Cogeco Cable Inc.
TSX : CCA

Cogeco Cable Inc.

April 08, 2011 07:30 ET

Solid Second Quarter Results for Cogeco Cable

MONTREAL, QUEBEC--(Marketwire - April 8, 2011) - Today, Cogeco Cable Inc. (TSX:CCA) ("Cogeco Cable" or the "Corporation") announced its financial results for the second quarter and first six months of fiscal 2011, ended February 28, 2011.

For the second quarter and first six months of fiscal 2011:

  • Revenue increased by 5% to reach $336.6 million, and by 4.8% to reach $668.1 million;
  • Operating income before amortization(1) increased by 9.6% to $134.4 million when compared to the second quarter of fiscal 2010, and by 7.6% to $263.8 million when compared to the first half of the prior fiscal year;
  • Operating margin(1) increased to 39.9% from 38.3% in the quarter, and to 39.5% from 38.4% in the first six months when compared to the same periods of the prior year;
  • In the second quarter, the Corporation redeemed the $175 million Senior Secured Notes Series B, bearing interest at 7.73%, from the net proceeds of the issuance, in the first quarter of fiscal 2011, of the $200 million Senior Secured Debentures Series 2, bearing interest at 5.15%. A one-time make-whole premium of $8.8 million was paid on the redemption, which increased financial expense during the second quarter and first six months;
  • Net income grew by $1.4 million, or 4.6% to reach $31.2 million in the second quarter, compared to $29.8 million for the same period of the previous fiscal year. For the first half of fiscal 2011, net income amounted to $64.8 million, compared to $86.5 million in the first half of fiscal 2010. In the first six months of fiscal 2010, net income included a favourable income tax adjustment of $29.8 million related to the reduction of Ontario provincial corporate income tax rates for the Canadian operations. Excluding this adjustment, net income progression in the first six months of fiscal 2011 amounted to $8.1 million, or 14.3% when compared to the adjusted net income(1) of $56.7 million in the first half of fiscal 2010;
  • Free cash flow(1) reached $48.2 million for the quarter, an increase of $4.2 million, or 9.6%, when compared to $43.9 million in the comparable quarter of the prior year. For the first six months, free cash flow amounted to $18.1 million, compared to $105.9 million in the first half of fiscal 2010. This reduction is primarily due to the recognition of current income tax expense relating to the modifications to the corporate structure which reduced the future income tax expense accordingly and the increase in financial expense;
  • Quarterly dividends of $0.17 per share were paid to the holders of subordinate and multiple voting shares, a quarterly increase of $0.03 per share, or 21.4%, when compared to quarterly dividends of $0.14 per share in the first six months of fiscal 2010. Dividend payments in the first six months totalled $0.34 per share in fiscal 2011, compared to $0.28 per share in fiscal 2010;
  • Revenue-generating units ("RGU")(2) grew by 57,079 net additions in the quarter and 147,948 net additions in the first six months, for a total of 3,327,297 RGU at February 28, 2011.

"In the second quarter, we have continued to increase our customer base with 57,079 RGU net additions essentially in our Digital television, HSI and Telephony services from both our Canadian and European operations. This positive growth cascaded in Cogeco Cable's other key consolidated financial indicators, in particular with revenue and operating income before amortization. In this quarter, Cogeco Cable maintained its increased quarterly dividends to the holders of subordinate and multiple voting shares reflecting the continuous growth and positive financial results of the Corporation. We are on target to deliver Cogeco Cable's revised projections as issued in January of this year by providing to our customers a superior offering, through various improvements and best-in-class customer service", declared Louis Audet, President and CEO of Cogeco Cable.

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

ABOUT COGECO CABLE

Cogeco Cable (www.cogeco.ca) is a telecommunications company, the second largest hybrid fibre coaxial cable operator in Ontario, Québec and Portugal. Through its two-way broadband cable networks, Cogeco Cable provides its residential customers with Audio, Analogue and Digital Television, as well as HSI and Telephony services. Cogeco Cable also provides, to its commercial customers, data networking, e-business applications, video conferencing, hosting services, Ethernet, private line, Voice over Internet Protocol ("VoIP"), HSI access, data storage, data security and co-location services and other advanced communication solutions. Cogeco Cable's subordinate voting shares are listed on the Toronto Stock Exchange (TSX: CCA).

Analyst Conference Call:Friday, April 8, 2011 at 11:00 a.m. (EDT)
Media representatives may attend as listeners only.
Please use the following dial-in number to have access to the conference call by dialling five minutes before the start of the conference:
Canada/USA Access Number: 1 800 820-0231
International Access Number: + 1 416 640-5926
Confirmation Code: 5366022
By Internet at www.cogeco.ca/investors
A rebroadcast of the conference call will be available until April 15, 2011, by dialling:
Canada and USA access number: 1 888 203-1112
International access number: + 1 647 436-0148
Confirmation code: 5366022

SHAREHOLDERS' REPORT

Second quarter ended February 28, 2011

FINANCIAL HIGHLIGHTS

Quarters ended
February 28,
Six months ended
February 28,
20112010Change20112010Change
($000, except percentages and per share data)$$%$$%
(unaudited)(unaudited)(unaudited)(unaudited)
Operations
Revenue336,569320,3975.0668,088637,7624.8
Operating income before amortization
(1)
134,372122,6139.6263,800245,2197.6
Operating margin(1)39.9%38.3%39.5%38.4%
Operating income69,29356,77422.1135,731113,81519.3
Net income31,15129,7894.664,78886,455(25.1)
Adjusted net income(1)31,15129,7894.664,78856,67314.3
Cash Flow
Cash flow from operating activities92,663114,037(18.7)147,666110,41933.7
Cash flow from operations(1)118,819118,3180.4155,252248,547(37.5)
Capital expenditures and increase in deferred charges70,66874,379(5.0)137,115142,600(3.8)
Free cash flow(1)48,15143,9399.618,137105,947(82.9)
Financial Condition(2)
Fixed assets1,333,3141,325,0770.6
Total assets2,694,3312,702,819(0.3)
Indebtedness
(3)
954,933958,939(0.4)
Shareholders' equity1,185,2581,136,3014.3
RGU growth57,07968,782(17.0)147,948158,567(6.7)
Per Share Data(4)
Earnings per share
Basic0.640.614.91.341.78(24.7)
Diluted0.640.614.91.331.78(25.3)
Adjusted earnings per share(1)
Basic0.640.614.91.341.1714.5
Diluted0.640.614.91.331.1614.7
(1)The indicated terms do not have standardized definitions prescribed by Canadian Generally Accepted Accounting Principles ("GAAP") and therefore, may not be comparable to similar measures presented by other companies. For more details, please consult the "Non-GAAP financial measures" section of the Management's discussion and analysis.
(2)At February 28, 2011 and August 31, 2010.
(3)Indebtedness is defined as the total of bank indebtedness, principal on long-term debt and obligations under derivative financial instruments.
(4)Per multiple and subordinate voting share.

FORWARD-LOOKING STATEMENTS

Certain statements in this report 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 two 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 downturn 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 2010 annual Management's Discussion and Analysis (MD&A)) that could cause actual results to differ materially from what Cogeco Cable currently expects. These factors include technological changes, changes in market and competition, governmental or regulatory developments, general economic conditions, the development of new products and services, the enhancement of existing products and services, and the introduction of competing products having technological or other advantages, many of which are beyond the Corporation's control. Therefore, future events and results may vary significantly from what management currently foresee. 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 expressly disclaims any such obligation), and does not undertake to update or alter this information before the next quarter.

This report should be read in conjunction with the Corporation's consolidated financial statements, and the notes thereto, prepared in accordance with Canadian Generally Accepted Accounting Principles and the MD&A included in the Corporation's 2010 Annual Report. Throughout this discussion, all amounts are in Canadian dollars unless otherwise indicated.

MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A)

Second quarter ended February 28, 2011

CORPORATE STRATEGIES AND OBJECTIVES

Cogeco Cable Inc.'s ("Cogeco Cable" or the "Corporation") objectives are to improve profitability and create shareholder value. The strategies for reaching those objectives are sustained growth through the diversification and the improvement of products, services, clientele and territories, as well as the continuous improvement of networks and equipment and tight controls over costs and business processes. The Corporation measures its performance, with regards to these objectives by monitoring operating income before amortization(1), operating margin(1), revenue-generating units ("RGU")(2) growth and free cash flow(1).

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

During the first six months of fiscal 2011, the Corporation invested approximately $66.3 million in its network infrastructure and equipment to upgrade its capacity, improve its robustness and extend its territories in order to better serve and increase its service offerings for new and existing clientele.

RGU growth and penetration of service offerings

During the six month period ended February 28, 2011, the number of RGU increased by 147,948, or 4.7%, to reach 3,327,297 RGU, mainly as a result of targeted marketing initiatives in the Canadian operations and customer acquisition and retention strategies in the European operations designed to improve penetration, and to the continuing interest for high definition ("HD") television service. As a result of the sustained growth in the first half of the fiscal year, Cogeco Cable expects to achieve its fiscal 2011 revised guidelines of 275,000 net additions, representing growth of approximately 8.6% when compared to August 31, 2010. RGU growth is expected to stem primarily from the continued strong interest in Digital Television services, enhanced service offerings, and through promotional activities.

Operating income before amortization and operating margin

First-half operating income before amortization increased by 7.6% when compared to the first six months of fiscal 2010 to reach $263.8 million and operating margin increased to 39.5% from 38.4%, in line to achieve Management's revised projection of $545 million in operating income before amortization for fiscal 2011. The resulting operating margin of approximately 40.1% is expected for the 2011 fiscal year.

Free cash flow

For the six month period ended February 28, 2011, Cogeco Cable achieved free cash flow of $18.1 million, compared to $105.9 million for the first half of the previous fiscal year, a decrease of $87.8 million. The decrease in free cash flow in the first six months of fiscal 2011 reflects the timing of the recognition of income tax liabilities as a result of modifications made to the corporate structure in fiscal 2009. Management expects to achieve its fiscal 2011 free cash flow revised guidelines of $70 million.

OPERATING RESULTS – CONSOLIDATED OVERVIEW

Quarters ended
February 28,
Six months ended
February 28,
20112010Change20112010Change
($000, except percentages)$$%$$%
(unaudited)(unaudited)(unaudited)(unaudited)
Revenue336,569320,3975.0668,088637,7624.8
Operating costs199,669195,1062.3395,116383,5243.0
Management fees - COGECO Inc.2,5282,678(5.6)9,1729,0191.7
Operating income before amortization134,372122,6139.6263,800245,2197.6
Operating margin39.9%38.3%39.5%38.4%

Revenue

Fiscal 2011 second-quarter revenue rose by $16.2 million, or 5%, to reach $336.6 million, when compared to the prior year. For the first six months, revenue amounted to $668.1 million, an increase of $30.3 million, or 4.8% when compared to the first six months of fiscal 2010. For further details on the Corporation's operating results, please refer to the "Canadian operations" and "European operations" sections.

Operating costs

For the second quarter of fiscal 2011, operating costs, excluding management fees payable to COGECO Inc., increased by $4.6 million, to reach $199.7 million, an increase of 2.3% compared to the prior year. For the first half of the fiscal year, operating costs, excluding management fees payable to COGECO Inc., amounted to $395.1 million, an increase of $11.6 million, or 3%, when compared to fiscal 2010. For further details on the Corporation's operating results, please refer to the "Canadian operations" and "European operations" sections.

Operating income before amortization and operating margin

Fiscal 2011 operating income before amortization increased by $11.8 million, or 9.6%, to reach $134.4 million in the second quarter, and by $18.6 million, or 7.6%, in the first six months to reach $263.8 million. Cogeco Cable's second-quarter operating margin increased to 39.9% from 38.3% in the comparable period of the prior year. For the first six months, the operating margin grew to 39.5% from 38.4% in the first half of fiscal 2010. For further details on the Corporation's operating results, please refer to the "Canadian operations" and "European operations" sections.

RELATED PARTY TRANSACTIONS

Cogeco Cable is a subsidiary of COGECO Inc., which holds 32.2% of the Corporation's equity shares, representing 82.6% of the votes attached to the Corporation's voting shares. Under a management agreement, the Corporation pays COGECO Inc. monthly management fees equal to 2% of its total revenue, capped annually and subject to an adjustment based on the increase in the Consumer Price Index in Canada, for certain executive, administrative, legal, regulatory, strategic and financial planning and additional services. Accordingly, for fiscal 2011, management fees have been set at a maximum of $9.2 million, which was paid within the first six months of the fiscal year. For fiscal 2010, management fees were capped at $9 million, and were fully paid in the first half of the year.

Cogeco Cable granted 35,800 stock options to COGECO Inc.'s employees during the first six months of fiscal 2011, compared to 33,266 for the same period last year. During the second quarter and first six months, Cogeco Cable charged COGECO Inc. amounts of $57,000 and $115,000, respectively, with regards to Cogeco Cable's options granted to COGECO Inc.'s employees, compared to $62,000 and $177,000 in the comparable periods of the prior year.

Cogeco Cable has also established an incentive share unit plan for senior executives and designated employees. During the first six months of this year, the Corporation granted 10,000 incentive share units to COGECO Inc.'s employees, compared to 9,981 incentive share units in the first six months of fiscal 2010. During the second quarter and first half of fiscal 2011, the Corporation charged COGECO Inc. amounts of $58,000 and $97,000 with respect to these incentive share units, compared to $28,000 and $37,000, respectively, in the comparable periods of the previous fiscal year.

Details regarding the management agreement and stock options and incentive share units granted to COGECO Inc.'s employees are provided in the Corporation's 2010 Annual Report.

There were no other material related party transactions during the periods covered.

FIXED CHARGES

Quarters ended
February 28,
Six months ended
February 28,
20112010Change20112010Change
($000, except percentages)$$%$$%
(unaudited)(unaudited)(unaudited)(unaudited)
Amortization65,07965,839(1.2)128,069131,404(2.5)
Financial expense24,12515,03360.540,82531,17431.0

Second-quarter 2011 amortization amounted to $65.1 million, $0.8 million, or 1.2% less when compared to $65.8 million for the same period of the prior year. For the first six months, amortization decreased by $3.3 million, or 2.5%, at $128.1 million when compared to $131.4 million in the first half of the prior year. The decreases are mainly due to a reduction in amortization in the European operations stemming from certain acquired assets that are now fully amortized and the depreciation of the Euro in relation to the Canadian dollar in fiscal 2011, partly offset by additional capital expenditures in the Canadian operations arising from customer premise equipment acquisitions to support RGU growth.

Financial expense amounted to $24.1 million in the second quarter compared to $15 million in the prior year. In the first six months of fiscal 2011, financial expense amounted to $40.8 million, compared to $31.2 million in the first half of the prior year. Financial expense increases are primarily due to the payment of a make-whole premium amounting to $8.8 million on the early repayment, on December 22, 2010, of the $175 million Senior Secured Notes Series B due on October 31, 2011, partly offset by the impact of the lower interest rate on the $200 million Senior Secured Debentures Series 2 issued on November 16, 2010 and the financial expense impact of fluctuations in the level of bank indebtedness.

INCOME TAXES

Fiscal 2011 second-quarter income tax expense amounted to $14 million, compared to $12 million in the prior year. The increase of $2.1 million, or 17.3%, is mainly due to operating income before amortization growth, partly offset by increase in financial expense and the previously announced annual declines in the enacted Canadian federal and provincial income tax rates.

In the first six months, income tax expense amounted to $30.1 million, compared to an income tax recovery of $3.8 million in the first half of fiscal 2010. The income tax recovery in the first six months of the prior year included the favourable impact of $29.8 million from the reduction in corporate income tax rates announced on March 26, 2009 by the Ontario provincial government and considered substantively enacted on November 16, 2009 (the "reduction of Ontario provincial corporate income tax rates"). Excluding this impact in the prior year, income tax expense would have amounted to $26 million. Fiscal 2011 first-half income tax expense increase is mainly due to operating income before amortization growth and the decrease in amortization, partly offset by the increase in financial expense and the previously announced annual declines in the enacted Canadian federal and provincial income tax rates.

NET INCOME

Fiscal 2011 second-quarter net income amounted to $31.2 million, or $0.64 per share, compared to $29.8 million, or $0.61 per share, for the same period in fiscal 2010. The increases of $1.4 million, or 4.6%, and of $0.03 per share, or 4.9%, are mainly due to the growth in operating income before amortization in the second quarter of fiscal 2011, partly offset by the make-whole premium on early repayment of debt described in the "Fixed charges" section amounting to $6.4 million, net of income taxes.

For the first half of fiscal 2011, net income amounted to $64.8 million, or $1.34 per share. In the comparable period of fiscal 2010, net income amounted to $86.5 million, or $1.78 per share, which included the reduction of Ontario provincial corporate income tax rates described in the "Income Taxes" section. Excluding this prior year effect, fiscal 2011 net income increased by $8.1 million, or 14.3%, and $0.17 per share, or 14.5%, when compared to adjusted net income((2)) of $56.7 million, or $1.17 per share(1), for the first half of fiscal 2010. Net income progression has resulted mainly from the growth in operating income before amortization and the decrease in amortization expense, partly offset by make-whole premium on early repayment of debt of $6.4 million, net of income taxes.

(1)The indicated terms do not have standardized definitions prescribed by Canadian GAAP and therefore, may not be comparable to similar measures presented by other companies. For more details, please consult the "Non-GAAP financial measures" section.

CASH FLOW AND LIQUIDITY

Quarters ended
February 28,
Six months ended
February 28,
2011201020112010
($000)$$$$
(unaudited)(unaudited)(unaudited)(unaudited)
Operating activities
Cash flow from operations118,819118,318155,252248,547
Changes in non-cash operating items(26,156)(4,281)(7,586)(138,128)
92,663114,037147,666110,419
Investing activities(1)(70,668)(74,277)(137,115)(142,337)
Financing activities(1)(193,666)(44,528)(20,182)4,967
Effect of exchange rate changes on cash and cash equivalents denominated in a foreign currency94(1,102)(135)(900)
Net change in cash and cash equivalents(171,577)(5,870)(9,766)(27,851)
Cash and cash equivalents, beginning of period197,65317,47735,84239,458
Cash and cash equivalents, end of period26,07611,60726,07611,607
(1)Excludes assets acquired under capital leases.

Fiscal 2011 second-quarter cash flow from operations reached $118.8 million, essentially the same when compared to $118.3 million in the second quarter of the prior year. Changes in non-cash operating items required cash outflows of $26.2 million, mainly as a result of decreases in accounts payable and accrued liabilities and income tax liabilities, combined with an increase in accounts receivable. In the prior year, changes in non-cash operating items required cash outflows of $4.3 million, mainly as a result of increases in income taxes receivable and accounts receivable, partly offset by increases in accounts payable and accrued liabilities and deferred and prepaid revenue and other liabilities.

For the first six months of fiscal 2011, cash flow from operations reached $155.3 million, $93.3 million or 37.5%, lower than the comparable period last year. This reduction is primarily due to the recognition of current income tax expense relating to the modifications to the corporate structure which reduced the future income tax expense accordingly and the increase in financial expense. Changes in non-cash operating items required cash outflows of $7.6 million, mainly as a result of a decrease in accounts payable and accrued liabilities and an increase in accounts receivable, partly offset by an increase in income tax liabilities. In the prior year, changes in non-cash operating items required cash outflows of $138.1 million, mainly as a result of decreases in accounts payable and accrued liabilities and income tax liabilities and increases in income taxes receivable and accounts receivable.

Investing activities, including capital expenditures segmented according to the National Cable Television Association ("NCTA") standard reporting categories, are as follows:

Quarters ended
February 28,
Six months ended
February 28,
2011201020112010
($000)$$$$
(unaudited)(unaudited)(unaudited)(unaudited)
Customer premise equipment(1)27,58826,63054,53460,105
Scalable infrastructure21,14317,51337,14730,340
Line extensions4,0556,3547,94511,788
Upgrade / Rebuild10,94915,21521,17825,685
Support capital4,4176,21210,5579,163
Total capital expenditures(2)68,15271,924131,361137,081
Increase in deferred charges and others2,5162,3535,7545,397
Total investing activities(2)70,66874,277137,115142,478
(1)Includes mainly home terminal devices as well as new and replacement drops.
(2)Includes capital leases, which are excluded from the statements of cash flows.

Fiscal 2011 second-quarter Total capital expenditures amounted to $68.2 million, a decrease of 5.2% when compared to $71.9 million in the second quarter of the prior year due to the following factors:

  • Decreases in upgrades and rebuilds and in line extensions which surpassed the increase in scalable infrastructure. This net decrease stems from the timing of the various initiatives undertaken by the Corporation in order to expand its network and improve its capacity;

  • An increase in customer premise equipment spending mainly due to the timing of equipment purchases to support RGU growth in the Canadian operations, which offset the decrease in customer premise equipment spending reflecting lower RGU growth in the European operations and the depreciation of the value of the Euro relative to the Canadian dollar.

For the first half of fiscal 2011, Total capital expenditures amounted to $131.4 million, a decrease of 4.2% when compared to $137.1 million in the comparable period of the prior year due to the following factors:

  • A decrease in customer premise equipment spending mainly due to lower RGU growth in the European operations and the depreciation of the value of the Euro relative to the Canadian dollar, partly offset by an increase in customer premise equipment spending to support RGU growth in the Canadian operations;

  • Decreases in upgrades and rebuilds and in line extensions stemming from the timing of the various initiatives undertaken by the Corporation in order to expand its network and improve its capacity;

  • An increase in scalable infrastructure in the Canadian operations to improve network capacity in existing areas served;

Deferred charges and others are mainly attributable to reconnect and additional service activation costs. For the second quarter and first six months, the increase in deferred charges and others amounted to $2.5 million and $5.8 million, respectively, essentially the same when compared to $2.4 million and $5.4 million for the same periods of the 2010 fiscal year.

In the second quarter, free cash flow amounted to $48.2 million, compared to $43.9 million in the comparable period of fiscal 2010, representing an increase of $4.2 million, or 9.6%. The growth in free cash flow over the prior year is due to the increase in operating income before amortization and the decrease in capital expenditures in the second quarter of fiscal 2011, partly offset by the increase in financial expense and the decrease in current income tax recovery.

For the first six months, free cash flow amounted to $18.1 million, compared to $105.9 million in the comparable period of fiscal 2010, representing a decrease of $87.8 million. The decline in free cash flow over the prior year is due to an increase of $104.2 million in current income tax expense stemming from modifications to the corporate structure and the increase in financial expense, which offset the increase in operating income before amortization and the decrease in capital expenditures in the first half of fiscal 2011.

In the second quarter of fiscal 2011, Indebtedness affecting cash decreased by $189.3 million mainly due to the decrease in cash and cash equivalents of $171.6 million and the free cash flow of $48.2 million, partly offset by the cash outflows of $26.2 million from the changes in non-cash operating items and the dividend payment of $8.2 million described below. Indebtedness mainly decreased through the repayment, on December 22, 2010, of the $175 million Senior Secured Notes Series B due on October 31, 2011 and the related make-whole premium on early repayment, combined with a net repayment of $13.6 million on the Corporation's Term Revolving Facility. In the second quarter of fiscal 2010, Indebtedness affecting cash decreased by $38 million mainly due to the free cash flow of $43.9 million and the reduction in cash and cash equivalents of $5.9 million, partly offset by the dividend payment of $6.8 million described below and the decrease in non-cash operating items of $4.3 million. Indebtedness mainly decreased through a net repayment of $36.5 million on the Corporation's Term Facility.

During the second quarter of fiscal 2011, a dividend of $0.17 per share was paid to the holders of subordinate and multiple voting shares, totalling $8.2 million, compared to a dividend of $0.14 per share, or $6.8 million the year before.

In the first six months of fiscal 2011, Indebtedness affecting cash decreased by $5.6 million mainly due to the free cash flow of $18.1 million generated in the first half of the fiscal year and the decrease in cash and cash equivalents of $9.8 million, partly offset by the dividend payments totalling $16.5 million described below and the cash outflows of $7.6 million from the changes in non-cash operating items. Indebtedness mainly decreased through the previously described repayment of the $175 million Senior Secured Notes Series B, combined with a net repayment of $27.4 million on the Corporation's Term Revolving Facility. The Senior Secured Notes Series B were repaid from the net proceeds of $198.3 million as a result of the issuance, on November 16, 2010, of Senior Secured Debentures Series 2 ("Fiscal 2011 debentures"). In the first half of fiscal 2010, Indebtedness affecting cash increased by $20 million mainly due to the decrease in non-cash operating items of $138 million and the dividend payment of $13.6 million described below, partly offset by the free cash flow of $105.9 million and the decrease in cash and cash equivalents of $27.9 million. Indebtedness mainly increased through an increase of $43.7 million in bank indebtedness, partly offset by a net repayment of $21.6 million on the Corporation's Term Facility.

During the first half of fiscal 2011, quarterly dividends of $0.17 per share, for a total of $0.34 per share, were paid to the holders of subordinate and multiple voting shares, totalling $16.5 million, compared to quarterly dividends of $0.14 per share, for a total of $0.28 per share, or $13.6 million the year before.

As at February 28, 2011, the Corporation had a working capital deficiency of $157.1 million compared to $195.5 million at August 31, 2010. The decrease in the deficiency is mainly attributable to decreases in accounts payable and accrued liabilities and future income tax liabilities, combined with an increase in accounts receivable. This decrease was partly offset by an increase in income tax liabilities and a decrease 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 as a large portion of the Corporation's customers pay before their services are rendered, unlike accounts payable and accrued liabilities, which are paid after products are delivered or services are rendered, thus enabling the Corporation to use cash and cash equivalents to reduce Indebtedness.

At February 28, 2011, the Corporation had used $101.8 million of its $750 million Term Revolving Facility for a remaining availability of $648.2 million.

FINANCIAL POSITION

Since August 31, 2010, there have been significant changes to the balances of "income tax liabilities", "future income tax liabilities", "future income tax assets", "accounts payable and accrued liabilities", "long-term debt", "cash and cash equivalents", "derivative financial instruments", "accounts receivable" and "fixed assets".

The increase of $73.4 million in income taxes liabilities and the decreases of $53.9 million in future income tax liabilities and $10.4 million in future income tax assets primarily reflect the timing of the recognition of income tax liabilities as a result of modifications made to the corporate structure. The $70.2 million decrease in accounts payable and accrued liabilities is related to the timing of supplier payments. The decrease of $23 million in long-term debt and the $9.8 million decrease in cash and cash equivalents are due to the factors previously discussed in the "Cash Flow and Liquidity" section combined with the fluctuations in foreign exchange rates. The $20 million decrease in derivative financial instruments is due to the factors discussed in the "Financial management" section. The $12.4 million increase in accounts receivable is due to the increase in revenues and the timing of payments received from customers. The $8.2 million increase in fixed assets reflects the capital expenditures discussed in the "Cash Flow and Liquidity" section which surpassed the amortization expense and the impact of the depreciation of the Euro in relation to the Canadian dollar.

A description of Cogeco Cable's share data as of March 31, 2011 is presented in the table below:

Number of shares/optionsAmount
($000)
Common shares
Multiple voting shares15,691,10098,346
Subordinate voting shares33,050,824897,588
Options to purchase Subordinate voting shares
Outstanding options586,902
Exercisable options413,491

In the normal course of business, Cogeco Cable has incurred financial obligations, primarily in the form of long-term debt, operating and capital leases and guarantees. Cogeco Cable's obligations, as discussed in the 2010 Annual Report, have not materially changed since August 31, 2010, except as mentioned below.

On November 16, 2010, the Corporation completed, pursuant to a public debt offering, the issue of $200 million Senior Secured Debentures Series 2 for net proceeds of $198.3 million, net of discounts and transaction costs. These debentures mature on November 16, 2020 and bear interest at 5.15% per annum, payable semi-annually. These debentures are indirectly secured by a first priority fixed and floating charge and a security interest on substantially all present and future real and personal property and undertaking of every nature and kind of the Corporation and certain of its subsidiaries. The net proceeds of sale of the debentures were used to redeem in full, on December 22, 2010, the Senior Secured Notes Series B due October 31, 2011 for an amount of $175 million plus accrued interest and make-whole premium, and the remainder for working capital and general corporate purposes.

DIVIDEND DECLARATION

At its April 7, 2011 meeting, the Board of Directors of Cogeco Cable declared a quarterly eligible dividend of $0.17 per share for subordinate and multiple voting shares, payable on May 5, 2011, to shareholders of record on April 21, 2011. 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.

FINANCIAL MANAGEMENT

Cogeco Cable has entered into a swap agreement with a financial institution to fix the floating benchmark interest rate with respect to a portion of the Euro-denominated loans outstanding under the Term Revolving Facility, and previously the Term Facility, for a notional amount of €111.5 million, which has been reduced to €95.8 million on July 28, 2009, and to €69.6 million on July 28, 2010. The interest rate swap to hedge these loans has been fixed at 2.08% until the maturity of the swap agreement on July 28, 2011. In addition to the interest rate swap of 2.08%, Cogeco Cable will continue to pay the applicable margin on these loans in accordance with its Term Revolving Facility. In the first six months of fiscal 2011, the fair value of interest rate swap increased by $0.8 million, which is recorded as an increase of other comprehensive income, net of income taxes, compared to a decrease of $0.2 million which was recorded as a decrease of other comprehensive income, net of income taxes, in the prior year.

The Corporation has also entered into cross-currency swap agreements to set the liability for interest and principal payments on its US$190 million Senior Secured Notes Series A maturing on October 1, 2015. These agreements have the effect of converting the U.S. interest coupon rate of 7.00% per annum to an average Canadian dollar interest rate of 7.24% per annum. The exchange rate applicable to the principal portion of the debt has been fixed at $1.0625 per US dollar. In the first half of fiscal 2011, amounts due under the US$190 million Senior Secured Notes Series A decreased by $18.1 million due to the US dollar's depreciation relative to the Canadian dollar. The fair value of cross-currency swaps decreased by a net amount of $20.9 million, of which a decrease of $18.1 million offsets the foreign exchange gain on the debt denominated in US dollars. The difference of $2.8 million was recorded as a decrease of other comprehensive income, net of income taxes. In the first six months of the prior year, amounts due under the US$190 million Senior Secured Notes Series A decreased by $8.1 million due to the US dollar's depreciation over the Canadian dollar. The fair value of cross-currency swaps decreased by a net amount of $7.2 million, of which $8.1 million offsets the foreign exchange gain on the debt denominated in US dollars. The difference of $0.9 million was recorded as an increase of other comprehensive income, net of income taxes.

Furthermore, the Corporation's net investment in self-sustaining foreign subsidiaries is exposed to market risk attributable to fluctuations in foreign currency exchange rates, primarily changes in the values of the Canadian dollar versus the Euro. This risk is mitigated since the major part of the purchase price for Cabovisão was borrowed directly in Euros. This debt is designated as a hedge of a net investment in self-sustaining foreign subsidiaries and, accordingly, the Corporation recorded a foreign exchange loss of $1.4 million in the first six months of fiscal 2011, compared to $5 million in the comparable period of the prior year, which is deferred and recorded in the consolidated statement of comprehensive income. The exchange rate used to convert the Euro currency into Canadian dollars for the balance sheet accounts as at February 28, 2011 was $1.3406 per Euro compared to $1.3515 per Euro as at August 31, 2010. The average exchange rates prevailing during the second quarter and first six months of fiscal 2011 used to convert the operating results of the European operations were $1.3369 per Euro and $1.3601 per Euro, respectively, compared to $1.4905 per Euro and $1.5318 per Euro in the comparable periods of fiscal 2010. Since the Corporation's consolidated financial statements are expressed in Canadian dollars but a portion of its business is conducted in the Euro currency, exchange rate fluctuations can increase or decrease revenue, operating income before amortization, net income and the carrying value of assets and liabilities.

The following table shows the Canadian dollar impact of a 10% fluctuation in the average exchange rate of the Euro currency into Canadian dollars on European operating results for the six month period ended February 28, 2011:

Six months ended February 28, 2011As reportedExchange rate impact
($000)$$
(unaudited)(unaudited)
Revenue85,3248,532
Operating income before amortization8,417842
Net loss17,3821,738

The Corporation is also impacted by foreign currency exchange rates, primarily changes in the values of the US dollar relative to the Canadian dollar with regards to purchases of equipment, as the majority of customer premise equipment is purchased and subsequently paid in US dollars. Please consult the "Foreign Exchange Risk" section in note 13 of the Interim Financial Statements for further details.

CANADIAN OPERATIONS

CUSTOMER STATISTICS

Net additions (losses)% of Penetration(1)
Quarters ended February 28,Six months ended February 28,February 28,
February 28, 2011201120102011201020112010
RGU2,474,20752,94047,274123,630110,446
Basic Cable service customers880,755(788)(54)6,2508,865
HSI service customers586,47910,55011,06827,42228,57468.464.9
Digital Television service customers614,78226,45014,05455,36430,16070.661.5
Telephony service customers392,19116,72822,20634,59442,84747.840.8
(1)As a percentage of Basic Cable service customers in areas served.

Fiscal 2011 second-quarter and first six month RGU net additions were higher than in the comparable periods of the prior year, and the Canadian operations continue to generate RGU growth despite higher penetration rates, category maturity and aggressive competition. Basic Cable service customers net losses stood at 788 for the quarter, compared to 54 in the second quarter of the prior year. For the first six months, Basic Cable service customers increased by 6,250, compared to 8,865 in the prior year. Basic Cable service net additions in the first six months of fiscal 2011 were mainly due to expansions in the network and the bundling effect of continued growth in HSI and Telephony services. In the quarter, Telephony service customers grew by 16,728 compared to 22,206 for the same period last year, and the number of net additions to the HSI service stood at 10,550 customers compared to 11,068 customers in the second quarter of the prior year. For the first six months, net additions of Telephony service customers amounted to 34,594 compared to 42,847 for the same period last year, and the number of HSI service customers grew by 27,422 compared to 28,574 in the first half of the prior year. HSI and Telephony net additions continue to stem from the enhancement of the product offering, the impact of the bundled offer (Cogeco Complete Connection) of Television, HSI and Telephony services, and promotional activities. For the three and six-month periods ended February 28, 2011, additions to the Digital Television service stood at 26,450 and 55,364 customers, compared to 14,054 and 30,160 for the comparable periods of the prior year. Digital Television service net additions are due to targeted marketing initiatives to improve penetration, the launch of new HD channels and the continuing interest for HD television service.

OPERATING RESULTS

Quarters ended February 28,Six months ended February 28,
20112010Change20112010Change
($000, except percentages)$$%$$%
(unaudited)(unaudited)(unaudited)(unaudited)
Revenue294,508271,4308.5582,764535,7908.8
Operating costs161,754154,1574.9318,209299,7466.2
Management fees – COGECO Inc.2,5282,678(5.6)9,1729,0191.7
Operating income before amortization130,226114,59513.6255,383227,02512.5
Operating margin44.2%42.2%43.8%42.4%

Revenue

Driven by RGU growth combined with an increase in sales and rentals of home terminal devices stemming from the strong growth in Digital Television services, rate increases implemented in the second half of fiscal 2010 and the revenue related to the new levy amounting to 1.5% of gross Cable Television service revenue imposed by the Canadian Radio-television and Telecommunications Commission ("CRTC") in order to finance the new Local Programming Improvement Fund ("LPIF"), second-quarter revenue rose by $23.1 million, or 8.5%, to reach $294.5 million, and first six-month revenue increased by $47 million, or 8.8%, at $582.8 million.

Operating costs

For the three and six months ended February 28, 2011, operating costs excluding management fees payable to COGECO Inc. increased by $7.6 million, or 4.9%, at $161.8 million, and by $18.5 million, or 6.2%, to reach $318.2 million, respectively. The increases in operating costs are mainly attributable to servicing additional RGU, the launch of new HD channels and additional marketing initiatives.

Operating income before amortization

Operating income before amortization rose by $15.6 million, or 13.6%, to reach $130.2 million in the second quarter, mainly due to the increased revenue exceeding the growth in operating costs. Cogeco Cable's Canadian operations' operating margin increased to 44.2% in the second quarter compared to 42.2% for the same period of the prior year. In the first half of fiscal 2011, operating income before amortization amounted to $255.4 million, $28.4 million, or 12.5%, higher than in the first half of the prior year. The operating margin increased to 43.8% from 42.4% when compared to the first six months of fiscal 2010. The growth in the operating margin stems from rate increases and RGU growth.

EUROPEAN OPERATIONS

CUSTOMER STATISTICS

Net additions (losses)% of Penetration(1)
Quarters ended February 28,Six months ended February 28,February 28,
February 28, 2011201120102011201020112010
RGU853,0904,13921,50824,31848,121
Basic Cable service customers260,100(755)(740)(167)(1,302)
HSI service customers167,2214425,7934,03411,00264.359.9
Digital Television service customers175,8033,21612,18915,95128,30367.650.8
Telephony service customers249,9661,2364,2664,50010,11896.191.7
(1)As a percentage of Basic Cable service customers in areas served.

In the second quarter and first half of fiscal 2011, the number of Basic Cable service customers decreased by 755 and 167 customers, respectively, compared to losses of 740 and 1,302 customers in the comparable periods of the prior year. Economic conditions in Portugal continued to be difficult. Management has not yet detected clear signs of a sustained economic recovery. Consequently, the Corporation continues to closely control costs and is focusing on generating RGU growth in the near term. The rate of growth for our services has diminished in this environment. HSI service customers increased by 442 for the quarter and 4,034 for the first six months compared to 5,793 and 11,002 customers in the second quarter and first half of fiscal 2010. The number of Digital Television service customers grew by 3,216 customers in the second quarter of fiscal 2011, compared to 12,189 customers in the comparable period of fiscal 2010, and by 15,951 in the first half of fiscal 2011 compared to 28,303 in the first half of fiscal 2010. Telephony service customers increased by 1,236 and 4,500 customers in the three and six months ended February 28, 2011, compared to 4,266 and 10,118 customers in the same periods of the prior year.

OPERATING RESULTS

Quarters ended February 28,Six months ended February 28,
20112010Change20112010Change
($000, except percentages)$$%$$%
(unaudited)(unaudited)(unaudited)(unaudited)
Revenue42,06148,967(14.1)85,324101,972(16.3)
Operating costs37,91540,949(7.4)76,90783,778(8.2)
Operating income before amortization4,1468,018(48.3)8,41718,194(53.7)
Operating margin9.9%16.4%9.9%17.8%

Revenue

In the second quarter of fiscal 2011 revenue decreased by $6.9 million, or 14.1%, at $42.1 million. First six-month revenue amounted to $85.3 million, $16.6 million, or 16.3%, less than in the prior year. These declines in revenue were mainly due to the depreciation of the Euro in relation to the Canadian dollar and reflect the impact of retention strategies implemented in the second half of fiscal 2009 in order to offset the recurring intense promotions and advertising initiatives from competitors in the Portuguese market. Revenue from the European operations in the local currency for the three and six-month periods ended February 28, 2011 amounted to €31.5 million and €62.7 million, decreases of €1.4 million, or 4.2%, and €3.8 million, or 5.7%, respectively, when compared to the same periods of the prior year.

Operating costs

Fiscal 2011 second-quarter operating costs decreased by $3 million, or 7.4%, at $37.9 million. 2011 first-half operating costs decreased by $6.9 million, or 8.2%, at $76.9 million. These decreases were mainly due to the decline of the value of the Euro over the Canadian dollar which surpassed increases in operating costs related to additional marketing initiatives and the launch of new HD channels by Cabovisão. Operating costs of the European operations for the second quarter and first six months in the local currency amounted to €28.4 million, an increase of €0.9 million, or 3.3%, and €56.5 million, an increase of €1.8 million, or 3.4%, respectively, when compared to the corresponding periods of the prior year.

Operating income before amortization

Operating income before amortization decreased to $4.1 million in the second quarter from $8 million for the same period of the prior year, representing a decrease of $3.9 million, or 48.3%. In the first six months, operating income before amortization decreased by $9.8 million, or 53.7%, at $8.4 million. The reductions are mainly due to decreases in revenue which outpaced the decreases in operating costs. European operations' operating margin decreased to 9.9% in the second quarter and first six months of fiscal 2011 from 16.4% in the second quarter and 17.8% in the first six months of fiscal 2010. Operating income before amortization in the local currency amounted to €3.1 million compared to €5.4 million in the second quarter of the prior year, representing a decrease of 42.3%, and €6.2 million compared to €11.8 million in the first six months, representing a decrease of 47.7%.

CONTROLS AND PROCEDURES

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 and internal controls over financial reporting, as defined in NI 52-109. Cogeco Cable's internal control framework is based on the criteria published in the report "Internal Control-Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission and is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP.

The CEO and CFO, supported by Management, evaluated the design of the Corporation's disclosure controls and procedures and internal controls over financial reporting as at February 28, 2011, and have concluded that they were adequate. Furthermore, no significant changes to the internal controls over financial reporting occurred during the quarter ended February 28, 2011.

However, in the first quarter of fiscal 2011, the Corporation introduced a new financial suite under an integrated Oracle platform. This project was required in order to adequately support the implementation of the International Financial Reporting Standards ("IFRS") and to remain current with the operational platform used by the Corporation. Following the introduction of this new financial suite, internal controls over financial reporting have been updated in order to support adequate disclosure controls and procedures.

UNCERTAINTIES AND MAIN RISK FACTORS

There has been no significant change in the uncertainties and main risk factors faced by the Corporation since August 31, 2010. A detailed description of the uncertainties and main risk factors faced by Cogeco Cable can be found in the 2010 Annual Report.

ACCOUNTING POLICIES AND ESTIMATES

There has been no significant change in Cogeco Cable's accounting policies, estimates and future accounting pronouncements since August 31, 2010, except as described below. A description of the Corporation's policies and estimates can be found in the 2010 Annual Report.

Future accounting pronouncements

Adoption of International accounting standards

In March 2006, the Canadian Accounting Standards Board ("AcSB") of the Canadian Institute of Chartered Accountants ("CICA") released its new strategic plan, which proposed to abandon Canadian GAAP and effect a complete convergence to the IFRS for Canadian publicly accountable entities. This plan was confirmed in subsequent exposure drafts issued in April 2008, March 2009 and October 2009. The changeover will occur no later than fiscal years beginning on or after January 1, 2011. Accordingly, the Corporation's first interim consolidated financial statements presented in accordance with IFRS will be for the quarter ending November 30, 2011, and its first annual consolidated financial statements presented in accordance with IFRS will be for the year ending August 31, 2012.

IFRS uses a conceptual framework similar to Canadian GAAP, but there are significant differences in recognition, measurement and disclosure requirements. The Corporation has established a project team including representatives from various areas of the organization to plan and complete the transition to IFRS. This team reports periodically to the Audit Committee, which oversees the IFRS implementation project on behalf of the Board of Directors. The Corporation is assisted by external advisors as required.

The implementation project consists of three primary phases, which may occur concurrently as IFRS are applied to specific areas of operations:

PhaseArea of impactKey activitiesStatus
Scoping and diagnosticPervasivePerform a high-level impact assessment to identify key areas that are expected to be impacted by the transition to IFRS.Completed
Rank IFRS impacts in order of priority to assess the timing and complexity of transition efforts that will be required in subsequent phases.
Impact analysis, evaluation and designFor each area identified in the scoping and diagnostic phaseIdentify the specific changes required to existing accounting policies.Completed
Analyse policy choices permitted under IFRS.
Present analysis and recommendations on accounting policy choices to the Audit Committee.
PervasiveIdentify impacts on information systems and business processes.Completed
Prepare draft IFRS consolidated financial statement template.
Identify impacts on internal controls over financial reporting and other business processes.
Implementation and reviewFor each area identified in the scoping and diagnostic phaseTest and execute changes to information systems and business processes.Completed
Obtain formal approval of required accounting policy changes and selected accounting policy choices.In progress - to be completed in fiscal 2011
Communicate impact on accounting policies and business processes to external stakeholders.To be completed during fiscal 2011
PervasiveGather financial information necessary for opening balance sheet and comparative IFRS financial statements.In progress - to be completed in fiscal 2011
Update and test internal control processes over financial reporting and other business processes.
Collect financial information necessary to compile IFRS-compliant financial statements.In progress - to be completed during fiscal 2012
Provide training to employees and end-users across the organization.
Prepare IFRS compliant financial statements.
Obtain the approval from the Audit Committee of the IFRS consolidated financial statements.
Continually review IFRS and implement changes to the standards as they apply to the Corporation.To be completed throughout transition and post-conversion periods

The Corporation's project for the transition from Canadian GAAP to IFRS is progressing according to the established plan and the Corporation expects to meet its target date for migration.

Multiple deliverable revenue arrangements

In December 2009, the Emerging Issues Committee ("EIC") of the Canadian AcSB issued a new abstract concerning multiple deliverable revenue arrangements, EIC-175, Multiple deliverable revenue arrangements, which amended EIC-142, Revenue arrangements with multiple deliverables. EIC-175 requires a vendor to allocate arrangement consideration at the inception of the arrangement to all deliverables using the relative selling price method, thereby eliminating the use of the residual value method. The amendment also changes the level of evidence of the standalone selling price required to separate deliverables when more objective evidence of the selling price is not available. EIC-175 should be adopted prospectively to revenue arrangements entered into or materially modified in the first annual fiscal period beginning on or after January 1, 2011, with early adoption permitted. The Corporation has elected not to early-adopt this EIC, and in light of the adoption of International accounting standards taking effect at that same date, this EIC will not be applicable to the Corporation.

NON-GAAP FINANCIAL MEASURES

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

Cash flow from operations and 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 items. 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-GAAP 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 Canadian GAAP measure is cash flow from operating activities. Cash flow from operations is calculated as follows:

Quarters ended
February 28,
Six months ended"
February 28,
2011201020112010
($000)$$$$
(unaudited)(unaudited)(unaudited)(unaudited)
Cash flow from operating activities92,663114,037147,666110,419
Changes in non-cash operating items26,1564,2817,586138,128
Cash flow from operations118,819118,318155,252248,547

Free cash flow is calculated as follows:

Quarters ended
February 28,
Six months ended
February 28,
2011201020112010
($000)$$$$
(unaudited)(unaudited)(unaudited)(unaudited)
Cash flow from operations118,819118,318155,252248,547
Acquisition of fixed assets(68,152)(71,924)(131,361)(136,940)
Increase in deferred charges(2,516)(2,455)(5,754)(5,519)
Assets acquired under capital leases – as per note 11 c)(141)
Free cash flow48,15143,93918,137105,947

Operating income before amortization and operating margin

Operating income before amortization is used by Cogeco Cable's management and investors to assess the Corporation's ability to seize growth opportunities in a cost effective manner, to finance its ongoing operations and to service its debt. Operating income before amortization is a proxy for cash flows from operations excluding the impact of the capital structure chosen, and is one of the key metrics used by the financial community to value the business and its financial strength. Operating margin is a measure of the proportion of the Corporation's revenue which is available, before income taxes, to pay for its fixed costs, such as interest on Indebtedness. Operating margin is calculated by dividing operating income before amortization by revenue.

The most comparable Canadian GAAP financial measure is operating income. Operating income before amortization and operating margin are calculated as follows:

Quarters ended
February 28,
Six months ended
February 28,
2011201020112010
($000, except percentages)$$$$
(unaudited)(unaudited)(unaudited)(unaudited)
Operating income69,29356,774135,731113,815
Amortization65,07965,839128,069131,404
Operating income before amortization134,372122,613263,800245,219
Revenue336,569320,397668,088637,762
Operating margin39.9%38.3%39.5%38.4%

Adjusted net income and adjusted earnings per share

Adjusted net income and adjusted earnings per share are used by Cogeco Cable's management and investors to evaluate what would have been the net income and earnings per share excluding unusual adjustments. This allows the Corporation to isolate the unusual adjustments in order to evaluate the net income and earnings per share from ongoing activities.

The most comparable Canadian GAAP financial measures are net income and earnings per share. Adjusted net income and adjusted earnings per share are calculated as follows:

Quarters ended
February 28,
Six months ended
February 28,
2011201020112010
($000, except numbers of shares and per share data)$$$$
(unaudited)(unaudited)(unaudited)(unaudited)
Net income31,15129,78964,78886,455
Adjustments:
Reduction of Ontario provincial corporate income tax rates(29,782)
Adjusted net income31,15129,78964,78856,673
Weighted average number of multiple voting and subordinate voting shares outstanding48,512,57648,507,59948,513,01148,528,628
Effect of dilutive stock options198,787175,639187,651121,857
Effect of dilutive subordinate voting shares held in trust under the Incentive Share Unit Plan111,56155,09489,07631,573
Weighted average number of diluted multiple voting and subordinate voting shares outstanding48,822,92448,738,33248,789,73848,682,058
Adjusted earnings per share
Basic0.640.611.341.17
Diluted0.640.611.331.16

SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION

Quarters ended(1)February 28,November 30,August 31,May 31,
($000, except percentages 20112010201020092010200920102009
and per share data)$$$$$$$$
(unaudited)(unaudited)(unaudited)(unaudited)(unaudited)(unaudited)(unaudited)(unaudited)
Revenue336,569320,397331,519317,365324,323307,807319,291305,672
Operating income before amortization134,372122,613129,428122,606138,177143,892126,700125,951
Operating margin39.9%38.3%39.0%38.6%42.6%46.7%39.7%41.2%
Operating income69,29356,77466,43857,04174,48175,62462,92962,086
Income taxes14,01711,95216,101(15,766)17,77222,00515,06026,357
Net income31,15129,78933,63756,66639,66344,69831,18532,453
Adjusted net income31,15129,78933,63726,88439,66326,12331,18527,665
Cash flow from operating activities92,663114,03755,003(3,618)194,414175,450112,45199,956
Cash flow from operations118,819118,31836,433130,229127,024108,631119,24392,030
Capital expenditures and increase in deferred charges70,66874,37966,44768,221107,79993,87269,28360,139
Free cash flow48,15143,939(30,014)62,00819,22514,75949,96031,891
Earnings per share(2)
Basic0.640.610.691.170.820.920.640.67
Diluted0.640.610.691.160.810.920.640.67
Adjusted earnings per share(2)
Basic0.640.610.690.550.820.540.640.57
Diluted0.640.610.690.550.810.540.640.57
(1)The addition of quarterly information may not correspond to the annual total due to rounding.
(2)Per multiple and subordinate voting share.

ADDITIONAL INFORMATION

This MD&A was prepared on April 7, 2011. Additional information relating to the Corporation, including its Annual Report and Annual Information Form, is available on the SEDAR website at www.sedar.com.

SEASONAL VARIATIONS

Cogeco Cable's operating results are not generally subject to material seasonal fluctuations. However, the customer growth in the Basic Cable and HSI service 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 seasons, and students leaving their campuses at the end of the school year. Cogeco Cable offers its services in several university and college towns such as Kingston, Windsor, St. Catharines, Hamilton, Peterborough, Trois-Rivières and Rimouski in Canada, and Aveiro, Covilhã, Evora, Guarda and Coimbra in Portugal. Furthermore, the third and fourth quarter operating margins are usually higher as 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 has been reached in the second quarter of fiscal 2011, Cogeco Cable will not pay management fees in the second half of fiscal 2011. Similarly, as the maximum amount was paid in the first six months of fiscal 2010, Cogeco Cable paid no management fees in the second half of the previous fiscal year.

SIGNEDSIGNED
Jan PeetersLouis Audet
Chairman of the BoardPresident and Chief Executive Officer
Cogeco Cable
Montréal, Québec
April 8, 2011

INTERIM FINANCIAL STATEMENTS

Second quarter ended February 28, 2011

Three months ended February 28,Six months ended February 28,
(In thousands of dollars, except per share data)2011201020112010
$$$$
Revenue
Service332,448316,430660,784631,763
Equipment4,1213,9677,3045,999
336,569320,397668,088637,762
Operating costs199,669195,106395,116383,524
Management fees – COGECO Inc.2,5282,6789,1729,019
Operating income before amortization134,372122,613263,800245,219
Amortization (note 3)65,07965,839128,069131,404
Operating income69,29356,774135,731113,815
Financial expense (note 4)24,12515,03340,82531,174
Income before income taxes45,16841,74194,90682,641
Income taxes (note 5)14,01711,95230,118(3,814)
Net income31,15129,78964,78886,455
Earnings per share (note 6)
Basic0.640.611.341.78
Diluted0.640.611.331.78

COGECO CABLE INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

Three months
ended February 28,
Six months
ended February 28,
(In thousands of dollars)2011201020112010
$$$$
Net income31,15129,78964,78886,455
Other comprehensive income (loss)
Unrealized losses on derivative financial instruments designated as cash flow hedges, net of income tax recovery of $2,334,000 and $3,300,000 ($333,000 and $2,474,000 in 2010)(11,866)(1,155)(16,733)(4,924)
Reclassification to net income of unrealized losses on derivative financial instruments designated as cash flow hedges, net of income tax recovery of $1,411,000 and $2,328,000 ($79,000 and $1,086,000 in 2010)9,07751015,7416,989
Unrealized gains (losses) on translation of a net investment in self-sustaining foreign subsidiaries1,390(26,316)(1,753)(23,590)
Unrealized gains (losses) on translation of long-term debt designated as hedges of a net investment in self-sustaining foreign subsidiaries(826)20,66440118,573
(2,225)(6,297)(2,344)(2,952)
Comprehensive income28,92623,49262,44483,503

COGECO CABLE INC.

CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (DEFICIT)

(unaudited)

Six months ended February 28,
(In thousands of dollars)20112010
$$
Balance at beginning, as previously reported123,02517,172
Changes in accounting policies(24,279)
Balance at beginning, as restated123,025(7,107)
Net income64,78886,455
Dividends on multiple voting shares(5,334)(4,394)
Dividends on subordinate voting shares(11,159)(9,203)
Balance at end171,32065,751

COGECO CABLE INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)

(In thousands of dollars)February 28, 2011August 31, 2010
$$
Assets
Current
Cash and cash equivalents (note 11 b))26,07635,842
Accounts receivable (note 13)79,45867,064
Income taxes receivable43,21844,800
Prepaid expenses and other14,49413,669
Future income tax assets4,2906,133
167,536167,508
Fixed assets1,333,3141,325,077
Deferred charges26,52326,974
Intangible assets (note 7)1,015,2711,017,658
Goodwill (note 7)144,465144,695
Derivative financial instruments5,085
Future income tax assets7,22215,822
2,694,3312,702,819
Liabilities and Shareholders' equity
Liabilities
Current
Accounts payable and accrued liabilities164,847235,087
Income tax liabilities73,967558
Deferred and prepaid revenue45,04245,602
Derivative financial instrument3561,189
Current portion of long-term debt (note 8)2,4242,296
Future income tax liabilities38,01778,267
324,653362,999
Long-term debt (note 8)929,534952,687
Derivative financial instruments15,781-
Deferred and prepaid revenue and other liabilities13,36612,234
Pension plan liabilities and accrued employees benefits4,3803,624
Future income tax liabilities221,359234,974
1,509,0731,566,518
Shareholders' equity
Capital stock (note 9)992,147988,830
Contributed surplus5,7766,087
Retained earnings171,320123,025
Accumulated other comprehensive income (note 10)16,01518,359
1,185,2581,136,301
2,694,3312,702,819

COGECO CABLE INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

Three months ended
February 28,
Six months ended
February 28,
(In thousands of dollars)2011201020112010
$$$$
Cash flow from operating activities
Net income31,15129,78964,78886,455
Adjustments for:
Amortization (note 3)65,07965,839128,069131,404
Amortization of deferred transaction costs and discounts on long-term debt8657601,5961,508
Future income taxes19,50921,388(42,446)27,809
Stock-based compensation (note 9)8414411,260900
Loss (gain) on disposals and write-offs of fixed assets1,084(36)1,40462
Other290137581409
118,819118,318155,252248,547
Changes in non-cash operating items (note 11 a))(26,156)(4,281)(7,586)(138,128)
92,663114,037147,666110,419
Cash flow from investing activities
Acquisition of fixed assets (note 11 c))(68,152)(71,924)(131,361)(136,940)
Increase in deferred charges(2,516)(2,455)(5,754)(5,519)
Other102122
(70,668)(74,277)(137,115)(142,337)
Cash flow from financing activities
Increase (decrease) in bank indebtedness(663)43,673
Net repayments under the Term Facility and Term Revolving Facility(13,592)(36,495)(27,392)(21,579)
Issuance of long-term debt, net of discounts and transaction costs(25)198,295
Repayments of long-term debt(175,694)(854)(176,513)(2,069)
Issuance of subordinate voting shares (note 9)3,8892834,179283
Acquisition of subordinate voting shares held in trust under the Incentive Share Unit Plan (note 9)(2,258)(1,744)
Dividends on multiple voting shares(2,667)(2,197)(5,334)(4,394)
Dividends on subordinate voting shares(5,577)(4,602)(11,159)(9,203)
(193,666)(44,528)(20,182)4,967
Effect of exchange rate changes on cash and cash equivalents denominated in a foreign currency94(1,102)(135)(900)
Net change in cash and cash equivalents(171,577)(5,870)(9,766)(27,851)
Cash and cash equivalents at beginning197,65317,47735,84239,458
Cash and cash equivalents at end26,07611,60726,07611,607

See supplemental cash flow information in note 11.

COGECO CABLE INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

February 28, 2011

(unaudited)

(amounts in tables are in thousands of dollars, except number of shares and per share data)

1. Basis of Presentation

In the opinion of management, the accompanying unaudited interim consolidated financial statements, prepared in accordance with Canadian generally accepted accounting principles ("GAAP"), present fairly the financial position of Cogeco Cable Inc. ("the Corporation") as at February 28, 2011 and August 31, 2010 as well as its results of operations and its cash flows for the three and six month periods ended February 28, 2011 and 2010.

While management believes that the disclosures presented are adequate, these unaudited interim consolidated financial statements and notes should be read in conjunction with Cogeco Cable Inc.'s annual consolidated financial statements for the year ended August 31, 2010. These unaudited interim consolidated financial statements have been prepared using the same accounting policies and methods as the most recent annual consolidated financial statements.

Future accounting pronouncements

Multiple deliverable revenue arrangements

In December 2009, the Emerging Issues Committee ("EIC") of the Canadian Accounting Standards Board issued a new abstract concerning multiple deliverable revenue arrangements, EIC-175, Multiple deliverable revenue arrangements, which amended EIC-142, Revenue arrangements with multiple deliverables. EIC-175 requires a vendor to allocate arrangement consideration at the inception of the arrangement to all deliverables using the relative selling price method, thereby eliminating the use of the residual value method. The amendment also changes the level of evidence of the standalone selling price required to separate deliverables when more objective evidence of the selling price is not available. EIC-175 should be adopted prospectively to revenue arrangements entered into or materially modified in the first annual fiscal period beginning on or after January 1, 2011, with early adoption permitted. The Corporation has elected not to early-adopt this EIC, and in light of the adoption of International accounting standards taking effect at that same date, this EIC will not be applicable to the Corporation.

2. Segmented Information

The Corporation's activities are comprised of Cable Television, High Speed Internet ("HSI"), Telephony and other telecommunications services. The Corporation considers its Cable Television, HSI, Telephony and other telecommunications activities as a single operating segment. The Corporation's activities are carried out in Canada and in Europe.

The principal financial information per business segment is presented in the table below:

CanadaEuropeConsolidated
Three months ended February 28,201120102011201020112010
$$$$$$
Revenue294,508271,43042,06148,967336,569320,397
Operating costs161,754154,15737,91540,949199,669195,106
Management fees – COGECO Inc.2,5282,6782,5282,678
Operating income before amortization130,226114,5954,1468,018134,372122,613
Amortization50,96346,80314,11619,03665,07965,839
Operating income (loss)79,26367,792(9,970)(11,018)69,29356,774
Financial expense (revenue)24,17716,205(52)(1,172)24,12515,033
Income taxes14,71213,177(695)(1,225)14,01711,952
Net income (loss)40,37438,410(9,223)(8,621)31,15129,789
Total assets (1)2,417,0102,407,059277,321295,7602,694,3312,702,819
Fixed assets (1)1,113,4931,094,971219,821230,1061,333,3141,325,077
Intangible assets (1)1,015,2711,017,6581,015,2711,017,658
Goodwill (1)116,243116,24328,22228,452144,465144,695
Acquisition of fixed assets (2)58,48655,7039,66616,22168,15271,924
(1)At February 28, 2011 and August 31, 2010.
(2)Includes fixed assets acquired through capital leases that are excluded from the consolidated statements of cash flows.
CanadaEuropeConsolidated
Six months ended February 28,201120102011201020112010
$$$$$$
Revenue582,764535,79085,324101,972668,088637,762
Operating costs318,209299,74676,90783,778395,116383,524
Management fees – COGECO Inc.9,1729,0199,1729,019
Operating income before amortization255,383227,0258,41718,194263,800245,219
Amortization101,64192,21726,42839,187128,069131,404
Operating income (loss)153,742134,808(18,011)(20,993)135,731113,815
Financial expense (revenue)40,90332,080(78)(906)40,82531,174
Income taxes30,669(4,041)(551)22730,118(3,814)
Net income (loss)82,170106,769(17,382)(20,314)64,78886,455
Total assets (1)2,417,0102,407,059277,321295,7602,694,3312,702,819
Fixed assets (1)1,113,4931,094,971219,821230,1061,333,3141,325,077
Intangible assets (1)1,015,2711,017,6581,015,2711,017,658
Goodwill (1)116,243116,24328,22228,452144,465144,695
Acquisition of fixed assets (2)113,222107,85118,13929,230131,361137,081
(1)At February 28, 2011 and August 31, 2010.
(2)Includes fixed assets acquired through capital leases that are excluded from the consolidated statements of cash flows.

3. Amortization

Three months ended February 28,Six months ended February 28,
2011201020112010
$$$$
Fixed assets61,20761,963120,318123,528
Deferred charges2,6782,6815,3645,488
Intangible assets1,1941,1952,3872,388
65,07965,839128,069131,404

4. Financial expense

Three months ended
February 28,
Six months ended
February 28,
2011201020112010
$$$$
Interest on long-term debt24,37315,73140,26231,550
Foreign exchange gains(1,133)(391)(1,465)(879)
Amortization of deferred transaction costs399407841814
Other486(714)1,187(311)
24,12515,03340,82531,174

5. Income Taxes

Three months ended February 28,Six months ended February 28,
2011201020112010
$$$$
Current(5,492)(9,436)72,564(31,623)
Future19,50921,388(42,446)27,809
14,01711,95230,118(3,814)

The following table provides the reconciliation between income taxes at the Canadian statutory federal and provincial income tax rates and the consolidated income tax expense (recovery):

Three months ended
February 28,
Six months ended
February 28,
2011201020112010
$$$$
Income before income taxes45,16841,74194,90682,641
Combined income tax rate28.91%31.51%28.91%31.51%
Income taxes at combined income tax rate13,05813,15227,43726,040
Adjustment for losses or income subject to lower or higher tax rates(1,489)(3,251)(2,408)(5,629)
Decrease in future income taxes as a result of decrease in substantively enacted tax rates(29,782)
Utilization of pre-acquisition tax losses4,432
Income taxes arising from non-deductible expenses159100324303
Effect of foreign income tax rate differences2,1721,8774,6332,124
Other11774132(1,302)
Income taxes at effective income tax rate14,01711,95230,118(3,814)

6. Earnings per Share

The following table provides the reconciliation between basic and diluted earnings per share:

Three months ended February 28,Six months ended February 28,
2011201020112010
$$$$
Net income31,15129,78964,78886,455
Weighted average number of multiple voting and subordinate voting shares outstanding48,512,57648,507,59948,513,01148,528,628
Effect of dilutive stock options (1)198,787175,639187,651121,857
Effect of dilutive subordinate voting shares held in trust under the Incentive Share Unit Plan111,56155,09489,07631,573
Weighted average number of diluted multiple voting and subordinate voting shares outstanding48,822,92448,738,33248,789,73848,682,058
Earnings per share
Basic0.640.611.341.78
Diluted0.640.611.331.78
(1)For the three and six month periods ended February 28, 2011, 71,761 stock options (103,549 and 224,905 in 2010) were excluded from the calculation of diluted earnings per share as the exercise price of the options was greater than the average share price of the subordinate voting shares.

7. Goodwill and Other Intangible Assets

February 28, 2011August 31, 2010
$$
Customer relationships25,71928,106
Customer base989,552989,552
1,015,2711,017,658
Goodwill144,465144,695
1,159,7361,162,353

a) Intangible assets

During the first six months, intangible assets variations were as follows:

Customer relationshipsCustomer
base
Total
$$$
Balance at August 31, 201028,106989,5521,017,658
Amortization (note 3)(2,387)(2,387)
Balance at February 28, 201125,719989,5521,015,271

b) Goodwill

During the first six months, goodwill variation was as follows:

$
Balance at August 31, 2010144,695
Foreign currency translation adjustment(230)
Balance at February 28, 2011144,465

8. Long-Term Debt

MaturityInterest rateFebruary 28, 2011August 31, 2010
%$$
Parent company
Term Revolving Facility
Revolving loan – €70,000,000 (€90,000,000 at August 31, 2010)20143.00 (1)(2)93,842121,635
Senior Secured Notes
Series A – US$190,000,00020157.00 (3)183,424201,387
Series B20187.6054,62854,609
Senior Secured Debentures Series 120145.95297,697297,379
Senior Secured Debentures Series 2 (4)20205.15198,334
Senior Secured Notes Series B2011(5)7.73174,738
Senior Unsecured Debenture20185.9499,81799,806
Subsidiaries
Obligations under capital leases20136.71 – 9.934,2165,429
931,958954,983
Less current portion2,4242,296
929,534952,687
(1)Interest rate on debt as at February 28, 2011, including applicable margin.
(2)On January 21, 2009, the Corporation entered into a swap agreement with a financial institution to fix the floating benchmark interest rate with respect to a portion of Euro-denominated loans outstanding under the Term Revolving Facility, and previously the Term Facility, for a notional amount of €111.5 million which has been reduced to €95.8 million on July 28, 2009 and to €69.6 million on July 28, 2010. The interest swap rate to hedge the Euro-denominated loans has been fixed at 2.08% until the maturity of the swap agreement on July 28, 2011. In addition to the interest swap rate of 2.08%, the Corporation will continue to pay the applicable margin on these Euro-denominated loans in accordance with the Term Revolving Facility.
(3)Cross-currency swap agreements have resulted in an effective interest rate of 7.24% on the Canadian dollar equivalent of the US denominated debt.
(4)On November 16, 2010, the Corporation completed pursuant to a public debt offering, the issue of $200 million Senior Secured Debentures Series 2 (the "Debentures") for net proceeds of $198.3 million, net of discounts and transaction costs. These Debentures mature on November 16, 2020 and bear interest at 5.15% per annum payable semi-annually. These debentures are indirectly secured by a first priority fixed and floating charge and a security interest on substantially all present and future real and personal property and undertaking of every nature and kind of the Corporation and certain of its subsidiaries.
(5)On December 22, 2010, the Corporation redeemed the 7.73% Senior Secured Notes Series B in the aggregate principal amount of $175 million. As a result, the aggregate redemption cash consideration that the Corporation paid totalled $183.8 million, excluding accrued interest. The excess of the redemption price over the aggregate principal amount was recorded as financial expense during the second quarter of fiscal 2011.

9. Capital Stock

Authorized

Unlimited number of:

Class A Preference shares, without voting rights, redeemable by the Corporation and retractable at the option of the holder at any time at a price of $1 per share, carrying a cumulative preferential cash dividend at a rate of 11% of the redemption price per year.

Class B Preference shares, without voting rights, could be issued in series.

Multiple voting shares, 10 votes per share.

Subordinate voting shares, 1 vote per share.

Issued

February 28, 2011August 31, 2010
$$
15,691,100 multiple voting shares98,34698,346
33,050,824 subordinate voting shares (32,885,337 at August 31, 2010)897,588892,332
995,934990,678
105,459 subordinate voting shares held in trust under the Incentive Share Unit Plan (57,409 at August 31, 2010)(3,787)(1,848)
992,147988,830

During the first six months, subordinate voting share transactions were as follows:

Number of sharesAmount
$
Balance at August 31, 201032,885,337892,332
Shares issued for cash under the Employee Stock Option Plan165,4874,179
Compensation expense previously recorded in contributed surplus for options exercised1,077
Balance at February 28, 201133,050,824897,588

During the first six months, subordinate voting shares held in trust under the Incentive Share Unit Plan transactions were as follows:

Number of sharesAmount
$
Balance, beginning of year57,4091,848
Subordinate voting shares acquired57,2032,258
Subordinate voting shares distributed to employees(9,153)(319)
Balance at February 28, 2011105,4593,787

Stock-based plans

The Corporation offers, for certain executives a Stock Option Plan, which is described in the Corporation's annual consolidated financial statements. During the first six months of 2011, the Corporation granted 66,700 stock options (66,174 in 2010) with an exercise price of $39.00 ($31.82 to $38.86 in 2010) of which 35,800 stock options (33,266 in 2010) were granted to COGECO Inc.'s employees. These options vest equally over a period of five years beginning one year after the day such options are granted and are exercisable over ten years. During the three and six month periods ended February 28, 2011, the Corporation charged COGECO Inc. an amount of $57,000 and $115,000 ($62,000 and $177,000 in 2010) with regards to the Corporation's options granted to COGECO Inc.'s employees. As a result, a compensation expense of $84,000 and $192,000 ($157,000 and $379,000 in 2010) was recorded for the three and six month periods ended February 28, 2011.

The weighted average fair value of stock options granted for the six month period ended February 28, 2011 was $9.55 ($8.11 in 2010) per option. The weighted average fair value of each option granted was estimated at the grant date for purposes of determining stock-based compensation expense using the binomial option pricing model based on the following assumptions:

20112010
%%
Expected dividend yield1.441.49
Expected volatility2929
Risk-free interest rate2.052.67
Expected life in years4.94.8

Under the Stock Option Plan, the following options were granted by the Corporation and are outstanding at February 28, 2011:

Outstanding at August 31, 2010716,760
Granted66,700
Exercised(165,487)
Forfeited / Cancelled(28,169)
Expired(448)
Outstanding at February 28, 2011589,356
Exercisable at February 28, 2011415,945

The Corporation also offers a senior executive and designated employee Incentive Share Unit Plan ("ISU Plan"), which is described in the Corporation's annual consolidated financial statements. During the first six months of 2011, the Corporation granted 58,088 (63,666 in 2010) Incentive Share Units ("ISUs") of which 10,000 (9,981 in 2010) ISUs were granted to COGECO Inc.'s employees. The Corporation establishes the value of the compensation related to the ISUs granted based on the fair value of the Corporation's subordinate voting shares at the date of grant and a compensation expense is recognized over the vesting period, which is three years less one day. A trust was created for the purpose of purchasing these shares on the stock market in order to guard against stock price fluctuation. The Corporation instructed the trustee to purchase 57,203 (55,094 in 2010) subordinate voting shares of the Corporation on the stock market. These shares were purchased for cash consideration aggregating $2,258,000 ($1,744,000 in 2010) and are held in trust for the participants until they are fully vested. The trust, considered as a variable interest entity, is consolidated in the Corporation's financial statements with the value of the acquired shares presented as subordinate voting shares held in trust under the ISU Plan in reduction of capital stock. A compensation expense of $503,000 and $681,000 ($122,000 and $166,000 in 2010) was recorded for the three and six month periods ended February 28, 2011 related to this plan. During the three and six month periods ended February 28, 2011, the Corporation charged COGECO Inc. an amount of $58,000 and $97,000 ($28,000 and $37,000 in 2010) with regards to the Corporation's ISUs granted to COGECO Inc.'s employees. Under the ISU Plan, the following ISUs were granted by the Corporation and are outstanding at February 28, 2011:

Outstanding at August 31, 201057,409
Granted58,088
Distributed(9,153)
Forfeited / Cancelled(885)
Outstanding at February 28, 2011105,459

The Corporation also offers a Deferred Share Unit Plan ("DSU Plan") which is described in the Corporation's annual consolidated financial statements. During the first six months of 2011, 4,521 (4,422 in 2010) Deferred Share Units ("DSUs") were awarded to the participants in connection with the DSU Plan. A compensation expense of $136,000 and $175,000 ($72,000 and $141,000 in 2010) was recorded for the three and six month periods ended February 28, 2011 for the liability related to this plan. Under the DSU Plan, the following DSUs were issued by Cogeco Cable Inc. and are outstanding at February 28, 2011:

Outstanding at August 31, 201010,855
Issued4,521
Dividend equivalents109
Outstanding at February 28, 201115,485

10. Accumulated Other Comprehensive Income

Translation of a net investment in self-sustaining foreign subsidiariesCash flow hedgesTotal
$$$
Balance as at August 31, 201015,4392,92018,359
Other comprehensive loss(1,352)(992)(2,344)
Balance as at February 28, 201114,0871,92816,015

11. Statements of Cash Flows

a) Changes in non-cash operating items

Three months ended
February 28,
Six months
ended February 28,
2011201020112010
$$$$
Accounts receivable(9,292)(7,844)(12,464)(11,096)
Income taxes receivable(223)(9,608)1,565(30,139)
Prepaid expenses and other(3,989)(348)(828)(1,522)
Accounts payable and accrued liabilities(7,654)8,227(69,841)(62,582)
Income tax liabilities(5,506)8273,412(40,197)
Deferred and prepaid revenue and other liabilities5085,2105707,408
(26,156)(4,281)(7,586)(138,128)

b) Cash and cash equivalents

February 28, 2011August 31, 2010
$$
Cash12,67035,842
Cash equivalents (1)13,406
26,07635,842
(1)At February 28, 2011, term deposit of €10,000,000, bearing interest at 1.40%, maturing on March 14, 2011.

c) Other information

Three months ended
February 28,
Six months ended
February 28,
2011201020112010
$$$$
Fixed asset acquisitions through capital leases141
Financial expense paid21,33810,67642,33531,614
Income taxes paid (received)237940(2,410)39,564

12. Employee Future Benefits

The Corporation and its Canadian subsidiaries offer to their employees contributory defined benefit pension plans, defined contribution pension plans or a collective registered retirement savings plan, which are described in the Corporation's annual consolidated financial statements. The total expense related to these plans is as follows:

Three months ended February 28,Six months ended February 28,
2011201020112010
$$$$
Contributory defined benefit pension plans513377935754
Defined contribution pension plans and collective registered retirement savings plan1,3061,0802,5412,175
1,8191,4573,4762,929

13. Financial and Capital Management

a) Financial management

Management's objectives are to protect Cogeco Cable Inc. and its subsidiaries against material economic exposures and variability of results, and against certain financial risks including credit risk, liquidity risk, interest rate risk and foreign exchange risk.

Credit risk

Credit risk represents the risk of financial loss for the Corporation if a customer or counterparty to a financial asset fails to meet its contractual obligations. The Corporation is exposed to credit risk arising from the derivative financial instruments, cash and cash equivalents and trade accounts receivable, the maximum exposure of which is represented by the carrying amounts reported on the balance sheet.

Credit risk from the derivative financial instruments arises from the possibility that counterparties to the cross-currency swap and interest rate swap agreements may default on their obligations in instances where these agreements have positive fair values for the Corporation. The Corporation reduces this risk by completing transactions with financial institutions that carry a credit rating equal to or superior to its own credit rating. The Corporation assesses the creditworthiness of the counterparties in order to minimize the risk of counterparties default under the agreements. At February 28, 2011, management believes that the credit risk relating to its derivative financial instruments is minimal, since the lowest credit rating of the counterparties to the agreements is "A".

Cash and cash equivalents consist mainly of highly liquid investments, such as money market deposits. The Corporation has deposited the cash and cash equivalents with reputable financial institutions, from which management believes the risk of loss to be remote.

The Corporation is also exposed to credit risk in relation to its trade accounts receivable. In the current global economic environment, the Corporation's credit exposure is higher than usual but it is difficult to predict the impact this could have on the Corporation's account receivable balances. To mitigate such risk, the Corporation continuously monitors the financial condition of its customers and reviews the credit history or worthiness of each new large customer. At February 28, 2011, no customer balance represents a significant portion of the Corporation's consolidated trade accounts receivable. The Corporation establishes an allowance for doubtful accounts based on specific credit risk of its customers by examining such factors as the number of overdue days of the customer's balance outstanding as well as the customer's collection history. The Corporation believes that its allowance for doubtful accounts is sufficient to cover the related credit risk. The Corporation has credit policies in place and has established various credit controls, including credit checks, deposits on accounts and advance billing, and has also established procedures to suspend the availability of services when customers have fully utilized approved credit limits or have violated existing payment terms. Since the Corporation has a large and diversified clientele dispersed throughout its market areas in Canada and Europe, there is no significant concentration of credit risk. The following table provides further details on the Corporation's accounts receivable balances:

February 28, 2011August 31, 2010
$$
Trade accounts receivable75,60667,189
Allowance for doubtful accounts(6,844)(7,478)
68,76259,711
Other accounts receivable10,6967,353
79,45867,064

The following table provides further details on trade accounts receivable, net of allowance for doubtful accounts. Trade accounts receivable past due is defined as amount outstanding beyond normal credit terms and conditions for the respective customers. A large portion of the Corporation's customers are billed in advance and are required to pay before their services are rendered. The Corporation considers amount outstanding at the due date as trade accounts receivable past due.

February 28, 2011August 31, 2010
$$
Net trade accounts receivable not past due51,30542,817
Net trade accounts receivable past due17,45716,894
68,76259,711

Liquidity risk

Liquidity risk is the risk that the Corporation will not be able to meet its financial obligations as they become due. The Corporation manages liquidity risk through the management of its capital structure and access to different capital markets. It also manages liquidity risk by continuously monitoring actual and projected cash flows to ensure sufficient liquidity to meet its obligations when due. At February 28, 2011, the available amount of the Corporation's Term Revolving Facility was $648.2 million. Management believes that the committed Term Revolving Facility will, until its maturity in July 2014, provide sufficient liquidity to manage its long-term debt maturities and support working capital requirements.

The following table summarizes the contractual maturities of the financial liabilities and related capital amounts:

20112012201320142015ThereafterTotal
$$$$$$$
Accounts payable and accrued liabilities (1)147,131147,131
Long-term debt (2)393,842539,566933,408
Derivative financial instruments
Cash outflows (Canadian dollar)201,875201,875
Cash inflows (Canadian dollar equivalent of US dollar)(184,566)(184,566)
Obligations under capital leases (3)1,3962,29688974,588
148,5272,296889393,849556,8751,102,436
(1)Excluding accrued interest.
(2)Principal excluding obligations under capital leases.
(3)Including interest.

The following table is a summary of interest payable on long-term debt (excluding interest on capital leases) that is due for each of the next five years and thereafter, based on the principal amount and interest rate prevailing on the outstanding debt at February 28, 2011 and their respective maturities:

20112012201320142015ThereafterTotal
$$$$$$$
Interest payments on long-term debt27,00054,00154,00153,64933,33695,548317,535
Interest payments on derivative financial instruments8,89214,61414,61414,61414,6147,30674,654
Interest receipts on derivative financial instruments(7,626)(12,920)(12,920)(12,920)(12,920)(6,459)(65,765)
28,26655,69555,69555,34335,03096,395326,424

Interest rate risk

The Corporation is exposed to interest rate risks for both fixed interest rate and floating interest rate instruments. Fluctuations in interest rates will have an effect on the valuation and collection or repayment of these instruments. At February 28, 2011, all of the Corporation's long-term debt was at fixed rate, except for the Corporation's Term Revolving Facility. However, on January 21, 2009, the Corporation entered into a swap agreement with a financial institution to fix the floating benchmark interest rate with respect to a portion of the Euro-denominated loans outstanding under the Term Revolving Facility and previously the Term Facility, for a notional amount of €111.5 million which have been reduced to €95.8 million on July 28, 2009 and to €69.6 million on July 28, 2010. The interest swap rate to hedge the Euro-denominated loans has been fixed at 2.08% until the swap agreement maturity of July 28, 2011. In addition to the interest swap rate of 2.08%, the Corporation will continue to pay the applicable margin on the revolving loans in accordance with the Term Revolving Facility. The Corporation elected to apply cash flow hedge accounting on this derivative financial instrument. The sensitivity of the Corporation's annual financial expense to a variation of 1% in the interest rate applicable to the Term Revolving Facility is approximately nil based on the outstanding debt at February 28, 2011 and taking into consideration the effect of the interest rate swap agreement.

Foreign exchange risk

The Corporation is exposed to foreign exchange risk related to its long-term debt denominated in US dollars. In order to mitigate this risk, the Corporation has established guidelines whereby 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, the Corporation entered into cross-currency swap agreements to set the liability for interest and principal payments on its US$190 million Senior Secured Notes Series A issued on October 1, 2008. These agreements have the effect of converting the US interest coupon rate of 7.00% per annum to an average Canadian dollar interest rate of 7.24% per annum. The exchange rate applicable to the principal portion of the debt has been fixed at $1.0625. The Corporation elected to apply cash flow hedge accounting on these derivative financial instruments.

The Corporation is also exposed to foreign exchange risk on cash and cash equivalents, bank indebtedness and accounts payable denominated in US dollars or Euros. At February 28, 2011, cash and cash equivalents in US dollars amounted to US$18,144,000 (US$13,613,000 at August 31, 2010) while accounts payable denominated in US dollars amounted to US$3,656,000 (US$15,850,000 at August 31, 2010). At February 28, 2011, Euro-denominated bank indebtedness amounted to €205,000 (cash and cash equivalents of €187,000 at August 31, 2010) while there were no accounts payable denominated in Euros at February 28, 2011 and at August 31, 2010. Due to their short-term nature, the risk arising from fluctuations in foreign exchange rates is usually not significant. The impact of a 10% change in the foreign exchange rates (US dollar and Euro) would change financial expense by approximately $1.4 million.

Furthermore, the Corporation's net investment in self-sustaining foreign subsidiaries is exposed to market risk attributable to fluctuations in foreign currency exchange rates, primarily changes in the values of the Canadian dollar versus the Euro. This risk is mitigated since the major part of the purchase price for Cabovisão was borrowed directly in Euros. At February 28, 2011, the net investment amounted to €169,312,000 (€182,104,000 at August 31, 2010) while long-term debt denominated in Euros amounted to €70,000,000 (€90,000,000 at August 31, 2010). The exchange rate used to convert the Euro currency into Canadian dollars for the balance sheet accounts at February 28, 2011 was $1.3406 per Euro compared to $1.3515 per Euro at August 31, 2010. The impact of a 10% change in the exchange rate of the Euro into Canadian dollars would change financial expense by approximately $0.4 million and other comprehensive income by approximately $13.3 million.

Fair value

Fair value is the amount at which willing parties would accept to exchange a financial instrument based on the current market for instruments with the same risk, principal and remaining maturity. Fair values are estimated at a specific point in time, by discounting expected cash flows at rates for debts of the same remaining maturities and conditions. These estimates are subjective in nature and involve uncertainties and matters of significant judgement, and therefore, cannot be determined with precision. In addition, income taxes and other expenses that would be incurred on disposition of these financial instruments are not reflected in the fair values. As a result, the fair values are not necessarily the net amounts that would be realized if these instruments were settled. The Corporation has determined the fair value of its financial instruments as follows:

a) The carrying amount of cash and cash equivalents, accounts receivable and accounts payable and accrued liabilities approximates fair value because of the short-term nature of these instruments.

b) Interest rates under the terms of the Corporation's Term Revolving Facility are based on bankers' acceptance, LIBOR, EURIBOR, bank prime rate loan or US base rate loan plus applicable margin. Therefore, the carrying value approximates fair value for the Term Revolving Facility, since the Term Revolving Facility has conditions similar to those currently available to the Corporation.

c) The fair value of the Senior Secured Debentures Series 1 and 2, Senior Secured Notes Series A and B and Senior Unsecured Debenture are based upon current trading values for similar financial instruments.

d) The fair values of obligations under capital leases are not significantly different from their carrying amounts.

The carrying value of all the Corporation's financial instruments approximates fair value, except as otherwise noted in the following table:

February 28, 2011August 31, 2010
Carrying valueFair valueCarrying valueFair value
$$$$
Long-term debt931,958993,230954,9831,050,696

In accordance with CICA Handbook Section 3862, Financial instruments – disclosures, all financial instruments recognized at fair value on the consolidated balance sheet must be classified based on the three fair value hierarchy levels, which are as follows:

  • Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;
  • Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices); and
  • Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

The Corporation considers that its derivative financial instruments are classified as Level 2 under the fair value hierarchy. The fair value of derivative financial instruments are estimated using valuation models that reflect projected future cash flows over contractual terms of the derivative financial instruments and observable market data, such as interest and currency exchange rate curves.

b) Capital management

The Corporation's objectives in managing capital are to ensure sufficient liquidity to support the capital requirements of its various businesses, including growth opportunities. The Corporation manages its capital structure and makes adjustments in light of general economic conditions, the risk characteristics of the underlying assets and the Corporation's working capital requirements. Management of the capital structure involves the issuance of new debt, the repayment of existing debts using cash generated by operations and the level of distribution to shareholders.

The capital structure of the Corporation is composed of shareholders' equity, bank indebtedness, long-term debt and assets or liabilities related to derivative financial instruments.

The provisions under the Term Revolving Facility provide for restrictions on the operations and activities of the Corporation. Generally, the most significant restrictions relate to permitted investments and dividends on multiple and subordinate voting shares, as well as incurrence and maintenance of certain financial ratios primarily linked to the operating income before amortization, financial expense and total indebtedness. At February 28, 2011 and August 31, 2010, the Corporation was in compliance with all of its debt covenants and was not subject to any other externally imposed capital requirements.

The following table summarizes certain of the key ratios used to monitor and manage the Corporation's capital structure:

February 28, 2011August 31, 2010
Net indebtedness(1) / shareholders' equity0.80.8
Net indebtedness(1) / operating income before amortization(2)1.81.8
Operating income before amortization(2) / financial expense(2)7.17.9
(1)Net indebtedness is defined as the total of bank indebtedness, principal on long-term debt and obligations under derivative financial instruments, less cash and cash equivalents.
(2)Calculation based on operating income before amortization and financial expense for the twelve-month periods ended February 28, 2011 and August 31, 2010.

CUSTOMER STATISTICS
(unaudited)

February 28, 2011August 31, 2010
Homes passed
Canada1,604,7021,593,743
Portugal(1)905,624905,359
Total2,510,3262,499,102
Homes connected(2)
Canada993,649979,590
Portugal268,721269,194
Total1,262,3701,248,784
Revenue-generating units(3)
Canada2,474,2072,350,577
Portugal853,090828,772
Total3,327,2973,179,349
Basic Cable service customers
Canada880,755874,505
Portugal260,100260,267
Total1,140,8551,134,772
High Speed Internet service customers
Canada586,479559,057
Portugal167,221163,187
Total753,700722,244
Digital Television service customers
Canada614,782559,418
Portugal175,803159,852
Total790,585719,270
Telephony service customers
Canada392,191357,597
Portugal249,966245,466
Total642,157603,063
(1)The Corporation is currently assessing the number of homes passed.
(2)Represents the sum of Basic Cable service customers and High Speed Internet ("HSI") and Telephony service customers who do not subscribe to the Basic Cable service.
(3)Represents the sum of Basic Cable, HSI, Digital Television and Telephony service customers.

Contact Information

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

    Information:
    Media
    Marie Carrier
    Director, Communications
    514-764-4761