property, plant and equipment, intangible and other assets amounted to $309.3 million and revenue to over $1.5 billion for a capital intensity ratio of 20.3% compared to 17.2% in the same period of the prior year. Capital intensity ratio has increased mainly as result of higher acquisitions of property, plant and equipment, intangible and other assets in all of our operating segments compared to the same period of the previous year. However, the acquisitions of property, plant and equipment and the capital intensity are still in line with the Corporation's financial guidelines.

In the Canadian cable services segment, the acquisitions of property, plant and equipment, intangible and other assets amounted to $160.2 million and revenue to $946.7 million for a capital intensity of 16.9% compared to acquisitions of property, plant and equipment, intangible and other assets of $130.0 million and revenue of $939.8 million for a capital intensity of 13.8% for the same period of the prior year. The increase is mainly attributable to additional customer premise equipment as a result of the launch of TiVo digital advanced television services on November 3, 2014 in Ontario and on March 30, 2015 in Québec combined with the increase in line extensions, partly offset by capital expenditure decreases due to the timing of certain initiatives.

In the American cable services segment, the acquisitions of property, plant and equipment, intangible and other assets amounted to $61.0 million and revenue amounted to $343.7 million for a capital intensity of 17.7% compared to acquisitions of property, plant and equipment, intangible and other assets of $52.7 million and revenue of $292.0 million for a capital intensity of 18.0% for the same period of fiscal 2014. The increase in capital expenditures is mainly due to additional customer premise equipment resulting from the launch in fiscal 2014 of Tivo's digital advanced television services and Primary service units ("PSU")(2) growth combined with the increase in scalable infrastructure to extend and improve the network capacity in some of its areas served. As a result of revenue growth exceeding acquisitions of property, plant and equipment, intangible and other assets growth, capital intensity slightly decreased in fiscal 2015 compared to the previous year.

In the Enterprise data services segment, the acquisitions of property, plant and equipment, intangible and other assets amounted to $88.0 million and revenue to $234.6 million for a capital intensity of 37.5% compared to acquisitions of property, plant and equipment, intangible and other assets of $67.6 million and revenue of $227.3 million for a capital intensity of 29.7% for the same period of the prior year. The increase in capital expenditures is essentially attributable to the construction by Cogeco Data Services of all remaining pods (pods 2, 3 and 4) at the Barrie, Ontario data centre and of pod 1 at a new data centre in Montréal, Québec.

For further details on the Corporation's capital expenditures please refer to the "Cash flow analysis" section.

(1)The indicated terms do not have standardized definitions prescribed by IFRS and therefore, may not be comparable to similar measures presented by other companies. For more details, please consult the "Non-IFRS financial measures" section.
(2)Represents the sum of Television, High Speed Internet ("HSI") and Telephony service customers.

BUSINESS DEVELOPMENTS AND OTHER

On July 14, 2015, Cogeco Cable Inc. and its parent company, COGECO Inc. ("COGECO"), amended the Management Services Agreement in place since 1993, which was amended once eighteen years ago in 1997. The amendment takes into account the significant expansion of the business activities of Cogeco Cable in recent years, both by virtue of internal growth and its several acquisitions and a better alignment of management fees with the costs, time and resources committed by COGECO to provide such services to the Corporation. Starting in fiscal 2016, Cogeco Cable Inc. will pay monthly fees equal to 0.85% of its consolidated revenue to COGECO. For further details on the changes made to the Management Services agreement and the Board process leading up to these changes, please consult the related party transactions sub-section under "Operating and financial results" section.

On June 8, 2015, Atlantic Broadband, a wholly-owned subsidiary of Cogeco Cable Inc., entered into an agreement with MetroCast Communications of Connecticut, LLC ("MetroCast Connecticut") and its parent Harron Communications, L.P. to acquire substantially all of the assets of MetroCast Connecticut which serves about 23,000 Television, 22,000 High Speed Internet and 8,000 Telephony customers. The transaction is valued at US $200 million, subject to customary closing adjustments, and expected to be financed through non-recourse debt financing at Atlantic Broadband. The transaction is subject to usual closing conditions, regulatory approvals and other customary conditions. The Corporation expects the transaction to close around September 1, 2015.

As a part of a process initiated in the previous months, the Corporation announced, on May 5, 2015, the restructuring of its Enterprise data services segment by combining the strengths of its two subsidiaries Cogeco Data Services and Peer 1 Hosting. This combination represents a growth opportunity for Cogeco Cable by bringing the teams and capabilities together and therefore, positioning it to increase operational efficiencies, streamline the product offerings and leverage the global footprint. The restructuring process should result in estimated annual costs savings of $10 million.

OPERATING AND FINANCIAL RESULTS

OPERATING RESULTS

Three months ended Nine months ended
May 31,
2015
May 31,
2014

Change
May 31,
2015
May 31,
2014

Change
(in thousands of dollars, except percentages)$ $ %$ $ %
Revenue516,426 496,448 4.01,522,897 1,457,436 4.5
Operating expenses276,663 267,059 3.6823,133 785,235 4.8
Management fees - COGECO Inc.- - -9,877 9,674 2.1
Adjusted EBITDA239,763 229,389 4.5689,887 662,527 4.1
Operating margin46.4%46.2% 45.3%45.5%

REVENUE

Fiscal 2015 third-quarter revenue increased by $20.0 million, or 4.0%, compared to prior year, to reach $516.4 million mainly driven by growth of 19.4% in the American cable services segment as a result of favorable exchange rates compared to last year, PSU growth and rate increases. For the first nine months of fiscal 2015, revenue amounted to over $1.5 billion, an increase of $65.5 million, or 4.5%, compared to the same period of fiscal 2014 driven by growth of 0.7% in the Canadian cable services segment, 17.7% in the American cable services segment and 3.2% in the Enterprise data services segment. Revenue increased mainly from the improvement in the American cable services segment combined with the favorable foreign exchange rates for our foreign operations compared to the same periods of last year. For further details on the Corporation's revenue, please refer to the "Segmented operating results" section.

OPERATING EXPENSES AND MANAGEMENT FEES

For the third quarter of fiscal 2015, operating expenses increased by $9.6 million, or 3.6%, to reach $276.7 million. For the first nine months of fiscal 2015, operating expenses amounted to $823.1 million, an increase of $37.9 million, or 4.8%, compared to the same period of fiscal 2014. Operating expenses increased for most of our operating units combined with the appreciation of the US dollar and British Pound currency compared to the Canadian dollar, partly offset by cost reduction initiatives. For further details on the Corporation's operating expenses, please refer to the "Segmented operating results" section.

For the third quarter of fiscal 2015 and 2014, no management fees were paid to COGECO Inc. For fiscal 2015, management fees have been set at a maximum of $9.9 million ($9.7 million in 2014), which were fully paid in the first quarter of fiscal 2015. For further details on the Corporation's management fees, please refer to the "Related party transactions" section.

ADJUSTED EBITDA AND OPERATING MARGIN

For the three and nine-month periods ended May 31, 2015, adjusted EBITDA increased by $10.4 million, or 4.5%, to reach $239.8 million, and by $27.4 million, or 4.1%, to reach $689.9 million, respectively, compared to the same periods of the prior year. The progression for the quarter resulted mainly from the improvement of the American cable services segment combined with the favorable foreign exchange rates. The increase for the first nine months resulted mainly from the improvement of all the operating segments combined with the favorable exchange rates compared to the same period of of last year.

Cogeco Cable's third-quarter operating margin increased from 46.2% to 46.4% mainly as a result of the improvement in the Enterprise data services segment. Operating margin slightly decreased to 45.3% from 45.5% for the first nine months of fiscal 2015 compared to the comparable periods of the prior year mainly as a result of the higher proportion of the American cable services segment which generates lower margin, partly offset by the improvement in the Canadian cable and Enterprise data services segments. For further details on the Corporation's adjusted EBITDA and operating margin, please refer to the "Segmented operating results" section.

FIXED CHARGES

Three months ended Nine months ended
May 31,
2015
May 31,
2014

Change
May 31,
2015
May 31,
2014

Change
(in thousands of dollars, except percentages)$$% $$%
Depreciation and amortization116,351117,653(1.1)347,799346,5400.4
Impairment on property, plant and equipment-32,197(100.0)-32,197(100.0)
Financial expense35,74332,03811.6 106,99597,5059.7

For the three and nine-month periods ended May 31, 2015, depreciation and amortization expense amounted to $116.4 million and $347.8 million, respectively, compared to $117.7 million and $346.5 million for the same periods of the prior year. The variation for both periods is mainly due to the appreciation of the US dollar and the British Pound currency compared to Canadian dollar and from additional acquisitions of property, plant and equipment, partly offset by certain intangible assets being fully amortized since the end of the fourth quarter of fiscal 2014.

For the three and nine-month periods ended May 31, 2015, financial expense amounted to $35.7 million and $107.0 million, respectively, representing increases of $3.7 million and $9.5 million compared to the same periods of prior year. Financial expense increased in both periods mainly as a result of the appreciation of the US dollar and British Pound currency compared to the Canadian dollar.

During the third quarter of fiscal 2014, the Corporation's subsidiary, Cogeco Cable Canada, recognized an impairment of $32.2 million of property, plant and equipment, capitalized wages and borrowing costs related to an Internet Protocol Television ("IPTV") solution project which had to be abandoned as a result of unexpected performance issues encountered with the platform.

INCOME TAXES

For the three and nine-month periods ended May 31, 2015, income taxes amounted to $17.9 million and $48.3 million, respectively, compared to $8.8 million and $36.9 million for the same periods in fiscal 2014. The increase for both periods are mostly due to the improvement of adjusted EBITDA, the appreciation of the US dollar and British Pound currency compared to the Canadian dollar and last year's impairment of property, plant and equipment, partly offset by the increase in financial expense explained above compared to the same periods of fiscal 2014.

PROFIT FOR THE PERIOD

For the third quarter of fiscal 2015, profit for the period amounted to $64.1 million, or $1.31 per share, compared to $35.5 million, or $0.73 per share in the third quarter of fiscal 2014. For the nine-month period ended May 31, 2015, profit for the period amounted to $179.8 million, or $3.68 per share, compared to $145.6 million, or $2.99 per share for the comparable period. Profit progression for both periods is mainly due to the improvement in adjusted EBITDA combined with last year's impairment of property, plant and equipment of $32.2 million, partly offset by the increases in financial expense and income taxes.

CUSTOMER STATISTICS

Net additions (losses) Net additions (losses)
ConsolidatedUNITED STATESCANADAThree months ended Nine months ended
May 31, 2015 May 31, 2015 May 31, 2014 May 31, 2015 May 31, 2014
PSU2,448,755511,8321,936,923(2,401)(2,509)6,571 (15,539)
Television service customers998,043223,066774,977(6,438)(9,620)(25,051)(31,961)
HSI service customers905,057204,967700,0906,250 7,811 35,604 27,152
Telephony service customers545,65583,799461,856(2,213)(700)(3,982)(10,730)

At May 31, 2015, PSU reached 2,448,755 of which 1,936,923 came from the Canadian cable services segment and 511,832 came from the American cable services segment. For the three and nine-month periods ended May 31, 2015, PSU net losses stood at 2,401 and net additions at 6,571, respectively, compared to PSU net losses of 2,509 and 15,539 for the same periods of fiscal 2014. Fiscal 2015 third-quarter and first nine months net losses for Television service customers stood at 6,438 and 25,051 compared to 9,620 and 31,961 mainly as a result of service category maturity and competitive offers in the industry, partly offset by the launch of TiVo digital advanced television services in Canada on November 3, 2014 in Ontario and on March 30, 2015 in Québec as well as in fiscal 2014 in the United States. HSI service customers grew by 6,250 and 35,604 in the third quarter and the first nine months of fiscal 2015 compared to 7,811 and 27,152 and the Telephony service customers net losses stood at 2,213 and 3,982 compared to net losses of 700 and 10,730 for the comparable periods of fiscal 2014. HSI net additions continued to stem from the enhancement of the product offering, the positive impact of bundle offers and the growth in the business sector. The lower decrease in Telephony services customers for the first nine months is mainly attributable to the net additions in the American cable services segment, partly offset by net losses in the Canadian cable services segment as a result of the increasing mobile penetration rate and various unlimited offers launched by mobile operators causing customers to cancel their landline Telephony services for mobile services only.

In the Canadian cable services segment, PSU decreased by 6,735 for the third quarter of fiscal 2015, compared to 5,633 for the same period last year mainly as a result of a lower increase in HSI services and a higher decrease in Telephony services, partly offset by a lower decrease in Television services. For the first nine months of fiscal 2015, PSU decreased by 9,099 compared to a decrease of 23,678 for the comparable period in 2014 mainly due to additional HSI services combined with lower decreases both in the Television and Telephony services.

In the American cable services segment, PSU increased by 4,334 for the third-quarter of fiscal 2015, compared to 3,124 for the same period of prior year. For the first nine months of fiscal 2015, PSU increased by 15,670 compared to 8,139 for the comparable period in 2014. For both periods, the PSU growth stems primarily from additional HSI and Telephony services and from a lower decrease in Television services.

For further details on the Corporation's customer statistics, please refer to the "Segmented operating results" section.

RELATED PARTY TRANSACTIONS

Cogeco Cable Inc. is a subsidiary of COGECO, which holds 31.9% of the Corporation's equity shares, representing 82.4% of the Corporation's voting shares.

Following the July 2015 Board meeting of the Corporation, the Management Services Agreement (the "Agreement") pursuant to which COGECO provides executive, administrative, financial and strategic planning services and other services (the "Services") to the Corporation was amended. Originally entered into in 1993 when the cable operations of COGECO were spun off into the Corporation, COGECO initially provided the Services for an annual fee equal to 2% of its gross revenue, subject to an inflation-adjusted maximum annual fee. In addition, the Corporation reimburses COGECO's out-of-pocket expenses incurred with respect to services provided to the Corporation under the Agreement. The maximum annual fee level was increased only once in 1997 as a result of the growth of cable operations. The Corporation agreed at the July 2015 Board meeting that an amendment to the Agreement was required since the operations of the Corporation have significantly expanded over the past 18 years and since the annual fees were no longer aligned with the costs, time and resources committed by COGECO to provide such services.

Consideration of the amendment began when a presentation related to the Services and fees was reviewed and discussed at a special meeting of the Board of COGECO at the end of June 2015. The independent Directors of the Board resolved that the management fees should be increased, for the fiscal year beginning on September 1, 2015, to an annual fee, payable monthly, equal to 0.85% of the consolidated revenue of the Corporation, with no maximum level or inflation-based adjustment. Accordingly, COGECO submitted to the Corporation a request for an adjustment of the fees and amendments to the Agreement.

As contemplated by the existing Agreement, this was referred to the Audit Committee of the Corporation for determination. The Committee acknowledged that the size of operations of the Corporation has expanded significantly in recent years, both by virtue of internal growth and its several acquisitions including Atlantic Broadband, Cogeco Data Services and Peer 1 Hosting. Consequently, the services, time and efforts of COGECO's management being supplied to the Corporation have also increased significantly. The Audit Committee ultimately determined that the management fees should be increased to the requested level of 0.85% of the consolidated revenue of the Corporation. The matter was then considered by the Corporation's Board at its July 2015 meeting, and the increased level of management fees and updated Management Services Agreement were ratified and approved by the independent Directors of the Board. In the updated Agreement, provision is made for future adjustment upon the request of either COGECO or the Corporation should the level of management fees no longer align with the costs, time and resources committed by COGECO.

For fiscal year 2015, management fees have been set at a maximum of $9.9 million ($9.7 million in 2014), which were fully paid in the first quarter. For fiscal year 2014, management fees were fully paid in the first half of the year. In fiscal 2016, under the updated Agreement, management fees will no longer be subject to a maximum amount and will be paid on a monthly basis. Accordingly, management fees will be recognized and paid throughout the year resulting in more comparable operating margins from quarter to quarter. If the new level of management fees had been applicable in fiscal 2015, it is estimated that they would have amounted to approximately $17 million.

No direct remuneration is payable to COGECO's executive officers by the Corporation. However, during the first nine months of fiscal 2015, the Corporation granted 61,300 (84,250 in 2014) stock options to these executive officers as executive officers of Cogeco Cable. During the third quarter and first nine months of fiscal 2015, the Corporation charged COGECO amounts of $128,000 and $355,000 ($124,000 and $286,000 in 2014) with regard to the Corporation's stock options granted to these executive officers.

No Incentive Share Units ("ISUs") of the Corporation were granted to executive officers of COGECO during the first nine months of fiscal 2015 (12,550 in 2014). During the third quarter and first nine months of fiscal 2015, the Corporation charged COGECO amounts of $72,000 and $232,000 ($122,000 and $440,000 in 2014) with regard to the ISUs previously granted by the Corporation to these executive officers of COGECO.

During the first quarter of fiscal 2015, the Corporation introduced a Performance Share Unit Plan ("PSU Plan"). For the first nine months of fiscal 2015, the Corporation granted 11,050 Performance Share Units ("PSUs") to executive officers of COGECO as executive officers of Cogeco Cable and charged COGECO amounts of $58,000 and $131,000 for the three and nine-month periods ended May 31, 2015 with regard to the Corporation's PSUs granted to these executive officers.

Additional information on the stock options and ISUs granted to COGECO's executive officers are provided in the Corporation's 2014 Annual Report. Details regarding the new PSU Plan are provided in Note 10 of the condensed interim consolidated financial statements. There were no other material related party transactions during the periods covered.

CASH FLOW ANALYSIS

Three months ended Nine months ended
May 31, May 31, May 31, May 31,
2015 2014 2015 2014
(in thousands of dollars)$ $ $ $
Cash flow from operations179,563 175,595 523,194 502,872
Changes in non-cash operating activities28,754 15,397 (105,273)(77,388)
Amortization of deferred transaction costs and discounts on long-term debt(2,114)(1,898)(6,226)(5,628)
Income taxes paid(17,903)(15,995)(52,624)(53,538)
Current income taxes22,887 22,162 62,797 68,932
Financial expense paid(49,651)(42,864)(111,267)(103,582)
Financial expense35,743 32,038 106,995 97,505
Cash flow from operating activities197,279 184,435 417,596 429,173
Cash flow from investing activities(102,941)(84,427)(308,233)(249,742)
Cash flow from financing activities(38,615)(123,719)(103,104)(189,870)
Effect of exchange rate changes on cash and cash equivalents denominated in foreign currencies(331)(535)3,217 1,390
Net change in cash and cash equivalents55,392 (24,246)9,476 (9,049)
Cash and cash equivalents, beginning of the period17,915 54,772 63,831 39,575
Cash and cash equivalents, end of the period73,307 30,526 73,307 30,526

OPERATING ACTIVITIES

Fiscal 2015 third-quarter cash flow from operating activities reached $197.3 million compared to $184.4 million in fiscal 2014 third-quarter, representing an increase of $12.8 million, or 7.0%. The variation for the quarter is mainly due to the improvement of $10.4 million in adjusted EBITDA and of $13.4 million in changes in non-cash operating activities as a result of a higher decrease in trade and other receivables and prepaid expense and other as well as an increase in provisions compared to a decrease in the prior year, partly offset by an increase of $6.8 million in financial expense paid. For the first nine months of fiscal 2015, cash flow from operating activities reached $417.6 million, representing a decrease of $11.6 million, or 2.7%, compared to $429.2 million for the same period of fiscal 2014. The decrease is mainly explained by the decrease of $27.9 million in changes in non-cash operating activities and the increase of $7.7 million in financial expense paid, partly offset by the improvement of $27.4 million in adjusted EBITDA. The decrease in changes in non-cash operating activities result from a higher decrease in trade and other payables, partly offset by a decrease in trade and other receivables compared to an increase for the same period of the prior year.

For the the third quarter ended May 31, 2015, cash flow from operations increased by $4.0 million, or 2.3%, to reach $179.6 million compared to the same period last year, mainly due to the improvement of $10.4 million in adjusted EBITDA, partly offset by the increase of $3.7 million in financial expense. For the nine-month period ended May 31, 2015, cash flow from operations amounted to $523.2 million compared to $502.9 million for the comparable period in fiscal 2014, representing an increase of $20.3 million, or 4.0%, mainly explained by the improvement of $27.4 million in adjusted EBITDA combined with the decrease in current income taxes of $6.1 million, partly offset by the increase of $9.5 million in financial expense.

INVESTING ACTIVITIES

For the three and nine-month periods ended May 31, 2015, investing activities amounted to $102.9 million and $308.2 million, respectively, compared to $84.4 million and $249.7 million for the comparable period of fiscal 2014, mainly due to the acquisitions of property, plant and equipment, intangible and other assets as explained below.

ACQUISITIONS OF PROPERTY, PLANT AND EQUIPMENT, INTANGIBLE AND OTHER ASSETS

Investing activities, including the acquisition of property, plant and equipment segmented according to the National Cable Television Association ("NCTA") standard reporting categories, are as follows:

Three months endedNine months ended
May 31,May 31,May 31,May 31,
2015201420152014
(in thousands of dollars)$$$$
Customer premise equipment(1)29,58925,32797,46168,872
Scalable infrastructure(2)18,28717,86748,26853,341
Line extensions10,3055,67731,62017,095
Upgrade / Rebuild3,9706,65812,48517,225
Support capital9,2056,97921,25315,711
Acquisition of property, plant and equipment - Cable services71,35662,508211,087172,244
Acquisition of property, plant and equipment - Enterprise data services28,22117,00186,71464,431
Acquisition of property, plant and equipment - Head office--2-
Acquisitions of property, plant and equipment99,57779,509297,803236,675
Acquisition of intangible and other assets - Cable services3,3603,36810,15710,513
Acquisition of intangible and other assets - Enterprise data services7811,5751,3143,159
Acquisitions of intangible and other assets4,1414,94311,47113,672
103,71884,452309,274250,347
(1)Includes mainly home terminal devices as well as new and replacement drops.
(2)Includes mainly head-end equipment, digital video and telephony transport as well as HSI equipment.

For the third quarter ended May 31, 2015, acquisition of property, plant and equipment in the Canadian and American cable services segments amounted to $71.4 million compared to $62.5 million for the comparable period of fiscal 2014. For the third quarter ended May 31, 2015, $54.0 million came from the Canadian cable services segment compared to $39.6 million for the comparable period of the prior year and $17.4 million came from the American cable services segment compared to $22.9 million for the same period of fiscal 2014. The variation in acquisitions of property, plant and equipment is attributable to the following factors:

  • In the Canadian cable services segment, the increase in capital expenditures was mainly due to additional customer premise equipment for the launch of TiVo digital advanced television services on March 30, 2015 in Québec combined with the increases in scalable infrastructure and line extensions to extend and improve network capacity in the areas served; and

  • In the American cable services segment, the decrease in capital expenditures was mainly due to the timing of certain initiatives.

For the nine-month period ended May 31, 2015, acquisition of property, plant and equipment in the Canadian and American cable services segments amounted to $211.1 million compared to $172.2 million for the comparable period of fiscal 2014. For the nine-month period ended May 31, 2015, $152.1 million came from the Canadian cable services segment compared to $120.9 million for the comparable period of the prior year and $59.0 million came from the American cable services segment compared to $51.4 million for the same period of fiscal 2014. The capital intensity for the Canadian cable services segment reached 16.9% compared to 13.8% for the same period of prior year as a result of higher acquisitions of property, plant and equipment. The capital intensity for the American cable services segment reached 17.7% compared to 18.0% for the same period of prior year as a result of revenue growth exceeding acquisitions of property, plant and equipment, intangible and other assets growth.

The increase in acquisitions of property, plant and equipment is attributable to the following factors:

  • In the Canadian cable services segment, the increase in acquisition of property, plant and equipment was mainly due to additional customer premise equipment for the launch of TiVo digital advanced television services on November 3, 2014 in Ontario and on March 30, 2015 in Québec, partly offset by capital expenditures decreases due to the timing of certain initiatives; and

  • In the American cable services segment, the increase in acquisition of property, plant and equipment was mainly due to additional customer premise equipment resulting from the launch in fiscal 2014 of TiVo's digital advanced television as well as the PSU growth combined with the increase in scalable infrastructure and line extensions to extend and improve network capacity in the areas served as well as higher foreign exchange rates compared to last year, partly offset by the timing of certain initiatives.

During the fiscal 2015 third-quarter and first nine months, acquisition of property, plant and equipment in the Enterprise data services segment amounted to $28.2 million and $86.7 million, respectively, compared to $17.0 million and $64.4 million for the same periods of fiscal 2014. For the three and nine-month periods ended May 31, 2015, the capital intensity reached 37.0% and 37.5%, respectively, compared to 23.6% and 29.7% for the comparable periods of the prior year. The increases are mainly due to the construction by Cogeco Data Services of all remaining pods (pods 2, 3 and 4) at the Barrie, Ontario data centre and of pod 1 at a new data centre in Montréal, Québec.

Acquisition of intangible and other assets are mainly attributable to reconnect and additional service activation costs as well as other customer acquisition costs. For the third quarter and the first nine months of fiscal 2015, the acquisition of intangible and other assets amounted to $4.1 million and $11.5 million, respectively, compared to $4.9 million and $13.7 million for the same periods last year mainly due to lower reconnect activities in the Canadian cable services segment and customer acquisition costs in the Enterprise data services segment.

FREE CASH FLOW AND FINANCING ACTIVITIES

For the third quarter of fiscal 2015, free cash flow amounted to $75.8 million, representing a decrease of $15.3 million compared to $91.1 million for the same period in fiscal 2014. The decrease is mainly attributable to the increase of $20.1 million in acquisitions of property, plant and equipment explained above combined with the increase of $3.7 million in financial expense, partly offset by the improvement of adjusted EBITDA of $10.4 million. For the first nine months of fiscal 2015, free cash flow decreased by $38.6 million to reach $213.9 million, compared to $252.5 million for the same period of prior year. The decrease is mainly due to the increases of $61.1 million in acquisitions of property, plant and equipment and of $9.5 million in financial expense, partly offset by the improvement of $27.4 million in adjusted EBITDA.

In the third quarter of fiscal 2015, a lower Indebtedness level resulted in a cash decrease of $21.5 million mainly due to the decrease of $4.1 million in bank indebtedness combined with the repayments of $9.5 million under the revolving facilities and of $7.9 million of long-term debt. In the third quarter of fiscal 2014, a lower Indebtedness level resulted in a cash decrease of $109.6 million mainly due to the repayments of $112.6 million under the revolving facilities.

For the first nine-month period ended May 31, 2015, a lower Indebtedness level resulted in a cash decrease of $50.5 million, mainly due to the repayments of $34.0 million under the revolving facilities and of $28.2 million of long-term debt, partly offset by the increase in bank indebtedness of $11.7 million. For the first nine months of fiscal 2014, a lower Indebtedness level resulted in a cash decrease of $142.8 million, mainly due to the repayments under the revolving facilities of $128.2 million and of long-term debt amounting to $10.9 million.

During the third quarter of fiscal 2015, a quarterly eligible dividend of $0.35 per share was paid to the holders of subordinate and multiple voting shares, totaling $17.1 million, compared to a quarterly eligible dividend paid of $0.30 per share, or $14.6 million in the third quarter of fiscal 2014. Dividend payments in the first nine months totaled $1.05 per share, or $51.3 million, compared to $0.90 per share, or $43.9 million the prior year.

At May 31, 2015, the Corporation had a working capital deficiency of $369.0 million compared to $267.6 million at August 31, 2014. The $101.4 million deficiency increase is mainly due to the increases of $239.3 million in the current portion of long-term debt as a result of the US$190 million Senior Secured Notes Series A maturing in October 2015 and of $11.7 million in bank indebtedness, partly offset by the decrease of $120.5 million in trade and other payables, the increase of $36.1 million in derivative financial instruments asset related to the cross-currency swaps on the Senior Secured Notes Series A and the increase of $9.5 million in cash and cash equivalents. As part of the usual conduct of its business, Cogeco Cable maintains a working capital deficiency due to a low level of accounts receivable since a large proportion of the Corporation's customers pay before their services are rendered, unlike trade and other payables, which are usually paid after products are delivered or services are rendered, thus enabling the Corporation to use cash and cash equivalents to reduce Indebtedness.

At May 31, 2015, the Corporation had used $205.1 million of its $800 million amended and restated Term Revolving Facility for a remaining availability of $594.9 million. In addition, two subsidiaries of the Corporation also benefit from a Revolving Facility of $186.6 million (US$150 million), of which $28.3 million (US$22.7 million) was used at May 31, 2015 for a remaining availability of $158.3 million (US$127.3 million).

FINANCIAL POSITION

Since August 31, 2014 the following balances have changed significantly: "derivative financial instruments", "property, plant and equipment", "intangible assets", "goodwill", "trade and other payables", "current portion of long-term debt" and "long-term debt".

The increase of $30.0 million in derivative financial instruments asset related to the cross-currency swap on the Senior Secured Notes Series A is due to the appreciation of the US dollar currency against the Canadian dollar. Property, plant and equipment and intangible assets increased by $52.9 million and $80.3 million, respectively, due to the appreciation of the US dollar and British Pound currency against the Canadian dollar, partly offset by the depreciation and amortization expense exceeding capital expenditures. Goodwill increased by $122.9 million as a result of the US dollar and the British Pound currency appreciation against the Canadian dollar during the first nine months of fiscal 2015. The decrease of $120.5 million in trade and other payables related to the timing of payments made to suppliers. The increase of $239.3 million in the current portion of long-term debt is mainly due to the US$190 million Senior Secured Notes Series A maturing in October 2015. The decrease of $39.4 million in long-term debt is mainly due to the increase in the current portion of long-term debt and repayments amounting to $62.2 million, partly offset by the appreciation of the US dollar and British Pound currency appreciation against the Canadian dollar.

OUTSTANDING SHARE DATA

A description of Cogeco Cable's share data at June 30, 2015 is presented in the table below. Additional details are provided in Note 10 of the condensed interim consolidated financial statements.

Number of
shares/options
Amount
(in thousands
of dollars)
Common shares
Multiple voting shares15,691,100$98,346
Subordinate voting shares33,533,342$918,057
Options to purchase subordinate voting shares
Outstanding options726,673
Exercisable options247,142

FINANCING

In the normal course of business, Cogeco Cable has incurred financial obligations, primarily in the form of long-term debt, operating and finance leases and guarantees. Cogeco Cable's obligations, as reported in the 2014 Annual Report, have not materially changed since August 31, 2014, except as mentioned below.

On December 12, 2014, the Corporation amended its Term Revolving Facility. Under the term of the amendment, the maturity was extended by an additional year and consequently, will mature on January 22, 2020.

FINANCIAL MANAGEMENT

The Corporation is exposed to interest rate risks for both fixed and floating interest rate instruments. Interest rate fluctuations will have an effect on the valuation and collection or repayment of these instruments. At May 31, 2015, all of the Corporation's long-term debt was at fixed rate, except for the Corporation's Term Revolving Facility and First Lien Credit Facilities. To mitigate such risk, the Corporation entered on July 22, 2013 into interest rate swap agreements.

The following table shows the interest rate swaps outstanding at May 31, 2015:

Type of hedgeNotional amountReceive interest ratePay interest rateMaturity Hedged item
Cash flowUS$200 millionUS Libor base rate0.39625%July 25, 2015 US$70.5 million of Term Revolving Facility
US$129.5 million of Term Loan A Facility

The sensitivity of the Corporation's annual financial expense to a variation of 1% in the interest rate applicable to these facilities is approximately $3.6 million based on the current debt at May 31, 2015.

In addition, the Corporation is exposed to foreign exchange risk related to its long-term debt denominated in US dollars that is not designated as a hedge on its US dollar net investments. In order to mitigate this risk, the Corporation has established guidelines whereby cross-currency swap agreements can be used to fix the exchange rates applicable to its US dollar denominated long-term debt. All such agreements are exclusively used for hedging purposes. Accordingly, on October 2, 2008, Cogeco Cable entered into cross-currency swap agreements to set the liability for interest and principal payments on its Senior Secured Notes Series A.

The following table shows the cross-currency swaps outstanding at May 31, 2015:

Type of hedgeNotional amountReceive interest ratePay interest rateMaturityExchange rate Hedged item
Cash flowUS$190 million7.00% USD7.24% CADOctober 1, 20151.0625 US$190 million Senior
Secured Notes Series A

The impact of a 10% change in the exchange rate of the US dollar and British Pound into Canadian dollars would change financial expense by approximately $6.9 million based on the outstanding debt at May 31, 2015.

The Corporation is also exposed to foreign exchange risk related to its forecasted purchase commitments of property, plant and equipment denominated in US dollars. In order to mitigate such risk, the Corporation has entered into foreign currency forward contracts during the third quarter of fiscal 2015 and designated them as hedges for accounting purposes.

The following table shows the forward contracts outstanding at May 31, 2015:

Type of hedgeNotional amountMaturityExchange rate Hedged item
Cash flowUS$15.3 millionJune - September 20151.2209 - 1.2223 Purchase commitments of property, plant and equipment

Furthermore, the Corporation's investments in foreign operations is exposed to market risk attributable to fluctuations in foreign currency exchange rates, primarily changes in the values of the Canadian dollar versus the US dollar and British Pound. This risk was mitigated since the major part of the purchase prices for Atlantic Broadband and Peer 1 Hosting were borrowed directly in US dollars and British Pounds.

The following table shows the investments in foreign operations outstanding at May 31, 2015:

Type of hedgeNotional amount of debt Aggregate investments Hedged item
Net investmentUS$860.5 million US$1.1 billion Net investment in foreign operations in US dollar
Net investment£54.4 million £59.4 million Net investment in foreign operations in British pound

The exchange rate used to convert the US dollar currency and British Pound currency into Canadian dollar for the statement of financial position accounts at May 31, 2015 was $1.2437 per US dollar and $1.9011 per British Pound. The impact of a 10% change in the exchange rate of the US dollar and British Pound into Canadian dollars would change other comprehensive income by approximately $30.7 million.

For the three and nine-month periods ended May 31, 2015, the average rates prevailing used to convert the operating results of the American cable services and a portion of the Enterprise data services were as follows:

Three months ended Nine months ended

May 31,May 31, May 31,May 31,
20152014Change20152014Change
$$%$$%
US dollar vs Canadian dollar1.23781.099712.61.18701.075910.3
British Pound vs Canadian dollar1.87151.84051.71.83891.76644.1

The following tables highlight in Canadian dollars, the impact of a 10% increase in the US dollar and British Pound against the Canadian dollar on Cogeco Cable's operating results for the three and nine-month periods ended May 31, 2015:

Canadian cable servicesAmerican cable servicesEnterprise data services

Three months ended May 31, 2015

As reported

Exchange rate impact

As reported

Exchange rate impact

As reported

Exchange rate impact
(in thousands of dollars)$$$$$$
Revenue317,486-121,13512,11378,4753,798
Operating expenses153,79771268,7636,87651,5463,028
Adjusted EBITDA163,689(712)52,3725,23726,929770
Acquisitions of property, plant and equipment, intangible and other assets56,6462,06718,0701,80529,002636
Canadian cable services American cable services Enterprise data services

Nine months ended May 31, 2015

As reported

Exchange rate impact

As reported

Exchange rate impact

As reported

Exchange rate impact
(in thousands of dollars)$$ $$$$
Revenue946,674- 343,74134,356234,58711,559
Operating expenses464,1192,406 194,61319,446153,2808,761
Adjusted EBITDA482,555(2,406)149,12814,91081,3072,798
Acquisitions of property, plant and equipment, intangible and other assets160,2478,458 60,9976,16888,0281,656

DIVIDEND DECLARATION

At its July 14, 2015 meeting, the Board of Directors of Cogeco Cable declared a quarterly eligible dividend of $0.35 per share for multiple voting and subordinate voting shares, payable on August 11, 2015, to shareholders of record on July 28, 2015. The declaration, amount and date of any future dividend will continue to be considered and approved by the Board of Directors of the Corporation based upon the Corporation'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 declared, and if declared, the amount and frequency may vary.

SEGMENTED OPERATING RESULTS

The Corporation reports its operating results in three operating segments: Canadian cable services, American cable services and Enterprise data services. The reporting structure reflects how the Corporation manages the business activities to make decisions about resources to be allocated to each segment and to assess its performance.

CANADIAN CABLE SERVICES

CUSTOMER STATISTICS

Net additions (losses) % of penetration(1)
Three months ended Nine months ended
May 31,May 31, May 31, May 31, May 31, May 31,May 31,
20152015 2014 2015 2014 20152014
PSU1,936,923(6,735)(5,633)(9,099)(23,678)
Television service customers774,977(5,500)(8,021)(22,188)(26,940)46.747.9
HSI service customers700,0901,843 3,821 20,506 15,465 42.240.2
Telephony service customers461,856(3,078)(1,433)(7,417)(12,203)27.828.0
(1)As a percentage of homes passed.

Fiscal 2015 third-quarter PSU decreased by 6,735 compared to 5,633 for the same period last year mainly as a result of a lower increase in HSI services and a higher decrease in Telephony services, partly offset by a lower decrease in Television services. For the first nine months of fiscal 2015, PSU decreased by 9,099 compared to a decrease of 23,678 for the comparable period in 2014 mainly due to additional HSI services combined with lower decreases both in the Television and Telephony services. For the third quarter and first nine months of fiscal 2015, net customer losses for Television service stood at 5,500 and 22,188 compared to 8,021 and 26,940 for the same periods of fiscal 2014. The lower decrease in Television service customers is mainly due to the launch of TiVo digital advanced television services on November 3, 2014 in Ontario and on March 30, 2015 in Québec, partly offset by promotional offers of competitors for the video service, service category maturity and the expansion of IPTV footprint of competitors. For the third quarter and first nine months of fiscal 2015, net additions for HSI service customers stood at 1,843 and 20,506 compared to 3,821 and 15,465 for the comparable periods of fiscal 2014. HSI net additions continue to stem from the enhancement of the product offering, the impact of bundle offers of Television, HSI and Telephony services, promotional activities and the growth in the business sector. Net losses for the Telephony service amounted to 3,078 and 7,417 for the third quarter and the first nine months of fiscal 2015, compared to 1,433 and 12,203 for the same periods of the prior year mainly attributable to the increasing mobile penetration rate in North America and various unlimited offers launched by mobile operators causing customers to cancel their landline Telephony services for mobile telephony services only.

Furthermore, at May 31, 2015, 70% (69% in 2014) of the Canadian cable services customers subscribed to two or more services. The distribution of customers by number of services for the Canadian cable services were: 30% who subscribe to the single play (31% in 2014), 35% to the double play (33% in 2014) and 35% to the triple play (36% in 2014).

OPERATING RESULTS

Three months endedNine months ended
May 31,May 31, May 31,May 31,
20152014Change20152014Change
(in thousands of dollars, except percentages)$$%$$%
Revenue317,486317,0720.1946,674939,7500.7
Operating expenses153,797153,3370.3464,119463,8820.1
Adjusted EBITDA163,689163,735-482,555475,8681.4
Operating margin51.6%51.6% 51.0%50.6%

REVENUE

Fiscal 2015 third-quarter revenue increased by $0.4 million, or 0.1%, to reach $317.5 million, compared to the same period last year. For the first nine months, revenue increased by $6.9 million, or 0.7%, to reach $946.7 million, compared to the first nine months of fiscal 2014. Revenue increase is mainly attributable to rate increases implemented in April 2014 and February 2015 in Québec and Ontario, partly offset by PSU losses due to the intense competitive environment and service category maturity.

OPERATING EXPENSES

For the third quarter and first nine months ended May 31, 2015, operating expenses amounted to $153.8 million and $464.1 million, respectively, compared to $153.3 million and $463.9 million for the same periods last year, mainly as a result of higher programming costs and additional marketing initiatives related to the launch of TiVo digital advanced television services on November 3, 2014 in Ontario and on March 30, 2015 in Québec, mostly offset by cost reduction initiatives.

ADJUSTED EBITDA AND OPERATING MARGIN

As a result of revenue and operating expenses being essentially the same, fiscal 2015 third-quarter adjusted EBITDA remained at $163.7 million compared to the same period of the prior year and consequently, operating margin was maintained at 51.6% for the third-quarter of fiscal 2015.

For the first nine months of fiscal 2015, adjusted EBITDA amounted to $482.6 million, or 1.4% higher than in the same period of the prior year mainly due to revenue growth exceeding operating expenses growth. Consequently, operating margin increased from 50.6% to 51.0% for the first nine months of fiscal 2015 compared to last year.

AMERICAN CABLE SERVICES

Net additions (losses) % of penetration(1)
Three months ended Nine months ended
May 31,May 31, May 31, May 31, May 31, May 31,May 31,
20152015 2014 2015 2014 20152014
PSU511,8324,334 3,124 15,670 8,139
Television service customers223,066(938)(1,599)(2,863)(5,021)42.943.8
HSI service customers204,9674,407 3,990 15,098 11,687 39.436.4
Telephony service customers83,799865 733 3,435 1,473 16.115.4
(1) As a percentage of homes passed.

Fiscal 2015 third-quarter and first nine months PSU net additions amounted to 4,334 and 15,670, respectively, compared to 3,124 and 8,139 for the same periods of the prior year. Net customer losses for the Television service stood at 938 and 2,863, respectively, for the third quarter and first nine months of fiscal 2015 compared to 1,599 and 5,021 for the same periods of last year as a result of competitive offers in the industry, partly offset by the growth of TiVo's digital advanced television services launched during the first quarter of fiscal 2014. For the third quarter and first nine months of fiscal 2015, net customer additions for HSI service amounted to 4,407 and 15,098 compared to 3,990 and 11,687 for the same periods of the prior year mainly due to the launch of TiVo's services, additional marketing initiatives which focused on bundle package offerings, thus increasing overall demand for the HSI residential services as well as increased commercial HSI customers. The net customer additions for Telephony service stood at 865 and 3,435 for the three and nine-month periods ended May 31, 2015, compared to 733 and 1,473 for the same periods in fiscal 2014 as a result of the impact of bundle offers.

Furthermore, as at May 31, 2015, 59% (59% in 2014) of the American cable services customers subscribed to two or more services. The distribution of customers by number of services for the American cable services were: 41% who subscribe to the single play (41% in 2014), 38% to the double play (38% in 2014) and 21% to the triple play (21% in 2014).

OPERATING RESULTS

Three months endedNine months ended
May 31,May 31, May 31,May 31,
20152014Change20152014Change
(in thousands of dollars, except percentages)$$%$$%
Revenue121,135101,43519.4343,741292,03217.7
Operating expenses68,76356,61021.5194,613162,39619.8
Adjusted EBITDA52,37244,82516.8149,128129,63615.0
Operating margin43.2%44.2% 43.4%44.4%

REVENUE

Fiscal 2015 third-quarter revenue increased by $19.7 million, or 19.4%, to reach $121.1 million compared to the same period last year. For the first nine months, revenue amounted to $343.7 million, an increase of $51.7 million compared to the first nine months of fiscal 2014. Revenue increased in both periods as a result of favorable foreign exchange rates compared to the same period last year, PSU growth as well as rate increases implemented during the first quarter of fiscal 2015.

For the third quarter and first nine months of fiscal 2015, revenue in local currency amounted to US$97.9 million and US$289.4 million compared to US$92.2 million and US$271.4 million for the same periods last year.

OPERATING EXPENSES

Fiscal 2015 third-quarter operating expenses amounted to $68.8 million, an increase of 21.5% compared to the same period last year. For the first nine months, operating expenses amounted to $194.6 million, an increase of $32.2 million compared to the first nine months of fiscal 2014. The increases for both periods is mainly attributable to the appreciation of the US dollar over the Canadian dollar, higher programming costs, costs to serve additional PSU, marketing initiatives to improve PSU growth as well as the deployment of TiVo digital advanced television services.

Operating expenses in local currency for the third quarter and first nine months of fiscal 2015 amounted to US$55.6 million and US$163.8 million compared to US$51.5 million and US$150.8 million for the comparable periods of fiscal 2014.

ADJUSTED EBITDA AND OPERATING MARGIN

Adjusted EBITDA for the third-quarter and first nine months of fiscal 2015 increased by 16.8% and 15.0% to reach $52.4 million and $149.1 million, respectively, compared to $44.8 million and $129.6 million for the same periods of fiscal 2014. As a result of operating expenses growth exceeding revenue growth, operating margin for the three and nine-month periods ended May 31, 2015 decreased to 43.2% from 44.2% and to 43.4% from 44.4% for the comparable periods of the prior year.

Fiscal 2015 third-quarter and first nine months adjusted EBITDA in local currency amounted to US$42.3 million and US$125.6 million compared to US$40.8 million and US$120.5 million for the same periods last year.

ENTERPRISE DATA SERVICES

As a part of a process initiated in the previous months, the Corporation announced, on May 5, 2015, the restructuring of its Enterprise data services segment by combining the strengths of its two subsidiaries Cogeco Data Services and Peer 1 Hosting. This combination represents a growth opportunity for Cogeco Cable by bringing the teams and capabilities together and therefore, positioning it to increase operational efficiencies, streamline the product offerings and leverage the global footprint. For the three and nine-month periods ended May 31, 2015, the Corporation recognized restructuring costs of $5.4 million and $6.7 million, respectively. The restructuring process should result in estimated annual costs savings of $10 million.

OPERATING RESULTS

Three months ended Nine months ended
May 31, May 31, May 31, May 31,
2015 2014 Change 2015 2014 Change
(in thousands of dollars, except percentages)$ $ % $ $ %
Revenue78,475 78,573 (0.1)234,587 227,284 3.2
Operating expenses51,546 54,407 (5.3)153,280 150,062 2.1
Adjusted EBITDA26,929 24,166 11.4 81,307 77,222 5.3
Operating margin34.3%30.8% 34.7%34.0%

REVENUE

Fiscal 2015 third-quarter revenue remained essentially the same at $78.5 million compared to the same period last year as a result of the appreciation of the US dollar and British Pound against the Canadian dollar, partly offset by higher churn. In addition, the increase over the period would have been higher without certain non recurring adjustments recorded in the fourth quarter of fiscal 2014, some of which were related to previous quarters. For the first nine months of fiscal 2015, revenue amounted to $234.6 million, an increase of $7.3 million compared to the first nine months of fiscal 2014 mainly due of the appreciation of the US dollar and the British Pound against the Canadian dollar for our foreign operations.

OPERATING EXPENSES

For the third quarter of fiscal 2015, operating expenses decreased by $2.9 million, to $51.5 million mainly due to costs reduction initiatives, partly offset by the appreciation of the US dollar and the British Pound against the Canadian dollar and non-recurring costs incurred during the third quarter of fiscal 2014 with regards to certain initiatives and the enhancement of the collection process at Peer 1 Hosting. For the first nine months of fiscal 2015, operating expenses increased by $3.2 million to reach $153.3 million mainly as a result of the appreciation of the US dollar and the British Pound against the Canadian dollar and higher various infrastructure support costs.

ADJUSTED EBITDA AND OPERATING MARGIN

Fiscal 2015 third-quarter adjusted EBITDA increased by $2.8 million, or 11.4%, to reach $26.9 million compared to the same period of the prior year. As a result of revenue growth exceeding operating expenses growth, operating margin increased to 34.3% from 30.8% compared to the same period of fiscal 2014.

Fiscal 2015 first nine months adjusted EBITDA increased by $4.1 million, or 5.3%, to reach $81.3 million compared to the same period of fiscal 2014. As a result of the reduction in operating expenses, operating margin increased to 34.7% from 34.0% in first nine months compared to the same period of the prior year.

FISCAL 2015 REVISED FINANCIAL GUIDELINES

As a result of the costs associated with the restructuring of its Enterprise data services segment, the Corporation revised its financial guidelines for the 2015 fiscal year issued on April 8, 2015. Management expects integration, restructuring and acquisition costs to reach $15 million, and consequently, profit for the year should decrease by $10 million to $250 million and free cash flow by $15 million to $275 million.

Fiscal 2015 revised financial guidelines are as follows:

Revised projections Revised projections
July 14, 2015 April 8, 2015
Fiscal 2015 Fiscal 2015
(in million of dollars, except percentages)$ $
Revenue2,050 2,050
Adjusted EBITDA935 935
Operating margin45.6%45.6%
Integration, restructuring and acquisition costs15 1
Depreciation and amortization465 465
Financial expense140 140
Current income tax expense90 90
Profit for the year250 260
Acquisitions of property, plant and equipment, intangible and other assets430 430
Free cash flow(1)275 290
Capital intensity21.0%21.0%
(1)Free cash flow is calculated as adjusted EBITDA plus non-cash items of approximately $15 million and less, integration, restructuring and acquisition costs, financial expense, current income taxes and acquisitions of property, plant and equipment, intangible and other assets.

FISCAL 2016 PRELIMINARY FINANCIAL GUIDELINES

The following section contain forward-looking statements concerning the business outlook of Cogeco Cable. For a description of risk factors that could cause actual results to differ materially from what Cogeco Cable currently expects, please refer to the "Uncertainties and main risk factors" section of the Corporation's 2014 annual MD&A.

These preliminary financial guidelines do not include expected financial results from the announcement of the agreement for the acquisition of MetroCast Connecticut by the Corporation's wholly-owned subsidiary, Atlantic Broadband. They will be revised when the transaction is concluded.

Cogeco Cable expects fiscal 2016 revenue growth to be driven by all its operating segments. In the Cable services segments, revenue growth should stem primarily from targeted marketing initiatives to improve penetration rates of HSI in the residential and business sectors and Telephony services in the business sector while the penetration of residential Telephony and Television services should decrease in Canada, reflecting service category maturity and intense competition. We expect the penetration of Digital video and HSI services to continue to benefit from customers' ongoing interest in TiVo's digital advanced television services in Canada and the United States. The Cable services segment should also benefit from the impact of rate increases in most of its services in Canada and the United States and from the PSU growth in the United States. In the Enterprise data services segment, revenue growth should stem primarily from data transport, colocation services, cloud and managed services due to the increasing market demand and the completion of the remaining pods of the Barrie, Ontario data centre facility as well as the construction of the first pod in fiscal 2015 of a new data centre facility in Montréal, Québec. The revenue growth should also be driven by connectivity services as a result of network expansions and new customer installations.

Adjusted EBITDA progression should stem from revenue growth exceeding operating expenses as a result of cost reduction initiatives from improved systems and processes and costs savings resulting from the restructuring activities in the Enterprise data services segment in fiscal 2015, partly offset by marketing initiatives and retention strategies to support the revenue growth. Consequently, the operating margin should improve compared to the revised fiscal 2015 projections.

Free cash flow should increase compared to the revised fiscal 2015 projections as a result of the improvement of the adjusted EBITDA, partly offset by additional capital expenditures. Accordingly, generated free cash flow should reduce Indebtedness, net of cash and cash equivalents, thus improving the Corporation's net leverage ratios. The capital intensity ratio should slightly decrease compared to the revised fiscal 2015 projections.

The following table outlines fiscal 2016 preliminary financial guidelines ranges on a consolidated basis:

Preliminary Revised projections
projections July 14, 2015
Fiscal 2016(2)Fiscal 2015
(in million of dollars, except percentages)$ $
Revenue2,140 to 2,170 2,050
Adjusted EBITDA970 to 1,000 935
Operating margin45.3% to 46.1% 45.6%
Integration, restructuring and acquisition costs- 15
Depreciation and amortization475 to 485 465
Financial expense130 to 140 140
Current income tax expense95 to 105 90
Profit for the year280 to 305 250
Acquisitions of property, plant and equipment, intangible and other assets430 to 445 430
Free cash flow(1)315 to 345 275
Capital intensity20.0% to 20.5% 21.0%
(1)Free cash flow is calculated as adjusted EBITDA plus non-cash items and less, integration, restructuring and acquisition costs, financial expense, current income taxes and acquisitions of property, plant and equipment, intangible and other assets.
(2)Fiscal 2016 financial guidelines are based on a USD/CDN exchange rate of 1.25 and a GBP/CDN exchange rate of 1.80.

CONTROLS AND PROCEDURES

Internal control over financial reporting ("ICFR") is a process designed to provide reasonable, but not absolute, assurance regarding the reliability of financial reporting and of the preparation of financial statements for external purposes in accordance with IFRS. The President and Chief Executive Officer ("CEO") and the Senior Vice President and Chief Financial Officer ("CFO"), together with Management, are responsible for establishing and maintaining adequate disclosure controls and procedures ("DC&P") and ICFR, as defined in National Instrument 52-109. Cogeco Cable's internal control framework is based on the criteria published in the updated version released in May 2013 of the report Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

At August 31, 2014, Management disclosed the existence of a material weakness in ICFR at Peer1 Hosting which has since been corrected. A material weakness in ICFR exists if there is a deficiency or combination of deficiencies in ICFR such that there is a reasonable possibility that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

The deficiencies in ICFR at Peer1 Hosting related mainly to the financial statement close process and inadequate segregation of duties over certain information system access controls. Since then, the material weakness previously identified has been addressed and corrected. Several detailed review and monitoring processes have been implemented to facilitate and enhance proper oversight over operations. Furthermore, access rights were reviewed and adjusted accordingly to reflect proper segregation of duties.

The CEO and CFO, supported by Management, evaluated the design of the Corporation's DC&P and ICFR at May 31, 2015, and concluded that they are adequate. Furthermore, except as explained above, no significant changes to the internal controls over financial reporting occurred during the quarter and nine-month periods ended May 31, 2015.

UNCERTAINTIES AND MAIN RISK FACTORS

A detailed description of the uncertainties and main risk factors faced by Cogeco Cable can be found in the 2014 Annual Report, available at www.sedar.com and corpo.cogeco.com. The following update should be read together with the uncertainties and main risk factors described in the 2014 Annual Report, which are hereby incorporated by reference.

Following a regulatory policy proceeding launched in April of last year respecting Canadian television broadcasting and distribution (the « Let's Talk TV Proceeding »), the CRTC has issued a series of regulatory policy statements that provide for a number of major changes to the regulatory framework for television broadcasting and distribution in Canada.

More particularly, changes provided for in Broadcasting Regulatory Policy CRTC 2015-96 (« BRP 2015-96 ») include the obligation for operators of licensed broadcasting distribution undertakings (« BDUs ») to offer to all their customers:

a) a small entry-level service by March 2016 at a monthly retail price of not more than $25;

b) all discretionary programming channels, whether Canadian or non-Canadian, either on a pick and-pay basis or in small reasonably priced packages such as theme and pick packs by March 2016, and in both these configurations by December 2016; and

c) a preponderance of Canadian television services, but customers will be free to ultimately choose how many and which Canadian or non-Canadian discretionary channels they wish to receive beyond the entry-level service offering.

Except for the $25 maximum monthly retail price for the entry-level service, retail prices charged by BDUs remain unregulated. BDUs are also permitted to offer additional alternative entry-level service that includes other discretionary services as they do now.

The CRTC states that it will initiate a follow-up process to broaden the exemption order for terrestrial BDUs to allow BDUs with fewer than 20,000 subscribers to enter and compete in markets with licensed BDUs.

The CRTC has also initiated two follow-up proceedings dealing respectively with proposals for:

a) a tighter and binding Wholesale Code containing standard and binding regulatory requirements, including specific requirements applicable to vertically integrated groups; and

b) a new Television Service Provider Code that will govern the relationship between BDUs and their customers.

Management considers that these changes to the regulatory framework for television broadcasting and distribution announced by the CRTC are largely in line with the submissions made by Cogeco Cable as part of the Let's Talk TV Proceeding and that, going forward, they should provide a sound basis for the pursuit of Cogeco Cable's television programming distribution activities in Canada through improved customer satisfaction and improved protection against restrictive, abusive or unfair affiliation agreement terms imposed by vertically integrated broadcasting groups. It is however too early at this time to have a clear view of the impact of these changes on overall subscriptions to television services and packages offered by BDUs or their related average revenue per user (« ARPU »).

In the United States, the Federal Communications Commission (« FCC ») has issued its decision on network neutrality. While this decision may be the subject of further regulatory requirements or legal challenges down the line, management considers that it will not in its present form materially affect the cable activities of Atlantic Broadband.

FUTURE ACCOUNTING DEVELOPMENTS IN CANADA

A number of new standards, interpretations and amendments to existing standards issued by the International Accounting Standards Board ("IASB") are effective for annual periods starting on or after January 1, 2014 and have been applied in preparing the condensed interim consolidated financial statements for the three and nine-month periods ended May 31, 2015.

NEW ACCOUNTING STANDARDS

The following standards issued by the IASB were adopted by the Corporation on September 1, 2014 and had no effect on the financial performance of the Corporation:

  • Amendments to IAS 19 Defined Benefits Plans: Employee Contributions which applies to contributions from employees or third parties to defined benefit plans. The objective of the amendments is to simplify the accounting for contributions that are independent of the number of years of employee service, for example, employee contributions that are calculated according to a fixed percentage of salary.
  • IFRIC 21 Levies which sets out the accounting for an obligation to pay a levy that is not income taxes. The interpretation addresses what an obligating event is that gives rise to pay a levy and when should a liability be recognized.

CHANGES IN CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There has been no significant change in Cogeco Cable's accounting policies, estimates and future accounting pronouncements since August 31, 2014. A description of the Corporation's policies and estimates can be found in the 2014 Annual Report, available on the SEDAR website at www.sedar.com or on the Corporation's website at corpo.cogeco.com.

NON-IFRS FINANCIAL MEASURES

This section describes non-IFRS financial measures used by Cogeco Cable throughout this MD&A. It also provides reconciliations between these non-IFRS measures and the most comparable IFRS financial measures. These financial measures do not have standard definitions prescribed by IFRS and, therefore, may not be comparable to similar measures presented by other companies. These measures include "cash flow from operations", "free cash flow", "adjusted EBITDA", "operating margin" and "capital intensity".

CASH FLOW FROM OPERATIONS AND FREE CASH FLOW

Cash flow from operations is used by Cogeco Cable's management and investors to evaluate cash flows generated by operating activities, excluding the impact of changes in non-cash operating activities, amortization of deferred transaction costs and discounts on long-term debt, income taxes paid, current income taxes, financial expense paid and financial expense. This allows the Corporation 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-IFRS measure, "free cash flow". Free cash flow is used, by Cogeco Cable's management and investors, to measure its ability to repay debt, distribute capital to its shareholders and finance its growth.

The most comparable IFRS measure is cash flow from operating activities. Cash flow from operations is calculated as follows:

Three months ended Nine months ended
May 31,
2015
May 31,
2014
May 31,
2015
May 31,
2014
(in thousands of dollars)$ $ $ $
Cash flow from operating activities197,279 184,435 417,596 429,173
Changes in non-cash operating activities(28,754)(15,397)105,273 77,388
Amortization of deferred transaction costs and discounts on long-term debt2,114 1,898 6,226 5,628
Income taxes paid17,903 15,995 52,624 53,538
Current income taxes(22,887)(22,162)(62,797)(68,932)
Financial expense paid49,651 42,864 111,267 103,582
Financial expense(35,743)(32,038)(106,995)(97,505)
Cash flow from operations179,563 175,595 523,194 502,872

Free cash flow is calculated as follows:

Three months ended Nine months ended
May 31, May 31, May 31, May 31,
2015 2014 2015 2014
(in thousands of dollars)$ $ $ $
Cash flow from operations179,563 175,595 523,194 502,872
Acquisition of property, plant and equipment(99,577)(79,509)(297,803)(236,675)
Acquisition of intangible and other assets(4,141)(4,943)(11,471)(13,672)
Free cash flow75,845 91,143 213,920 252,525

ADJUSTED EBITDA AND OPERATING MARGIN

Adjusted EBITDA and operating margin are benchmarks commonly used in the telecommunications industry, as they allow comparisons with companies that have different capital structures and are more current measures since they exclude the impact of historical investments in assets. Adjusted EBITDA evolution assesses Cogeco Cable's ability to seize growth opportunities in a cost-effective manner, to finance its ongoing operations and to service its debt. Adjusted EBITDA is a proxy for cash flow from operations. Consequently, adjusted EBITDA is one of the key metrics used by the financial community to value the business and its financial strength. Operating margin is calculated by dividing adjusted EBITDA by revenue.

The most comparable IFRS financial measure is profit for the period. Adjusted EBITDA and operating margin are calculated as follows:

Three months endedNine months ended
May 31,May 31,May 31,May 31,
2015201420152014
(in thousands of dollars, except percentages)$$$$
Profit for the period64,14935,514179,764145,593
Income taxes17,8518,80148,32136,912
Financial expense35,74332,038106,99597,505
Impairment of property, plant and equipment-32,197-32,197
Depreciation and amortization116,351117,653347,799346,540
Integration, restructuring and acquisitions costs5,6693,1867,0083,780
Adjusted EBITDA239,763229,389689,887662,527
Revenue516,426496,4481,522,8971,457,436
Operating margin46.4%46.2%45.3%45.5%

CAPITAL INTENSITY

Capital intensity is used by Cogeco Cable's management and investors to assess the Corporation's investment in capital expenditures in order to support a certain level of revenue. Capital intensity ratio is defined as amount spent for acquisitions of property, plant and equipment, intangible and other assets divided by revenue.

Capital intensity is calculated as follows:

Three months ended Nine months ended
May 31, May 31, May 31, May 31,
2015 2014 2015 2014
(in thousands of dollars, except percentages)$ $ $ $
Acquisition of property, plant and equipment99,577 79,509 297,803 236,675
Acquisition of intangible and other assets4,141 4,943 11,471 13,672
Total capital expenditures103,718 84,452 309,274 250,347
Revenue516,426 496,448 1,522,897 1,457,436
Capital intensity20.1%17.0%20.3%17.2%

SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION

Three months ended
May 31,
February 28,

November 30,

August 31,
(in thousands of dollars, except percentages and per share data)2015 2014 2015 2014 2014 2013 2014 2013
$ $ $ $ $ $ $ $
Revenue516,426 496,448 509,470 486,008 497,001 474,890 490,155 470,386
Adjusted EBITDA239,763 229,389 231,264 221,616 218,860 211,522 230,830 222,539
Operating margin46.4%46.2%45.4%45.6%44.0%44.5%47.1%47.3%
Impairment of property, plant and equipment- 32,197 - - - - 3,296 -
Income taxes17,851 8,801 18,640 14,838 11,830 13,273 16,272 11,159
Profit for the period64,149 35,514 58,906 60,381 56,709 49,698 63,848 43,870
Cash flow from operating activities197,279 184,435 198,195 181,628 22,122 63,110 329,195 228,230
Cash flow from operations179,563 175,595 175,809 174,013 167,822 153,264 187,276 161,581
Acquisitions of property, plant and equipment, intangible and other assets
103,718

84,452

102,673

80,806

102,883

85,089

165,125

108,095
Free cash flow75,845 91,143 73,136 93,207 64,939 68,175 22,151 53,486
Capital intensity20.1%17.0%20.2%16.6%20.7%17.9%33.7%23.0%
Earnings per share(1)
Basic1.31 0.73 1.21 1.24 1.16 1.02 1.31 0.90
Diluted1.30 0.72 1.19 1.23 1.15 1.01 1.30 0.89
(1)Per multiple and subordinate voting share.

SEASONAL VARIATIONS

Cogeco Cable's operating results are not generally subject to material seasonal fluctuations except as follows. In the Canadian and American cable services segments, the number of customers in the Television services and HSI services are 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 season, 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 in the Pennsylvania region, and to a lesser extent in South Carolina, Maryland and Delaware in United States. In the American cable services segment, the Miami region is also subject to seasonal fluctuations due to winter season residents returning home from late spring through the fall. Furthermore, the second, third and fourth quarters' operating margins are usually higher as very low or no management fees are paid to COGECO Inc. Under the Management Agreement, Cogeco Cable pays a fee equal to 2% of its total revenue subject to a maximum amount. As the maximum amount was reached in the first quarter of fiscal 2015, Cogeco Cable will not pay any management fees for the remainder of the year. In fiscal 2014, as the maximum amount was paid in the first six months, Cogeco Cable paid no management fees in the second half of the year.

ADDITIONAL INFORMATION

This MD&A was prepared on July 14, 2015. Additional information relating to the Corporation, including its Annual Information Form, is available on the SEDAR website at www.sedar.com or the Corporation's website at corpo.cogeco.com.

/s/ Jan Peeters/s/ Louis Audet
Jan PeetersLouis Audet
Chairman of the BoardPresident and Chief Executive Officer

Contact Information

  • Source:
    Cogeco Cable Inc.
    Patrice Ouimet
    Senior Vice President and Chief Financial Officer
    514-764-4700

    Information:
    Media
    Rene Guimond
    Vice-President, Public Affairs and Communications
    514-764-4700