Cogeco Cable Inc.
TSX : CCA

Cogeco Cable Inc.

April 08, 2015 19:03 ET

Cogeco Cable Inc. Releases its Second Quarter 2015 Financial Results

- Second-quarter revenue reached $509.5 million, an increase of 4.8%;

- Adjusted EBITDA(1) increased by 4.4%, to reach $231.3 million;

- A quarterly dividend of $0.35 per share was declared, an increase of 16.7% compared to fiscal 2014; and

- The Corporation's subsidiary, Cogeco Cable Canada, launched TiVo's digital television services in Quebec on March 30, 2015.

MONTRÉAL, QUÉBEC--(Marketwired - April 8, 2015) - Today, Cogeco Cable Inc. (TSX:CCA) ("Cogeco Cable" or the "Corporation") announced its financial results for the second quarter of fiscal 2015, ended February 28, 2015.

For the second quarter and first six months of fiscal 2015:

  • Second-quarter revenue increased by $23.5 million, or 4.8%, to reach $509.5 million driven by growth of 0.3% in the Canadian cable services segment, 18.3% in the American cable services segment and 6.4% in the Enterprise data services segment. For the six-month period ended February 28, 2015, revenue increased by $45.5 million, or 4.7% to reach over $1.0 billion driven by growth of 1.0% in the Canadian cable services segment, 16.8% in the American cable services segment and 5.0% in the Enterprise data services segment. Revenue for both periods increased organically from all of our operating units combined with favorable foreign exchange rates for our foreign operations compared to last year;

  • Adjusted EBITDA increased by $9.6 million, or 4.4%, to reach $231.3 million compared to the second quarter of fiscal 2014, and by $17.0 million, or 3.9%, to reach $450.1 million compared to the first six months of the prior year. The progression resulted mainly from the improvement in all of our 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) slightly decreased to 45.4% from 45.6% in the second quarter and to 44.7% from 45.1% in the first six months compared to the same periods of the prior year mainly as a result of the higher proportion of the Enterprise data services and the American cable services segments, partly offset by the improvement in the Canadian cable services segment;

  • Second-quarter profit for the period amounted to $58.9 million, or $1.21 per share, compared to $60.4 million, or $1.24 per share in fiscal 2014, a decrease of 2.4%, mainly as a result of the increases in depreciation and amortization, financial expense and income taxes, partly offset by the improvement in adjusted EBITDA. For the first half of fiscal 2015, profit for the period amounted to $115.6 million, or $2.37 per share, compared to $110.1 million, or $2.26 per share for the comparable period of last year, representing an increase of 5.0% mainly due to the improvement in adjusted EBITDA, partly offset by increases in depreciation and amortization, financial expense and income taxes;

  • Second-quarter free cash flow(1) decreased by $20.1 million to reach $73.1 million compared to $93.2 million in the second quarter of fiscal 2014 mainly as a result of the increase in acquisitions of property, plant and equipment of $22.6 million. For the six-month period ended February 28, 2015, free cash flow decreased by $23.3 million to reach $138.1 million, compared to $161.4 million in the first half of fiscal 2014 mainly due to the increase in acquisitions of property, plant and equipment of $41.1 million, partly offset by the improvement in adjusted EBITDA of $17.0 million;

  • Fiscal 2015 second-quarter cash flow from operating activities reached $198.2 million compared to $181.6 million, representing an increase of $16.6 million, or 9.1%, compared to fiscal 2014 second-quarter. The variation for the quarter is mainly due to the improvement in adjusted EBITDA combined with decreases of financial expense paid and income taxes paid. For the first six months, cash flow from operating activities decreased by $24.4 million to reach $220.3 million compared to $244.7 million in the first half of fiscal 2014. The decrease for the period is mainly attributable to the decreases in changes in non-cash operating activities, partly offset by the improvement of adjusted EBITDA;

  • The Corporation revised its financial guidelines for the 2015 fiscal year and management expects revenue to increase by $20 million to reach $2.05 billion, adjusted EBITDA by $10 million to reach $935 million and free cash flow by $10 million to reach $290 million as a result of the appreciation of the US dollar and British Pound compared to the Canadian dollar;

  • 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 second quarter of fiscal 2014. Dividend payments in the first six months totaled $0.70 per share in fiscal 2015 compared to $0.60 in the comparable period of fiscal 2014;

  • At its April 8, 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 May 6, 2015;

  • On March 30, 2015, the Corporation's subsidiary, Cogeco Cable Canada, officially launched TiVo's digital advanced television services in Québec, which now completes the deployment of TiVo in our Canadian and American footprints. TiVo is the leader in advanced television services. The TiVo experience provides TV viewers with simple universal search, discovery, viewing and recording from any device, creating the ultimate viewing experience; and

  • On March 26, 2015, the Canadian Radio-Television and Telecommunications Commission ("CRTC") issued its final decision on Let's Talk TV proceedings. The new regulatory framework is virtually aligned with the recommendations that the Corporation made, creating the optimum environment for future growth of our video services in harmony with the customer expectations.
(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").

"We are satisfied with our financial results for the second quarter of fiscal year 2015," declared Louis Audet, President and Chief Executive Officer of Cogeco Cable Inc. "We continue to maintain a rigorous cost control discipline in how we leverage our spending while continuing to seize on growth opportunities."

"We are pleased with the improvements in our cable customer acquisition and retention numbers in Canada and the United States, and the Enterprise data services segment is now poised to take better advantage of growth opportunities," continued Louis Audet.

"Having completed the first half of the year, I feel our performance continues to be solid and I am confident that Cogeco Cable Inc. will deliver on its 2015 revised projections," concluded Louis Audet.

ABOUT COGECO CABLE

Cogeco Cable Inc. (www.cogeco.ca) 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 subsidiaries Cogeco Data Services and Peer 1 Hosting, Cogeco Cable provides to its commercial customers a suite of information technology services (colocation, managed and dedicated hosting, managed IT, cloud and connectivity services), with 20 data centres, extensive fibre networks in Montréal and Toronto as well as 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: Thursday, April 9, 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: 3132273
By Internet at www.cogeco.ca/investors
A rebroadcast of the conference call will be available until April 15, 2015, by dialing:
Canada and United States access number: 1 888-203-1112
International access number: + 1 647-436-0148
Confirmation code: 3132273

SHAREHOLDERS' REPORT

Three and six-month periods ended February 28, 2015

FINANCIAL HIGHLIGHTS

(in thousands of dollars, except percentages and per share data) Three months
ended February 28,
Six months
ended February 28,
2015 2014 Change 2015 2014 Change
$ $ % $ $ %
Operations
Revenue 509,470 486,008 4.8 1,006,471 960,988 4.7
Adjusted EBITDA(1) 231,264 221,616 4.4 450,124 433,138 3.9
Operating margin(1) 45.4 % 45.6 % - 44.7 % 45.1 % -
Profit for the period 58,906 60,381 (2.4 ) 115,615 110,079 5.0
Cash Flow
Cash flow from operating activities 198,195 181,628 9.1 220,317 244,738 (10.0 )
Cash flow from operations(1) 175,809 174,013 1.0 343,631 327,277 5.0
Acquisitions of property, plant and equipment, intangible and other assets 102,673 80,806 27.1 205,556 165,895 23.9
Free cash flow(1) 73,136 93,207 (21.5 ) 138,075 161,382 (14.4 )
Financial Condition(2)
Property, plant and equipment - - - 1,888,637 1,830,971 3.1
Total assets - - - 5,452,899 5,173,741 5.4
Indebtedness(3) - - - 2,956,912 2,744,746 7.7
Shareholders' equity - - - 1,629,896 1,508,256 8.1
Capital intensity(1) 20.2 % 16.6 % - 20.4 % 17.3 % -
Per Share Data(4)
Earnings per share
Basic 1.21 1.24 (2.4 ) 2.37 2.26 4.9
Diluted 1.19 1.23 (3.3 ) 2.34 2.24 4.5
(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 February 28, 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 six-month periods ended February 28, 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 six-month periods ended February 28, 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. 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).

(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.

KEY PERFORMANCE INDICATORS

ADJUSTED EBITDA AND OPERATING MARGIN

For the six-month period ended February 28, 2015, adjusted EBITDA increased by 3.9% to reach $450.1 million compared to the same period of fiscal 2014 and operating margin slightly decreased to 44.7% from 45.1%. Progression in the adjusted EBITDA is mainly attributable to the improvement in all of our 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 Enterprise data services and the American cable services segments, partly offset by the improvement in the Canadian cable services segment. As a result of the appreciation of the US dollar and British Pound currency compared to the Canadian dollar, the Corporation revised its financial guidelines for the 2015 fiscal year issued on October 31, 2014. Adjusted EBITDA is now expected to reach $935 million from $925 million and operating margin should remain the same at 45.6%. For further details, please consult the fiscal 2015 revised projections in the "Fiscal 2015 financial guidelines" section.

FREE CASH FLOW

For the six-month period ended February 28, 2015, Cogeco Cable reported free cash flow of $138.1 million, a decrease of $23.3 million compared to $161.4 million for the same period of the previous fiscal year. The decrease is mostly attributable to the increase in acquisitions of property, plant and equipment, intangible and other assets as explained below, partly offset by the improvement of adjusted EBITDA explained above. As a result of the improvement in adjusted EBITDA, the Corporation also revised its free cash flow projections from $280 million to $290 million. For further details, please consult the fiscal 2015 revised projections in the 'Fiscal 2015 financial guidelines" section.

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

During the six-month period ended February 28, 2015, the acquisitions of property, plant and equipment, intangible and other assets amounted to $205.6 million and revenue to over $1.0 billion for a capital intensity ratio of 20.4% compared to 17.3% 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.

In the Canadian cable services segment, the acquisitions of property, plant and equipment, intangible and other assets amounted to $103.6 million and revenue to $629.2 million for a capital intensity of 16.5% compared to 14.1% 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, partly offset by capital expenditures 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 $42.9 million and revenue to $222.6 million for a capital intensity of 19.3% compared to 15.4% for the same period of fiscal 2014. The increase in capital expenditures is also mainly due to additional customer premise equipment resulting from the launch in fiscal 2014 of Tivo's digital advanced television services and PSU growth combined with the increase in scalable infrastructure to extend and improve the network capacity in some of its areas served.

In the Enterprise data services segment, the acquisitions of property, plant and equipment, intangible and other assets amounted to $59.0 million and revenue to $156.1 million for a capital intensity of 37.8% compared to 33.0% for the same period of the previous year. The increase is essentially attributable to the construction by Cogeco Data Services of all remaining pods (pods 2, 3 and 4) at the Barrie data centre as well as the expansion of its data centre footprint with the construction of pod 1 in the new data centre in Montréal, Québec.

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

BUSINESS DEVELOPMENTS AND OTHER

On March 30, 2015, the Corporation's subsidiary, Cogeco Cable Canada, officially launched TiVo's digital advanced television services in Québec, which now completes the deployment of TiVo in our Canadian and American footprints. TiVo is the leader in advanced television services. The TiVo experience provides TV viewers with simple universal search, discovery, viewing and recording from any device, creating the ultimate viewing experience.

OPERATING AND FINANCIAL RESULTS

OPERATING RESULTS

Three months ended Six months ended

February
28,
2015

February
28, 2014


Change

February
28,
2015

February
28, 2014


Change
(in thousands of dollars, except percentages) $ $ % $ $ %
Revenue 509,470 486,008 4.8 1,006,471 960,988 4.7
Operating expenses 278,206 264,227 5.3 546,470 518,176 5.5
Management fees - COGECO Inc. - 165 - 9,877 9,674 2.1
Adjusted EBITDA 231,264 221,616 4.4 450,124 433,138 3.9
Operating margin 45.4 % 45.6 % 44.7 % 45.1 %

REVENUE

Fiscal 2015 second-quarter revenue increased by $23.5 million, or 4.8%, compared to prior year, to reach $509.5 million driven by growth of 0.3% in the Canadian cable services segment, 18.3% in the American cable services segment and 6.4% in the Enterprise data services segment. For the first six months of fiscal 2015, revenue amounted to over $1.0 billion, an increase of $45.5 million, or 4.7%, compared to the same period of fiscal 2014 driven by growth of 1.0% in the Canadian cable services segment, 16.8% in the American cable services segment and 5.0% in the Enterprise data services segment. Revenue for both periods increased organically from all of our operating units 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 second quarter of fiscal 2015, operating expenses increased by $14.0 million to reach $278.2 million, representing an increase of 5.3% compared to the prior year. For the first half of the fiscal year, operating expenses amounted to $546.5 million, an increase of $28.3 million, or 5.5%, compared to the same period of fiscal 2014. Operating expenses increased organically from all of our operating units combined with the appreciation of the US dollar and British Pound currency compared to the Canadian dollar. For further details on the Corporation's operating expenses, please refer to the "Segmented operating results" section.

For the second quarter of fiscal year 2015, no management fees were paid to COGECO Inc. compared to $0.2 million in the same period of fiscal 2014. 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 six-month periods ended February 28, 2015, adjusted EBITDA increased by $9.6 million, or 4.4%, to reach $231.3 million, and by $17.0 million, or 3.9%, to reach $450.1 million, respectively, compared to the same periods of the prior year. The increases for both periods is mainly attributable to the improvement in all of our operating segments as well as the favorable foreign exchange rates for our foreign operations compared to the same period of last year.

Cogeco Cable's second-quarter operating margin slightly decreased to 45.4% from 45.6% and slightly decreased to 44.7% from 45.1% for the first six months of fiscal 2015 compared to the comparable periods of the prior year mainly as a result of the higher proportion of the Enterprise data services and the American cable services segments, partly offset by the improvement in the Canadian cable services segment. 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 Six months ended

February
28,
2015
February" 28, 2014
Change
February
28,
2015
February
28, 2014

Change
(in thousands of dollars, except percentages) $ $ % $ $ %
Depreciation and amortization 116,855 113,133 3.3 231,448 228,887 1.1
Financial expense 35,524 32,918 7.9 71,252 65,467 8.8

For the three and six-month periods ended February 28, 2015, depreciation and amortization expense amounted to $116.9 million and $231.4 million, respectively, compared to $113.1 million and $228.9 million for the same periods of the prior year. The increases for both periods are 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 six-month periods ended February 28, 2015, financial expense amounted to $35.5 million and $71.3 million, respectively, representing increases of $2.6 million and $5.8 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.

INCOME TAXES

For the three and six-month periods ended February 28, 2015, income taxes amounted to $18.6 million and $30.5 million, respectively, compared to $14.8 million and $28.1 million for the same periods in fiscal 2014. The increases for both periods are mostly due to the improvement of adjusted EBITDA and the appreciation of the US dollar and British Pound currency compared to the Canadian dollar, partly offset by the increase in fixed charges explained above compared to the same periods of fiscal 2014.

PROFIT FOR THE PERIOD

For the second quarter of fiscal 2015, profit for the period amounted to $58.9 million, or $1.21 per share, compared to $60.4 million, or $1.24 per share in the second quarter of fiscal 2014 mainly as a result of the increases in depreciation and amortization, financial expense and income taxes, partly offset by the improvement of adjusted EBITDA. For the six-month period ended February 28, 2015, profit for the period amounted to $115.6 million, or $2.37 per share, compared to $110.1 million, or $2.26 per share for the comparable period mainly due to the improvement of adjusted EBITDA, partly offset by increases in depreciation and amortization, financial expense and income taxes.

CUSTOMER STATISTICS

Net additions (losses) Net additions (losses)
Consolidated UNITED STATES CANADA Three months ended Six months ended

February 28, 2015
February 28,
2015
February 28,
2014
February 28,
2015
February 28,
2014
PSU (1) 2,451,156 507,498 1,943,658 (2,116 ) (10,305 ) 8,972 (13,030 )
Television service customers 1,004,481 224,004 780,477 (10,148 ) (13,248 ) (18,613 ) (22,341 )
HSI service customers 898,807 200,560 698,247 10,819 8,889 29,354 19,341
Telephony service customers 547,868 82,934 464,934 (2,787 ) (5,946 ) (1,769 ) (10,030 )
(1) Represents the sum of Television, High Speed Internet ("HSI") and Telephony service customers.

At February 28, 2015, PSU reached 2,451,156 of which 1,943,658 came from the Canadian cable services segment and 507,498 came from the American cable services segment. For the three and six-month periods ended February 28, 2015, PSU net losses stood at 2,116 and net additions at 8,972, respectively, compared to PSU net losses of 10,305 and 13,030 for the same periods of fiscal 2014. Fiscal 2015 second-quarter and first six months net losses for Television service customers stood at 10,148 and 18,613 compared to 13,248 and 22,341 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 on November 3, 2014 in Ontario, Canada and in fiscal 2014 in the United States. HSI service customers grew by 10,819 and 29,354 in the second quarter and the first six months of fiscal 2015 compared to 8,889 and 19,341 and the Telephony service customers net losses stood at 2,787 and 1,769 compared to net losses of 5,946 and 10,030 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 is mainly attributable to 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 7,659 for the second-quarter of fiscal 2015, compared to 13,425 for the same period last year. For the first six months of fiscal 2015, PSU decreased by 2,364 compared to a decrease of 18,045 for the comparable period in 2014. For both periods, the PSU variation stems primarily from additional HSI services, partly offset by a slightly lower decrease in the Television and Telephony services.

In the American cable services segment, PSU increased by 5,543 for the second-quarter of fiscal 2015, compared to 3,120 for the same period of prior year. For the first six months of fiscal 2015, PSU increased by 11,336 compared to 5,015 for the comparable period in 2014. For both periods, the PSU growth stems primarily from additional HSI and Telephony services and by 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 Inc., which holds 31.9% of the Corporation's equity shares, representing 82.4% of the Corporation's voting shares. On September 1, 1992, Cogeco Cable Inc. executed a management agreement with COGECO Inc. under which the parent company agreed to provide certain executive, administrative, legal, regulatory, strategic and financial planning services and additional services to the Corporation and its subsidiaries (the "Management Agreement"). These services are provided by COGECO Inc.'s senior executives, including the President and Chief Executive Officer, the Senior Vice President and Chief Financial Officer, the Vice President, Regulatory Affairs and Copyright, the Vice President, Corporate Affairs, Chief Legal Officer and Secretary, the Vice President, Corporate Development, the Vice President and Treasurer, the Vice President, Public Affairs and Communications, the Vice President, Corporate Human Resources and the Vice President, Internal Audit and Risk Management. No direct remuneration is payable to such senior executives by the Corporation. However, during the first six months of fiscal 2015, the Corporation granted 61,300 (83,650 in 2014) stock options to these senior executives as senior executives of Cogeco Cable. During the second quarter and first six months of fiscal 2015, the Corporation charged COGECO Inc. amounts of $114,000 and $227,000 ($68,000 and $162,000 in 2014) with regards to the Corporation's stock options granted to these senior executives.

No Incentive Share Units ("ISUs") of the Corporation were granted to senior executives of COGECO Inc. during the first six months of fiscal 2015 (12,450 in 2014). During the second quarter and first six months of fiscal 2015, the Corporation charged to COGECO Inc. amounts of $74,000 and $160,000 ($119,000 and $318,000 in 2014) with regards to the ISUs previously granted by the Corporation to these executives of COGECO Inc.

The Corporation introduced a Performance Share Unit Plan ("PSU Plan") in the first quarter of fiscal 2015. During the first six months of fiscal 2015, the Corporation granted 11,050 Performance Share Units ("PSUs") to senior executives of COGECO Inc. as senior executives of Cogeco Cable and charged COGECO Inc. amounts of $56,000 and $73,000 for the three and six-month periods ended February 28, 2015 with regards to the Corporation's PSUs granted to these senior executives.

Under the Management Agreement, the Corporation pays monthly fees equal to 2% of its total revenue to COGECO Inc. for the above-mentioned services. The management fees are subject to annual upward adjustment based on increases in the Consumer Price Index in Canada. This limit can be increased under certain circumstances upon request to that effect by COGECO Inc. 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 addition, the Corporation reimburses COGECO Inc.'s out-of-pocket expenses incurred with respect to services provided to the Corporation under the Management Agreement.

Details regarding the Management Agreement and stock options and ISUs granted to COGECO Inc.'s senior executives 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 Six months ended
February
28,
2015
February
28, 2014
February
28,
2015
February
28, 2014
(in thousands of dollars) $ $ $ $
Cash flow from operations 175,809 174,013 343,631 327,277
Changes in non-cash operating activities (4,086 ) (6,081 ) (134,027 ) (92,785 )
Amortization of deferred transaction costs and discounts on long-term debt (2,094 ) (1,888 ) (4,112 ) (3,730 )
Income taxes paid (14,371 ) (19,239 ) (34,721 ) (37,543 )
Current income taxes 22,666 20,217 39,910 46,770
Financial expense paid (15,253 ) (18,312 ) (61,616 ) (60,718 )
Financial expense 35,524 32,918 71,252 65,467
Cash flow from operating activities 198,195 181,628 220,317 244,738
Cash flow from investing activities (102,542 ) (80,655 ) (205,292 ) (165,315 )
Cash flow from financing activities (95,948 ) (74,458 ) (64,489 ) (66,151 )
Effect of exchange rate changes on cash and cash equivalents denominated inforeign currencies 1,918 1,726 3,548 1,925
Net change in cash and cash equivalents 1,623 28,241 (45,916 ) 15,197
Cash and cash equivalents, beginning of the period 16,292 26,531 63,831 39,575
Cash and cash equivalents, end of the period 17,915 54,772 17,915 54,772

OPERATING ACTIVITIES

Fiscal 2015 second-quarter cash flow from operating activities reached $198.2 million compared to $181.6 million, representing an increase of $16.6 million, or 9.1%, compared to fiscal 2014 second-quarter. The increase is mainly explained by the increases of $9.6 million in adjusted EBITDA combined with decreases of $3.1 million in financial expense paid and of $4.9 million in income taxes paid. For the first six months of fiscal 2015, cash flow from operating activities reached $220.3 million compared to $244.7 million, representing a decrease of $24.4 million, or 10.0%, compared to the same period of fiscal 2014. The decrease is mainly explained by the decrease of $41.2 million in changes in non-cash operating activities as a result of a higher decrease in trade and other payables compared to the same period of prior year, partly offset by the improvement of $17.0 million in adjusted EBITDA.

For the second quarter ended February 28, 2015, cash flow from operations remained essentially the same at $175.8 million compared to $174.0 million for the same period last year, mainly explained by the improvement of $9.6 million in adjusted EBITDA, partly offset by the increases of $2.6 million in financial expense and of $2.4 million in current income taxes. For the six-month period ended February 28, 2015, cash flow from operations amounted to $343.6 million compared to $327.3 million for the comparable period in fiscal 2014, representing an increase of $16.4 million, or 5.0%, mainly explained by the improvement of $17.0 million in adjusted EBITDA and the decrease in current income taxes of $6.9 million, partly offset by the increase of $5.8 million in financial expense.

INVESTING ACTIVITIES

For the three and six-month periods ended February 28, 2015, investing activities amounted to $102.5 million and $205.3 million, respectively, compared to $80.7 million and $165.3 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 acquisition of property, plant and equipment segmented according to the National Cable Television Association ("NCTA") standard reporting categories, are as follows:

Three months ended Six months ended
February
28,
2015
February
28, 2014
February
28,
2015
February
28, 2014
(in thousands of dollars) $ $ $ $
Customer premise equipment(1) 32,540 18,228 67,872 43,545
Scalable infrastructure(2) 16,204 15,675 29,981 35,475
Line extensions 11,285 6,121 21,315 11,418
Upgrade / Rebuild 4,319 5,261 8,515 10,567
Support capital 4,602 4,750 12,048 8,731
Acquisition of property, plant and equipment - Cable services 68,950 50,035 139,731 109,736
Acquisition of property, plant and equipment - Enterprise data services 29,858 26,158 58,493 47,430
Acquisition of property, plant and equipment - Head office 2 - 2 -
Acquisitions of property, plant and equipment 98,810 76,193 198,226 157,166
Acquisition of intangible and other assets - Cable services 3,559 3,467 6,797 7,145
Acquisition of intangible and other assets - Enterprise data services 304 1,146 533 1,584
Acquisitions of intangible and other assets 3,863 4,613 7,330 8,729
102,673 80,806 205,556 165,895
(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 second quarter ended February 28, 2015, acquisition of property, plant and equipment in the Canadian and American cable services segments amounted to $69.0 million compared to $50.0 million for the comparable period of fiscal 2014 of which $49.1 million, came from the Canadian cable services segment compared to $32.5 million for the comparable period of the prior year and $19.9 million came from the American cable services segment compared to $17.5 million for the same period of fiscal 2014.

For the six-month period ended February 28, 2015, acquisition of property, plant and equipment in the Canadian and American cable services segments amounted to $139.7 million compared to $109.7 million for the comparable period of fiscal 2014 of which $98.1 million, came from the Canadian cable services segment compared to $81.3 million for the comparable period of the prior and $41.6 million came from the American cable services segment compared to $28.4 million for the same period of fiscal 2014.

For the six-month period ended February 28, 2015, the capital intensity for the Canadian and American cable services segments reached 16.5% and 19.3%, respectively, compared to 14.1% and 15.4% for the same period of prior year. Capital intensity ratio has increased mainly as result of higher acquisitions of property, plant and equipment attributable to the following factors:

  • In the Canadian cable services segment, the increase in acquisition of property, plant and equipment during the three and six-month periods ended February 28, 2015 was mainly due to additional customer premise equipment for the launch of TiVo digital advanced television services on November 3, 2014 in Ontario, 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 during the three and six-month periods ended February 28, 2015 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 to extend and improve network capacity in the areas served as well as higher foreign exchange rates compared to last year.

During fiscal 2015 second-quarter and first six months, acquisition of property, plant and equipment in the Enterprise data services segment amounted to $29.9 million and $58.5 million, respectively, compared to $26.2 million and $47.4 million for the same periods of fiscal 2014. 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 as well as the expansion of its data centre footprint with the construction of pod 1 in the 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 second quarter and the first six months of fiscal 2015, the acquisition of intangible and other assets amounted to $3.9 million and $7.3 million, respectively, compared to $4.6 million and $8.7 million for the same periods last year mainly due to lower reconnect activities in the Canadian cable services segment.

FREE CASH FLOW AND FINANCING ACTIVITIES

For the second quarter of fiscal 2015, free cash flow amounted to $73.1 million, representing a decrease of $20.1 million compared to $93.2 million for the same period in fiscal 2014. The decrease is mainly attributable to the increase of $22.6 million in acquisitions of property, plant and equipment explained above. For the first six months of fiscal 2015, free cash flow decreased by $23.3 million to reach $138.1 million, compared to $161.4 million for the same period of prior year. The decrease is mainly due to the increase of $41.1 million in acquisitions of property, plant and equipment, partly offset by the improvement of $17.0 million in adjusted EBITDA.

In the second quarter of fiscal 2015, a lower Indebtedness level resulted in a cash decrease of $83.1 million mainly due to the repayments of $75.6 million under the revolving facilities and the repayments of $3.6 million of long-term debt combined with the decrease of $3.9 million in bank indebtedness. In the second quarter of fiscal 2014, a lower indebtedness level resulted in a cash decrease of $60.9 million mainly due to the repayments of $48.9 million under the revolving facilities and the decrease of $7.4 million in bank indebtedness.

For the first six-month period ended February 28, 2015, a lower Indebtedness level resulted in a cash decrease of $28.9 million, mainly due to the repayments of $24.4 million under the revolving facilities combined with the repayments of $20.3 million of long-term debt, partly offset by the increase of $15.8 million in bank indebtedness. For the first six months of fiscal 2014, a lower Indebtedness level resulted in a cash decrease of $33.2 million, mainly due to a decrease in bank indebtedness of $11.5 million and repayments under the revolving facilities of $15.6 million.

During the second 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 second quarter of fiscal 2014. Dividend payments in the first six months totaled $0.70, or $34.2 million, compared to $0.60 per share, or $29.2 million the year before.

At February 28, 2015, the Corporation had a working capital deficiency of $409.4 million compared to $267.6 million at August 31, 2014. The $141.9 million deficiency increase is mainly due to the increase of $238.1 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 combined with the decrease of $45.9 million in cash and cash equivalents, partly offset by the decrease of $112.5 million in trade and other payables and the increase of $38.1 million in derivative financial instruments asset related to the cross-currency swaps on the Senior Secured Notes Series A. 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 February 28, 2015, the Corporation had used $212.1 million of its $800 million amended and restated Term Revolving Facility for a remaining availability of $587.9 million. In addition, two subsidiaries of the Corporation also benefit from a Revolving Facility of $187.5 million (US$150 million), of which $37.8 million (US$30.2 million) was used at February 28, 2015 for a remaining availability of $149.8 million (US$119.8 million).

FINANCIAL POSITION

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

Cash and cash equivalent decreased by $45.9 million mainly due to the decrease of $112.5 million in trade and other payables related to the timing of payments made to suppliers. Property, plant and equipment and intangible assets increased by $57.7 million and $97.3 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 $128.8 million as a result of the US dollar and the British Pound currency appreciation against the Canadian dollar during the first six months of fiscal 2015. The increase of $38.1 million in the current portion of 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. The increase of $238.1 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.

OUTSTANDING SHARE DATA

A description of Cogeco Cable's share data at March 31, 2015 is presented in the table below. Additional details are provided in Note 10 of the condensed interim consolidated financial statements.

Amount
Number of (in thousands
shares/options of dollars)
Common shares
Multiple voting shares 15,691,100 $ 98,346
Subordinate voting shares 33,532,442 $ 918,005
Options to purchase subordinate voting shares
Outstanding options 740,473
Exercisable options 246,222

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 February 28, 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 February 28, 2015:

Type of hedge Notional amount Receive interest rate Pay interest rate Maturity Hedged item
Cash flow US$200 million US Libor base rate 0.39625% 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 $3.8 million based on the current debt at February 28, 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 February 28, 2015:

Type of hedge Notional amount Receive interest rate Pay interest rate Maturity Exchange rate Hedged item
Cash flow US$190 million 7.00% USD 7.24% CAD October 1, 2015 1.0625 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 February 28, 2015.

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 February 28, 2015:

Type of hedge Notional amount of debt Aggregate investments Hedged item
Net investment US$860.5 million US$1.1 billion Net investment in foreign operations in US dollar
Net investment £54.8 million £61.2 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 February 28, 2015 was $1.2503 per US dollar and $1.9303 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 $30.6 million.

For the three and six-month periods ended February 28, 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 Six months ended
February
28,
2015
February
28, 2014

Change
February
28,
2015
February
28, 2014

Change
$ $ % $ $ %
US dollar vs Canadian dollar 1.2049 1.0879 10.8 1.1616 1.0639 9.2
British Pound vs Canadian dollar 1.8514 1.7917 3.3 1.8227 1.7294 5.4

The following tables highlight in Canadian dollars, the impact of a 10% increase in the US dollar and British Pound against the Canadian dollar as the case may be, of Cogeco Cable's operating results for the three and six-month periods ended February 28, 2015:

Canadian cable services American cable services Enterprise data services

Three months ended February 28, 2015
As
reported
Exchange
rate impact
As
reported
Exchange
rate impact
As
reported
Exchange
rate impact
(in thousands of dollars) $ $ $ $ $ $
Revenue 313,966 - 116,035 11,602 80,152 4,012
Operating expenses 154,931 1,054 66,116 6,611 51,771 2,947
Adjusted EBITDA 159,035 (1,054 ) 49,919 4,991 28,381 1,065
Acquisitions of property, plant and equipment, intangible and other assets 51,904 2,538 20,605 2,064 30,162 623
Canadian cable services American cable services Enterprise data services

Six months ended February 28, 2015
As
reported
Exchange
rate impact
As
reported
Exchange
rate impact
As
reported
Exchange
rate impact
(in thousands of dollars) $ $ $ $ $ $
Revenue 629,188 - 222,606 22,254 156,112 7,750
Operating expenses 310,322 1,687 125,850 12,577 101,734 5,733
Adjusted EBITDA 318,866 (1,687 ) 96,756 9,677 54,378 2,017
Acquisitions of property, plant and equipment, intangible and other assets 103,601 6,337 42,927 4,310 59,026 1,022

DIVIDEND DECLARATION

At its April 8, 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 May 6, 2015, to shareholders of record on April 22, 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 the segment and to assess its performance.

CANADIAN CABLE SERVICES

CUSTOMER STATISTICS

Net additions (losses) % of penetration(1)
Three months ended Six months ended

February
28, 2015
February
28,
2015
February
28, 2014
February
28,
2015
February
28, 2014
February
28,
2015
February
28, 2014
PSU(2) 1,943,658 (7,659 ) (13,425 ) (2,364 ) (18,045 )
Television service customers 780,477 (9,209 ) (11,797 ) (16,688 ) (18,919 ) 46.4 48.5
HSI service customers 698,247 5,336 4,724 18,663 11,644 41.5 40.0
Telephony service customers 464,934 (3,786 ) (6,352 ) (4,339 ) (10,770 ) 27.6 28.1
(1) As a percentage of homes passed.
(2) Represents the sum of Television, HSI and Telephony service customers.

Fiscal 2015 second-quarter and first six months PSU net losses amounted to 7,659 and 2,364, respectively, compared to 13,425 and 18,045 for the same periods of last year, mainly as a result of lower decreases in the Television and Telephony services, partly offset by additional customers in HSI services. For the second quarter and first six months of fiscal 2015, net customer losses for Television service stood at 9,209 and 16,688 compared to 11,797 and 18,919 for the same periods of fiscal 2014. Television service customer net losses are mainly due to the promotional offers of competitors for the video service, service category maturity and the expansion of IPTV footprint of competitors, partly offset by the launch of TiVo digital advanced television services on November 3, 2014 in Ontario. For the second quarter and first six months of fiscal 2015, net additions for HSI service customers stood at 5,336 and 18,663 compared to 4,724 and 11,644 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 3,786 and 4,339 for the second quarter and the first six months of fiscal 2015, compared to 6,352 and 10,770 for the same periods of 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 February 28, 2015, 70% (68% 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 (32% in 2014), 34% to the double play (32% in 2014) and 36% to the triple play (36% in 2014).

OPERATING RESULTS

Three months ended Six months ended
February
28,
2015
February
28, 2014

Change
February
28,
2015
February
28, 2014

Change
(in thousands of dollars, except percentages) $ $ % $ $ %
Revenue 313,966 313,159 0.3 629,188 622,678 1.0
Operating expenses 154,931 155,372 (0.3 ) 310,322 310,545 (0.1 )
Adjusted EBITDA 159,035 157,787 0.8 318,866 312,133 2.2
Operating margin 50.7 % 50.4 % 50.7 % 50.1 %

REVENUE

Fiscal 2015 second-quarter revenue increased by $0.8 million, or 0.3%, to reach $314.0 million, compared to the same period last year. For the first six months, revenue increased by $6.5 million, or 1.0%, to reach $629.2 million, compared to the first six months of fiscal 2014. Revenue increase is mainly attributable to a rate increase implemented in April 2014 in Québec and Ontario, partly offset by PSU losses as a result of promotional offers of competitors and service category maturity.

OPERATING EXPENSES

For the second quarter and first six months ended February 28, 2015, operating expenses remained essentially the same at $154.9 million and $310.3 million, respectively, compared to $155.4 million and $310.5 million for the same periods last year, mainly as a result of additional marketing initiatives related to the launch of TiVo digital advanced television services on November 3, 2014 in Ontario, mostly offset by cost reduction initiatives.

ADJUSTED EBITDA AND OPERATING MARGIN

Fiscal 2015 second-quarter adjusted EBITDA amounted to $159.0 million, or 0.8% higher than in the same period of the prior year. For the first six months of fiscal 2015, adjusted EBITDA amounted to $318.9 million, or 2.2% higher than in the same period of the prior year. Both increases in adjusted EBITDA are mainly attributable to revenue growth combined with operating expense reductions. Consequently, operating margin increased compared to fiscal 2014 second-quarter from 50.4% to 50.7% and from 50.1% to 50.7% for the first six months of fiscal 2015 compared to the prior year.

AMERICAN CABLE SERVICES

CUSTOMER STATISTICS

Net additions (losses) % of penetration(1)
Three months ended Six months ended

February
28, 2015
February
28,
2015
February
28, 2014
February
28,
2015
February
28, 2014
February
28,
2015
February
28, 2014
PSU(2) 507,498 5,543 3,120 11,336 5,015
Television service customers 224,004 (939 ) (1,451 ) (1,925 ) (3,422 ) 43.1 44.2
HSI service customers 200,560 5,483 4,165 10,691 7,697 38.6 35.7
Telephony service customers 82,934 999 406 2,570 740 16.0 15.3
(1) As a percentage of homes passed.
(2) Represents the sum of Television, HSI and Telephony service customers.

Fiscal 2015 second-quarter and first six months PSU net additions amounted to 5,543 and 11,336, respectively, compared to 3,120 and 5,015 for the same periods of the prior year. Net customer losses for the Television service stood at 939 and 1,925, respectively, for the second quarter and first six months of fiscal 2015 compared to 1,451 and 3,422 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 second quarter and first six months of fiscal 2015, net customer additions for HSI service amounted to 5,483 and 10,691 compared to 4,165 and 7,697 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 999 and 2,570 for the three and six-month periods ended February 28, 2015, compared to 406 and 740 for the same periods in fiscal 2014.

Furthermore, as at February 28, 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 ended Six months ended
February
28,
2015
February
28, 2014

Change
February
28,
2015
February
28, 2014

Change
(in thousands of dollars, except percentages) $ $ % $ $ %
Revenue 116,035 98,048 18.3 222,606 190,597 16.8
Operating expenses 66,116 55,767 18.6 125,850 105,786 19.0
Adjusted EBITDA 49,919 42,281 18.1 96,756 84,811 14.1
Operating margin 43.0 % 43.1 % 43.5 % 44.5 %

REVENUE

Fiscal 2015 second-quarter revenue increased by $18.0 million, or 18.3%, to reach $116.0 million compared to the same period last year. For the first six months, revenue amounted to $222.6 million, an increase of $32.0 million compared to the first six 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 second quarter and first six months of fiscal 2015, revenue in local currency amounted to US$96.3 million and US$191.6 million compared to US$90.1 million and US$179.1 million for the same periods last year.

OPERATING EXPENSES

Fiscal 2015 second-quarter operating expenses amounted to $66.1 million, an increase of 18.6% compared to the same period last year. For the first six months, operating expenses amounted to $125.9 million, an increase of $20.1 million compared to the first six months of fiscal 2014. The increases for both periods is mainly attributable to the appreciation of the US dollar over the Canadian dollar, 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 second quarter and first six months of fiscal 2015 amounted to US$54.9 million and US$108.3 million compared to US$51.2 million and US$99.3 million for the comparable periods of fiscal 2014.

ADJUSTED EBITDA AND OPERATING MARGIN

Adjusted EBITDA for the second-quarter and first six months of fiscal 2015 increased by 18.1% and 14.1% to reach $49.9 million and $96.8 million, respectively, compared to $42.3 million and $84.8 million for the same periods of fiscal 2014 as a result of the factors previously discussed. As a result of operating expenses growth exceeding revenue growth, operating margin for the three and six-month periods ended February 28, 2015 decreased to 43.0% from 43.1% and to 43.5% from 44.5% for the comparable periods of the prior year.

Fiscal 2015 second-quarter and first six months adjusted EBITDA in local currency amounted to US$41.4 million and US$83.3 million compared to US$38.9 million and US$79.8 million for the same periods last year.

ENTERPRISE DATA SERVICES

Three months ended Six months ended
February
28,
2015
February
28, 2014

Change
February
28,
2015
February
28, 2014

Change
(in thousands of dollars, except percentages) $ $ % $ $ %
Revenue 80,152 75,339 6.4 156,112 148,711 5.0
Operating expenses 51,771 50,174 3.2 101,734 95,655 6.4
Adjusted EBITDA 28,381 25,165 12.8 54,378 53,056 2.5
Operating margin 35.4 % 33.4 % 34.8 % 35.7 %

OPERATING RESULTS

REVENUE

Fiscal 2015 second-quarter revenue increased by $4.8 million, or 6.4%, to reach $80.2 million, compared to the same period last year. For the first six months of fiscal 2015, revenue amounted to $156.1 million, an increase of $7.4 million compared to the first six months of fiscal 2014. The increase for both periods is mainly due of the appreciation of the US dollar and the British Pound against the Canadian dollar for our foreign operations as well as the organic growth. In addition, the increase over the periods would have been higher without some revenue recorded in the fiscal 2014 first and second quarters, which were subsequently reversed through billing adjustments and credit notes in the second half of fiscal 2014 as a result of the application of more rigorous controls as a part of the certification process.

OPERATING EXPENSES

For the second quarter of fiscal 2015 operating expenses increased by $1.6 million, to $51.8 million. For the first six months of fiscal 2015, operating expenses increased by $6.1 million to reach $101.7 million. The increase for both periods are primarily due to the appreciation of the US dollar and the British Pound against the Canadian dollar, higher labour and benefits costs and higher various infrastructure support costs.

ADJUSTED EBITDA AND OPERATING MARGIN

Fiscal 2015 second-quarter adjusted EBITDA increased by $3.2 million, or 12.8%, to reach $28.4 million compared to the same period of the prior year. As a result of revenue growth exceeding operating expenses, operating margin increased to 35.4% from 33.4% compared to the same period of fiscal 2014.

Fiscal 2015 first six months adjusted EBITDA increased by $1.3 million, or 2.5%, to reach $54.4 million compared to the same period of fiscal 2014. As a result of operating expenses growth exceeding revenue, operating margin decreased to 34.8% from 35.7% in first six months compared to the same period of the prior year.

FISCAL 2015 FINANCIAL GUIDELINES

Giving effect to the appreciation of the US dollar and British Pound currency compared to the Canadian dollar, the Corporation revised its financial guidelines for the 2015 fiscal year issued on October 31, 2014. Management expects revenue to reach $2.05 billion, representing a growth of $20 million, or 1.0%, compared to those issued on October 31, 2014. Adjusted EBITDA should increase by $10 million to reach $935 million and consequently, free cash flow should increase by $10 million to reach $290 million compared to the October 31, 2014 projections. Financial expense should increase by $15 million mainly due to the appreciation of the US dollar and British Pound currency compared to the Canadian dollar.

Fiscal 2015 revised financial guidelines are as follows:

Revised projections Projections
April 8, 2015 October 31, 2014
Fiscal 2015 Fiscal 2015
(in million of dollars, except percentages) $ $
Revenue 2,050 2,030
Adjusted EBITDA 935 925
Operating margin 45.6 % 45.6 %
Integration, restructuring and acquisition costs 1 -
Depreciation and amortization 465 465
Financial expense 140 125
Current income tax expense 90 100
Profit for the year 260 260
Acquisitions of property, plant and equipment, intangible and other assets 430 430
Free cash flow(1) 290 280
Capital intensity 21.0 % 21.2 %
(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.

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 February 28, 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 six-month periods ended February 28, 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 www.cogeco.ca. 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:

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

  2. 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

  3. 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:

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

  2. a new Television Service Provider Code that will govern 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 six-month periods ended February 28, 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 www.cogeco.ca.

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 Six months ended
February
28,
2015
February
28, 2014
February
28,
2015
February
28, 2014
(in thousands of dollars) $ $ $ $
Cash flow from operating activities 198,195 181,628 220,317 244,738
Changes in non-cash operating activities 4,086 6,081 134,027 92,785
Amortization of deferred transaction costs and discounts on long-term debt 2,094 1,888 4,112 3,730
Income taxes paid 14,371 19,239 34,721 37,543
Current income taxes (22,666 ) (20,217 ) (39,910 ) (46,770 )
Financial expense paid 15,253 18,312 61,616 60,718
Financial expense (35,524 ) (32,918 ) (71,252 ) (65,467 )
Cash flow from operations 175,809 174,013 343,631 327,277

Free cash flow is calculated as follows:

Three months ended Six months ended
February
28,
2015
February
28, 2014
February
28,
2015
February
28, 2014
(in thousands of dollars) $ $ $ $
Cash flow from operations 175,809 174,013 343,631 327,277
Acquisition of property, plant and equipment (98,810 ) (76,193 ) (198,226 ) (157,166 )
Acquisition of intangible and other assets (3,863 ) (4,613 ) (7,330 ) (8,729 )
Free cash flow 73,136 93,207 138,075 161,382

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 ended Six months ended
February
28,
2015
February
28, 2014
February
28,
2015
February
28, 2014
(in thousands of dollars, except percentages) $ $ $ $
Profit for the period 58,906 60,381 115,615 110,079
Income taxes 18,640 14,838 30,470 28,111
Financial expense 35,524 32,918 71,252 65,467
Depreciation and amortization 116,855 113,133 231,448 228,887
Integration, restructuring and acquisitions costs 1,339 346 1,339 594
Adjusted EBITDA 231,264 221,616 450,124 433,138
Revenue 509,470 486,008 1,006,471 960,988
Operating margin 45.4 % 45.6 % 44.7 % 45.1 %

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 Six months ended
February
28, 2015
February
28, 2014
February
28, 2015
February
28, 2014
(in thousands of dollars, except percentages) $ $ $ $
Acquisition of property, plant and equipment 98,810 76,193 198,226 157,166
Acquisition of intangible and other assets 3,863 4,613 7,330 8,729
Total capital expenditures 102,673 80,806 205,556 165,895
Revenue 509,470 486,008 1,006,471 960,988
Capital intensity 20.2% 16.6% 20.4% 17.3%

SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION

Three months ended February 28, November 30, August 31, May 31,
(in thousands of dollars, except percentages and per share data) 2015 2014 2014 2013 2014 2013 2014 2013
$ $ $ $ $ $ $ $
Revenue 509,470 486,008 497,001 474,890 490,155 470,386 496,448 464,497
Adjusted EBITDA 231,264 221,616 218,860 211,522 230,830 222,539 229,389 215,182
Operating margin 45.4 % 45.6 % 44.0 % 44.5 % 47.1 % 47.3 % 46.2 % 46.3 %
Impairment of property, plant and equipment - - - - 3,296 - 32,197 -
Income taxes 18,640 14,838 11,830 13,273 16,272 11,159 8,801 18,411
Profit for the period 58,906 60,381 56,709 49,698 63,848 43,870 35,514 48,079
Profit for the period attributable to owners of theCorporation
58,906

60,381

56,709

49,698

63,848

43,870

35,514

47,877
Cash flow from operating activities 198,195 181,628 22,122 63,110 329,195 228,230 184,435 166,976
Cash flow from operations 175,809 174,013 167,822 153,264 187,276 161,581 175,595 155,868
Acquisitions of property, plant and equipment, intangible and other assets
102,673

80,806

102,883

85,089

165,125

108,095

84,452

112,841
Free cash flow 73,136 93,207 64,939 68,175 22,151 53,486 91,143 43,027
Capital intensity 20.2 % 16.6 % 20.7 % 17.9 % 33.7 % 23.0 % 17.0 % 24.3 %
Earnings per share(1)
Basic 1.21 1.24 1.16 1.02 1.31 0.90 0.73 0.98
Diluted 1.19 1.23 1.15 1.01 1.30 0.89 0.72 0.98
(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, Miami region is also subject to seasonal fluctuations due to the 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 April 8, 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 www.cogeco.ca.

Jan Peeters Louis Audet
Chairman of the Board President 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