20-F 1 a18-6703_120f.htm 20-F

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

 

o

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

OR

 

 

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017

 

 

OR

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                          to

 

 

OR

 

 

o

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report . . . . . . . . . . . . . . . . . . .

 

For the transition period from                       to                        

 

Commission file number 033-51000

 

VIDEOTRON LTD. / VIDÉOTRON LTÉE

(Exact name of Registrant as specified in its charter)

 

Province of Québec, Canada

(Jurisdiction of incorporation or organization)

 

612 St. Jacques Street

Montréal, Québec, Canada H3C 4M8

(Address of principal executive offices)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of each class

 

Name of each exchange on which registered

None

 

None

 

Securities registered or to be registered pursuant to Section 12(g) of the Act.

 

None

(Title of Class)

 



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Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

 

5% Senior Notes due July 15, 2022

(Title of Class)

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

 

172,516,829 Class “A” Common Shares

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

o Yes   x No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

x Yes   o No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

o Yes  x No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

Accelerated filer o

Non-accelerated filer x

Emerging growth company o

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.  o

 

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP o

 

International Financial Reporting Standards as issued
by the International Accounting Standards Board
x

 

Other o

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

o Item 17   o Item 18

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes   x No

 



Table of Contents

 

TABLE OF CONTENTS

 

 

Page

 

 

Explanatory Notes

ii

Industry and Market Data

ii

Presentation of Financial Information

ii

Exchange Rate Information

iii

Cautionary Statement Regarding Forward-Looking Statements

iv

ITEM 1 – Identity of Directors, Senior Management and Advisers

5

ITEM 2 – Offer Statistics and Expected Timetable

5

ITEM 3 – Key Information

5

ITEM 4 – Information on the Corporation

25

ITEM 4A – Unresolved Staff Comments

46

ITEM 5 – Operating and Financial Review and Prospects

47

ITEM 6 – Directors, Senior Management and Employees

81

ITEM 7 – Major Shareholders and Related Party Transactions

88

ITEM 8 – Financial Information

89

ITEM 9 – The Offer and Listing

90

Item 11 - Quantitative and Qualitative Disclosures About Market Risk

111

ITEM 12 – Description of Securities Other Than Equity Securities

112

ITEM 13 – Defaults, Dividend Arrearages and Delinquencies

112

ITEM 14 – Material Modifications to the Rights of Security Holders and Use of Proceeds

112

ITEM 15 – Controls and Procedures

112

ITEM 16 – [Reserved]

113

ITEM 16A – Audit Committee Financial Expert

113

ITEM 16B – Code of Ethics

113

ITEM 16C – Principal Accountant Fees And Services

113

ITEM 16D – Exemptions from the Listing Standards for Audit Committees

114

ITEM 16E – Purchases of Equity Securities by the Issuer and Affiliated Purchasers

114

ITEM 16F – Changes in Registrant’s Certifying Accountant

114

ITEM 16G – Corporate Governance

114

ITEM 17 – Financial Statements

114

ITEM 18 – Financial Statements

114

ITEM 19 – Exhibits

114

Signature

121

Index to Consolidated Financial Statements

F-1

 



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EXPLANATORY NOTES

 

All references in this annual report to “Videotron” or “our Corporation”, as well as the use of the terms “we”, “us”, “our” or similar terms, are references to Videotron Ltd. and, unless the context otherwise requires, its consolidated subsidiaries. All references in this annual report to “Quebecor Media” are to our parent corporation Quebecor Media Inc., all references to “TVA Group” are to TVA Group Inc., a public subsidiary of Quebecor Media, all references to “Quebecor” are to Quebecor Inc., the majority shareholder of Quebecor Media, all references to “4Degrees” are references to 4Degrees Colocations Inc., and all references to “Fibrenoire” are references to Fibrenoire Inc.

 

In this annual report, all references to the “CRTC” are references to the Canadian Radio-television and Telecommunications Commission.

 

All references in this annual report to our “Senior Notes” are to, collectively, our issued and outstanding 5% Senior Notes due July 15, 2022, our 53/8% Senior Notes due June 15, 2024, our 55/8% Senior Notes due June 15, 2025, our 53/4% Senior Notes due January 15, 2026 and our 51/8% Senior Notes due April 15, 2027.

 

INDUSTRY AND MARKET DATA

 

Industry statistics and market data used throughout this annual report were obtained from internal surveys, market research, publicly available information and industry publications, including the CRTC and Numeris. Industry publications generally state that the information they contain has been obtained from sources believed to be reliable, but that the accuracy and completeness of this information is not guaranteed. Industry and company data is approximate and may reflect rounding in certain cases.

 

Information contained in this annual report concerning the telecommunication industry, our general expectations concerning this industry and our market positions and market shares may also be based on estimates and assumptions made by us based on our knowledge of the industry and which we believe to be reliable. We believe, however, that this data is inherently imprecise, although generally indicative of relative market positions and market shares.

 

PRESENTATION OF FINANCIAL INFORMATION

 

IFRS and Functional Currency

 

Our audited consolidated financial statements for the years ended December 31, 2017, 2016, 2015, 2014 and 2013 have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board.

 

In this annual report, references to Canadian Dollars, CAN$ or $ are to the lawful currency of Canada, our functional currency, and references to US Dollars or US$ are to the currency of the United States.

 

Non-IFRS Financial Measures and Key Performance Indicator

 

In this annual report, we use certain non-IFRS financial measures, including adjusted operating income, adjusted operating income margin and long-term debt, excluding QMI subordinated loans. These financial measures are not calculated in accordance with, or recognized by, IFRS. Our method of calculating these financial measures may differ from the methods used by other companies and, as a result, the non-IFRS financial measures presented in this annual report may not be comparable to other similarly titled measures disclosed by other companies.

 

We provide a definition of adjusted operating income, adjusted operating income margin and average monthly revenue per user (“ARPU”) under “Item 5. Operating and Financial Review and Prospects — Non-IFRS Financial Measures” and “Item 5. Operating and Financial Review and Prospects — Key Performance Indicator”. We also provide a definition of adjusted operating income, a reconciliation of adjusted operating income and a reconciliation of long-term debt, excluding QMI subordinated loans to the most directly comparable financial measures under IFRS in footnotes 3 and 4 to the tables under “Item 3. Key Information — A. Selected Financial Data”. We also provide a definition of ARPU in footnote 11 to the tables under “Item 3. Key Information — A. Selected Financial Data”.

 

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Unless otherwise indicated, information provided in this annual report, including all operating data presented, is as of December 31, 2017.

 

EXCHANGE RATE INFORMATION

 

The following table sets forth, for the periods indicated, the average, high, low and end of period daily exchange rates published by the Bank of Canada. Such rates are presented as U.S. dollars per CAN$1.00. On March 22, 2018, the daily exchange rate was CAN$1.00 equals US$0.7747. We do not make any representation that Canadian dollars could have been converted into U.S. dollars at the rates shown or at any other rate. You should note that the rates set forth below may differ from the actual rates used in our accounting processes and in the preparation of our consolidated financial statements.

 

Year Ended:

 

Average(1)

 

High

 

Low

 

Period End

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

0.7708

 

0.8245

 

0.7276

 

0.7971

 

December 31, 2016

 

0.7548

 

0.7972

 

0.6854

 

0.7448

 

December 31, 2015

 

0.7820

 

0.8527

 

0.7148

 

0.7225

 

December 31, 2014

 

0.9054

 

0.9422

 

0.8589

 

0.8620

 

December 31, 2013

 

0.9710

 

1.0164

 

0.9348

 

0.9402

 

 

Month Ended:

 

Average(2)

 

High

 

Low

 

Period End

 

 

 

 

 

 

 

 

 

 

 

March 2018 (through March 22, 2018)

 

0.7724

 

0.7794

 

0.7641

 

0.7747

 

February 28, 2018

 

0.7946

 

0.8138

 

0.7807

 

0.7807

 

January 31, 2018

 

0.8047

 

0.8135

 

0.7978

 

0.8135

 

December 31, 2017

 

0.7831

 

0.7971

 

0.7760

 

0.7971

 

November 30, 2017

 

0.7832

 

0.7885

 

0.7759

 

0.7759

 

October 31, 2017

 

0.7935

 

0.8018

 

0.7756

 

0.7756

 

September 30, 2017

 

0.8142

 

0.8245

 

0.8013

 

0.8013

 

 


(1)    For years 2013 to 2016, the average of the daily noon rates for each day during the applicable year. For year 2017, the average of the daily exchange rates for each day during the year.

 

(2)    The average of the daily exchange rates for each day during the applicable month.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This annual report contains forward-looking statements with respect to our financial condition, results of operations, business, and certain of our plans and objectives. These forward-looking statements are made pursuant to the “Safe Harbor” provisions of the United States Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industries in which we operate as well as beliefs and assumptions made by our management. Such statements include, in particular, statements about our plans, prospects, financial position and business strategies. Words such as “may,” “will,” “expect,” “continue,” “intend,” “estimate,” “anticipate,” “plan,” “foresee,” “believe,” or “seek,” or the negatives of these terms or variations of them or similar terminology, are intended to identify such forward-looking statements. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements, by their nature, involve risks and uncertainties and are not guarantees of future performance. Such statements are also subject to assumptions concerning, among other things: our anticipated business strategies; anticipated trends in our business; anticipated reorganizations of any of our segments or businesses, and any related restructuring provisions or impairment charges; and our ability to continue to control costs. We can give no assurance that these estimates and expectations will prove to have been correct. Actual outcomes and results may, and often do, differ from what is expressed, implied or projected in such forward-looking statements, and such differences may be material. Some important factors that could cause actual results to differ materially from those expressed in these forward-looking statements include, but are not limited to:

 

·                  our ability to successfully continue developing our network and facilities-based mobile services;

 

·                  general economic, financial or market conditions;

 

·                  the intensity of competitive activity in the industries in which we operate;

 

·                  new technologies that might change consumer behaviour towards our product suite;

 

·                  unanticipated higher capital spending required to deploy our network or to address the continued development of competitive alternative technologies, or the inability to obtain additional capital to continue the development of our business;

 

·                  our ability to implement successfully our business and operating strategies and manage our growth and expansion;

 

·                  disruptions to the network through which we provide our digital television, Internet access, telephony and over-the-top (“OTT”) video services, and our ability to protect such services from piracy, unauthorized access or other security breaches;

 

·                  labour disputes or strikes;

 

·                  changes in our ability to obtain services and equipment critical to our operations;

 

·                  changes in laws and regulations, or in their interpretations, which could result, among other things, in the loss (or reduction in value) of our licenses or markets or in an increase in competition, compliance costs or capital expenditures;

 

·                  our substantial indebtedness, the tightening of credit markets, and the restrictions on our business imposed by the terms of our debt; and

 

·                  interest rate fluctuations that affect a portion of our interest payment requirements on long-term debt.

 

We caution you that the above list of cautionary statements is not exhaustive. These and other factors are discussed in further detail elsewhere in this annual report, including under “Item 3. Key Information — Risk Factors” of this annual report. Each of these forward-looking statements speaks only as of the date of this annual report. We disclaim any obligation to update these statements unless applicable securities laws require us to do so. We advise you to consult any documents we may file with or furnish to the U.S. Securities and Exchange Commission (“SEC”), as described under “Item 10. Additional Information — Documents on Display” of this annual report.

 

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ITEM 1 — IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not applicable.

 

ITEM 2 — OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3 — KEY INFORMATION

 

A-                                   Selected Financial Data

 

The following tables present selected consolidated financial information for our business presented in accordance with IFRS for each of the years ended December 31, 2017, 2016, 2015, 2014 and 2013. We derived this selected consolidated financial information from our audited consolidated financial statements, which are comprised of consolidated balance sheets as at December 31, 2017, 2016, 2015, 2014 and 2013 and the related consolidated statements of income, comprehensive income, equity and cash flows for each of the years in the five-year period ended December 31, 2017. The selected consolidated financial information presented below should be read in conjunction with the information contained in “Item 5. Operating and Financial Review and Prospects” and our audited consolidated financial statements as at December 31, 2017 and 2016 and for the years ended December 31, 2017, 2016 and 2015 and notes thereto contained in “Item 18. Financial Statements” of this annual report (beginning on page F-1). Our audited consolidated financial statements as at December 31, 2015, 2014 and 2013 and for the years ended December 31, 2014 and 2013 are not included in this annual report. Our consolidated financial statements as at December 31, 2017, 2016, 2015, 2014 and 2013 and for the years ended December 31, 2017, 2016, 2015, 2014 and 2013, prepared in accordance with IFRS, have been audited by Ernst & Young LLP, an independent registered public accounting firm. Ernst & Young LLP’s report on our consolidated financial statements as at December 31, 2017 and 2016 and for the years ended December 31, 2017, 2016 and 2015 is included in this annual report.

 

The information presented below the caption “Other Financial Data and Ratios” is unaudited except for cash flows, capital expenditures and additions to spectrum licenses, which have been derived from our consolidated financial statements. The information presented below the caption “Operating Data” is not derived from our consolidated financial statements and is unaudited.

 

Our historical results are not necessarily indicative of our future financial condition or results of operations.

 

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SELECTED FINANCIAL DATA

 

 

 

Year ended December 31,

 

 

 

2017

 

2016

 

2015

 

2014

 

2013

 

 

 

(dollars in thousands, except percentages, ratios and Operating Data)

 

Consolidated Statement of Income Data:

 

 

 

 

 

 

 

 

 

 

 

Operating revenues:

 

 

 

 

 

 

 

 

 

 

 

Cable television

 

$

1,009,584

 

$

1,024,283

 

$

1,053,797

 

$

1,074,821

 

$

1,090,261

 

Internet

 

1,030,861

 

978,723

 

920,746

 

856,051

 

814,682

 

Mobile telephony

 

609,772

 

510,420

 

403,668

 

287,665

 

220,561

 

Cable telephony

 

397,787

 

424,795

 

458,028

 

475,143

 

473,798

 

Over-the-top video

 

39,720

 

31,443

 

23,596

 

12,213

 

3,718

 

Business

 

124,608

 

111,181

 

69,134

 

65,632

 

63,525

 

Equipment sales

 

56,542

 

53,577

 

57,627

 

45,627

 

36,524

 

Other

 

9,968

 

9,917

 

11,383

 

9,613

 

8,754

 

Total operating revenues

 

3,278,842

 

3,144,339

 

2,997,979

 

2,826,765

 

2,711,823

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee costs

 

386,353

 

376,757

 

356,503

 

342,399

 

347,097

 

Purchase of goods and services

 

1,359,850

 

1,320,568

 

1,259,179

 

1,136,055

 

1,079,919

 

Depreciation and amortization

 

654,614

 

596,065

 

625,366

 

601,381

 

561,743

 

Financial expenses(1)

 

149,243

 

161,452

 

167,429

 

169,177

 

174,145

 

Loss on valuation and translation of financial instruments

 

3,098

 

2,126

 

518

 

3,430

 

163,725

 

Restructuration of operations, litigation and other items

 

5,888

 

15,880

 

(129,737

)

39,445

 

684

 

Gain on sale of spectrum licences

 

(330,871

)

 

 

 

 

Loss on debt refinancing

 

5,201

 

7,346

 

12,153

 

21,403

 

18,912

 

Income taxes expense

 

131,231

 

116,910

 

120,665

 

93,283

 

29,449

 

Income from discontinued operations

 

 

 

 

 

40,706

 

Net income

 

$

914,235

 

$

547,235

 

$

585,903

 

$

420,192

 

$

376,855

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheet Data (at year end):

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

815,848

 

$

961

 

$

1,774

 

$

342,802

 

$

322,469

 

Total assets

 

6,673,403

 

5,812,685

 

7,656,559

 

6,255,596

 

7,029,396

 

Long-term debt, excluding QMI subordinated loans(2)(3)

 

3,270,330

 

3,163,108

 

3,266,642

 

2,924,540

 

2,399,105

 

QMI subordinated loans(2)(3)

 

 

 

2,090,000

 

1,080,000

 

2,280,000

 

Capital stock

 

132,401

 

132,401

 

132,401

 

3,401

 

3,401

 

Equity attributable to shareholder

 

1,732,493

 

1,071,231

 

813,092

 

793,096

 

820,807

 

Cash dividends declared

 

295,000

 

282,000

 

665,000

 

410,000

 

361,880

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Financial Data and Ratios:

 

 

 

 

 

 

 

 

 

 

 

Adjusted operating income(4)

 

$

1,532,639

 

$

1,447,014

 

$

1,382,297

 

$

1,348,311

 

$

1,284,807

 

Adjusted operating income margin(4)

 

46.7

%

46.0

%

46.1

%

47.7

%

47.4

%

Cash flows provided by operating activities

 

1,271,720

 

1,244,093

 

1,207,964

 

1,106,452

 

1,058,340

 

Cash flows (used in) provided by investing activities

 

(92,283

)

1,182,250

 

(1,975,082

)

294,905

 

(1,174,875

)

Cash flows (used in) provided by financing activities

 

(364,550

)

(2,427,156

)

426,090

 

(1,381,024

)

272,601

 

Capital expenditures(5)

 

706,593

 

792,180

 

723,105

 

693,224

 

582,530

 

Additions to spectrum licenses(5)

 

 

 

219,033

 

217,364

 

15,964

 

Ratio of earnings to fixed charges(6)

 

7.1x

 

5.0x

 

5.3x

 

3.8x

 

3.2x

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Data (at year end, except ARPU):

 

 

 

 

 

 

 

 

 

 

 

Homes passed(7)

 

2,873,748

 

2,839,293

 

2,806,001

 

2,777,264

 

2,742,476

 

Basic cable customers(8)

 

1,640,520

 

1,690,846

 

1,736,892

 

1,782,242

 

1,825,081

 

Basic cable penetration(9)

 

57.1

%

59.6

%

61.9

%

64.2

%

66.5

%

Digital customers

 

1,640,520

 

1,587,039

 

1,570,622

 

1,553,593

 

1,527,363

 

Digital penetration(10)

 

100

%

93.9

%

90.4

%

87.2

%

83.7

%

Cable Internet customers

 

1,666,491

 

1,612,827

 

1,568,165

 

1,537,532

 

1,505,992

 

Cable Internet penetration(9)

 

58.0

%

56.8

%

55.9

%

55.4

%

54.9

%

Cable telephony lines

 

1,188,475

 

1,253,060

 

1,316,293

 

1,349,010

 

1,348,520

 

Cable telephony penetration(9)

 

41.4

%

44.1

%

46.9

%

48.6

%

49.2

%

Mobile telephony lines

 

1,023,995

 

893,932

 

768,589

 

632,766

 

504,314

 

Over-the-top video customers

 

361,563

 

314,706

 

257,477

 

177,667

 

58,238

 

ARPU(11)

 

$

154.59

 

$

144.86

 

$

135.68

 

$

125.16

 

$

118.03

 

 

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(1)                                We are party to a number of back-to-back transactions with Quebecor Media, 9101-0835 Québec inc. and 9346-9963 Québec inc., both subsidiaries of Quebecor Media. With respect to these back-to-back transactions, we recorded interest expense of $193.7 million for the year ended December 31, 2017, $202.6 million for the year ended December 31, 2016, $213.2 million for the year ended December 31, 2015, $218.6 million for the year ended December 31, 2014 and $265.9 million for the year ended December 31, 2013, but we recorded $195.5 million, $204.5 million, $216.3 million, $224.2 million and $272.5 million in dividends from Quebecor Media in 2017, 2016, 2015, 2014 and 2013 respectively. See “Item 5. Operating and Financial Review and Prospects — Uses of Liquidity and Capital Resources - Purchase of Shares of Quebecor Media and Servicing of Subsidiary Subordinated Loan.”

(2)                                For the years ended December 31, 2017, 2016, 2015, 2014 and 2013, the term “QMI subordinated loans” refers to the $1.0 billion subordinated loan due in 2022 we entered into in 2007 in favor of Quebecor Media (entirely redeemed for $670.0 million and $330.0 million in 2010 and 2014, respectively), the $1.3 billion subordinated loan due in 2025 we entered into in 2010 in favor of Quebecor Media (entirely redeemed for $870.0 million and $430.0 million in 2014 and 2016, respectively), the $3.25 billion subordinated loan due in 2043 we entered into in 2013 in favor of Quebecor Media (entirely redeemed for $2.6 billion and $650.0 million in 2013 and 2016, respectively), the $1.01 billion subordinated loan due in 2045 we entered into in 2015 in favor of Quebecor Media (entirely redeemed in 2016), the $625.0 million loan due in 2046 we entered into in 2016 in favor of Quebecor Media (entirely redeemed in 2016), and the $3.6 billion subordinated loan due in 2047 we entered into in 2017 in favor of Quebecor Media (entirely redeemed in 2017). See “Item 5. Operating and Financial Review and Prospects — Uses of Liquidity and Capital Resources - Purchase of Shares of Quebecor Media and Servicing of Subsidiary Subordinated Loan.”

(3)                                We believe that long-term debt, excluding QMI subordinated loans, provides investors with a meaningful measure of our long-term debt because the QMI subordinated loans are subordinated in right of payment to the prior payment in full of our senior indebtedness, including our notes, and because the proceeds of our QMI subordinated loans due 2022, 2025, 2043, 2045, 2046 and 2047 were invested in retractable preferred shares of Quebecor Media or its subsidiaries as part of back-to-back transactions to reduce our income tax obligations. Consequently, we disclose long-term debt, excluding QMI subordinated loans, as a supplemental measure of our indebtedness in this annual report. Long-term debt, excluding QMI subordinated loans, is not intended to be, and should not be, regarded as an alternative to other financial reporting measures, and it should not be considered in isolation as a substitute for measures of liabilities prepared in accordance with IFRS. Long-term debt, excluding QMI subordinated loans, is calculated from and reconciled to long-term debt as follows:

 

 

 

At December 31

 

 

 

2017

 

2016

 

2015

 

2014

 

2013

 

 

 

(Canadian dollars in millions)
(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

3,270.3

 

$

3,163.1

 

$

5,356.6

 

$

4,004.5

 

$

4,679.1

 

QMI subordinated loans(2)

 

 

 

(2,090.0

)

(1,080.0

)

(2,280.0

)

Long-term debt, excluding QMI subordinated loans, as defined

 

$

3,270.3

 

$

3,163.1

 

$

3,266.6

 

$

2,924.5

 

$

2,399.1

 

 

(4)                                Adjusted operating income and ratios based on this measure are not calculated in accordance with, or recognized by, IFRS.  We define adjusted operating income, as reconciled to net income under IFRS, as net income before depreciation and amortization, financial expenses, loss on valuation and translation of financial instruments, loss on debt refinancing, restructuring of operations, litigation and other items, gain on sale of spectrum licences, income taxes and income from discontinued operations. We define adjusted operating income margin as adjusted operating income expressed as a percentage of revenues under IFRS. Adjusted operating income, and ratios using this measure, are not intended to be regarded as alternatives to other financial operating performance measures or to the consolidated statement of cash flows as a measure of liquidity and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. We use adjusted operating income because we believe that it is a meaningful measure in evaluating our consolidated results. This measure eliminates the effect of significant levels of non-cash charges related to depreciation of tangible assets and amortization of certain intangible assets, and it is unaffected by the capital structure or our investment activities. A limitation of this measure, however, is that it does not reflect the periodic costs of tangible and intangible assets used in generating revenues. Our definition of adjusted operating income may not be the same as similarly titled measures reported by other companies, therefore limiting its usefulness as a comparative measure. See “Presentation of Financial Information — Non-IFRS Measures”. Our adjusted operating income is calculated from and reconciled to net income under IFRS for the years ended December 31, 2017, 2016, 2015, 2014 and 2013 in the table below:

 

 

 

Year ended December 31,

 

 

 

2017

 

2016

 

2015

 

2014

 

2013

 

Net income

 

$

914.2

 

$

547.2

 

$

585.9

 

$

420.2

 

$

376.9

 

Depreciation and amortization

 

654.6

 

596.1

 

625.4

 

601.4

 

561.7

 

Financial expenses(1)

 

149.2

 

161.5

 

167.4

 

169.2

 

174.1

 

Loss on valuation and translation of financial instruments

 

3.1

 

2.1

 

0.5

 

3.4

 

163.7

 

Loss on debt refinancing

 

5.2

 

7.3

 

12.2

 

21.4

 

18.9

 

Gain on spectrum licences

 

(330.9

)

 

 

 

 

Restructuring of operations, litigation and other items

 

5.9

 

15.9

 

(129.7

)

39.4

 

0.7

 

Income taxes expense

 

131.2

 

116.9

 

120.7

 

93.3

 

29.4

 

Income from discontinued operations

 

 

 

 

 

(40.7

)

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted operating income, as defined

 

$

1,532.5

 

$

1,447.0

 

$

1,382.4

 

$

1,348.3

 

$

1,284.7

 

 

(5)                                Capital expenditures are comprised of additions to fixed assets and intangible assets, excluding additions to spectrum licenses, which are presented separately in the table.

 

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(6)                                For the purpose of calculating the ratio of earnings to fixed charges, (i) earnings consist of net income plus income taxes, fixed charges, amortized capitalized interest, less interest capitalized, and (ii) fixed charges consist of interest expensed and capitalized, excluding interest on QMI subordinated loans, plus premiums and discounts amortization, financing fees amortization and an estimate of the interest within rental expense.

(7)                                “Homes passed” means the number of residential premises, such as single dwelling units or multiple dwelling units, and commercial premises passed by the cable television distribution network in a given cable system service area in which the programming services are offered.

(8)                                “Basic cable customers” are customers who receive basic cable television service in either analog or digital mode.

(9)                                Represents customers as a percentage of total homes passed.

(10)                         Represents customers for the digital service as a percentage of basic cable customers.

(11)                         ARPU is not a measurement that is calculated in accordance with IFRS, and our definition and calculation of ARPU may not be the same as identically titled measurements reported by other companies. We calculate our ARPU by dividing our combined cable television, Internet access, over-the-top video and cable and mobile telephony revenues by the average number of basic cable customers during the applicable period, and then dividing the resulting amount by the number of months in the applicable period.

 

B-                                   Capitalization and Indebtedness

 

Not applicable.

 

C-                                   Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

D-                                   Risk Factors

 

This section describes some of the risks that could materially affect our business, revenues, results of operations and financial condition, as well as the market value of our Senior Notes. The factors below should be considered in connection with any forward-looking statements in this document and with the cautionary statements contained in the section “Cautionary Statement Regarding Forward-Looking Statements” at the forepart of this annual report. The risks below are not the only ones that we face. Some risks may not yet be known to us and some that we do not currently believe to be material could later turn out to be material.

 

Risks Relating to Our Business

 

We operate in highly competitive industries that are experiencing rapid technological developments and fierce price competition, and our inability to compete successfully could have a material adverse effect on our business, prospects, revenues, financial condition and results of operations.

 

In our cable business, we compete against incumbent local exchange carriers (“ILECs”), the primary one in our market holds a regional license to provide terrestrial broadcasting distribution in Montréal and several other communities in the Province of Québec. Such primary ILEC is rolling out its own Internet protocol television (“IPTV”) service throughout the country but more specifically in Montréal (including a portion of the greater Montréal area), in Québec City, and in other locations in the Province of Québec. It has also secured licenses to launch video distribution services using video digital subscriber line (“VDSL”) technology. We also compete against providers of direct broadcast satellite (“DBS”, which in Canada are also referred to as “DTH” for “direct-to-home” satellite providers), multichannel multipoint distribution systems, and satellite master antenna television systems. The direct access to some broadcasters’ websites that provide streaming in high-definition (“HD”) of video-on-demand (“VOD”) content is also available for some of the channels we offer in our television programming. In addition, some third-party Internet service providers (“ISPs”) have launched Internet Protocol video services (“IPVS”) in territories in which we provide services.

 

We also face competition from illegal providers of cable television services and illegal access to non-Canadian DBS (also called grey market piracy), as well as from signal theft of DBS that enables customers to access programming services from U.S. and Canadian DBS without paying any fees (also called black market piracy). Competitors in the video business also include emerging content delivery platforms. Furthermore, OTT content providers, such as Netflix, Apple TV and Amazon Prime Video, as well as Canadian services such as Crave TV, compete for viewership and a share of the monthly entertainment spending currently allocated to traditional cable television and cable service VOD offerings.

 

Unlike us, OTT service providers are not subject to CRTC’s regulations and do not have to contribute financially to the Canadian traditional television business model or Internet infrastructure. Furthermore, foreign providers with no

 

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Canadian place of business are not required to charge federal and provincial sales tax. Consequently, this could place us at a competitive disadvantage, lead to increased operational costs and have an adverse effect on our business, prospects, revenues, financial condition, and results of operations. On September 28, 2017, the Minister of Canadian Heritage and Netflix concluded an arrangement pursuant to which Netflix undertakes to invest a minimum of $500 million in original productions in Canada over the next five years. As part of this arrangement, the Federal Government has decided not to impose the Goods and Services Tax (GST) on Netflix’s services. Given that our clients must pay GST when they purchase our services, this decision could place us at a competitive disadvantage.

 

In our Internet access business, we compete against other ISPs offering residential and commercial Internet access services as well as WiMAX and open Wi-Fi networks in some cities. The main competitors are the ILECs that offer Internet access through digital subscriber line (“DSL”), fibre to the node and fibre to the home technologies, often offering download speeds comparable to ours. In addition, satellite operators such as Xplornet are increasing their existing high-speed Internet access capabilities with the launch of high-throughput satellites, targeting households in rural and remote locations and claiming future download speeds comparable to our low and medium download speeds. The CRTC also requires cable and ILEC network providers, including ourselves, to offer wholesale access to our high-speed Internet systems to third-party ISP competitors for them to provide retail Internet access services. These third-party ISP competitors may also provide telephony, television services, IPVS and networking applications. Certain municipalities also plan to build and operate their own broadband networks. They plan to do so through public/private partnership arrangements, competing directly with us in some of our local markets.

 

Our cable telephony business has numerous competitors, including ILECs, competitive local exchange carriers, mobile telephony service operators and other providers of telephony, television services, Voice over Internet Protocol (“VoIP”) and Internet communications, including competitors that are not facility-based and therefore have much lower infrastructure costs. In addition, Internet protocol-based products and services are generally subject to downward pricing pressure, lower margins and technological evolution, all of which could have an adverse effect on our business, prospects, revenues, financial condition and results of operations.

 

In our mobile telephony business, we compete against a mix of market participants, some of them active in some or all of the products we offer, with others offering only mobile telephony services. In addition, users of mobile voice and data systems may find their communication needs satisfied by other current or developing adjunct technologies, such as Wi-Fi, “hotspots” or trunk radio systems, which have the technical capability to handle mobile data communication and mobile telephone calls. There can be no assurance that current or future competitors will not provide network capacity and/or services comparable or superior to those we provide or may in the future provide, or at lower prices, or adapt more quickly to evolving industry trends or changing market requirements, or introduce competing services. For instance, some providers of mobile telephony services (including incumbent carriers) have deployed and have been operating for many years lower-cost mobile telephony brands in order to acquire additional market share. In the near future, depending on new regulations, we could see the emergence of non facility-based operators in the wireless space. Also, we may not be able to compete successfully in the future against existing or potential competitors, and increased competition could have a material adverse effect on our business, prospects, revenues, financial condition and results of operations.

 

Due to ongoing technological developments, the distinction between traditional platforms (broadcasting, Internet and telephony) is fading rapidly. For instance, emerging Go Platforms such as HBO Go, allow customers to view their traditional television content directly on their mobile devices or computers via Internet connection (although authentication as a broadcasting distribution undertaking’s subscriber (“BDU’s subscriber”) is still required in Canada). Also, the Internet, through wireline or cable and mobile devices, is an important broadcasting and distribution platform. In addition, mobile operators, with the development of their Long-Term Evolution (also known as “LTE”) networks, offer wireless and fixed wireless Internet services. Finally, our VoIP telephony service also competes with Internet-based solutions.

 

Moreover, a few of our competitors are offering special discounts to customers who subscribe to two or more of their services (cable television or IPTV, Internet, residential and mobile telephony services). Should we fail to keep our existing customers and lose them to such competitors, we may end up losing a subscriber for each of our services as a result of our bundling strategy. This could have an adverse effect on our business, prospects, revenues, financial condition and results of operations.

 

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Fierce price competition in all our businesses and across the industries in which we operate may affect our ability to raise the price of our products and services in line with increases in our operating costs, as we have done in the past. This could have an adverse effect on our business, revenues, financial condition and results of operations.

 

We compete, and will continue to compete, with alternative technologies and we may be required to invest a significant amount of capital to address continuing technological evolution and development needs.

 

The media industry is experiencing rapid and significant technological changes, which have resulted in alternative means of program and content transmission. The continued growth of the Internet has presented alternative content distribution options that compete with traditional media. Furthermore, in our video distribution markets, industry regulators have authorized DTH, microwave services and VDSL services and may authorize other alternative methods of transmitting television and other content with improved speed and quality.

 

We may not be able to successfully compete with existing or newly developed alternative technologies, such as 5G, Software-defined networking (SDN), Network function virtualization (NFV) and virtual reality technologies, or we may be required to acquire, develop or integrate new technologies. The cost of the acquisition, development or implementation of new technologies could be significant and our ability to fund such implementations may be limited, which could have a material adverse effect on our ability to successfully compete in the future. Any such difficulty or inability to compete could have a material adverse effect on our business, reputation, prospects, financial condition, and results of operations.

 

We have entered into roaming agreements with other mobile operators in order to provide worldwide coverage to our mobile telephony customers. Our inability to extend our worldwide coverage or to renew, or substitute for, these roaming agreements at their respective terms, and on acceptable terms, may place us at a competitive disadvantage, which could adversely affect our ability to operate our mobile business successfully and profitably.

 

We have entered into roaming agreements with multiple carriers around the world (including Canada, the United States and Europe), and have established worldwide coverage. Our inability to extend our worldwide coverage or to renew, or substitute for, these roaming agreements at their respective or better terms or on acceptable terms, may place us at a competitive disadvantage, which could adversely affect our ability to operate our mobile business successfully and profitably. In addition, if we are unable to renew, or substitute for, these roaming agreements on a timely basis and at an acceptable cost, our cost structure could materially increase, and, consequently, our business, prospects, revenues, financial condition and results of operations could be adversely affected.

 

Moreover, since 2015 in Canada, the CRTC has decided that each of the three national wireless incumbent carriers would be obliged to provide wholesale roaming services to regional (including Videotron) and new entrant carriers at cost-based rates. A tariff proceeding is currently underway to determine these rates. The result of the wholesale roaming tariff proceeding may have an impact on our roaming cost structure and on the types of retail packages we are able to offer our customers in this regard.

 

Our reputation may be negatively impacted, which could have a material adverse effect on our business, financial condition and results of operations.

 

We have generally enjoyed a good reputation among the public. Our ability to maintain our existing customer relationships and to attract new customers depends to a large extent on our reputation. While we have put in place certain mechanisms to mitigate the risk that our reputation may be tarnished, including good governance practices and a Code of Ethics, we cannot be assured that we will continue to enjoy a good reputation nor can we be assured that events that are beyond our control will not cause our reputation to be negatively impacted. The loss or tarnishing of our reputation could have a material adverse effect on our business, prospects, financial condition and results of operations.

 

We could be adversely impacted by higher handset subsidies and increase in bring-your-own-device (“BYOD”) customers.

 

Our mobile telephony business model is based substantially on subsidizing the cost of subscriber handsets, similar to other Canadian wireless carriers. This model attracts customers and in exchange they commit to a term contract with us. We also commit to a minimum subsidy per unit with the supplier of certain smartphone devices. If we are unable to

 

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recover the costs of the subsidies over the term of the customer contract, this could negatively impact our business, prospects, revenues, financial condition and results of operations.

 

Also, with the introduction of the CRTC’s Wireless Code in 2013 and its revision in 2017, limiting wireless term contracts to two years and eliminating device locking, the number of BYOD customers with no-term contracts has increased. Such customers are under no contractual obligation to remain with us, this could have a material adverse effect on our churn rate and, consequently, on our business, prospects, revenues, financial condition and results of operations.

 

Our inventory may become obsolete.

 

Our various products in inventory generally have a relatively short lifecycle due to frequent technological changes. If we cannot effectively manage inventory levels based on product demand, or minimum order quantities from our suppliers, this could increase the risk of inventory obsolescence and could have an adverse effect on our business, financial condition and results of operations.

 

We are regularly required to make capital expenditures to remain technologically and economically competitive. We may not be able to obtain additional capital to implement our business strategies and make capital expenditures.

 

Our strategy of maintaining a leadership position in the suite of products and services we offer and of launching new products and services requires capital investments in our network and infrastructure to support growth in our customer base and its demands for increased bandwidth capacity and other services. In the past, we have required substantial capital for the upgrade, expansion and maintenance of our network and the launch and deployment of new or additional services. We expect that additional capital expenditures will continue to be required in the short-term, mid-term and long-term in order to expand and maintain our networks, systems and services, including expenditures relating to advancements in Internet access, HD television, ultra-high-definition (“UHD”) television, Internet of Things, IPTV and television everywhere/every platform requiring Internet protocol delivery technology, the introduction of virtual reality, as well as the cost of our mobile services infrastructure deployment, maintenance and enhancement.

 

New technologies in our industry are evolving faster than the historical investment cycle in the industry. The introduction of new technologies and their pace of adoption could result in requirements for additional capital investments not currently planned, as well as shorter estimated useful lives for certain of our existing assets.

 

The demand for wireless data services has been growing at high rates and it is projected that this demand will further accelerate, driven by the following increases: levels of broadband penetration; need for personal connectivity and networking; affordability of smartphones and Internet-only devices (e.g., high-usage data devices such as mobile Internet keys, tablets and electronic book readers); multimedia-rich services and applications; and unlimited data plans. The anticipated levels of data traffic will represent a growing challenge to the current mobile network’s ability to serve this traffic. We may have to acquire additional spectrum, if available and if economically reasonable, in order to address this increased demand. The ability to acquire additional spectrum (if needed) is dependent on the timing and the rules established by Innovation, Science and Economic Development Canada (“ISED”). If we are not successful in acquiring additional spectrum we may need on reasonable terms, or not at all, that could have a material adverse effect on our business, prospects and financial condition. See also “Item 4. Information on the Corporation — Regulation — Canadian Telecommunications Services — Regulatory Framework for Mobile Wireless Services.”

 

Developing, maintaining and enhancing our LTE network requires capital expenditures to remain competitive and to comply with our obligations under the agreement with our partner governing the joint build-out of our LTE network. A geographical expansion or densification of our LTE network may require us to incur significant costs and to make significant capital expenditures. See also “Item 4. Information on the Corporation — Business Overview.”

 

There can be no assurance that we will be able to generate or otherwise obtain the funds to finance any portion of these capital improvement programs, new strategies and services or other capital expenditure requirements, whether through cash from operations, additional borrowings or other sources. If we are unable to generate sufficient funds or obtain additional financing on acceptable terms, we may be unable to implement our business strategies or proceed with the capital expenditures and investments required to maintain our leadership position, and our business, financial condition, results of operations, reputation, and prospects could be materially adversely affected. Even if we are able to obtain adequate funding, the period of time required to upgrade our network could have a material adverse effect on our

 

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ability to successfully compete in the future. Moreover, additional investments in our business may not translate into incremental revenues, cash flows or profitability.

 

See also the risk factors “— We operate in highly competitive industries that are experiencing rapid technological developments and fierce price competition, and our inability to compete successfully could have a material adverse effect on our business, prospects, revenues, financial condition and results of operations”, “— We compete, and will continue to compete, with alternative technologies and we may be required to invest a significant amount of capital to address continuing technological evolution and development” and “— Risks Relating to our Senior Notes and our Capital Structure — We may be required from time to time to refinance certain of our indebtedness. Our inability to do so on favorable terms, or at all, could have a material adverse effect on us.”

 

We may need to support increasing costs in securing access to support structures needed for our cable network.

 

We require access to the support structures of hydroelectric and telephone utilities and need municipal rights of way to deploy our cable network. Where access to the structures of telephone utilities cannot be secured, we may apply to the CRTC to obtain a right of access under the Telecommunications Act (Canada) (the “Telecommunications Act”). We have entered into comprehensive support structure access agreements with all the major hydroelectric companies and all the major telecommunications companies in our service territory. In the event that we seek to renew or to renegotiate these agreements, we cannot guarantee that these agreements will continue to be available on their respective terms, on acceptable terms, or at all, which may place us at a competitive disadvantage and which may have a material adverse effect on our business and prospects.

 

We may not successfully implement our business and operating strategies.

 

Our strategies include strengthening our position as telecommunications leader, introducing new and enhanced products and services, maintaining our advanced broadband network, further integrating the operations of our subsidiaries, leveraging geographic clustering and maximizing customer satisfaction across our business. We may not be able to implement these strategies successfully or realize their anticipated results fully or at all, and their implementation may be more costly or challenging than initially planned. In addition, our ability to successfully implement these strategies could be adversely affected by a number of factors beyond our control, including operating difficulties, increased ongoing operating costs, regulatory developments, general or local economic conditions, increased competition, technological changes and other factors described in this “Risk Factors” section. While the centralization of certain business operations and processes has the advantage of standardizing our practices, thereby reducing costs and increasing effectiveness, it also represents a risk in itself should a business solution implemented by a centralized office throughout the organization fail to produce the intended results. We may also be required to make capital expenditures or other investments that may affect our ability to implement our business strategies if we are unable to secure additional financing on acceptable terms or to generate sufficient funds internally to cover those requirements. Any material failure to implement our strategies could have a material adverse effect on our reputation, business, financial condition, prospects and results of operations, as well as on our ability to meet our obligations, including our ability to service our indebtedness.

 

As part of our strategy, in recent years, we have entered into certain agreements with third-parties under which we are committed to making significant operating expenditures in the future. We can provide no assurance that we will be successful in developing new activities in relation to these engagements, including the development of new revenue sources.

 

We could be adversely impacted by consumers’ trend to abandon cable telephony and television services.

 

The recent trend towards mobile substitution or “cord-cutting” (when users cancel their landline telephony services and opt for mobile telephony services only) is largely the result of the increasing mobile penetration rate in Canada and the various unlimited offers launched by mobile operators. In addition, there is also a consumer trend to abandon and substitute wire and cable television for Internet access services in order to stream directly from broadcasters and OTT content providers. We may not be successful in converting our existing cable telephony subscriber base to our mobile telephony services or in attracting customers to our OTT entertainment platforms, which could have a material adverse effect on our business, prospects, revenues, results of operations and financial condition.

 

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We could be adversely affected by the rapid growth of traffic volumes on the Internet.

 

Internet users are downloading an increasing amount of data each year and households are connected to the Internet through a combination of several computers, tablets and other mobile devices, leading to simultaneous flows per home. In addition, some content on the Internet, such as videos, is available at a higher bandwidth for which HD, as opposed to standard definition, has become the norm. OTT service providers have recently started streaming UHD content which uses even more bandwidth than HD content. There has therefore been an increase in data consumption and an intensification of Internet traffic during peak periods, which calls for increased bandwidth capacity to address the needs of our customers.

 

Equipment costs are under pressure in an effort to counterbalance customers’ demand for bandwidth. While we can relay some of this pressure on costs to our manufacturers, can adopt new technologies that reduce costs or implement other cost-reduction initiatives, our inability to fully meet our increasing need for bandwidth may result in loss of clients, price increases or reduced profitability.

 

If we do not effectively manage our growth, our business, results of operations and financial condition could be adversely affected.

 

We have experienced substantial growth in our business and have significantly expanded our operations over the years. We have sought in the past, and may, in the future, seek to further expand the types of businesses in which we participate, under appropriate conditions. We can provide no assurance that we will be successful in either developing or fulfilling the objectives of any such business expansion.

 

In addition, our expansion may require us to incur significant costs or divert significant resources, and may limit our ability to pursue other strategic and business initiatives, which could have an adverse effect on our business, prospects, results of operations and financial condition. Furthermore, if we are not successful in managing our growth, or if we are required to incur significant or unforeseen costs, our business, prospects, results of operations and financial condition could be adversely affected.

 

The implementation of changes to the structure of our business may be more expensive than expected and we may not gain all the anticipated benefits.

 

We have and will continue to implement changes to the structure of our business due to many factors such as the necessity of a corporate restructuring, a system replacement or upgrade, a process redesign, and the integration of business acquisitions or existing business units. These changes must be managed carefully to ensure that we capture the intended benefits. The implementation process may lead to greater-than-expected operational challenges and costs, expenses, customer loss, and business disruption for us, which could adversely affect our business and our ability to gain the anticipated benefits.

 

We depend on key personnel and our inability to retain skilled employees may have an adverse effect on our business, prospects, results of operations and financial condition.

 

Our success depends to a large extent on the continued services of our senior management and our ability to retain skilled employees. There is intense competition for qualified management and skilled employees, and our failure to recruit, train and retain such employees could have a material adverse effect on our business, prospects, results of operations and financial condition. In addition, in order to implement and manage our businesses and operating strategies effectively, we must sustain a high level of efficiency and performance, maintain content quality, continually enhance our operational and management systems, and continue to effectively attract, train, motivate and manage our employees. If we are not successful in these efforts, it may have a material adverse effect on our business, prospects, results of operations and financial condition.

 

Our financial performance could be materially adversely affected if we cannot continue to distribute a wide range of television programming on commercially reasonable terms.

 

The financial performance of our cable and mobile services depends in large part on our ability to distribute, on our platforms, a wide range of appealing, conveniently-scheduled television programming at reasonable rates. We obtain television programming rights from suppliers pursuant to programming contracts. In recent years, these suppliers have become vertically integrated and are now more limited in number. The quality and amount of television programming we offer affect the attractiveness of our services to customers and, accordingly, the rates we can charge for these services. We

 

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may be unable to maintain key programming contracts at commercially reasonable rates for television programming. Loss of programming contracts, our inability to obtain programming at reasonable rates or our inability to pass rate increases through to our customers could have a material adverse effect on our business, prospects, results of operations and financial condition.

 

In addition, our ability to attract and retain cable customers depends, to a certain extent, on our capacity to offer quality content, HD and UHD programming, an appealing variety of programming choices and packages, as well as multiplatform distribution and on-demand content, at competitive prices. If the number of specialty channels being offered does not increase at the level and pace comparable to our competitors, if the content offered on such channels does not receive audience acceptance, or if we are unable to offer multiplatform availability, HD and UHD programming and on-demand content for capacity reasons, among others, this may have a negative impact on revenues from our cable operations.

 

The multiplicity of foreign and deregulated content providers (often global players on the Internet) puts pressure on the viability of our current business model for television distribution. Substantial capital expenditures on our infrastructure and on our research and development may be required to remain competitive.

 

We provide our cable television, Internet access, cable telephony and mobile telephony services through a single clustered network, which may be more vulnerable to widespread disruption.

 

We provide our cable television, Internet access, cable telephony and mobile telephony services through a primary headend and through twelve additional regional headends in our single clustered network. Despite available emergency backup or replacement sites, a failure in our primary headend, including exogenous threats, such as cyberattacks, natural disasters, sabotage or terrorism, or dependence on certain external infrastructure providers (such as electric utilities), could prevent us from delivering some of our products and services throughout our network until the failure has been resolved, which may result in significant customer dissatisfaction, loss of revenues and potential civil litigation, and could have a material adverse effect on our financial condition.

 

Cybersecurity breaches and other similar disruptions could expose us to liability, which would have an adverse effect on our business and reputation.

 

The ordinary course of our telecommunications and data-storage businesses involves the receipt, collection, storage and transmission of sensitive data, including our proprietary business information and that of our customers, and personally identifiable information of our customers and employees, whether in our data centres, systems, infrastructure, networks and processes, including those of our suppliers. The secure processing, maintenance and transmission of this information is critical to our operations and business strategy.

 

Although we have implemented and regularly review and update processes and procedures to protect against unauthorized access to or use of sensitive data, including data of our customers, and to prevent data loss, and, although ever-evolving cyber-threats require us to continually evaluate and adapt our data centres, systems, infrastructure, networks and processes, we cannot assure that our data centres, systems, infrastructure, networks and processes, as well as those of our suppliers, will be adequate to safeguard against all information security access by third-parties or errors by employees or by third party suppliers. If we are subject to a significant cyber-attack or breach, unauthorized access, errors of third-party suppliers or other security breaches, we may incur significant costs, be subject to investigations, sanctions and litigation, including under laws that protect the privacy of personal information, and we may suffer damage to our business, competitive position and reputation, which could have a material adverse effect on our financial condition.

 

In addition, the preventive actions we take to reduce the risks associated with cyber-attacks, including protection of our data centres and information assets as well as efforts to improve the overall governance over information security and the controls within our IT systems, may be insufficient to repel or mitigate the effects of a major cyber-attack in the future.

 

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We store and process increasingly large amounts of personally identifiable data of our clients, employees or our business partners, and the improper use or disclosure of such data would have an adverse effect on our business and reputation.

 

We store and process increasingly large amounts of personally identifiable information of our clients, employees or our business partners. We face risks inherent in protecting the security of such personal data. In particular, we face a number of challenges in protecting the data in and hosted on our systems, or those belonging to our suppliers, including from advertent or inadvertent actions or inactions by our employees, as well as in relation to compliance with applicable laws, rules and regulations relating to the collection, use, disclosure and security of personal information, including any requests from regulatory and government authorities relating to such data.  Although we have developed systems, processes and security controls that are designed to protect personally identifiable information of our clients, employees or our business partners, we may be unable to prevent the improper disclosure, loss, misappropriation of, unauthorized access to, or other security breach relating to such data that we store or process or that our suppliers store or process. As a result, we may incur significant costs, be subject to investigations, sanctions and litigation, including under laws that protect the privacy of personal information, and we may suffer damage to our business, competitive position and reputation, which could have a material adverse effect on our financial condition.

 

We are dependent upon our information technology systems and those of certain third-parties. The inability to enhance our systems could have an adverse impact on our financial results and operations.

 

The day-to-day operation of our business is highly dependent on information technology systems, including those of certain third-party suppliers. An inability to maintain and enhance our existing information technology systems or obtain new systems to accommodate additional customer growth or to support new products and services could have an adverse impact on our ability to acquire new subscribers, retain existing customers, produce accurate and timely billing, generate revenue growth and manage operating expenses, all of which may have a material adverse effect on our business, prospects, results of operations and financial condition.

 

Products and services supplied to us by third-party suppliers may contain latent security issues, including but not limited to software security issues, that would not be apparent upon a diligent inspection. Failure to identify and remedy those issues could adversely impact our results of operations and financial condition.

 

Malicious and abusive Internet practices could impair our cable data and mobile data services as well as our fibre-optic connectivity business.

 

Our cable data, mobile data and fibre-optic connectivity business customers utilize our network to access the Internet and, as a consequence, we or they may become a victim of common malicious and abusive Internet activities, such as unsolicited mass advertising (or spam) and dissemination of viruses, worms and other destructive or disruptive software. These activities could have adverse consequences on our network and our customers, including deterioration of service, excessive call volume to call centers, and damage to our customers’ equipment and data or ours. Significant incidents could lead to customer dissatisfaction and, ultimately, to a loss of customers or revenues, in addition to increased costs to service our customers and protect our network. Any significant loss of cable data, mobile data or fibre-optic connectivity business customers, or a significant increase in the costs of serving those customers, could adversely affect our reputation, business, prospects, results of operations and financial condition.

 

We may not be able to protect our services from piracy, which may have an adverse effect on our customer base and lead to a possible decline in revenues.

 

In our cable television, Internet access, OTT and telephony business, we may not be able to protect our services and data from piracy. We may be unable to prevent electronic attacks to gain unauthorized access to our network, digital programming, and our Internet access services. We use encryption technology to protect our cable signals and OTT from unauthorized access and to control programming access based on subscription packages. We may not be able to develop or acquire adequate technology to prevent unauthorized access to our network, programming and data, which may have an adverse effect on our customer base and lead to a possible decline in our revenues, as well as to significant remediation costs and legal claims.

 

We depend on third-party suppliers and providers for services, hardware, equipment, licensed technological platforms, information and other items critical to our operations.

 

We depend on third-party suppliers and providers for certain services, hardware, licensed technological platforms and equipment that are, or may become, critical to our operations and network evolution. These materials and services

 

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include set-top boxes, mobile telephony handsets and network equipment, cable and telephony modems, servers and routers, fibre-optic cable, telephony switches, inter-city links, support structures, licensed technological platforms, software, the “backbone” telecommunications network for our Internet access and telephony services, and construction services for the expansion of and upgrades to our cable and mobile networks. These services and equipment are available from a single or limited number of suppliers and therefore we face the risks of supplier disruption, including business difficulties, restructuring or supply-chain issues. If no supplier can provide us with the equipment and services that we require or that comply with evolving Internet and telecommunications standards or that are compatible with our other equipment and software, our business, financial condition and results of operations could be materially adversely affected. In addition, if we are unable to obtain critical equipment, software, services or other items on a timely basis and at an acceptable cost, our ability to offer our products and services and roll out our advanced services may be delayed, and our business, financial condition and results of operations could be materially adversely affected.

 

In addition, we obtain proprietary content critical to our operations through licensing arrangements with content providers. Some providers may seek to increase fees or impose technological requirements to protect their proprietary content. If we are unable to renegotiate commercially acceptable arrangements with these content providers, comply with their technological requirements or find alternative sources of equivalent content, our operations may be adversely affected.

 

We may be adversely affected by litigation and other claims.

 

In the normal course of business, we are involved in various legal proceedings and other claims relating to the conduct of our business, including class actions. Although, in the opinion of our management, the outcome of current pending claims and other litigation is not expected to have a material adverse effect on our reputation, results of operations, liquidity or financial condition, a negative outcome in respect of any such claim or litigation could have a said adverse effect. Moreover, the cost of defending against lawsuits and the diversion of management’s attention could be significant. See also “Item 8. Financial Information — Legal Proceedings” in this annual report.

 

Our businesses depend on not infringing the intellectual property rights of others and on using and protecting our intellectual property rights.

 

We rely on our intellectual property, such as patents, copyrights, trademarks and trade secrets, as well as licenses and other agreements with our vendors and other third parties, to use various technologies, conduct our operations and sell our products and services. Legal challenges to our intellectual property rights, or the ones of third party suppliers, and claims of intellectual property infringement by third parties could require that we enter into royalty or licensing agreements on unfavorable terms, incur substantial monetary liability, or be enjoined preliminarily or permanently from further use of the intellectual property in question or from the continuation of our businesses as currently conducted. We may need to change our business practices if any of these events occur, which may limit our ability to compete effectively and could have an adverse effect on our results of operations. In the event that we believe any such challenges or claims are without merit, they can nonetheless be time-consuming and costly to defend and divert management’s attention and resources away from our businesses. Moreover, if we are unable to obtain or continue to obtain licenses from our vendors and other third parties on reasonable terms, our businesses could be adversely affected.

 

Piracy and other unauthorized uses of content are made easier, and the enforcement of our intellectual property rights more challenging, by technological advances. The steps we have taken to protect our intellectual property may not prevent the misappropriation of our proprietary rights. We may not have the ability in certain jurisdictions to adequately protect intellectual property rights. Moreover, others may independently develop processes and technologies that are competitive to ours. Also, we may not be able to discover or determine the extent of any unauthorized use of our proprietary rights. Unauthorized use of our intellectual property rights may increase the cost of protecting these rights or reduce our revenues. We cannot be sure that any legal actions against such infringers will be successful, even when our rights have been infringed.

 

We may be adversely affected by strikes and other labour protests.

 

As of December 31, 2017, approximately 60% of our employees are unionized, and the terms of their employment are governed by one of our five regional collective bargaining agreements.

 

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We are not currently subject to any labour dispute. Nevertheless, we can neither predict the outcome of current or future negotiations relating to labour disputes, union representation or renewal of collective bargaining agreements, nor guarantee that we will not experience future work stoppages, strikes or other forms of labour protests pending the outcome of any current or future negotiations. If our unionized workers engage in a strike or any other form of work stoppage, we could experience a significant disruption to our operations, damage to our property and/or interruption to our services, which could adversely affect our business, assets, financial condition, results of operations and reputation. Even if we do not experience strikes or other forms of labour protests, the outcome of labour negotiations could adversely affect our business and results of operations. Such could be the case if current or future labour negotiations or contracts were to further restrict our ability to maximize the efficiency of our operations. In addition, our ability to make short-term adjustments to control compensation and benefit costs is limited by the terms of our collective bargaining agreements.

 

Our defined benefit pension plans are currently underfunded and our pension funding requirements could increase significantly due to a reduction in funded status as a result of a variety of factors.

 

The economic cycles, employee demographics and changes in regulations could have a negative impact on the funding of our defined benefit pension plans and related expenditures. There is no guarantee that the expenditures and contributions required to fund these pension plans will not increase in the future and therefore negatively impact our operating results and financial condition. Risks related to the funding of defined benefit plans may materialize if total obligations with respect to a pension plan exceed the total value of its trust assets. Shortfalls may arise due to lower-than-expected returns on investments, changes in the assumptions used to assess the pension plan’s obligations, and actuarial losses.

 

We may be adversely affected by exchange rate fluctuations.

 

Most of our revenues and expenses are denominated in Canadian dollars. However, certain expenditures, such as the purchase of set-top boxes and cable modems, certain mobile devices and certain capital expenditures, including certain costs related to the development and maintenance of our mobile network, are paid in U.S. dollars. Those costs are partially hedged hence a significant increase in the U.S. dollar could have an adverse effect on our results of operations and financial condition.

 

Also, a substantial portion of our debt is denominated in U.S. dollars, and interest, principal and premium, if any, are payable in U.S. dollars. For the purposes of financial reporting, any change in the value of the Canadian dollar against the U.S. dollar during a given financial reporting period would result in a foreign exchange gain or loss on the translation of any unhedged U.S. dollar-denominated debt into Canadian dollars. Consequently, our reported earnings and debt could fluctuate materially as a result of foreign-exchange gains or losses. We have entered into transactions to hedge the exchange rate risk with respect to our U.S. dollar-denominated debt outstanding at December 31, 2017 and we intend in the future to enter into such transactions for new U.S. dollar-denominated debt. These hedging transactions could, in certain circumstances, prove economically ineffective and may not be successful in protecting us against exchange rate fluctuations, or we may in the future be required to provide cash and other collateral in order to secure our obligations with respect to such hedging transactions, or we may in the future be unable to enter into such transactions on favorable terms, or at all, or, pursuant to the terms of these hedging transactions, our counterparties thereto may owe us significant amounts of money and may be unable to honour such obligations, all of which could have an adverse effect on our results of operations and financial condition.

 

In addition, certain cross-currency interest rate swaps entered into by us include an option that allows each party to unwind the transaction on a specific date at the then settlement amount.

 

The fair value of the derivative financial instruments we are party to is estimated using period-end market rates and reflects the amount we would receive or pay if the instruments were terminated and settled at those dates, as adjusted for counterparties’ non-performance risk. At December 31, 2017, the net aggregate fair value of our cross-currency interest rate swaps and foreign-exchange forward contracts was in a net asset position of $259.0 million on a consolidated basis. See also “Item 11. Quantitative and Qualitative Disclosures About Market Risk” of this annual report.

 

Some of our suppliers source their products out of the U.S., therefore, although we pay those suppliers in Canadian dollars, the prices we pay for such products may be affected by fluctuations in the exchange rate. We may in the future enter into transactions to hedge our exposure to the exchange rate risk related to the prices of some of those

 

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products. However, fluctuations to the exchange rate for our purchases that are not hedged could affect the prices we pay for such purchases and could have an adverse effect on our results of operations and financial condition.

 

The volatility and disruptions in the capital and credit markets could adversely affect our business, including the cost of new capital, our ability to refinance our scheduled debt maturities and meet our other obligations as they become due.

 

The capital and credit markets have experienced significant volatility and disruption in the past, resulting in periods of upward pressure on the cost of new debt capital and severe restrictions in credit availability for many companies. In such periods, the disruptions and volatility in the capital and credit markets have also resulted in higher interest rates or greater credit spreads on the issuance of debt securities and increased costs under credit facilities. Disruptions and volatility in the capital and credit markets could increase our interest expense, thereby adversely affecting our results of operations and financial position.

 

Our access to funds under our existing credit facilities is dependent on the ability of the financial institutions that are parties to those facilities to meet their funding commitments. Those financial institutions may not be able to meet their funding commitments if they experience shortages of capital and liquidity, or if they experience excessive volumes of borrowing requests within a short period of time. Moreover, the obligations of the financial institutions under our credit facilities are several and not joint and, as a result, a funding default by one or more institutions does not need to be made up by the others.

 

Extended periods of volatility and disruptions in the capital and credit markets as a result of uncertainty, ongoing changes in or increased regulation of financial institutions, reduced financing alternatives or failures of significant financial institutions could adversely affect our access to the liquidity and affordability of funding needed for our businesses in the longer term. Such disruptions could require us to take measures to conserve cash until markets stabilize or until alternative credit arrangements or other funding for our business needs can be arranged. Market disruptions and broader economic challenges may lead to lower demand for certain of our products and increased incidences of customer inability to pay or timely pay for the services or products that we provide. Events such as these could adversely impact our results of operations, cash flows, financial condition and prospects.

 

A failure to adopt an ethical business conduct may adversely affect our reputation.

 

Any failure or perceived failure to adhere to our policies, the law or ethical business practices could have a significant effect on our reputation and brands and could therefore negatively impact our financial performance. Our framework for managing ethical business conduct includes the adoption of a Code of Ethics which our directors and employees are required to acknowledge and agree to on a regular basis and, as part of an independent audit and security function, maintenance of a whistle-blowing hotline. There can be no assurance that these measures will be effective to prevent violations or perceived violations of law or ethical business practices.

 

Subject to the realization of various conditions and factors, we may have to record, in the future, asset impairment charges, which could be material and could adversely affect our future reported results of operations and equity.

 

We have recorded in the past asset impairment charges which, in some cases, have been material. Subject to the realization of various factors, including, but not limited to, weak economic or market conditions, we may be required to record in the future, in accordance with IFRS accounting valuation principles, additional non-cash impairment charges if the carrying value of an asset in our financial statements is in excess of its recoverable value. Any such asset impairment charge could be material and may adversely affect our future reported results of operations and equity, although such charges would not affect our cash flow.

 

We undertake acquisitions, dispositions, business combinations, or joint ventures from time to time which may involve significant risks and uncertainties.

 

From time to time, we engage in discussions and activities with respect to possible acquisitions, dispositions, business combinations, or joint ventures intended to complement or expand our business, some of which may be significant transactions for us and involve significant risks and uncertainties. We may not realize the anticipated benefit from any of the transactions we pursue, and may have difficulty incorporating or integrating any acquired business.

 

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Regardless of whether we consummate any such transaction, the negotiation of a potential transaction (including associated litigation), as well as the integration of any acquired business, could require us to incur significant costs and cause diversion of management’s time and resources and disrupt our business operations. We could face several challenges in the consolidation and integration of information technology, accounting systems, personnel and operations.

 

If we determine to sell individual properties or other assets or businesses, we will benefit from the net proceeds realized from such sales. However, our revenues may suffer in the long term due to the disposition of a revenue generating asset, or the timing of such dispositions may be poor, causing us to fail to realize the full value of the disposed asset, all of which may diminish our ability to repay our indebtedness at maturity.

 

Any of the foregoing could have a material adverse effect on our business, financial condition, operating results, liquidity, and prospects.

 

The competition for retail locations and the consolidation of independent retailers may adversely affect the customer reach of our telecommunications business’ sale network.

 

The competition to offer products in the best available retail commercial spaces is fierce in the telecommunications business. Some of our telecommunications business’ competitors have pursued a strategy of selling their products through independent retailers to extend their presence on the market and some of our competitors have also acquired certain independent retailers and created new distribution networks. This could result in limiting the customer reach of our retail network and may contribute to isolate us from our competitors, which could have an adverse effect on our business, prospects, results of operations and financial condition.

 

Risks Relating to Regulation

 

We are subject to extensive government regulation and policy-making. Changes in government regulation or policies could adversely affect our business, prospects, results of operations and financial condition.

 

Our operations are subject to extensive government regulation and policy-making in Canada. Laws and regulations govern the issuance, amendment, renewal, transfer, suspension, revocation and ownership of broadcast programming and distribution licenses. With respect to distribution, regulations govern, among other things, the distribution of Canadian and non-Canadian programming services and the maximum fees to be charged to the public in certain circumstances. Although the federal government eliminated the foreign ownership restrictions on telecommunications companies with less than 10 percent of total Canadian telecommunications market revenues, there are significant restrictions on the ability of non-Canadian entities to own or control broadcasting licenses and telecommunications carriers in Canada. Our broadcasting distribution and telecommunications operations (including Internet access service) are regulated respectively by the Broadcasting Act (Canada) (the “Broadcasting Act”) and the Telecommunications Act and regulations thereunder. The CRTC, which administers the Broadcasting Act and the Telecommunications Act, has the power to grant, amend, suspend, revoke and renew broadcasting licenses, approve certain changes in corporate ownership and control, and make regulations and policies in accordance with the Broadcasting Act and the Telecommunications Act, subject to certain directions from the federal cabinet. For instance, the CRTC introduced some form of rate regulation following its commonly referred to as “Lets talk TV” public consultation on television broadcasting and distribution. Consequently, we must offer a reduced basic service at $25 since March 1, 2016 and offer all specialty services “à la carte”, since December 1, 2016. Moreover, the CRTC adopted a Wireless Code which regulates numerous aspects of the provision of retail wireless services and a new Television Service Provider Code which regulates numerous aspects of the provisions of retail television services, which became effective as of September 1, 2017. Finally, the CRTC, in response to a directive received from the Governor in Council, recently initiated a proceeding to consider whether to grant access to non-facilities-based wireless service providers, including those whose customers rely primarily on non-carrier WiFi networks (referred to as “Wi-Fi first service providers”), to the wholesale roaming service tariffs of the national wireless carriers; which could have the effect of introducing mandatory resale into the wireless marketplace, to the detriment of facilities-based wireless competitors. Our wireless and cable operations are also subject to technical requirements, license conditions and performance standards under the Radiocommunication Act (Canada) (the “Radiocommunication Act”), which is administered by ISED.

 

In addition, laws relating to communications, data protection, e-commerce, direct marketing and digital advertising and the use of public records have become more prevalent in recent years. Existing and proposed legislation

 

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and regulations, including changes in the manner in which such legislation and regulations are interpreted by courts in Canada, the United States and other jurisdictions may impose limits on our collection and use of certain kinds of information. Furthermore, the CRTC and ISED have the power to impose monetary sanctions for failure to comply with current regulations. For a more extensive description of the regulatory environment affecting our business, see “Item 4. Information on the Corporation — Regulation”.

 

Changes to the laws, regulations and policies governing our operations, the introduction of new laws, regulations, policies or terms of license, the issuance of new licenses, including additional spectrum licenses to our competitors or changes in the treatment of the tax deductibility of advertising expenditures could have an impact on our customer buying practices and/or a material adverse effect on our business (including how we provide products and services), prospects, results of operations and financial condition. In addition, we may incur increased costs in order to comply with existing and newly adopted laws and regulations or penalties for any failure to comply. It is difficult to predict in what form laws and regulations will be adopted or how they will be construed by the relevant courts or the extent to which any changes might adversely affect us.

 

ISED may not renew our mobile spectrum licenses on acceptable terms, or at all.

 

Our AWS-1 licenses were issued in December 2008 for a 10-year term. The conditions of AWS-1 license renewal were the subject of a public consultation process that concluded on August 14, 2017. A separate public consultation process is expected to be initiated shortly regarding the licence fees to be paid during a renewal term. Decisions from both these processes are expected prior to the expiry of our initial 10-year licences.

 

Our other spectrum licenses, including in the AWS-3, 700MHz and 2500MHz bands, are issued for 20-year terms from their respective dates of issuance. At the end of those respective terms, applications may be made for new licenses for a subsequent term through a renewal process, unless a breach of license condition by us has occurred, a fundamental reallocation of spectrum to a new service is required, or in the event that an overriding policy need arises. The process for issuing or renewing licenses, including the terms and conditions of the new licenses and whether license fees should apply for a subsequent license term, are expected to be determined by ISED following public consultations.

 

If, at the end of their respective term, our licenses are not renewed on acceptable terms, or at all, our ability to continue to offer our wireless services, or to offer new services, may be negatively impacted and, consequently, it could have a material adverse effect on our business, prospects, results of operations and financial condition.

 

We are required to provide third-party ISPs with access to our cable systems, which may result in increased competition.

 

The largest cable operators in Canada, including Videotron, have been required by the CRTC to provide third-party ISPs with access to their cable systems at mandated cost-based rates. Several third-party ISPs are interconnected to our cable network and are thereby providing retail Internet access services.

 

In a series of decisions since 2015, the CRTC has reemphasized the importance it gives to mandated wholesale access arrangements as a driver of competition in the retail Internet access market. Most significantly, the CRTC has ordered all of the major telephone and cable companies, including Videotron, to provide new disaggregated wholesale access services, which are to replace existing aggregated wholesale access services after a transition period. These new disaggregated services will involve third-party ISPs provisioning their own regional transport services. They will also include, for the first time, mandated access to high-speed services provided over fibre-access facilities, including the fibre-access facilities of the large incumbent telephone companies. A tariff proceeding is under way to set the rates for these new disaggregated wholesale services. In parallel, on October 6, 2016, the CRTC ordered a significant interim reduction to the tariff rates for the existing aggregated wholesale services. A second tariff proceeding is under way to set revised final rates for these services while work moves forward on implementing the disaggregated services. Rulings in both tariff proceedings are expected in the first half of 2018. As a result of these rulings, we may experience increased competition for retail cable Internet and telephony customers. In addition, because our third-party Internet access rates are regulated by the CRTC, we could be limited in our ability to recover our costs associated with providing this access.

 

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We are subject to a variety of environmental laws and regulations.

 

We are subject to a variety of environmental laws and regulations. Some of our facilities are subject to federal, provincial, state and municipal laws and regulations concerning, for example, emissions to the air, water and sewer discharge, the handling and disposal of hazardous materials and waste, including electronic waste, recycling, soil remediation of contaminated sites, or otherwise relating to the protection of the environment. In addition, laws and regulations relating to workplace safety and worker health, which, among other things, regulate employee exposure to hazardous substances in the workplace, also govern our operations. Failure to comply with present or future laws or regulations could result in substantial liability for us.

 

Environmental laws and regulations and their interpretation have changed rapidly in recent years and may continue to do so in the future. For instance, most Canadian provinces have recently implemented Extended Producer Responsibility (EPR) regulations in order to encourage sustainability practices such as the “Ecological recovery and reclamation of electronic products”, which sets certain recovery targets and which may require us to monitor and adjust our practices in the future. Evolving public expectations with respect to the environment and increasingly stringent laws and regulations could result in increased costs of compliance, and failure to recognize and adequately respond to them could result in fines, regulatory scrutiny, or have a significant effect on our reputation and brands.

 

Our properties, as well as areas surrounding those properties, particularly those in areas of long-term industrial use, may have had historic uses, or may have current uses, in the case of surrounding properties, which may affect our properties and require further study or remedial measures. We cannot provide assurance that all environmental liabilities have been determined, that any prior owner of our properties did not create a material environmental condition not known to us, that a material environmental condition does not otherwise exist on any of our properties, or that expenditure will not be required to deal with known or unknown contamination.

 

Concerns about alleged health risks relating to radiofrequency emissions may adversely affect our business.

 

All our cell sites comply with applicable laws and we rely on our suppliers to ensure that the network equipment and customer equipment supplied to us meets all applicable regulatory and safety requirements. Nevertheless, some studies have alleged links between radiofrequency emissions from certain wireless devices and cell sites and various health problems, or possible interference with electronic medical devices, including hearing aids and pacemakers. There is no definitive evidence of harmful effects from exposure to radiofrequency emissions when the limits imposed by applicable laws and regulations are complied with.  Additional studies of radiofrequency emissions are ongoing and there is no certainty as to the results of any such future studies.

 

The current concerns over radiofrequency emissions or perceived health risks of exposure to radiofrequency emissions could lead to additional governmental regulation, diminished use of wireless services, including Videotron’s, or product liability lawsuits that might arise or have arisen.  Any of these could have a material adverse effect on our business, prospects, revenues, financial condition and results of operations. Videotron is currently a defendant, along with all other major wireless providers in the Province of Québec, in an authorization demand for a class action on this particular concern.

 

Risks Relating to our Senior Notes and our Capital Structure

 

Our indebtedness and significant interest payment requirements could adversely affect our financial condition and therefore make it more difficult for us to fulfill our obligations, including our obligations under our Senior Notes.

 

We currently have a substantial amount of debt and significant interest payment requirements. As at December 31, 2017, we had $3.3 billion of consolidated long-term debt (excluding QMI subordinated loans). Our indebtedness could have significant consequences, including the following:

 

·                  increase our vulnerability to general adverse economic and industry conditions;

 

·                  require us to dedicate a substantial portion of our cash flow from operations to making interest and principal payments on our indebtedness, reducing the availability of our cash flow to fund capital expenditures, working capital and other general corporate purposes;

 

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·                  limit our flexibility in planning for, or reacting to, changes in our businesses and the industries in which we operate;

 

·                  place us at a competitive disadvantage compared to our competitors that have less debt or greater financial resources; and

 

·                  limit, along with the financial and other restrictive covenants in our indebtedness, our ability to, among other things, borrow additional funds on commercially reasonable terms, if at all.

 

Although we have significant indebtedness, as at December 31, 2017, we had approximately $965.0 million available for additional borrowings under our existing credit facilities on a consolidated basis, and the indentures governing our outstanding Senior Notes would permit us to incur substantial additional indebtedness in the future. If we or our subsidiaries incur additional debt, the risks we now face as a result of our leverage could intensify. For more information regarding our long-term debt and its maturities, refer to Note 20 to our audited consolidated financial statements for the year ended December 31, 2017 included under “Item 18. Financial Statements” of this annual report. See also the risk factor “— Restrictive covenants in our outstanding debt instruments may reduce our operating and financial flexibility, which may prevent us from capitalizing on certain business opportunities.”

 

Restrictive covenants in our outstanding debt instruments may reduce our operating and financial flexibility, which may prevent us from capitalizing on certain business opportunities.

 

Our credit facilities and the respective indentures governing our Senior Notes contain a number of operating and financial covenants restricting our ability to, among other things:

 

·                  borrow money or sell preferred stock;

 

·                  create liens;

 

·                  pay dividends on or redeem or repurchase our stock;

 

·                  make certain types of investments;

 

·                  restrict dividends or other payments from certain of our subsidiaries;

 

·                  enter into transactions with affiliates;

 

·                  issue guarantees of debt; and

 

·                  sell assets or merge with other companies.

 

If we are unable to comply with these covenants and are unable to obtain waivers from our creditors, we would be unable to make additional borrowings under our credit facilities, our indebtedness under these agreements would be in default and that could, if not cured or waived, result in an acceleration of such indebtedness and cause cross-defaults under our other debt, including our Senior Notes. If our indebtedness is accelerated, we may not be able to repay our indebtedness or borrow sufficient funds to refinance it, and any such prepayment or refinancing could adversely affect our financial condition. In addition, if we incur additional debt in the future or refinance existing debt, we may be subject to additional covenants, which may be more restrictive than those to which we are currently subject. Even if we are able to comply with all applicable covenants, the restrictions on our ability to manage our business in our sole discretion could adversely affect our business by, among other things, limiting our ability to take advantage of financings, mergers, acquisitions and other corporate opportunities that we believe would be beneficial to us.

 

We may be required from time to time to refinance certain of our indebtedness. Our inability to do so on favorable terms, or at all, could have a material adverse effect on us.

 

We may be required from time to time to refinance certain of our existing debt at or prior to maturity. Our ability to obtain additional financing to repay such existing debt at maturity will depend upon a number of factors, including

 

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prevailing market conditions, credit availability and our operating performance. There can be no assurance that any such financing will be available to us on favorable terms or at all. See also the risk factor “— The volatility and disruptions in the capital and credit markets could adversely affect our business, including the cost of new capital, our ability to refinance our scheduled debt maturities and meet our other obligations as they become due.”

 

There is no public market for our Senior Notes.

 

There is currently no established trading market for our issued and outstanding Senior Notes and we do not intend to apply for listing of any of our Senior Notes on any securities exchange or to arrange for any quotation on any automated dealer quotation systems. No assurance can be given as to the prices or liquidity of, or trading markets for, any series of our Senior Notes. The liquidity of any market for our Senior Notes will depend upon the number of holders of our Senior Notes, the interest of securities dealers in making a market in our Senior Notes, applicable regulations, prevailing interest rates, the market for similar securities and other factors, including general economic conditions, our financial condition and performance and our prospects. The absence of an active market for our Senior Notes could adversely affect their market price and liquidity.

 

In addition, the market for non-investment grade debt has historically been subject to disruptions that have caused volatility in prices of securities. It is possible that the market for our Senior Notes will be subject to such disruptions. Any such disruptions may have a negative effect on a holder’s ability to sell our Senior Notes, regardless of our prospects and financial performance.

 

We may not be able to finance an offer to purchase our Senior Notes in the event of a change of control as required by the respective indentures governing our Senior Notes because we may not have sufficient funds at the time of the change of control or our credit facilities may not allow the repurchases.

 

If we experience a change of control, as that term is defined in the respective indentures governing our Senior Notes, we may be required to make an offer to repurchase all of our Senior Notes prior to maturity. We can provide no assurance that we will have sufficient funds or be able to arrange for additional financing to repurchase our Senior Notes following such change of control. There is no sinking fund with respect to our outstanding Senior Notes.

 

In addition, a change of control would be an event of default under our credit facilities. Any future credit agreement or other agreements relating to our indebtedness to which we become a party may contain similar provisions. Our failure to repurchase our Senior Notes if required upon a change of control would, pursuant to the terms of the respective indentures governing our outstanding Senior Notes, constitute an event of default under such indentures. Any such default could, in turn, constitute an event of default under future indebtedness, any of which may cause the related debt to be accelerated after the expiry of any applicable notice or grace periods. If debt were to be accelerated, we may not have sufficient funds to repurchase our Senior Notes and repay the debt.

 

Canadian bankruptcy and insolvency laws may impair the trustees’ ability to enforce remedies under the indentures governing our Senior Notes or the Senior Notes themselves.

 

The rights of the trustees, who represent the holders of our Senior Notes, to enforce remedies could be delayed by the restructuring provisions of applicable Canadian federal bankruptcy, insolvency and other restructuring legislation if the benefit of such legislation is sought with respect to us. For example, both the Bankruptcy and Insolvency Act (Canada) (the “BIA”) and the Companies’ Creditors Arrangement Act (Canada) (the “CCAA”) contain provisions enabling an insolvent person to obtain a stay of proceedings against its creditors and to file a proposal to be voted on by the various classes of its affected creditors. A restructuring proposal, if accepted by the requisite majorities of each affected class of creditors, and if approved by the relevant Canadian court, would be binding on all creditors within each affected class, including those creditors that did not vote to accept the proposal. Moreover, this legislation, in certain instances, permits the insolvent debtor to retain possession and administration of its property, subject to court oversight, even though it may be in default under the applicable debt instrument, during the period that the stay against proceedings remains in place. In addition, it may be possible in certain circumstances to restructure certain debt obligations under the corporate governing statute applicable to the debtor.

 

The powers of the court under the BIA, and particularly under the CCAA, have been interpreted and exercised broadly so as to protect a restructuring entity from actions taken by creditors and other parties. Accordingly, we cannot

 

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predict whether payments under our outstanding Senior Notes would be made during any proceedings in bankruptcy, insolvency or other restructuring, whether or when the trustees could exercise their respective rights under the respective indentures governing each series of our Senior Notes or whether and to what extent holders of our Senior Notes would be compensated for any delays in payment, if any, of principal, interest and costs, including the fees and disbursements of the respective trustees.

 

Non-U.S. holders of our Senior Notes are subject to restrictions on the transfer or resale of our Senior Notes.

 

Although we have registered certain series of our Senior Notes under the Securities Act, we did not, and we do not intend to, qualify our Senior Notes by prospectus in Canada, and, accordingly, the Senior Notes remain subject to restrictions on resale and transfer in Canada. In addition, non-U.S. holders remain subject to restrictions imposed by the jurisdiction in which the holder is resident.

 

U.S. investors in our Senior Notes may have difficulties enforcing civil liabilities.

 

We are incorporated under the laws of the Province of Québec. Substantially all of our directors, controlling persons and officers are residents of Canada or other jurisdictions outside the United States, and all or a substantial portion of their assets and substantially all of our assets are located outside the United States. We have agreed, in accordance with the terms of the respective indentures governing each series of our Senior Notes (other than our Canadian-dollar denominated Senior Notes), to accept service of process in any suit, action or proceeding with respect to the indentures or such Senior Notes brought in any federal or state court located in New York City by an agent designated for such purpose, and to submit to the jurisdiction of such courts in connection with such suits, actions or proceedings. However, it may be difficult for holders of our Senior Notes to effect service of process within the United States upon directors, controlling persons, officers and experts who are not residents of the United States or to enforce against us or them in the United States upon judgments of courts of the United States predicated upon civil liability under United States federal or state securities laws or other laws of the United States. In addition, there is doubt as to the enforceability in Canada of liabilities predicated solely upon United States federal or state securities laws against us or against our directors, controlling persons, officers and experts who are not residents of the United States, in original actions or in actions for enforcement of judgments of courts of the United States.

 

Although our Senior Notes are referred to as “senior notes,” they are effectively subordinated to our secured indebtedness and structurally subordinated to the liabilities of our subsidiaries that do not guarantee the Senior Notes.

 

Our Senior Notes are unsecured and, therefore, are effectively subordinated to any secured indebtedness that we may incur to the extent of the assets securing such indebtedness. In the event of a bankruptcy or similar proceeding involving us, the assets that serve as collateral for any secured indebtedness will be available to satisfy the obligations under the secured indebtedness before any payments are made on the Senior Notes. The Senior Notes are effectively subordinated to any borrowings under our secured credit facilities and structurally subordinated to the liabilities of our subsidiaries that do not guarantee the Senior Notes. In addition, our credit facilities and the respective indentures governing our Senior Notes permit us to incur additional secured indebtedness in the future, which could be significant.

 

We are controlled by Quebecor Media and its interests may differ from those of holders of the Senior Notes.

 

All of our issued and outstanding common shares are held by Quebecor Media. As a result, Quebecor Media controls our policies and operations. The interests of Quebecor Media, as our sole common shareholder, may conflict with the interests of the holders of our outstanding Senior Notes. In addition, actions taken by Quebecor Media, as well as its financial condition, matters over which we have no control, may affect us.

 

Also, Quebecor Media is a holding company with no significant assets other than its equity interests in its subsidiaries. Its principal source of cash needed to pay its own obligations is the cash that we and other subsidiaries generate from operations and borrowings. We have the ability to pay significant distributions under the terms of our indebtedness and applicable law and currently expect to make distributions to our shareholder in the future, subject to the terms of our indebtedness and applicable law. See “Item 8. Financial Information — Dividend Policy” elsewhere in this annual report.

 

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ITEM 4 — INFORMATION ON THE CORPORATION

 

A-           History and Development of the Corporation

 

Our legal and commercial name is Videotron Ltd. We were founded on September 1, 1989 and are governed by the Business Corporations Act (Québec). On October 23, 2000, we were acquired by Quebecor Media.

 

Our registered office is located at 612 St-Jacques Street, Montréal, Québec, Canada H3C 4M8, and our telephone number is (514) 281-1232. Our corporate website may be accessed through the URL http://www.videotron.com. The information found on our corporate website or on any other website to which we refer in this annual report does not, however, form part of this annual report and is not incorporated by reference herein. Our agent for service of process in the United States with respect to our Senior Notes (other than our Canadian-dollar denominated Senior Notes due 2025 and 2026) is CT Corporation System, 111 Eighth Avenue, New York, New York 10011.

 

Since December 31, 2014, we have undertaken and/or completed several business acquisitions, capital expenditures, business development projects and financing transactions, including, among others, the following:

 

·                  We have continued to actively develop our mobile network. As of December 31, 2017 Videotron’s mobile telephony services covered the Province of Québec (7.9 million people) and Eastern Ontario. During 2017, we activated 130,100 net new lines on our advanced mobile network at a pace of approximately 10,800 net new lines per month, bringing our total mobile customer base to 1,024,000 activated lines.

 

·                  On August 29, 2017, we announced a multiyear strategic partnership with multinational telecommunications, media technology company Comcast Corporation (“Comcast”), aimed at developing and delivering our own IPTV service based on Comcast’s XFINITY X1 platform to enhance customer experience for our customers.

 

·                  On July 24, 2017, we sold seven 2500 MHz and 700 MHz wireless spectrum licences outside Québec to Shaw Communications Inc. (“Shaw”) for a cash consideration of $430.0 million. The sale included three 700 MHz licences covering southern Ontario and the entirety of the provinces of Alberta and British Columbia, and four 2500 MHz licences covering the major urban centres in those provinces, namely Toronto, Edmonton, Calgary and Vancouver.

 

·                  On June 20, 2017, we sold our AWS-1 spectrum licence in the Metropolitan Toronto area to Rogers Communication Inc. (“Rogers”) for a cash consideration of $184.2 million, pursuant to the transfer option held by us since 2013.

 

·                  On May 4, 2017, pursuant to our obligations under our credit agreement as a result of the redemption in full of our 67/8% Senior Notes due July 15, 2021, we added the entire amount of our unsecured revolving credit facility to the amount of our secured revolving credit facility. As a result, we increased our secured facility from $630.0 million to $965.0 million and terminated our unsecured facility.

 

·                  On April 13, 2017, we issued US$600.0 million aggregate principal amount of 51/8% Senior Notes, maturing on April 15, 2027, for net proceeds of $794.5 million (net of financing expenses). The proceeds of this offering were used to (i) redeem and retire the entire outstanding amount of our outstanding 67/8% Senior Notes due July 15, 2021, (ii) partially repay the amounts outstanding under our senior credit facilities, and (iii) pay transaction fees and expenses.

 

·                  On March 31, 2017, we issued a notice for the redemption of all our outstanding 67/8% Senior Notes issued on July 5, 2011 and due July 15, 2021, in an aggregate principal amount of $125.0 million. On May 1, 2017, the Senior Notes were redeemed at a redemption price of 103.438% of their principal amount for a cash consideration of $129.3 million.

 

·                  On January 12, 2017, 4Degrees reached an agreement with Megaport (USA), Inc., a global leader in secured interconnectivity. The partnership will allow 4Degrees’ customers to link directly to the world’s largest providers of public cloud services. Customers may benefit from fast, secure, redundant access to business applications from three leading information and communications technology (ICT) providers: Microsoft Corporation (Azure, Office365, Exchange), Amazon Web Services, Inc. and Google.

 

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·                  On December 2, 2016, we issued a notice for the redemption of an aggregate principal amount of $175.0 million of our outstanding 67/8% Senior Notes issued on July 5, 2011 and due July 15, 2021. On January 5, 2017, the Senior Notes were redeemed at a redemption price of 103.438% of their principal amount for a cash consideration of $181.0 million.

 

·                  On November 15, 2016, we announced that we had begun implementing Data over Cable Service Interface Specification (“DOCSIS”) 3.1 technology on our network. This new-generation technology developed by the CableLabs consortium, of which we are a member, may eventually deliver lightning speeds of up to 10 Gbps for downloads and up to 1 Gbps for uploads. We are now deploying DOCSIS 3.1 modems on our network and adapting our equipment and working protocols to the new technology.

 

·                  On September 20, 2016, we, together with Ericsson Canada Inc. (“Ericsson”), École de technologie supérieure and Société du Quartier de l’innovation de Montréal announced a partnership to create Canada’s first open-air smart living laboratory in order to test all aspects of new fifth-generation telecommunication technologies.

 

·                  On September 13, 2016, 4Degrees officially opened its new data centre in Montréal. The $40.0 million, 46,000-square-feet facility boasts one of the largest server rooms in the Province of Québec and is purpose-designed for data hosting. The Montréal and Québec City data centres are linked by Videotron’s fibre-optic network.

 

·                  On July 13, 2016, we launched our new Hybrid Fibre Giga Internet service, which offers connection speeds of up to 940 Mbps.

 

·                  In June 2016, we amended our secured revolving credit facility and unsecured revolving credit facility to extend their maturity to July 2021. Some of the terms and conditions related to these credit facilities were also amended.

 

·                  On January 7, 2016, we closed a transaction whereby we acquired Fibrenoire, a company that provides businesses with fibre-optic connectivity services, for a purchase price of $125.0 million, subject to certain adjustments.

 

·                  On October 27, 2015, we announced a multi-year $35.0 million expansion of the 4Degrees data hosting centre located in Québec City, which we acquired in March 2015 for cash consideration of $35.5 million. The project added two new server rooms to the facility. 4Degrees is one of the few data centres in the Province of Québec to be Tier III certified by the Uptime Institute, an international standard that recognizes maximum reliability and operational sustainability.

 

·                  On September 15, 2015, we issued $375.0 million aggregate principal amount of 53/4% Senior Notes, maturing on January 15, 2026, for net proceeds of $370.1 million (net of financing expenses). The proceeds of this offering were used to (i) partially repay the amounts outstanding under our senior credit facilities, and (ii) pay transaction fees and expenses.

 

·                  On July 16, 2015, we redeemed and retired (i) the entire principal amount outstanding of our 91/8% Senior Notes issued on April 15, 2008, and due April 15, 2018, representing an aggregate principal amount of US$75.0 million, and unwound the related hedges in an asset position, and (ii) the entire principal amount outstanding of our 71/8% Senior Notes issued on January 13, 2010, and due January 15, 2020, representing an aggregate principal amount of $300.0 million.

 

·                  On June 16, 2015, we amended our senior credit facilities to (i) increase the amount available under our secured revolving credit facility from $575.0 million to $615.0 million, (ii) extend the maturity of our secured revolving credit facility from July 19, 2018 to July 20, 2020, and (iii) create a new $350.0 million unsecured revolving credit facility maturing on July 20, 2020.

 

·                  On May 12, 2015, the predecessor to ISED announced that we were the successful bidder for eighteen 20 MHz licenses in its 2500 MHz spectrum auction. The operating licenses, acquired for $187.0 million,

 

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cover all of the Province of Québec and the largest urban centres in other provinces of Canada, namely Toronto, Ottawa, Calgary, Edmonton and Vancouver.

 

·                  On April 10, 2015, we redeemed and retired the entire principal amount outstanding of our 63/8% Senior Notes due December 15, 2015, representing an aggregate principal amount of US$175.0 million, and unwound the related hedges in an asset position.

 

·                  On March 6, 2015, the predecessor to ISED announced that we were the successful bidder for four 30 MHz licenses in its AWS-3 commercial mobile spectrum auction. We obtained the 30 MHz licenses for Eastern Québec, Southern Québec, Northern Québec and Eastern Ontario / Outaouais for a total price of $31.8 million.

 

B-           Business Overview

 

Overview

 

We are the largest cable operator in the Province of Québec and the third largest in Canada, in each case based on the number of cable customers, as well as an Internet service provider and a provider of cable and mobile telephony and OTT video services in the Province of Québec. Our cable network is the largest broadband network in the Province of Québec covering approximately 79% of an estimated 3.6 million premises. The deployment of our LTE wireless network and our enhanced offering of mobile communication services for residential and business customers allow us to consolidate our position as a provider of integrated telecommunication services, as well as an entertainment and content leader. Our products and services are supported by extensive coaxial, fibre-optic and LTE wireless networks. Since May 13, 2015, the coverage of our LTE network was expanded coast-to-coast through roaming agreements with other wireless service providers.

 

Videotron Business is a premier full-service telecommunications provider and data center operator servicing small-, medium- and large-sized businesses, as well as telecommunications carriers. In recent years, we have significantly grown our customer base and have become a leader in the Province of Québec’s business telecommunication segment. Products and services include cable television, Internet access, telephony solutions, mobile services and business solutions products such as private network connectivity, Wi-Fi, audio and video transmission. Through 4Degrees, we operate data centres in Québec City and Montréal. These data centres are among a select few in the Province of Québec to be certified as Tier III Design and Facilities by the Uptime Institute. This is an international standard that recognizes maximum reliability and operational sustainability.

 

In January 7, 2016, we acquired Fibrenoire, a company that provides fibre-optic connectivity services. This acquisition enables Videotron Business and Fibrenoire to join forces to meet the growing demand from business customers for fibre-optic connectivity.

 

Competitive Strengths

 

Leading Market Positions

 

We are the largest cable operator in the Province of Québec and the third largest in Canada, in each case based on the number of cable customers. We believe that our strong market position has enabled us to launch and deploy new products and services more effectively. For example, since the introduction of our cable Internet access service, we estimate that we have become the largest provider of such service in the geographic areas we serve. Our extensive proprietary and third-party retail distribution network of stores and points of sale, including our Videotron-branded stores and kiosks, assists us in marketing and distributing our advanced telecommunications services, such as cable Internet access, digital television and cable and mobile telephony, on a large scale basis.

 

Differentiated Bundled Services

 

Through our technologically advanced wireline and wireless network, we offer a differentiated, bundled suite of entertainment, information and communication services and products, including digital television, cable Internet access, VOD, subscription-based OTT entertainment service (“Club illico”) and other interactive television services, as well as

 

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residential and commercial cable telephony services using VoIP technology, and mobile telephony services. In addition, we deliver high-quality services and products, including, for example, our standard cable Internet access service which is offered across our footprint and enables our customers to download data, in a portion of our territory, at a speed higher than currently offered by standard DSL technology. We also offer one of the widest range of French-language programming in Canada including content from our illico-on-Demand and Club illico services available on illico Digital TV, illico.tv or illico app (for Android and iOS). Customers can interrupt and resume programming at will on any of these three illico platforms.

 

Advanced Broadband Network

 

We are able to leverage our advanced broadband network, substantially all of which is bi-directional, to offer a wide range of advanced services on the same media, such as digital television, VOD, cable Internet access and cable telephony services. We are committed to maintaining and upgrading our network capacity and, to that end, we currently anticipate that ongoing capital expenditures will be required to accommodate the evolution of our products and services and to meet the demand for increased capacity.

 

Focused and Highly Reliable Network Cluster

 

Our single hybrid fibre coaxial clustered network covers approximately 79% of the Province of Québec’s total addressable market and nine of the province’s top ten urban areas. We believe that our single cluster and network architecture provides many benefits, including a higher quality and more reliable network, the ability to launch and deploy new products and services such as Club illico and the illico 4K UHD set-top box, and a lower cost structure through reduced maintenance and technical support costs.

 

Strong, Market-Focused Management Team

 

We have a strong, market-focused management team that has extensive experience and expertise in a range of areas, including marketing, finance, telecommunications and technology. Under the leadership of our senior management team, we have, among other things, improved penetration of our High Speed Internet Access offering, our VoIP telephony services, our cable products and our mobile telephony services, including through the successful build-out and launch of our mobile telephony network and upgrade to the LTE technology.

 

Products and Services

 

We currently offer to our customers cable services, mobile telephony services, OTT video services and business telecommunications services.

 

Cable Services

 

Advanced Cable-Based Products and Services

 

Our cable network’s large bandwidth is a key factor in the successful delivery of advanced products and services. Several emerging technologies and increasing Internet usage by our customers have presented us with significant opportunities to expand our sources of revenue. We currently offer a variety of advanced products and services, including cable Internet access, digital multiplatform television, residential telephony and selected interactive services. In 2015, we introduced the illico 4K set-top box on the market. This high-tech personal video recorder has a processor 12 times more powerful than the previous generation, thus allowing customers to program up to eight simultaneous recordings and store up to 115 hours of UHD recording. We intend to continue to develop and to deploy additional value-added services to further broaden our service offerings. In doing so, on August 29, 2017, we announced a multiyear agreement with multinational media and technology company, Comcast. This strategic partnership is aimed at developing and delivering an IPTV service based on Comcast’s “XFINITY X1” platform.

 

·                  Cable Internet Access. Leveraging our advanced cable infrastructure, we offer cable Internet access to our customers primarily via cable modems. We provide this service at download speeds of up to 200 Mbps to more than 98% of our homes passed. The launch of a new consumer Internet high speed service, with download speeds of up to 940 Mbps is also available to more than 45% of our homes passed.  As of December 31, 2017, we had 1,666,500 cable Internet access customers, representing 58.0% of our total

 

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homes passed. Based on internal estimates, we are the largest provider of Internet access services in the areas we serve with an estimated market share of 52% as of December 31, 2017.

 

·                  Digital Television. We have installed headend equipment through an hybrid fibre-optic and coax network capable of delivering digitally encoded transmissions to a two-way digital set-top box in the customer’s home and premises. This digital connection provides significant advantages. In particular, it increases channel capacity, which allows us to increase both programming and service offerings while providing increased flexibility in packaging our services and a HD quality. In accordance with CRTC regulations, we offer the basic package including 23 basic television channels, access to VOD and interactive programming guide. Furthermore, all of our custom packages include the basic package, 52 audio channels providing digital-quality music, 36 FM radio channels and an interactive programming guide. Our extended digital television offering allows customers to customize their choices with the ability to choose between custom or pre-assembled packages with a selection of more than 300 additional channels, including U.S. super-stations and other special entertainment programs. This also offers customers significant programming flexibility including the option of French-language only, English-language only or a combination of French- and English-language programming, as well as many foreign-language channels. As of December 31, 2017, we had 1,640,500 customers for our digital television service, representing 57.1% of our total homes passed.

 

·                  Cable Telephony. We offer cable telephony service using VoIP technology. We offer discounts to customers who subscribe to more than one of our services. As of December 31, 2017, we had 1,188,500 subscribers to our cable telephony service, representing a penetration rate of 41.4% of our homes passed.

 

·                  Video-On-Demand. VOD service enables digital cable customers to rent content from a library of movies, documentaries and other programming through their digital set-top box, computer, tablet or mobile phone respectively through illico Digital TV, illico.tv and our illico app. Our digital cable customers are able to rent their VOD selections for a period of up to 48 hours, which they are then able to watch at their convenience with full stop, rewind, fast forward, pause and replay functionality during their rental period. In addition, customers can resume viewing on-demand programming that was paused on either the television, illico.tv or the illico app offered on the iOS and Android platforms. These applications feature a customizable, intuitive interface that brings up selections of content based on the customer’s individual settings and enhances the experience by suggesting personalized themed content. These applications smartly and swiftly highlight any content available from the illico catalog, including VOD titles, live television broadcasts or recorded shows, and allow the customer to transfer it directly and seamlessly from their mobile devices to their television.

 

·                  Pay-Per-View and pay television channels. Pay-Per-View is a group of channels that allows our digital customers to order live events and movies based on a pre-determined schedule. In addition, we offer pay television channels on a subscription basis that allows our customers to access and watch most of the movies available on the linear pay TV channels these customers subscribe to.

 

Mobile Services

 

On September 9, 2010, we launched our High Speed Packet Access (“HSPA”) mobile communication network (3G) which was upgraded to HSPA+ (4G), on June 30, 2011.

 

In 2013, we signed a 20-year agreement with Rogers for the cooperation and collaboration in the build-out and operation of a shared LTE wireless network in the Province of Québec and the Ottawa region (the “Rogers LTE Agreement”). In September 2014, we launched our shared LTE wireless network, with Rogers. This shared network delivers an optimal user experience for consumers and businesses. We maintain our business independence throughout this agreement, including our product and service portfolios, billing systems and customer data.

 

In April 2014, we added Apple’s mobile devices, including the iPhone, to our extensive line-up of mobile handsets, thus enabling us to reach a significantly untapped segment of our addressable market, in particular the young mobile users. Subsequently, we launched new illico applications for iPhone and iPad.

 

In August 2015, we launched the Unlimited Music service, which allowed some mobile customers to stream music through the most popular online platforms without using data from their mobile plan. On April 20, 2017, the

 

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Canadian Radio-television and Telecommunications Commission (CRTC) made a decision ordering Videotron to stop offering its customers and consumers its unlimited music service by July 19, 2017. This deadline was later extended to August 4, 2017. In order to keep our competitive edge and to continue enhancing our customer experience, on November 15, 2017, the access to mobile version of Club illico was temporarily made available with any new mobile phone plan.

 

In the 700 MHz auction held in 2014, we acquired a package of seven spectrum licenses consisting of a single paired 5+5 MHz spectrum block in the upper 700 MHz band over a geographic territory which encompasses the provinces of Québec, Ontario (excluding the region of Northern Ontario), Alberta and British Columbia (the spectrum licences outside Quebec were subsequently sold to Shaw in 2017). The 700 MHz band presents certain superior propagation characteristics and benefits from well-developed LTE equipment and device ecosystems in North America. The 700 MHz band enhances our ability to maintain a leading edge and a high performance wireless network in the Province of Québec.

 

In the ISED auction for AWS-3 commercial mobile spectrum held on March 3, 2015, we acquired four 30 MHz licenses for Eastern Québec, Southern Québec, Northern Québec and Eastern Ontario / Outaouais, covering 100% of the population of the Province of Québec and the Ottawa region. This spectrum, which supports LTE technology, furthers enhance our ability to maintain a leading-edge, high performance wireless network in the Province of Québec and in the Ottawa region.

 

On May 12, 2015, after the closing of ISED’s auction for 2500 MHz commercial mobile spectrum, we were declared the successful bidder for eighteen licenses covering all of the Province of Québec as well as the major urban centres in the rest of Canada, including Toronto, Ottawa, Calgary, Edmonton and Vancouver  (the 2500 MHz spectrum licences outside Quebec were subsequently sold to Shaw in 2017).

 

Since May 13, 2015, the coverage of our LTE network was expanded coast-to-coast through roaming agreements with other wireless service providers.

 

On June 20, 2017, pursuant to the Rogers LTE Agreement, we exercised our option to sell our AWS-1 spectrum license in the Greater Toronto Area to Rogers for $184.2 million.

 

On July 24, 2017, we sold seven 2500 MHz and 700 MHz wireless spectrum licences outside Québec to Shaw for a cash consideration of $430.0 million, which licenses had been awarded to us in the 2014 and 2015 ISED auction for the 700 MHz and the 2500 MHz wireless spectrum licences, respectively.

 

We have kept our frequency band licences (Band 4 — AWS1, Band 66 — AWS3, Band 7 — 2500MHz and Band 13 — 700MHz) for the Province of Quebec and Eastern Ontario.

 

As of December 31, 2017, most households and businesses on our cable footprint had access to our advanced mobile services. As of December 31, 2017, there were 1,024,000 lines activated on our wireless network, representing a year-over-year increase of 130,100 lines (14.6%).

 

Club illico

 

Our clients can also benefit from Club illico, our subscription based OTT entertainment service, offering a rich and varied selection of unlimited, on-demand French language content (movies, television shows, children’s shows, documentaries, comedy performances and concerts). In late 2013, Club illico started funding the production of television series and offering them in their first broadcast window, prior to their linear broadcast. On November 15, 2017, Videotron launched the Club illico mobile application. As of December 31, 2017, 33,000 customers had downloaded this application.

 

On December 31, 2017, the Club illico service had 361,600 subscribers.

 

Business Telecommunications Services

 

Videotron Business is a premier telecommunications service provider, offering reliable and state-of-the-art mobile telephony, Internet access, telephony solutions, data and cable television solutions to all business segments: small and medium-sized companies, large corporations and other telecommunications carriers.

 

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Through 4Degrees, we operate data centres in Québec City and Montréal. These data centres are among a select few in the Province of Québec to be certified as Tier III Design and Facilities by the Uptime Institute. This is an international standard that recognizes maximum reliability and operational sustainability. The data centre in Montréal is 46,000 square feet and the one in Québec City is 91,000 square feet. Our data centres are interconnected via our fibre optic network. The connectivity makes us the only supplier in Québec able to offer Tier III Facilities certified intraprovincial redundancy. Furthermore, in partnership with Megaport (USA), Inc., a global leader in secure interconnectivity, our customers can benefit from a fast, secure, redundant access to business applications from three leading information and communications technology (ICT) providers.

 

In 2016, with the acquisition of Fibrenoire, we increased our presence in the growing market of fibre-optic connectivity.

 

We serve customers through a dedicated sales force and customer service teams with solid expertise in business market. Videotron Business relies on its extensive coaxial, fibre-optic, LTE wireless networks and data centres to provide the best possible customized solutions to all of its customers.

 

Customer Statistics Summary

 

The following table summarizes our customer statistics for our suite of advanced products and services:

 

 

 

As of December 31,

 

 

 

2017

 

2016

 

2015

 

2014

 

2013

 

 

 

(in thousands of customers)

 

Revenue-generating units (RGUs)

 

5,881.1

 

5,765.4

 

5,647.5

 

5,479.3

 

5,242.1

 

Mobile Telephony

 

 

 

 

 

 

 

 

 

 

 

Mobile telephony lines

 

1,024.0

 

893.9

 

768.6

 

632.8

 

504.3

 

Cable Internet

 

 

 

 

 

 

 

 

 

 

 

Cable Internet customers

 

1,666.5

 

1,612.8

 

1,568.2

 

1,537.5

 

1,506.0

 

Penetration(1)

 

58.0

%

56.8

%

55.9

%

55.4

%

54.9

%

Cable Television

 

 

 

 

 

 

 

 

 

 

 

Basic customers(2)

 

1,640.5

 

1,690.9

 

1,736.9

 

1,782.3

 

1,825.1

 

Penetration(1)

 

57.1

%

59.6

%

61.9

%

64.2

%

66.5

%

Digital customers(3)

 

1,640.5

 

1,587.1

 

1,570.6

 

1,553.6

 

1,527.4

 

Penetration(4)

 

100.0

%

93.9

%

90.4

%

87.2

%

83.7

%

Cable Telephony

 

 

 

 

 

 

 

 

 

 

 

Cable telephony lines

 

1,188.5

 

1,253.1

 

1,316.3

 

1,349.0

 

1,348.5

 

Penetration(1)

 

41.4

%

44.1

%

46.9

%

48.6

%

49.2

%

Club illico

 

 

 

 

 

 

 

 

 

 

 

Over-the-top video customers

 

361.6

 

314.7

 

257.5

 

177.7

 

58.2

 

Homes passed(5)

 

2,873.7

 

2,839.3

 

2,806.0

 

2,777.3

 

2,742.5

 

 


(1)                                 Represents customers as a percentage of total homes passed.

(2)                                 Basic customers are customers who receive basic cable service in either the analog or digital mode.

(3)                                 At the end of 2017, substantially all subscribers to the analog cable television service had migrated to digital service.

(4)                                 Represents customers for the digital service as a percentage of basic customers.

(5)                                 Homes passed means the number of residential premises, such as single dwelling units or multiple dwelling units, and commercial premises passed by our cable television distribution network in a given cable system service area in which the programming services are offered.

 

Pricing of our Products and Services

 

Our revenues are derived from the monthly fees our customers pay for cable television, Internet access and telephony and mobile services as well as Club illico. The rates we charge vary based on the market served and the level of service selected. Rates are usually adjusted annually. We also offer discounts to our customers who subscribe to more than one of our services, when compared to the sum of the prices of the individual services provided to these customers.

 

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As of December 31, 2017, the average monthly invoice on recurring subscription fees per residential customer was $118.56 (representing a 1% year-over-year increase) and approximately 78% of our customers were bundling two services or more. A one-time installation fee, which may be waived in part during certain promotional periods, is charged to new customers. Monthly fees for rented equipment, such as set-top boxes or Wi-Fi routers, can be charged depending on the promotional offer.

 

Our Network Technology

 

Cable

 

As of December 31, 2017, our cable network consisted of fibre-optic cable and of coaxial cable, covering approximately 2.9 million homes and serving approximately 2.3 million customers in the Province of Québec. Our network is the largest broadband network in the Province of Québec covering approximately 79% of premises. Our extensive network supports direct connectivity with networks in Ontario, the Maritimes and the United States.

 

Our cable television network is comprised of four distinct parts including signal acquisition networks, main headends, distribution networks and subscriber drops. The signal acquisition network picks up a wide variety of television, radio and multimedia signals. These signals and services originate from either a local source or content provider or are picked up from distant sites chosen for satellite or over-the-air reception quality and transmitted to the main headends by way of fibre-optic relay systems. Each main headend processes, modulates, scrambles and combines the signals in order to distribute them throughout the network. Each main headend is connected to the primary headend in order to receive the digital MPEG2/MPEG4 signals and the IP backbone for the Internet services. The first stage of this distribution consists of a fibre-optic link which distributes the signals to distribution or secondary headends. After that, the signal uses the hybrid fibre coaxial cable network made of wide-band optical nodes, amplifiers and coaxial cables capable of serving up to 30 km in radius from the distribution or secondary headends to the subscriber drops. The subscriber drop brings the signal into the customer’s television set directly or, depending on the area or the services selected, through various types of customer equipment including set-top boxes and cable and telephony modems.

 

We have adopted the hybrid fibre coaxial (“HFC”) network architecture as the standard for our ongoing system upgrades. HFC network architecture combines the use of both fibre-optic and coaxial cables. Fibre-optic cable has good broadband frequency characteristics, noise immunity and physical durability and can carry hundreds of video and data channels over extended distances. Coaxial cable is less expensive and requires greater signal amplification in order to obtain the desired transmission levels for delivering channels. In most systems, we deliver our signals via fibre-optic cable from the headend to a group of optical nodes and then via coax to the homes passed served by the nodes. We currently build our network by implementing cells of 125 homes (which can evolve to 64 homes). As a result of the modernization of our network in recent years, our network design now provides for average cells of 171 homes throughout our footprint. To allow for this configuration, secondary headends were put into operation in the Greater Montréal Area, in the Greater Québec City Area and in the Greater Gatineau City Area. Remote secondary headends must also be connected with fibre-optic links. From the secondary headends to the homes, the customer services are provided through the transmission of a radiofrequency (“RF”) signal which contains both downstream and upstream information (two-way). The loop structure of the two-way HFC networks brings reliability through redundancy, the cell size improves flexibility and capacity, while the reduced number of amplifiers separating the home from the headend improves signal quality and reliability. The HFC network design provided us with significant flexibility to offer customized programming to individual cells, which is critical to our advanced services, such as VOD, Switched Digital Video Broadcast and the continued expansion of our interactive services.

 

Starting in 2008, we began an extensive network modernization effort in the Greater Montréal Area in order to meet the ever expanding service needs of the customer in terms of video, telephony and Internet access services. This ongoing modernization implies an extension of the upper limit of the RF spectrum available for service offerings and a deep fibre deployment, which significantly extends the fibre portion in the HFC network (thereby reducing the coax portion). Additional optical nodes were systematically deployed to increase the segmentation of customer cells, both for upstream and downstream traffic. This modernization initiative results in (i) a network architecture where the segmentation for the upstream traffic is for 125 homes while that for the downstream traffic is set to 250 (which can evolve to 125 homes), and (ii) the availability of a 1 GHz spectrum for service offerings. The robustness of the network is greatly enhanced (much less active equipment in the network such as RF amplifiers for the coax portion), the service offering potential and customization to the customer base is significantly improved (through the extension of the spectrum

 

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to 1 GHz and the increased segmentation) and allows much greater speeds of transmission for Internet services which are presently unrivalled. The overall architecture employs Division Wavelength Multiplexing, which allows us to limit the amount of fibre required, while providing an effective customization potential. As such, in addition to the broadcast information, up to 12 wavelengths can be combined on a transport fibre from the secondary headend to a 3,000 homes aggregation point. Each of these wavelengths is dedicated to the specific requirements of 250 homes. The RF spectrum is set with digital information using quadrature amplitude modulation. MPEG video compression techniques and the DOCSIS protocol allow us to provide a great service offering of standard definition, HD and now UHD video, as well as complete voice and Internet services. This modernization project gives us flexibility to meet customer needs and future network evolution requirements. The modernization of the Greater Montréal Area network is scheduled to be completed by 2022.

 

DOCSIS 3.0 is currently deployed to provide data service at speeds of up to 940 Mbps. We are currently adapting our equipment and working protocols to the new DOCSIS 3.1 technology, which is to be deployed in 2018 on Videotron’s network. DOCSIS 3.1 is a new-generation technology developed by the CableLabs consortium, of which we are a member, which may eventually deliver lightning speeds of up to 10 Gbps for downloads and up to 1 Gbps for uploads.  DOCSIS 3.1 uses Orthogonal Frequency-Division Multiplexing (OFDM) modulation and Low-Density Parity Check (LDPC) correction algorithm that provide better resiliency to RF interference and increase throughput for the same spectrum, i.e. increase Mbps/MHz.  The maximum theoretical gain is 50% in the downstream direction (from the network to the user) and 100% in the upstream direction (from the user to the network), and upcoming live deployments will indicate which proportion of these theoretical limits can be achieved.

 

Our strategy of maintaining a leadership position in respect of the suite of products and services that we offer and launching new products and services requires investments in our network to support growth in our customer base and increases in bandwidth requirements. 74% of our network in the Province of Québec has been upgraded to a bandwidth of 1002 MHz, the remaining of our network being at 750 MHz. Also, in light of the greater availability of HD and UHD television programming and the ever increasing speed of Internet access, further investment in our network will be required.

 

Mobile Telephony

 

As of December 31, 2017, our shared LTE network reached 94% of the population of the Province of Québec and the Greater Ottawa Area, allowing the vast majority of our potential clients to have access to the latest mobile services. Almost all of our towers and transmission equipment are linked through our fibre-optic network using a multiple label switching — or MPLS — protocol. We plan to continue developing and enhancing our mobile technological offering by densifying network coverage, increasing download speeds and reducing latency. Our network is designed to support important customer growth in coming years as well as rapidly evolving mobile technologies. On October 20, 2017, we introduced the Voice over LTE (VoLTE) feature, a new generation of mobile voice services providing eligible users with improved indoor coverage and faster call routing and, on calls between our customers, enabling users to experience HD sound quality on the LTE network.

 

Our strategy in the coming years is to build on our position as a telecommunication leader with our LTE mobile services and to keep the technology at the cutting edge as it continues to evolve rapidly and new market standards such as LTE-Advanced and heterogeneous networks are being deployed. We are exploring 4.5G and 5G technologies. In doing so, we have created a partnership with Ericsson, L’École de technologie supérieure and Société du Quartier de l’innovation de Montréal. Together with our partners, we have established the first open-air smart living laboratory in Canada. This laboratory will test the many facets of innovations associated with the emerging industry revolving around fifth-generation telecommunications. Also, the Rogers LTE Agreement provides and allows Rogers and us to continue the evolution of the shared LTE network. Our and Rogers’ spectrum contribution will allow us to continue to exploit LTE evolutive technologies and to provide our subscribers with high throughput data connections.

 

During 2017, we maintained our HSPA+ network throughout the Province of Québec and over the Greater Ottawa Area.

 

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Marketing and Customer Care

 

Our long term marketing objective is to increase our cash flow through deeper market penetration of our services, development of new services and revenue and operating margin growth per customer. We believe that customers will come to view our cable connection as the best distribution channel to their home for a multitude of services. To achieve this objective, we are pursuing the following strategies:

 

·                  develop attractive bundle offers to encourage our customers to subscribe to two or more products, which increases average revenue per user — or ARPU — customer retention and operating margins;

 

·                  continue to rapidly deploy advanced products on all our services — cable, Internet access, telephony, Club illico and mobile — to maintain and increase our leadership and consequently, to gain additional market share;

 

·                  design product offers that provide greater opportunities for customer entertainment and information;

 

·                  deploy strong retention strategies aiming to maintain our existing customer base and to increase our ARPU;

 

·                  develop targeted marketing programs to attract former customers and households that have never subscribed to certain of our services and customers of alternative or competitive services as well as target specific market segments;

 

·                  enhance the relationship between customer service representatives and our customers by training and motivating customer service representatives to promote advanced products and services;

 

·                  leverage the retail presence of our Videotron-branded stores and kiosks, and third-party commercial retailers;

 

·                  maintain and promote our leadership in content and entertainment by leveraging the wide variety of services offered within the Quebecor Media group to our existing and future customers;

 

·                  introduce new value added packages of products and services, which we believe will increase ARPU and improve customer retention; and

 

·                  leverage our business market, using our network and expertise with our commercial customer base, to offer additional bundled services to our customers.

 

We continue to invest time, effort and financial resources in marketing new and existing services. To increase both customer penetration and the number of services used by our customers, we use integrated marketing techniques, including door-to-door solicitation, telemarketing, drive-to-store, media advertising, e-marketing, Short Message Service (SMS) and direct mail solicitation. Those initiatives are also strongly supported by business intelligence tools such as predictive churn models.

 

Maximizing customer satisfaction is a key element of our business strategy. In support of our commitment to customer satisfaction, we offer the service of dedicated, knowledgeable and well-trained technical experts which we call our “PROS”, the primary mission of which is to support our customers by helping them get the most out of what we have to offer. Through personalized demonstration sessions, the PROS provide customers with continued customer service after subscription has been made. We continue to provide a 24-hour customer service hotline seven days a week across most of our systems, in addition to our web-based customer service capabilities. All of our customer service representatives and technical support staff are trained to assist customers with all of our products and services, which in turn allows our customers to be served more efficiently and seamlessly. Our customer care representatives continue to receive extensive training to perfect their product knowledge and skills, which contributes to retention of customers and higher levels of customer service. We utilize surveys, focus groups and other research tools to assist us in our marketing efforts and anticipate customer needs. To increase customer loyalty, we are also starting to leverage strategic partnerships to offer exclusive promotions, privileges and contests which contribute in expanding our value proposition to our customers.

 

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Programming

 

We believe that offering a wide variety of conveniently scheduled programming is an important factor in influencing a customer’s decision to subscribe to and retain our cable services. We devote resources to obtaining access to a wide range of programming that we believe will appeal to both existing and potential customers. We rely on extensive market research, customer demographics and local programming preferences to determine our channel and package offerings. The CRTC currently regulates the distribution of foreign content in Canada and, as a result, we are limited in our ability to provide such programming to our customers. We obtain basic and premium programming from a number of suppliers, including all major Canadian media groups.

 

Our programming contracts generally provide for a fixed term of up to five years, and are subject to negotiated renewal. Programming tends to be made available to us for a flat fee per customer. Our overall programming costs have increased in recent years and may continue to increase due to factors including, but not limited to, additional programming being provided to customers as a result of system rebuilds that increase channel capacity, increased costs to produce or purchase specialty programming, inflationary or negotiated annual increases, the concentration of broadcasters following recent acquisitions in the market, the increased competition from OTT service providers for content and the significant increased costs of sports content rights.

 

Competition

 

We operate in a competitive business environment in the areas of price, product and service offerings and service reliability. We compete with other providers of television signals and other sources of home entertainment. Due to ongoing technological developments, the distinctions among traditional platforms (broadcasting, Internet, and telecommunications) are fading rapidly. The Internet as well as mobile devices are becoming important broadcasting and distribution platforms. In addition, mobile operators, with the development of their respective mobile networks, are now offering wireless and fixed wireless Internet services and our VoIP telephony service is also competing with Internet-based solutions.

 

·                  Providers of Other Entertainment. Cable systems face competition from alternative methods of distributing and receiving television signals and from other sources of entertainment such as live sporting events, movie theatres and home video products, including digital recorders, OTT content providers, such as Netflix, Amazon Prime Video and Apple TV, Blu-ray players and video games. The extent to which a cable television service is competitive depends in significant part upon the cable system’s ability to provide a greater variety of programming, superior technical performance and superior customer service that are available through competitive alternative delivery sources. The introduction of Club illico, our subscription based OTT platform offering a rich and varied selection of unlimited on-demand content, aims to reduce the effect of competition from alternative delivery sources.

 

·                  DSL. The deployment of DSL technology provides customers with Internet access at data transmission speeds greater than that available over conventional telephone lines. DSL service provides access speeds that are comparable to low-to-medium speeds of cable-modem Internet access but that decreases with the distance between the DSL modem and the line card.

 

·                  FTTN and FTTH. Fibre to the neighborhood (“FTTN”) technology addresses the distance limitation by bringing the fibre closer to the end user. The last mile is provided by the DSL technology. Fibre to the home (“FTTH”) brings the fibre up to the end user location. The speed is then limited by the end equipment rather than the medium (fibre) itself. It provides speeds comparable to high speeds of cable-modem Internet access. Because of the cost involved with FTTH and FTTN, deployment of these technologies is progressive. The main competition for cable-modem Internet access comes from a provider of DSL and Fibre to the x (FTTx) services.

 

·                  Internet Video Streaming. The continuous technology improvement of the Internet, combined with higher download speeds and its affordability, favors the development and deployment of alternative technologies such as digital content offered by OTT service providers through various Internet streaming platforms. While having a positive impact on the demand for our Internet access services, this model could adversely impact the demand for our cable television services.

 

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·                  VDSL. VDSL technology increases the available capacity of DSL lines, thereby allowing the distribution of digital video. Multi-system operators are now facing competition from ILECs, which have been granted licenses to launch video distribution services using this technology, which operates over copper phone lines. The transmission capabilities of VDSL will be significantly boosted with the deployment of technologies such as vectoring (the reduction or elimination of the effects of far-end crosstalk) and twisted pair bonding (use of additional twisted pairs to increase data carriage capacity). Certain ILECs have already started replacing many of their main feeds with fibre-optic cable and positioning VDSL transceivers, a VDSL gateway, in larger multiple-dwelling units, in order to overcome the initial distance limitations of VDSL. With this added capacity, along with the evolution of compression technology, VDSL-2 will offer significant opportunities for services and increase its competitive threat against other multi-system operators.

 

·                  Direct Broadcast Satellite. DBS is also a competitor to cable systems. DBS delivers programming via signals sent directly to receiving dishes from medium and high-powered satellites, as opposed to cable delivery transmissions. This form of distribution generally provides more channels than some of our television systems and is fully digital. DBS service can be received virtually anywhere in Canada through the installation of a small rooftop or side-mounted antenna. Like digital cable distribution, DBS systems use video compression technology to increase channel capacity and digital technology to improve the quality of the signals transmitted to their customers.

 

·                  Mobile Telephony Services. With our mobile network, we compete against a mix of participants, some of them being active in some or all the products we offer, while others only offer mobile telephony services in our market. The Canadian incumbents have deployed their LTE networks and this technology has become an industry standard.

 

·                  Private Cable. Additional competition is posed by satellite master antenna television systems known as “SMATV systems” serving multi dwelling units, such as condominiums, apartment complexes, and private residential communities.

 

·                  Wireless Distribution. Cable television systems also compete with wireless program distribution services such as MMDS. This technology uses microwave links to transmit signals from multiple transmission sites to line-of-sight antennas located within the customer’s premises.

 

·                  Grey and Black Market Providers. Cable and other distributors of television signals continue to face competition from the use of access codes and equipment that enable the unauthorized decoding of encrypted satellite signals, from unauthorized access to our analog and digital cable signals (black market) and from the reception of foreign signals through subscriptions to foreign satellite television providers that are not lawful distributors in Canada (grey market).

 

·                  Telephony Service. Our cable telephony service competes against ILECs and other telephony service providers, VoIP telephony service providers and mobile telephony service providers.

 

·                  Other Internet Service Providers. In the Internet access business, cable operators compete against other Internet service providers offering residential and commercial Internet access services. The CRTC requires the large Canadian incumbent cable operators to offer access to their high-speed Internet network to competitive Internet service providers at mandated rates.

 

C-           Regulation

 

Ownership and Control of Canadian Broadcast Undertakings

 

The Canadian Government has directed the CRTC not to issue, amend or renew a broadcasting license to an applicant that is a non-Canadian. Canadian, a defined term in the Direction to the CRTC (Inegibility of Non-Canadians) (the “Direction to CRTC”), means, among other things, a citizen or a permanent resident of Canada or a qualified corporation. A qualified corporation is one incorporated or continued in Canada, of which the chief executive officer and not less than 80% of the directors are Canadian, and not less than 80% of the issued and outstanding voting shares and not

 

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less than 80% of the votes are beneficially owned and controlled, directly or indirectly, by Canadians. In addition to the above requirements, Canadians must beneficially own and control, directly or indirectly, not less than 66.6% of the issued and outstanding voting shares and not less than 66.6% of the votes of the parent corporation that controls the subsidiary, and neither the parent corporation nor its directors may exercise control or influence over any programming decisions of the subsidiary if Canadians beneficially own and control less than 80% of the issued and outstanding shares and votes of the parent corporation, if the chief executive officer of the parent corporation is a non-Canadian or if less than 80% of the parent corporation’s directors are Canadian. There are no specific restrictions on the number of non-voting shares which may be owned by non-Canadians. Finally, an applicant seeking to acquire, amend or renew a broadcasting license must not otherwise be controlled in fact by non-Canadians, a question of fact which may be determined by the CRTC in its discretion. Control is defined broadly to mean control in any manner that results in control in fact, whether directly through the ownership of securities or indirectly through a trust, agreement or arrangement, the ownership of a corporation or otherwise. We are a qualified Canadian corporation.

 

Regulations made under the Broadcasting Act require the prior approval of the CRTC for any transaction that directly or indirectly results in a change in effective control of the licensee of a broadcasting distribution undertaking (“BDUs”) or a television programming undertaking (such as a conventional television station, network or pay or specialty undertaking service), or the acquisition of a voting interest above certain specified thresholds.

 

Diversity of Voices

 

The CRTC’s Broadcasting Public Notice CRTC 2008-4, entitled “Diversity of Voices,” sets forth the CRTC’s policies with respect to cross-media ownership; the common ownership of television services, including pay and specialty services; the common ownership of BDUs; and the common ownership of over-the-air television and radio undertakings. Pursuant to these policies, the CRTC will generally permit ownership by one person of no more than one conventional television station in one language in a given market. The CRTC, as a general rule, will not approve applications for a change in the effective control of broadcasting undertakings that would result in the ownership or control, by one person, of a local radio station, a local television station and a local newspaper serving the same market. The CRTC, as a general rule, will not approve applications for a change in effective control that would result in the control, by one person, of a dominant position in the delivery of television services to Canadians that would impact on the diversity of programming available to television audiences. In terms of BDUs, the CRTC, as a general rule, will not approve applications for a change in the effective control of BDUs in a market that would result in one person being in a position to effectively control the delivery of programming services in that market. The CRTC is not prepared to allow one person to control all BDUs in any given market.

 

Jurisdiction Over Canadian Broadcast Undertakings

 

Our cable distribution undertakings are subject to the Broadcasting Act and regulations made under the Broadcasting Act that empower the CRTC, subject to directions from the Governor in Council, to regulate and supervise all aspects of the Canadian broadcasting system in order to implement the policy set out in the Broadcasting Act. Certain of our undertakings are also subject to the Radiocommunication Act, which empowers ISED to establish and administer the technical standards that networks and transmitters must comply with, namely, maintaining the technical quality of signals.

 

The CRTC has, among other things, the power under the Broadcasting Act and regulations promulgated thereunder to issue, subject to appropriate conditions, amend, renew, suspend and revoke broadcasting licenses, approve certain changes in corporate ownership and control, and establish and oversee compliance with regulations and policies concerning broadcasting, including various programming and distribution requirements, subject to certain directions from the Federal Cabinet.

 

Broadcasting License Fees

 

Programming and BDU licensees are subject to annual license fees payable to the CRTC. The license fees consist of two separate fees. One fee allocates the CRTC’s regulatory costs for the year to licensees based on a licensee’s proportion of the gross revenue derived during the year from the licensed activities of all licensees whose gross revenues exceed specific exemption levels (Part I fee). The other fee, also called the Part II license fee, is to be paid on a pro rata basis by all broadcasting undertakings with licensed activity that exceeds $1,500,000. The total annual amount to be

 

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assessed by the CRTC is the lower of: (i) $100,000,000, and (ii) 1.365% multiplied by the aggregate fee revenues for the return year terminating during the previous calendar year of all licensees whose fee revenues exceed the applicable exemption levels, less the aggregate exemption level for all those licensees for that return year.

 

Canadian Broadcasting Distribution (Cable Television)

 

Licensing of Canadian Broadcasting Distribution Undertakings

 

A cable distribution undertaking, such as ours, distributes broadcasting services to customers predominantly over closed transmission paths. A license to operate a cable distribution undertaking gives the cable television operator the right to distribute television programming services in its licensed service area. Broadcasting licenses may be issued for periods not exceeding seven years and are usually renewed, except in particular circumstances or in cases of a serious breach of the conditions attached to the license or the regulations of the CRTC. The CRTC is required to hold a public hearing in connection with the issuance, suspension or revocation of a license. We operate 53 cable systems pursuant either to the issuance of a license or of an order that exempts certain network operations from the obligation to hold a license.

 

Cable systems with 20,000 customers or fewer and operating their own local headend are exempted from the obligation to hold a license pursuant to exemption orders issued by the CRTC on February 15, 2010 (Broadcasting Order CRTC 2009-544). These cable systems are required to comply with a number of programming carriage requirements set out in the exemption order and comply with the Canadian ownership and control requirements in the Direction to the CRTC. We remain with only 8 cable distribution licenses.

 

In order to conduct our business, we must maintain our broadcasting distribution undertaking licenses in good standing. Failure to meet the terms of our licenses may result in their short-term renewal, suspension, revocation or non-renewal. We have never failed to obtain a license renewal for any cable system.

 

Distribution of Canadian Content

 

The Broadcasting Distribution Regulations issued by the CRTC pursuant to the Broadcasting Act mandate the types of Canadian and non-Canadian programming services that may be distributed by BDUs, including cable television systems. For example, local television stations are subject to “must carry” rules which require terrestrial distributors, such as cable and MMDS operators, to carry these signals and, in some instances, those of regional television stations as part of their basic service. The guaranteed carriage enjoyed by local television broadcasters under the “must carry” rules is designed to ensure that the signals of local broadcasters reach cable households. Furthermore, cable operators, DTH operators and MMDS operators must offer their customers more Canadian programming than non-Canadian programming services. In summary, each cable television system is required to distribute all of the Canadian programming services that the CRTC has determined are appropriate for the market it serves, which includes local Canadian stations, services designated by the CRTC under section 9(1)(h) of the Broadcasting Act for mandatory distribution on the basic service, educational services and, if offered, the community channel, the provincial legislature and  the U.S. 4+1 signals.

 

Broadcasting Distribution Regulations

 

The Broadcasting Distribution Regulations promote competition among BDUs and the development of new technologies for the distribution of such services while ensuring that quality Canadian programs are broadcast. The Broadcasting Distribution Regulations introduced important new rules, including the following:

 

·                  Competition and Carriage Rules. The Broadcasting Distribution Regulations provide equitable opportunities for all distributors of broadcasting services and prohibit a distributor from giving an undue preference to any person, including itself, or subjecting any person to an undue disadvantage. This gives the CRTC the ability to address complaints of anti-competitive behaviour on the part of certain distributors. Signal carriage and substitution requirements are imposed on all cable television systems.

 

·                  Contribution to local expression, Canadian programming and community television. All distributors, except systems with fewer than 2,000 customers, are required to contribute at least 5% of their gross annual

 

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broadcast revenues to the creation and presentation of Canadian programming including community programming.

 

·                  Inside Wiring Rules. The CRTC determined that the inside wiring portion of cable networks creates a bottleneck facility that could affect competition if open access is not provided to other distributors. Incumbent cable companies may retain the ownership of the inside wiring but must allow usage by competitive undertakings to which the cable company may charge a just and reasonable fee for the use of the inside wire. Moreover, the CRTC found that it was appropriate to amend the Broadcasting Distribution Regulations to permit access by subscribers and competing BDUs to inside wire in commercial and institutional properties. Therefore, the CRTC directed all licensees to negotiate appropriate terms and conditions, including a just and reasonable rate, for the use by competitors of the inside wire such licensees own in commercial and institutional properties.

 

Rates

 

Our revenue related to cable television is derived mainly from (a) monthly subscription fees for basic cable service; (b) fees for premium services such as specialty services, pay-television, pay-per-view television and VOD; and (c) installation and additional outlets charges.

 

Pursuant to Broadcasting Regulatory Policy CRTC 2015-96, as of March 1, 2016, the CRTC regulates the fees charged by cable or non-cable BDUs for the basic service. The price of the entry-level basic service offering will be limited to $25 or less per month.

 

Vertical Integration

 

In September 2011, the CRTC released Broadcasting Regulatory Policy CRTC 2011-601 (the “Policy”) setting out its decisions on the regulatory framework for vertical integration. Vertical integration refers to the ownership or control by one entity of both programming services, such as conventional television stations or pay and specialty services, as well as distribution services, such as cable systems or DTH satellite services. The Policy: (i) prohibits companies from offering television programs on an exclusive basis to their mobile or Internet subscribers in a manner that they are dependent on the subscription to a specific mobile or retail Internet access service. Any program broadcast on television, including hockey games and other live events, must be made available to competitors under fair and reasonable terms; (ii) allows companies to offer exclusive programming to their Internet or mobile customers provided that it is produced specifically for an Internet portal or a mobile device; and (iii) adopts a code of conduct to prevent anti-competitive behaviour and ensure all distributors, broadcasters and online programming services negotiate in good faith. In Broadcasting Regulatory Policy CRTC 2015-438, the code of conduct was replaced by the Wholesale Code.

 

Hybrid VOD License

 

In Broadcasting Regulatory Policy CRTC 2015-86 issued on March 12, 2015, the CRTC considered appropriate to authorize a third category of VOD services based on a hybrid regulatory approach. In Broadcasting Order CRTC 2015-356, the CRTC has authorized these hybrid services to operate with the same flexibility as those services operating under the Digital Media Exemption Order (DMEO), provided that the service is delivered and accessed over the Internet without authentication to a BDU or mobile subscription. Club illico qualifies as a hybrid VOD service.

 

The hybrid VOD services benefit from the following incentives:

 

·                  the ability to offer exclusive programming in the same manner as services operating under the DMEO; and

 

·                  the ability to offer their service on a closed BDU network in the same manner as traditional VOD services without the regulatory requirements relating to financial contributions to and shelf space for Canadian programming that would normally be imposed on those traditional VOD services.

 

New Media Broadcasting Undertakings

 

Since 2009, the description of a “new media broadcasting undertaking” encompasses all Internet-based and mobile point-to-point broadcasting services, (Broadcasting Order CRTC 2009-660). In 2012, the Supreme Court of

 

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Canada upheld the Federal Court of Appeal’s decision to the effect that Internet access providers play a “content-neutral role” in the transmission of data and do not carry on broadcasting activities.

 

On July 26, 2012, the CRTC amended the Exemption Order for digital media broadcasting undertakings, Broadcasting Order CRTC 2012-409. These amendments implement determinations made by the CRTC in regulatory framework relating to vertical integration (Broadcasting Regulatory Policy CRTC 2011-601). As such, the CRTC implemented the following:

 

·                  A “no head start” rule, where the CRTC expects that digital media broadcasting undertakings that intend to provide exclusive access to television programming in a manner that restricts access based on a consumer’s specific mobile or retail Internet access service will provide other digital media broadcasting undertakings with appropriate notice in order to allow these undertakings to exercise their options;

 

·                  A provision to preclude undertakings operating under that exemption order from providing exclusive access to programming designed primarily for conventional television, specialty, pay or VOD services in situations where such access to the programming was restricted on the basis of a consumer’s specific mobile or retail Internet access service;

 

·                  A standstill rule whereby an undertaking that was in a dispute with another undertaking concerning the terms of carriage of programming or any right or obligation under the Broadcasting Act would be required to continue providing or distributing the service that was subject to the dispute on the same terms and conditions that prevailed before the dispute; and

 

·                  A dispute resolution mechanism.

 

Copyrights Royalties Payment Obligations

 

We have the obligation to pay copyright royalties set by Tariffs of the Copyright Board of Canada (the “Copyright Board”). The Copyright Board establishes the royalties to be paid for the use of certain copyright tariff royalties that Canadian broadcasting undertakings, including cable, television and specialty services, pay to copyright societies (being the organization that administers the rights of several copyright owner). Tariffs certified by the Copyright Board are generally applicable until a public process is held and a decision of the Copyright Board is rendered for a renewed tariff. Renewed tariffs are often applicable retroactively.

 

The Copyright Act (Canada) (the “Copyright Act”) provides for the payment of various royalties, including in respect of the communication to the public of musical works (either through traditional cable services or over the Internet), the retransmission of distant television and radio signals. Distant signal is defined for that purpose in regulations adopted under the authority of the Copyright Act.

 

The Government of Canada may from time to time make amendments to the Copyright Act to implement Canada’s international treaty obligations and for other purposes. Any such amendments could result in our broadcasting undertakings being required to pay additional tariff royalties.

 

ISP Liability

 

In 1996, SOCAN proposed a tariff to be applied against ISPs, in respect of composers’/publishers’ rights in musical works communicated over the Internet to ISPs’ customers. SOCAN’s proposed tariff was challenged by a number of industry groups and companies. In 1999, the Copyright Board decided that ISPs should not be liable for the communication of musical works by their customers, although they might be liable if they themselves operated a musical website. In June 2004, the Supreme Court of Canada upheld this portion of the decision of the Copyright Board and determined that ISPs do not incur liability for copyright content when they engage in normal intermediary activities, including web hosting for third parties and caching. As a consequence, ISPs may, however, be found liable if their conduct leads to the inference that they have authorized a copyright violation. At the end of 2012, amendments to the Copyright Act received royal assent. These amendments clarify ISPs’ liability with respect to acts other than communication to the public by telecommunication, such as reproductions, implements “safe harbours” for the benefit of

 

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ISPs, and further put in place a “notice and notice” process to be followed by ISPs, meaning that copyright infringement notices must now be sent to the Internet end-users by ISPs.

 

Canadian Telecommunications Services

 

Jurisdiction

 

The provision of telecommunications services in Canada is regulated by the CRTC pursuant to the Telecommunications Act. The Telecommunications Act provides for the regulation of facilities-based telecommunications common carriers under federal jurisdiction. With certain exceptions, companies that own or operate transmission facilities in Canada that are used to offer telecommunications services to the public for compensation are deemed “telecommunications common carriers” under the Telecommunications Act administered by the CRTC and are subject to regulation. Cable operators offering telecommunications services are deemed “Broadcast Carriers.”

 

In the Canadian telecommunications market, we operate as a CLEC and a Broadcast Carrier. We also operate our own 4G mobile wireless network and offer services over this network as a Wireless Service Provider (“WSP”).

 

The issuance of licenses for the use of radiofrequency spectrum in Canada is administered by ISED under the Radiocommunication Act. Use of spectrum is governed by conditions of license which address such matters as license term, transferability and divisibility, technical compliance, lawful interception, research and development requirements, and requirements related to antenna site sharing and mandatory roaming.

 

Our AWS-1 licenses were issued on December 23, 2008, for a term of 10 years. The conditions of AWS-1 license renewal were the subject of a public consultation process that concluded on August 14, 2017. A separate public consultation process is expected to be initiated shortly regarding the licence fees to be paid during a renewal term. Decisions from both these processes are expected prior to the expiry of our initial 10-year licences.

 

Our 700 MHz licenses were issued on April 3, 2014, for a term of 20 years. At the end of this term, we will have a high expectation that new licenses will be issued for a subsequent term through a renewal process unless a breach of license condition has occurred, a fundamental reallocation of spectrum to a new service is required, or an overriding policy need arises. The process for issuing licenses after this term and any issues relating to renewal, including the terms and conditions of the new licenses, will be determined by ISED following a public consultation.

 

Our AWS-3 licenses were issued on April 21, 2015, for a term of 20 years. License renewal at the end of this term will be governed by conditions identical to those just described for our 700 MHz licenses.

 

Our 2500 MHz licences were issued on June 24, 2015, for a term of 20 years.  License renewal at the end of this term will be governed by conditions identical to those just described for our 700 MHz and AWS-3 licenses.

 

Application of Canadian Telecommunications Regulation

 

In a series of decisions, the CRTC has determined that the carriage of “non-programming” services by a cable company results in that company being regulated as a carrier under the Telecommunications Act. This applies to a company serving its own customers, or allowing a third party to use its distribution network to provide non-programming services to customers, such as providing access to cable Internet services.

 

In addition, the CRTC regulates the provision of telephony services in Canada.

 

Elements of the CRTC’s local telecommunications regulatory framework to which we are subject include: interconnection standards and inter-carrier compensation arrangements; the mandatory provision of equal access (i.e. customer choice of long distance provider); standards for the provision of 911 service, message relay service and certain privacy features; the obligation not to prevent other local exchange carriers from accessing end-users on a timely basis under reasonable terms and conditions in multi dwelling units where we provide service; and the payment of contribution on VoIP revenues for the purposes of the revenue-based contribution regime established by the CRTC to subsidize residential telephone services in rural and remote parts of Canada.

 

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As a CLEC, we are not subject to retail price regulation. ILECs remain subject to retail price regulation in those geographic areas where facilities-based competition is insufficient to protect the interests of consumers. Our ILEC competitors have requested and been granted forbearance from regulation of local exchange services in the vast majority of residential markets in which we compete, as well as in a large number of business markets, including all of the largest metropolitan markets in the Province of Québec.

 

In a decision issued on December 21, 2016, the CRTC established a new universal service objective under which all Canadians, in urban areas as well as rural and remote areas, are to have access to voice services and broadband Internet access services, on both fixed and mobile wireless networks. To help achieve this universal service objective, the CRTC will begin to shift the focus of its regulatory frameworks from wireline voice services to broadband Internet access services. Most notably, the CRTC will phase out the existing revenue-based contribution regime that subsidizes local telephone service and replace it with a new regime that will subsidize broadband Internet access services in underserved areas. The new regime will ultimately distribute funds of approximately $200 million per year, compared to approximately $100 million per year under the existing regime. The contribution base for the new regime will also be broader than that of the existing regime, and will include retail Internet revenues for the first time. As a result of these changes, we will incur increased revenue-based contribution payments in future years. We will also be eligible to apply for subsidies to help finance broadband Internet expansion projects in underserved areas.

 

Right to Access to Telecommunications and Support Structures

 

The CRTC has concluded that some provisions of the Telecommunications Act may be characterized as encouraging joint use of existing support structures of telephone utilities to facilitate efficient deployment of cable distribution undertakings by Canadian carriers. We access these support structures in exchange for a tariff that is regulated by the CRTC. If it were not possible to agree on the use or conditions of access with a support structure owner, we could apply to the CRTC for a right of access to a supporting structure of a telephone utility. The Supreme Court of Canada, however, held on May 16, 2003, that the CRTC does not have jurisdiction under the Telecommunications Act to establish the terms and conditions of access to the support structures of hydro-electricity utilities. Terms of access to the support structures of hydro-electricity utilities must therefore be negotiated with those utilities.

 

We have entered into comprehensive support structure access agreements with all of the major hydro-electric companies and all of the major telecommunications companies in its service territory.

 

Right to Access to Municipal Rights-of-Way

 

Pursuant to sections 42, 43 and 44 of the Telecommunications Act, the CRTC possesses certain construction and expropriation powers related to the installation, operation and maintenance of telecommunication facilities. In the past, most notably in Telecom Decision CRTC 2001-23, the CRTC has used these powers to grant Canadian carriers access to municipal rights-of-way under terms and conditions set out in a municipal access agreement.

 

We have outstanding disputes with several Québec municipalities related to the use of municipal rights-of-way. Should these disputes not be resolved to the mutual satisfaction of the parties, and should they be referred to the CRTC for resolution, the outcome of which could have a material impact on our costs for municipal access for our wireline facilities.

 

Access by Third Parties to Cable Networks

 

In Canada, access to the Internet is a telecommunications service. While Internet access services are not regulated on a retail (price and terms of service) basis, Internet access for third-party ISPs is mandated and tariffed according to conditions approved by the CRTC for cable operators.

 

The largest cable operators in Canada, including Videotron, have been required by the CRTC to provide third-party ISPs with access to their cable systems at mandated cost-based rates. At the same time we offer any new retail Internet service speed, we are required to file proposed revisions to our third party Internet access (or “TPIA”) tariff to include this new speed offering. TPIA tariff items have been filed and approved for all Videotron Internet service speeds. Several third party ISPs are interconnected to our cable network and are thereby providing retail Internet access services.

 

The CRTC also requires the large cable carriers, such as us, to allow third party ISPs to provide telephony and networking (LAS/VPN) applications services in addition to retail Internet access services.

 

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In a series of decisions since 2015, the CRTC has reemphasized the importance it accords to mandated wholesale access arrangements as a driver of competition in the retail Internet access market. Most significantly, the CRTC has ordered all of the major telephone and cable companies, including Videotron, to provide new disaggregated wholesale access services, which are to replace existing aggregated wholesale access services after a transition period. These disaggregated services involve third-party ISPs provisioning their own regional transport services. They also include mandated access to high-speed services provided over fibre-access facilities, including the fibre-access facilities of the large incumbent telephone companies. A tariff proceeding is under way to set the rates for these new disaggregated wholesale services.

 

In parallel, on October 6, 2016, the CRTC ordered a significant interim reduction to the aggregated wholesale high-speed access service tariffs of the large cable carriers and telephone companies, pending approval of revised final rates. The interim rate reduction took effect immediately. A tariff proceeding is ongoing to determine the revised final aggregated service rates. As part of this proceeding, the CRTC will assess the extent to which, if at all, retroactivity will apply to these revised final rates.

 

Rulings in the two abovementioned tariff proceedings are expected in the first half of 2018. As a result of these rulings, we may experience increased competition for retail cable Internet and telephony customers. In addition, because our third-party Internet access rates are regulated by the CRTC, we could be limited in our ability to recover our costs associated with providing wholesale access.

 

Regulatory Framework for Mobile Wireless Services

 

The CRTC also regulates mobile wireless services under the Telecommunications Act. On August 12, 1994, the CRTC released a decision forbearing from the exercise of most of its powers under the Telecommunications Act as they relate to mobile wireless service. However, the CRTC did maintain its ability to require conditions governing customer confidential information and to place other general conditions on the provision of mobile wireless service. Since 1994, the CRTC has exercised this power, for example, to mandate wireless number portability, and to require all WSPs to upgrade their networks to more precisely determine the location of a person using a mobile phone to call 911.

 

The Wireless Code was published on June 3, 2013 and came into force on December 2, 2013. It includes, among other things, a limit on early cancellation fees to ensure customers can take advantage of competitive offers at least every two years, as well as measures requiring service providers to unlock wireless devices, to offer a trial period for wireless contracts, and to set default caps on data overage charges and data roaming charges. On June 15, 2017, the CRTC published a series of revisions to the Wireless Code. These revisions include, among other things, new rules ensuring customers will be provided with unlocked devices, giving families more control over data overages, setting minimum usage limits for the trial period and clarifying that data is a key contract term that cannot be changed during the commitment period without the customer’s consent. We have complied with these revisions as required by the December 1, 2017 deadline.

 

On July 31, 2014, after an investigation that confirmed instances of unjust discrimination and undue preference by one incumbent wireless carrier, the CRTC took action to prohibit exclusivity provisions in wholesale mobile wireless roaming agreements between Canadian carriers for service in Canada. Subsequently, on May 5, 2015, after a broader follow-up proceeding, the CRTC issued a comprehensive policy framework for the provision of wholesale wireless services, including roaming, tower sharing and mobile virtual network operator (MVNO) access services. Most notably, the CRTC decided that each of the three national wireless incumbent carriers would be obliged to provide wholesale roaming services to regional and new entrant carriers at cost-based rates. On March 22, 2018, the CRTC ruled on the final cost-based rates, declaring them retroactive to May 5, 2015. These final rates are substantially below the interim rates that had been in effect since May 5, 2015.

 

On December 17, 2014, the Government of Canada’s second omnibus budget implementation bill for 2014 (C-43) received Royal Assent. This bill amends both the Telecommunications Act and the Radiocommunication Act to give the CRTC and ISED the option to impose monetary penalties on companies that violate established rules such as the Wireless Code and those related to the deployment of spectrum, services to rural areas and tower sharing.

 

In its May 5, 2015 policy framework for the provision of wholesale wireless services, the CRTC elected not to order cost-based rates for either tower sharing or MVNO access services. In addition, the CRTC elected to exclude non-

 

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carrier WiFi networks from the definition of “home network” for the purpose of determining who may access the wholesale roaming service tariffs of the national wireless incumbent carriers. This latter measure had the effect of denying access to these tariffs by Wi-Fi first service providers. Since then, on July 20, 2017, in response to a directive received from the Governor in Council, the CRTC initiated a proceeding to review potential terms of access by Wi-Fi first service providers (and possibly other types of service providers) to the incumbents’ wholesale roaming service tariffs. On March 22, 2018, the CRTC ruled that no changes would be made to the terms of access by Wi-Fi first service providers, yet initiated a new proceeding to address an identified gap in the market for lower-cost data-only plans for consumers. This proceeding is scheduled to be concluded in June 2018 and may result in the imposition of a new regulatory obligation on the three national incumbent carriers to offer lower-cost data-only plans. A comprehensive proceeding to review the wholesale wireless policy framework, including the MVNO access framework, is also scheduled to commence sometime before April 2019.  The result of either of these proceedings could have an impact on the competitive environment within which we operate.

 

On April 20, 2017, the CRTC published a new policy framework for assessing the differential pricing practices of Internet service providers. With very narrow exceptions, this framework prohibits the offering of zero-rated services by Internet service providers in Canada, including mobile wireless data service providers. Simultaneously with the publication of this new framework, and as a first application thereof, the CRTC ordered us to cease providing our Unlimited Music mobile wireless offering. We have complied with this order. Going forward, the new framework will impact our flexibility in the design and marketing of its wireless and wireline data services.

 

Municipal Siting Processes for Wireless Antenna Systems

 

On February 28, 2013, the Canadian Wireless Telecommunications Association, of which we are a member, and the Federation of Canadian Municipalities signed a joint protocol on the siting process for wireless antenna systems. The protocol establishes a more comprehensive notification and consultation process than current regulations, and emphasizes the need for meaningful pre-consultation to ensure local land use priorities and sensitivities are fully reflected in the location and design of new antenna systems. Telecommunications carriers have agreed for the first time to notify municipalities of all antennas being installed before their construction, regardless of height, and to undertake full public consultation for towers under 15 meters - whenever deemed necessary by the municipality.

 

On June 26, 2014, the predecessor to ISED announced changes to the policy guiding the installation of new antenna towers, most notably to require companies to consult communities on all commercial tower installations regardless of height and to ensure residents are well informed of upcoming consultations. These changes are largely consistent with the joint protocol cited above.

 

D-           Organizational Structure

 

We are a wholly-owned subsidiary of Quebecor Media. Quebecor Media is a 81.53% owned subsidiary of Quebecor. The remaining 18.47% of Quebecor Media is owned by a subsidiary of CDPQ, one of Canada’s largest pension fund managers. The following chart illustrates our corporate structure as of March 22, 2018, including our significant subsidiaries, together with the jurisdiction of incorporation or organization of each entity. In each case, unless otherwise indicated, we own a 100% equity and voting interest in our subsidiaries.

 

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E-           Property, Plants and Equipment

 

Our corporate offices are located in leased space at 612 St-Jacques Street, Montréal, Québec, Canada H3C 4M8 (187,592 square feet) in the same building as Quebecor Media’s head office.

 

We also own or lease several buildings in Montréal and in Québec City, as indicated in the following table which presents, for each building, the address, the leased or owned status of the property, the primary use of the main facilities and the approximate square footage. In addition to the buildings indicated in the following table, we own or lease a significant number of smaller locations for signal reception sites, customer service and business offices.

 

Address

 

Owned/Leased Property

 

Use of Property

 

Floor Space
Occupied
(approximate sq. ft.)

 

 

 

 

 

 

 

 

 

Montréal, Québec
2155 Pie IX Street

 

Owned property

 

Office and Technical spaces, Headend

 

128,000

 

 

 

 

 

 

 

 

 

Montréal, Québec
150 Beaubien Street

 

Owned property

 

Office and Technical spaces, Headend

 

72,000

 

 

 

 

 

 

 

 

 

Montréal, Québec
800 de la Gauchetière Street

 

Leased property

 

Office space

 

52,000

 

 

 

 

 

 

 

 

 

Montréal, Québec
4545 Frontenac Street

 

Leased property

 

Office space, Warehouse, Headend

 

100,700

 

 

 

 

 

 

 

 

 

Montréal, Québec
888 De Maisonneuve Street

 

Leased property

 

Office space

 

49,000

 

 

 

 

 

 

 

 

 

Québec City, Québec
2200 Jean-Perrin Street

 

Owned property

 

Regional Headend for the Québec City region and Office space

 

40,000

 

 

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Address

 

Owned/Leased Property

 

Use of Property

 

Floor Space
Occupied
(approximate sq. ft.)

 

 

 

 

 

 

 

 

 

Québec City, Québec
2675 Parc Technologique Blvd.

 

Owned property

 

Data Centre and Office space

 

91,000

 

 

 

 

 

 

 

 

 

Montréal, Québec
2900 Marie-Curie Avenue

 

Owned property

 

Data Centre and Office space

 

46,000

 

 

Liens and Charges

 

Our senior secured credit facilities are secured by charges over all of our assets and those of most of our subsidiaries.

 

Intellectual Property

 

We use a number of trademarks for our products and services. Many of these trademarks are registered by us in the appropriate jurisdictions. In addition, we have legal rights in the unregistered marks arising from their use. We have taken affirmative legal steps to protect our trademarks and we believe our trademarks are adequately protected.

 

Environment

 

Our operations are subject to Canadian, provincial and municipal laws and regulations concerning, among other things, emissions to the air, water and sewer discharge, handling and disposal of hazardous materials, the recycling of waste, the soil remediation of contaminated sites, or otherwise relating to the protection of the environment. Laws and regulations relating to workplace safety and worker health, which among other things, regulate employee exposure to hazardous substances in the workplace, also govern our operations.

 

Compliance with these laws has not had, and management does not expect it to have, a material effect upon our capital expenditures, net income or competitive position. Environmental laws and regulations and the interpretation of such laws and regulations, however, have changed rapidly in recent years and may continue to do so in the future. We have monitored the changes closely and have modified our practices where necessary or appropriate.

 

Our past and current properties, as well as areas surrounding those properties, particularly those in areas of long-term industrial use, may have had historic uses, or may have current uses, in the case of surrounding properties, which may affect our properties and require further study or remedial measures.

 

We are not currently conducting or planning any material study or remedial measure. Furthermore, we cannot provide assurance that all environmental liabilities have been determined, that any prior owner of our properties did not create a material environmental condition not known to us, that a material environmental condition does not otherwise exist as to any such property, or that expenditure will not be required to deal with known or unknown contamination.

 

ITEM 4A — UNRESOLVED STAFF COMMENTS

 

None.

 

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FINANCIAL REVIEW

 

ITEM 5 - OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

The following Management Discussion and Analysis (“MD&A”) provides information concerning the operating results and financial condition of Videotron Ltd (“Videotron”, the “Corporation”, “we” or “our”). This discussion should be read in conjunction with our consolidated financial statements and accompanying notes. The Corporation’s consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board.

 

All amounts are in Canadian dollars, unless otherwise indicated. This discussion contains forward-looking statements, which are subject to a variety of factors that could cause actual results to differ materially from those contemplated by these statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed under “Cautionary Statement Regarding Forward-Looking Statements” and in “Item 3. Key Information — Risk Factors”.

 

Due to rounding, minor differences may exist between amounts shown in this MD&A and the consolidated financial statements.

 

TREND INFORMATION

 

Competition continues to be intense in the cable and alternative multichannel broadcast distribution industry and in the mobile telephony market. Moreover, the significant subscriber growth recorded in past years is not necessarily indicative of future growth due to penetration rates currently reached.

 

The Corporation requires substantial capital for the upgrade, expansion and maintenance of its wireline and mobile networks, the launch and expansion of new and additional services to support growth in its customer base and demand for increased bandwidth capacity and other services. The Corporation expects that additional capital expenditures will be required in the short and medium term in order to expand and maintain systems and services, including expenditures relating to the cost of its mobile services’ infrastructure, maintenance and enhancement, as well as cost relating to advancements in Internet access and TV everywhere, including higher capacity, lower latency and higher speeds, requiring IP technology, and the introduction of new technologies like virtual reality, Internet of Things (IoT), etc.

 

Moreover, the demand for wireless data services has grown significantly over time and it is projected that it will continue to grow in the future. The anticipated levels of data traffic will represent a growing challenge to the current mobile network’s ability to support this traffic. The Corporation may have to acquire additional spectrum in the future, if available.

 

HIGHLIGHTS SINCE DECEMBER 31, 2016

 

·                                In 2017, revenues and adjusted operating income grew 4.3% and 5.9%, respectively, year over year.

 

·                                Net growth of 115,700 revenue-generating units (“RGUs”) in 2017 (representing the total of our cable television, cable Internet and Club illico subscribers as well as cable and mobile telephony lines), compared with 117,900 net RGUs added in 2016. Total RGUs were 5,881,100 as of December 31, 2017.

 

·                                We activated 130,100 net new lines on our mobile telephony network, bringing our total mobile customer base to 1,024,000 lines.

 

·                                Videotron received many honourable distinctions in 2017:

 

·                  For the twelfth consecutive year, according to market research firm Léger, Videotron was ranked Québec’s most admired company in the telecommunication industry.

 

·                  For the sixth time, according to a Léger survey published in Les Affaires, Videotron ranks as the best telecommunications retailers in Québec.

 

·                  According to an Ipsos-Infopresse study, Videotron ranks as the most forward-thinking and engaging Québec brand for 2017.

 

·                  According to a Commission for Complaints for Telecom-television Services (CCTS) report, Videotron was the only major telecom provider to generate fewer complaints compared to previous period.

 

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·                                On November 15, 2017, we launched the Club illico mobile app, which was temporarily available with any new mobile phone plan. As of December 31, 2017, 33,000 customers had downloaded this application.

 

·                                On November 9, 2017, 4Degrees obtained the coveted Tier III Certification Design and Facilities by the Uptime Institute, which provides assurance of fail proof service at all times. 4Degrees is now one of the few players in Canada to have acquired this superior seal of quality for both the design and construction of its facilities.

 

·                                On November 8, 2017, Videotron celebrated the subscription of its millionth mobile customer, seven years after it launched its facilitated-based service.

 

·                                According to new data released in October 2017 from CEFRIO, a research and innovation organization specialized in the use and adoption of digital technology, Club illico had a penetration rate of 19% of households with Internet access, an increase of 4 points from last year. This makes Club illico the largest Canadian-based over-the-top video provider in the Province of Quebec.

 

·                                On August 29, 2017, Videotron announced an agreement with multinational media and technology company, Comcast Corporation. This strategic partnership is aimed at developing and delivering an IPTV service based on Comcast’s award-winning “XFINITY X1” platform that will deliver a unique user experience for Videotron customers.

 

·                                On July 24, 2017, the Corporation sold seven 2500 MHz and 700 MHz wireless spectrum licences outside Quebec to Shaw Communications inc. for a cash consideration of $430.0 million. The sale resulted in a gain on disposal of
$243.1 million.

 

·                                On June 20, 2017, the Corporation sold its AWS spectrum licence in the Toronto region to Rogers Communications Inc. for a cash consideration of $184.2 million, pursuant to the transfer option held since 2013. The sale resulted in a gain on disposal of $87.8 million.

 

·                                On May 4, 2017, the Corporation transferred all then existing commitments under its unsecured revolving credit facility to its secured revolving credit facility, hence increasing its secured facility from $630.0 million to $965.0 million and terminating its unsecured facility.

 

·                                On May 1, 2017, the Corporation redeemed $125.0 million aggregate principal amount of its outstanding 6.875% Senior Notes issued on July 5, 2011 and maturing on July 15, 2021 at a redemption price of 103.438% of their principal amount, in accordance with a notice issued on March 31, 2017. The repurchase followed the redemption on January 5, 2017 of a first $175.0 million tranche of the Notes.

 

·                                On April 13, 2017, the Corporation issued US$600.0 million aggregate principal amount of 5.125% Senior Notes maturing on April 15, 2027, for net proceeds of $794.5 million, net of financing fees of $9.9 million.

 

·                                On February 9, 2017, Videotron Business introduced Guaranteed Internet, a tested solution that assures no downtime by twinning the performance and reliability of our Fibre Hybrid and LTE networks.

 

·                                On January 17, 2017, 4Degrees obtained ISO 27001 certification, a highly respected international standard recognized by experts over the world. This certification ensures that 4Degrees’ customers will benefit from a data security program which includes major components such as data security, physical security and continuous uptime plan.

 

·                                On January 12, 2017, we announced an agreement between 4Degrees and Megaport (USA) Inc., a global leader in secure interconnectivity. This partnership allows 4Degrees’ customers to link directly to the world’s largest providers of public cloud services. Companies may benefit from fast, secure and redundant access to business applications from Microsoft Corporation (Azure, Office 365, Exchange), Amazon Web Services, Inc. and Google.

 

NON-IFRS FINANCIAL MEASURES

 

The non-IFRS financial measures used by the Corporation to assess its financial performance, such as adjusted operating income and adjusted operating income margin are not calculated in accordance with, or recognized by IFRS. The Corporation’s method of calculating these non-IFRS financial measures may differ from methods used by other companies and, as a result, the non-IFRS financial measures presented in this document may not be comparable to other similarly titled measures disclosed by other companies.

 

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Adjusted Operating Income

 

The Corporation defines adjusted operating income, as reconciled to net income under IFRS, as net income before depreciation and amortization, financial expenses, loss on valuation and translation of financial instruments, loss on debt refinancing, restructuring of operations, litigation and others items, gain on sale of spectrum licences and income tax expense. Adjusted operating income as defined above is not a measure of results that is consistent with IFRS. It is not intended to be regarded as an alternative to other financial operating performance measures or to the consolidated statement of cash flows as a measure of liquidity and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. Our management and Board of Directors use this measure in evaluating our consolidated results. As such, this measure eliminates the effect of significant levels of non-cash charges related to the depreciation of tangible assets and amortization of certain intangible assets and is unaffected by the capital structure or investment activities of the Corporation. Adjusted operating income is also relevant because it is a significant component of our annual incentive compensation programs. A limitation of this measure, however, is that it does not reflect the periodic costs of tangible and intangible assets used in generating revenues. Our definition of adjusted operating income may not be the same as similarly titled measures reported by other companies.

 

Adjusted Operating Income Margin

 

The Corporation defines adjusted operating income margin as the adjusted operating income expressed as a percentage of revenues under IFRS.

 

KEY PERFORMANCE INDICATOR

 

Average Monthly Revenue per User

 

ARPU is an industry metric that the Corporation uses to measure its monthly cable television, Internet access, cable and mobile telephony and Club illico revenues per average basic cable customer. ARPU is not a measurement that is calculated in accordance with IFRS and the Corporation’s definition and calculation of ARPU may not be the same as identically titled measurements reported by other companies. The Corporation calculates ARPU by dividing its combined cable television, Internet access, cable and mobile telephony and Club illico services revenues by the average number of basic cable customers during the applicable period, and then dividing the resulting amount by the number of months in the applicable period.

 

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Table 1 below presents a reconciliation of adjusted operating income to net income as disclosed in our consolidated financial statements. The consolidated income statement data for the three-month periods ended December 31, 2017 and 2016 is derived from the unaudited consolidated statements and are not included in this annual report.

 

Table 1

 

Reconciliation of the adjusted operating income measure used in this report to the net income measure used in the consolidated financial statements
(in millions of dollars)

 

 

 

Three-month period ended December 31

 

Twelve-month period ended December 31

 

 

 

2017

 

2016

 

2017

 

2016

 

2015

 

Adjusted operating income

 

$

388.4

 

$

363.8

 

$

1,532.5

 

$

1,447.0

 

$

1,382.4

 

Depreciation and amortization

 

(180.0

)

(151.7

)

(654.6

)

(596.1

)

(625.4

)

Financial expenses

 

(37.8

)

(41.0

)

(149.2

)

(161.5

)

(167.4

)

Loss on valuation and translation of financial instruments

 

(0.5

)

(1.7

)

(3.1

)

(2.1

)

(0.5

)

Loss on debt refinancing

 

 

(7.3

)

(5.2

)

(7.3

)

(12.2

)

Restructuring of operations, litigation and other items

 

(6.7

)

(4.6

)

(5.9

)

(15.9

)

129.7

 

Gain on sale of spectrum licences

 

 

 

330.9

 

 

 

Income tax expense

 

(34.3

)

(29.1

)

(131.2

)

(116.9

)

(120.7

)

Net income

 

$

129.1

 

$

128.4

 

$

914.2

 

$

547.2

 

$

585.9

 

 

Analysis of Consolidated Results of Videotron

 

2017/2016 Year Comparison

 

Customer Statistics

 

Revenue-generating units — As of December 31, 2017, the total number of revenue-generating units stood at 5,881,100 an increase of 115,700 (2.0 %) in 2017, compared with an increase of 117,900 (2.1%) in 2016.

 

Mobile telephony services — As of December 31, 2017, 1,024,000 lines were activated on our wireless telephony network, an increase of 130,100 (14.6%) in 2017, compared with an increase of 125,300 (16.3%) in 2016.

 

Cable Internet access services — The number of subscribers to cable Internet access services stood at 1,666,500 as at the end of 2017, an increase of 53,700 (3.3%) in 2017, compared with an increase of 44,600 (2.8%) in 2016. Our cable Internet access services household penetration rate (number of subscribers as a proportion of the 2,873,700 total homes passed) was 58.0% as of December 31, 2017, compared with 56.8% as of December 31, 2016.

 

Cable television services — Our combined customer base for cable television services decreased by 50,400 (3.0%) in 2017, compared with a decrease of 46,000 (2.6%) in 2016. As of December 31, 2017, our cable network household penetration rate was 57.1%, compared with 59.6% a year earlier.

 

·                                The number of subscribers to illico Digital TV stood at 1,640,500 as at the end of 2017, an increase of 53,400 (3.4%) in 2017, compared with an increase of 16,500 (1.1%) in 2016. As of December 31, 2017, 100% of our cable television customers were subscribers to our illico Digital TV services, compared with 93.9% as of December 31, 2016. Our illico Digital TV household penetration rate was 57.1% as of December 31, 2017, compared with 55.9% as of December 31, 2016.

 

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·                                At the end of 2017 all of our analog customers had migrated to digital, except for a few thousand customers in remote regions.

 

Cable telephony services The number of cable telephony lines stood at 1,188,500 as at the end of 2017, a decrease of 64,600 (5.2%) in 2017, compared with a decrease of 63,200 (4.8%) in 2016. Our cable telephony services household penetration rate was 41.4% as of December 31, 2017, compared with 44.1% as of December 31, 2016.

 

Club illico — The number of subscribers to Club illico stood at 361,600 as at the end of 2017, an increase of 46,900 (14.9%) in 2017, compared with an increase of 57,200 (22.2%) in 2016.

 

Table 2

 

End-of-year customer numbers

(in thousands of customers)

 

 

 

2017

 

2016

 

2015

 

2014

 

2013

 

Mobile telephony1

 

1,024.0

 

893.9

 

768.6

 

632.8

 

504.3

 

Cable Internet

 

1,666.5

 

1,612.8

 

1,568.2

 

1,537.5

 

1,506.0

 

Cable television:

 

 

 

 

 

 

 

 

 

 

 

Analog

 

 

103.8

 

166.3

 

228.7

 

297.7

 

Digital

 

1,640.5

 

1,587.1

 

1,570.6

 

1,553.6

 

1,527.4

 

 

 

1,640.5

 

1,690.9

 

1,736.9

 

1,782.3

 

1,825.1

 

Cable telephony1

 

1,188.5

 

1,253.1

 

1,316.3

 

1,349.0

 

1,348.5

 

Club iIlico

 

361.6

 

314.7

 

257.5

 

177.7

 

58.2

 

Revenue-generating units (RGUs)

 

5,881.1

 

5,765.4

 

5,647.5

 

5,479.3

 

5,242.1

 

 


1    In thousands of lines.

 

2017/2016 Analysis of Results

 

Revenues: $3,278.8 million, an increase of $134.5 million (4.3%) compared with 2016.

 

Revenues from mobile telephony services increased by $99.4 million (19.5%) to $609.8 million, essentially due to customer growth and higher revenues per line.

 

Revenues from Internet access services increased by $52.2 million (5.3%) to $1,030.9 million. The favourable variance was mainly due to subscriber plans mix, subscriber growth and rate increases on some packages, partially offset by higher discounts and lower revenues from excess usage.

 

Revenues from cable television services decreased by $14.7 million (1.4%) to $1,009.6 million. This decrease was primarily due to the net erosion of our customer base, subscriber plans mix and higher discounts, however partially offset by higher revenues from the leasing of digital set-top boxes and rate increases.

 

Revenues from cable telephony services decreased by $27.0 million (6.4%) to $397.8 million, mainly due to the net erosion of our customer base and lower long-distance revenues.

 

Revenues from Club illico increased by $8.3 million (26.4%) to $39.7 million, essentially due to customer growth.

 

Revenues from our business segment increased by $13.4 million (12.1%) to $124.6 million, mainly due to revenue growth from 4Degrees and Fibrenoire.

 

Revenues from equipment sales increased by $2.9 million (5.4%) to $56.5 million, mainly due to higher sales of mobile devices.

 

Other revenues increased by $0.1 million (1.0%) in 2017 to $10.0 million.

 

Monthly ARPU: $154.59 in 2017, compared with $144.86 in 2016, an increase of $9.73 (6.7%). This growth is mainly explained by an increase in revenues from mobile telephony and internet access services, as detailed above.

 

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Adjusted operating income: $1,532.5 million in 2017, an increase of $85.5 million (5.9%).

 

·                                This increase was primarily due to:

 

·                 revenue increase, as detailed above.

 

Partially offset by:

 

·                 increase in losses on sale of mobile devices, partially offset by the growing popularity of our “bring your own device” plans; and

 

·                 increase in operating expenses mainly related to engineering and IT costs.

 

Purchase of goods and services, expressed as a percentage of revenues: 41.5% in 2017, compared with 42.0% in 2016.

 

·                                Purchase of goods and services expenses as a proportion of revenues decreased, primarily due to fixed-cost base, which does not fluctuate in sync with revenue growth.

 

Employee costs, expressed as a percentage of revenues: 11.8% in 2017, compared with 12.0% in 2016.

 

Depreciation and amortization charge: $654.6 million in 2017, an increase of $58.5 million (9.8%) over 2016. The increase was due to an increase in assets related to our wireless and wireline networks and IT systems, as well as a change in estimate of useful life on some network components.

 

Financial expenses (primarily comprised of interest on long-term debt): $149.2 million in 2017, a decrease of $12.3 million (7.6%) over 2016.

 

·                                The decrease was mainly due to:

 

·                 $13.9 million in interest revenue from our subordinated loan to our parent corporation;

 

·                 $2.2 million favourable variance in other interest, mainly due to interest revenues on cash-on-hand; and

 

·                 $2.0 million favourable variance in gains and losses on foreign currency translation of short-term monetary items.

 

Partially offset by:

 

·                 $5.3 million increase in interest on long-term debt, mainly due to higher average indebtedness.

 

Gain or loss on valuation and translation of financial instruments: Loss of $3.1 million in 2017, compared with a loss of
$2.1 million in 2016, an unfavourable variance of $1.0 million mainly due to an unfavourable fluctuation in the fair value of financial instruments under fair value hedging relationships.

 

Restructuring of operations, litigation and other items: Charge of $5.9 million recorded in 2017, compared with a charge of $15.9 million in 2016, a favourable variance of $10.0 million.

 

·                                In 2017, a $5.9 million charge was recognized in connection with developments in legal disputes, labour cost reduction initiatives, and the decommissioning of our analog network.

 

·                                In 2016, a $15.9 million charge was recognized in connection with labour cost reduction initiatives, and the gradual decommissioning of our analog network.

 

Gain on sale of spectrum licences: $330.9 million in 2017.

 

·                                On July 24, 2017, the Corporation sold its seven 2500 MHz and 700 MHz wireless spectrum licences outside Québec to Shaw Communications Inc. for a cash consideration of $430.0 million, resulting in a gain on disposal of
$243.1 million, including $121.6 million without any tax consequences.

 

·                                On June 20, 2017, the Corporation sold its AWS spectrum licence in the Toronto region to Rogers Communications Inc. for a cash consideration of $184.2 million, pursuant to the transfer option held since 2013, resulting in a gain on disposal of $87.8 million, including $43.9 million without any tax consequences. These transactions resulted in the recognition of $44.4 million in tax benefits as they were carried out through tax consolidation arrangements with Quebecor Media, thereby reducing the Corporation’s income tax payments.

 

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Loss on debt refinancing: $5.2 million in 2017, compared with a loss of $7.3 million in 2016.

 

·                                The Corporation redeemed, on May 1, 2017, all of its outstanding 6.875% Senior Notes issued on July 5, 2011 and maturing on July 15, 2021, in an aggregate principal amount of $125.0 million, at a redemption price of 103.438% of their principal amount. A $5.2 million loss was recorded in the consolidated statement of income of 2017 in connection with this redemption.

 

·                                In accordance with a notice issued on December 2, 2016, the Corporation redeemed, on January 5, 2017, $175.0 million aggregate principal amount of its outstanding 6.875% Senior Notes issued on July 5, 2011 and maturing on July 15, 2021, at a redemption price of 103.438% of their principal amount. A $7.3 million loss was recorded in the consolidated statement of income of 2016 in connection with this redemption.

 

Income tax expense: $131.2 million (effective tax rate of 12.6%) in 2017, compared with $116.9 million (effective tax rate of 17.6%) in 2016.

 

·                                The increase of $14.3 million was mainly due to:

 

·                 $102.6 million related to an increase in taxable income; and

 

·                 $6.4 million related to a one-time reduction in deferred tax balances recorded in 2016 due to a change in substantively enacted tax rates.

 

Partially offset by:

 

·                  $50.3 million decrease due to non-taxable gains and non-deductible charges; and

 

·                  $41.7 million decrease due to changes in tax consolidation arrangements with our parent corporation.

 

Net income attributable to shareholder: $914.2 million, an increase of $367.0 million (67.1%).

 

·                                The increase was mainly due to:

 

·                 $330.9 million gain on sale of spectrum licences;

 

·                 $85.5 million increase in adjusted operating income;

 

·                  $12.3 million decrease in financial expenses;

 

·                  $10.0 million favourable variance in restructuring of operations, litigation and other items; and

 

·                  $2.1 million favourable variance in gain or loss on debt refinancing.

 

Partially offset by:

 

·                 $58.5 million increase in depreciation and amortization charges;

 

·                 $14.3 million increase in income taxes; and

 

·                 $1.0 million unfavourable variance in gain or loss on valuation and translation of financial instruments.

 

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2017/2016 Fourth Quarter Comparison

 

Customer statistics

 

Revenue-generating units — 34,900 (0.6%) increase in the fourth quarter of 2017, compared with an increase of 62,300 (1.1%) in the same period of 2016.

 

Mobile telephony services — As of December 31, 2017, 1,024,000 lines were activated on our mobile telephony services, an increase of 33,700 (3.4%) in the quarter, compared with an increase of 26,200 (3.0%) in the same period of 2016.

 

Cable Internet access services — The number of subscribers to cable Internet access services stood at 1,666,500 as at the end of the fourth quarter of 2017, an increase of 12,400 (0.7%) in the quarter, compared with an increase of 16,700 (1.0%) in the same period of 2016.

 

Cable television services — The combined customer base for cable television services decreased by 8,500 (0.5%) in the fourth quarter of 2017, compared with a decrease of 4,800 (0.3%) in the same period of 2016.

 

·                                The number of subscribers to illico Digital TV stood at 1,640,500 as at the end of the fourth quarter of 2017, an increase of 36,600 (2.3%) during the quarter, compared with an increase of 16,300 (1.0%) in the same period of 2016.

 

·                                At the end of 2017 all of our analog customers had migrated to digital, except for a few thousand customers in remote regions.

 

Cable telephony services — The number of cable telephony lines stood at 1,188,500 as at the end of the fourth quarter of 2017, a decrease of 16,900 (1.4%) in the quarter, compared with a decrease of 12,000 (0.9%) in the same period of 2016.

 

Club illico The number of subscribers to Club illico stood at 361,600 as at the end of the fourth quarter of 2017, an increase of 14,200 (4.1%) in the quarter, compared with an increase of 36,200 (13.0%) during the same period of 2016.

 

2017/2016 Fourth Quarter Analysis of Results

 

Revenues: $839.8 million, an increase of $36.8 million (4.6%) compared with the fourth quarter of 2016.

 

Revenues from mobile telephony services increased by $24.7 million (18.0%) to $161.8 million, essentially due to customer growth and higher revenues per line.

 

Revenues from Internet access services increased by 14.6 million (5.9%) to $263.1 million. The favourable variance was mainly due to subscriber plans mix, subscriber growth and rate increases.

 

Revenues from cable television services decreased by $2.8 million (1.1%) to $253.4 million. This decrease was primarily due to the net erosion of our customer base and subscriber plans mix, however partially offset by higher revenues from the leasing of digital set-top boxes and rate increases.

 

Revenues from cable telephony service decreased by $8.0 million (7.6%) to $96.8 million, mainly due to the net erosion of our customer base and lower long-distance revenues.

 

Revenues from Club illico increased by $2.2 million (25.6%) to $10.8 million, essentially due to customer growth.

 

Revenues from our business segment increased by $0.7 million (2.3%) to $30.9 million, mainly due to revenue growth from Fibrenoire.

 

Revenues from equipment sales increased by $5.4 million (36.0%) to $20.4 million, mainly due to higher revenue per mobile device, higher sales of mobile devices and higher revenues from the sale of digital set-top boxes.

 

Other revenues increased by $0.1 million (4.0%) in the fourth quarter to $2.6 million.

 

Monthly ARPU: $159.28 in the fourth quarter of 2017, compared with $148.56 in the same period of 2016, an increase of $10.72 (7.2%). This growth is mainly explained by an increase in revenues from mobile telephony and Internet access services, as detailed above.

 

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Adjusted operating income: $388.4 million in the fourth quarter of 2017, an increase of $24.7 million (6.8%) compared to the same quarter of 2016.

 

·                                This increase was primarily due to:

 

·                 revenue increase, as detailed above; and

 

Partially offset by:

 

·                 increase in operating expenses mainly related to engineering and IT costs.

 

Purchase of goods and services, expressed as a percentage of revenues: 42.2% in 2017, compared with 42.8% in 2016.

 

·                                Purchase of goods and services expenses as a proportion of revenues decreased, primarily due to fixed-cost base, which does not fluctuate in sync with revenue growth.

 

Employee costs, expressed as a percentage of revenues: 11.5% in 2017, compared with 11.9% in 2016.

 

Depreciation and amortization charge: $180.0 million, an increase of $28.3 million (18.7%), compared with the same quarter of 2016. The increase was due to a change in estimate of useful life on some network components and an increase in assets related to our wireless and wireline networks and IT systems.

 

Financial expenses (primarily comprised of interest on long-term debt): $37.8 million in 2017, a decrease of $3.2 million (7.8%) compared with 2016.

 

·                                The decrease was mainly due to:

 

·                 $4.7 million in interest revenue from our subordinated loan to our parent corporation; and

 

·                 $1.7 million favourable variance in other interest, mainly due to interest revenues on cash-on-hand.

 

Partially offset by:

 

·                 $3.9 million increase in interest on long-term debt, mainly due to higher average indebtedness.

 

Gain or loss on valuation and translation of financial instruments: $0.5 million loss in the fourth quarter of 2017, compared with a $1.7 million loss in the same quarter of 2016, a favourable variance of $1.2 million mainly due to a favourable fluctuation in the fair value of financial instruments under fair value hedging relationships.

 

Restructuring of operations, litigation and other items: $6.7 million charge recorded in the fourth quarter of 2017, compared with a $4.6 million charge in the same quarter of 2016, an unfavourable variance of $2.1 million mainly due to an increase in charges related to the decommissioning of our analog network.

 

Loss on debt refinancing: nil in the fourth quarter of 2017, compared to a loss of $7.3 million in the same period of 2016, a favourable variance of $7.3 million.

 

·                                In accordance with a notice issued on December 2, 2016, the Corporation redeemed, on January 5, 2017, $175.0 million aggregate principal amount of its outstanding 6.875% Senior Notes issued on July 5, 2011 and maturing on July 15, 2021, at a redemption price of 103.438% of their principal amount. A $7.3 million loss was recorded in the consolidated statement of income of 2016 in connection with this redemption.

 

Income tax expense: $34.3 million (effective tax rate of 21.0%) in the fourth quarter of 2017, compared with $29.1 million (effective tax rate of 18.5%) in the same quarter of 2016.

 

·                  The increase of $5.2 million was mainly due to:

 

·                 $6.4 million related to a one-time reduction in deferred tax balances recorded in the fourth quarter of 2016 due to a change in substantively enacted tax rates;

 

·                 $1.6 million related to an increase in taxable income; and

 

·                  $1.4 million related to non-taxable, non-deductible items and other items.

 

Partially offset by:

 

·                 $4.3 million related to changes in tax consolidation arrangements with our parent corporation.

 

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Net income attributable to shareholder: $129.1 million, an increase of $0.8 million (0.6%).

 

·                                The increase was mainly due to:

 

·                 $24.7 million increase in adjusted operating income;

 

·                 $7.3 million favourable variance in gain or loss on debt refinancing;

 

·                 $3.2 million decrease in financial expenses; and

 

·                 $1.2 million favourable variance in gain or loss on valuation and translation of financial instruments.

 

Partially offset by:

 

·                  $28.3 million increase in amortization charge;

 

·                 $5.2 million increase in income taxes expense; and

 

·                 $2.1 million unfavourable variance in restructuring of operations, litigation and other items.

 

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2016/2015 Year Comparison

 

Customer Statistics

 

Revenue-generating units — As of December 31, 2016, the total number of revenue-generating units stood at 5,765,400, an increase of 117,900 (2.1%) in 2016, compared with an increase of 168,200 (3.1%) in 2015.

 

Mobile telephony services — As of December 31, 2016, 893,900 lines were activated on our wireless telephony network, an increase of 125,300 (16.3%) in 2016, compared with an increase of 135,800 (21.5%) in 2015.

 

Cable Internet access services — The number of subscribers to cable Internet access services stood at 1,612,800 as at the end of 2016, an increase of 44,600 (2.8             %) in 2016, compared with an increase of 30,700 (2.0%) in 2015. Our cable Internet access services household penetration rate (number of subscribers as a proportion of the 2,839,300 total homes passed) was 56.8% as of December 31, 2016, compared with 55.9% as of December 31, 2015.

 

Cable television services — Our combined customer base for cable television services decreased by 46,000 (2.6%) in 2016, compared with a decrease of 45,400 (2.5%) in 2015. As of December 31, 2016, our cable network household penetration rate was 59.6%, compared with 61.9% a year earlier.

 

·                                The number of subscribers to illico Digital TV stood at 1,587,100 as at the end of 2016, an increase of 16,500 (1.1%) in 2016, compared with an increase of 17,000 (1.1%) in 2015. As of December 31, 2016, 93.9% of our cable television customers were subscribers to our illico Digital TV services, compared with 90.4% as of December 31, 2015. Our illico Digital TV household penetration rate was 55.9% as of December 31, 2016, compared with 56.0% as of December 31, 2015.

 

·                                The customer base for analog cable television services decreased by 62,500 (37.6%) in 2016, compared with a decrease of 62,400 customers (27.3%) in 2015.

 

Cable telephony services The number of cable telephony lines stood at 1,253,100 as at the end of 2016, a decrease of 63,200 (4.8%) in 2016, compared with a decrease of 32,700 (2.4%) in 2015. Our cable telephony services household penetration rate was 44.1% as of December 31, 2016, compared with 46.9% as of December 31, 2015.

 

Club illico — The number of subscribers to Club illico stood at 314,700 as at the end of 2016, an increase of 57,200 (22.2%) in 2016, compared with an increase of 79,800 (44.9%) in 2015.

 

2016/2015 Analysis of Results

 

Revenues: $3,144.3 million, an increase of $146.3 million (4.9%) compared with 2015.

 

Revenues from mobile telephony services increased by $106.7 million (26.4%) to $510.4 million, essentially due to customer growth and higher revenues per line.

 

Revenues from Internet access services increased by $58.0 million (6.3%) to $978.7 million. The favourable variance was mainly due to subscriber plans mix, rate increases, higher revenues from the leasing of Wi-Fi routers, subscriber growth and increased usage.

 

Revenues from cable television services decreased by $29.5 million (2.8%) to $1,024.3 million. This decrease was primarily due to the net erosion of our customer base, higher discounts and lower video-on-demand revenues, however partially offset by rate increases on some packages and higher revenues from the leasing of digital set-top boxes.

 

Revenues from cable telephony services decreased by $33.2 million (7.2%) to $424.8 million, mainly due to lower revenues per line due to higher discounts, the net erosion of our customer base and lower long-distance revenues.

 

Revenues from Club illico increased by $7.8 million (33.1%) to $31.4 million, essentially due to customer growth.

 

Revenues from our business segment increased by $42.1 million (60.9%) to $111.2 million, mainly due to the new revenues generated from the acquisition and integration of Fibrenoire and revenue growth from 4Degrees.

 

Revenues from equipment sales decreased by $4.0 million (6.9%) to $53.6 million, mainly due to lower sales of digital set-top boxes.

 

Other revenues decreased by $1.5 million (13.2%) in 2016 to $9.9 million.

 

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Monthly ARPU: $144.86 in 2016, compared with $135.68 in 2015, an increase of $9.18 (6.8%). This growth is mainly explained by an increase in revenues from mobile telephony and internet access services, as detailed above.

 

Adjusted operating income: $1,447.0 million in 2016, an increase of $64.6 million (4.7%).

 

·                                This increase was primarily due to:

 

·                 revenue increase, as detailed above;

 

Partially offset by:

 

·                 increase in losses on sale of mobile devices mitigated by the impact from the favourable variance in our “bring your own device” plans; and

 

·                 increases in some operating expenses, primarily administrative expenses, customer service and selling expenses.

 

Purchase of goods and services, expressed as a percentage of revenues: Stable at 42.0% year-over-year.

 

Employee costs, expressed as a percentage of revenues: Stable at 12.0% year-over-year.

 

Depreciation and amortization charge: $596.1 million, a decrease of $29.3 million (4.7%) over 2015.

 

·                                The decrease was mainly due to:

 

·                 the end of the accounting useful life of network assets for which the useful lives were reassessed in October 2000, when the Corporation was acquired by Quebecor Media; and

 

·                 a change in the assessment of the useful life of our spectrum licences, resulting in the cessation of the amortization of those assets during the second quarter of 2015.

 

Partially offset by:

 

·                 an increase in fixed assets and intangible assets, including through the acquisition of Fibrenoire.

 

Financial expenses (primarily comprised of interest on long-term debt): $161.5 million, a decrease of $5.9 million (3.5%) over 2015.

 

·                                The decrease was mainly due to:

 

·                 $6.2 million decrease in loss on foreign currency translation of short-term monetary items; and

 

·                 $1.0 million favourable variance in other interest.

 

Partially offset by:

 

·                 $1.0 million unfavourable variance due to changes in tax consolidation arrangements; and

 

·                 $0.5 million increase in interest on defined benefit plans.

 

·                                Interest on long-term debt remained stable year-over-year.  The impact of our higher average indebtedness was offset by debt refinancings at lower interest rates.

 

Gain or loss on valuation and translation of financial instruments: Loss of $2.1 million in 2016, compared with a loss of
$0.5 million in 2015, an unfavourable variance of $1.6 million.

 

·                                The variance was mainly due to:

 

·                  a $4.7 million unfavourable fluctuation in the fair value of financial instruments under fair value and cash flow hedging relationships.

 

Partially offset by:

 

·                  a $3.1 million favourable variance in the fair value of early settlement options, caused by fluctuations in valuation assumptions, including interest rates and credit premiums implicit in the adjusted prices of the underlying instruments.

 

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Loss on debt refinancing: $7.3 million in 2016, compared with $12.1 million in 2015, a favourable variance of $4.8 million.

 

·                                In accordance with a notice issued on December 2, 2016, the Corporation redeemed, on January 5, 2017, $175.0 million aggregate principal amount of its outstanding 6.875% Senior Notes issued on July 5, 2011 and maturing on July 15, 2021, at a redemption price of 103.438% of their principal amount. A $7.3 million loss was recorded in the consolidated statement of income of 2016 in connection with this redemption.

 

·                                In accordance with a notice issued on June 16, 2015, the Corporation fully redeemed, on July 16, 2015, its outstanding 9.125% Senior Notes issued on April 15, 2008 and maturing on April 15, 2018, in the aggregate principal amount of US$75.0 million, at a redemption price of 101.521% of their principal amount, and unwound the related hedging assets. A $0.2 million loss was recorded in the consolidated statement of income of 2015 in connection with this redemption, including a $2.1 million net gain previously recorded in “Other comprehensive income.”

 

·                                In accordance with a notice issued on June 16, 2015, the Corporation fully redeemed, on July 16, 2015, its outstanding 7.125% Senior Notes issued on January 13, 2010 and maturing on January 15, 2020, in the aggregate principal amount of $300.0 million, at a redemption price of 103.563% of their principal amount. A $13.6 million loss was recorded in the consolidated statement of income of 2015 in connection with this redemption.

 

·                                In accordance with a notice issued on March 11, 2015, the Corporation fully redeemed, on April 10, 2015, its 6.375% Senior Notes maturing on December 15, 2015, in the aggregate principal amount of US$175.0 million, at a redemption price of 100% of their principal amount, and unwound the related hedging assets. A $1.7 million net gain was recorded in the consolidated statement of income of 2015 in connection with this redemption, including a $1.8 million gain previously recorded in “Other comprehensive income”.

 

Restructuring of operations, litigation and other items: Charge of $15.9 million recorded in 2016, compared with a $129.7 million gain in 2015, an unfavourable variance of $145.6 million mainly due to the gain on litigation of $138.4 million recorded in the third quarter of 2015, and an increase in charges related to various restructuring initiatives.

 

Income tax expense: $116.9 million (effective tax rate of 17.6%) in 2016, compared with $120.7 million (effective tax rate of 17.1%) in 2015.

 

·                                The decrease of $3.8 million was mainly due to:

 

·                 $11.4 million related to a decrease in taxable income;

 

·                 $6.4 million related to a reduction in deferred tax balances due to a change in substantively enacted tax rates; and

 

·                  $5.3 million related to non-taxable, non-deductible and other items.

 

Partially offset by:

 

·                  $16.1 million adjustment in 2015 in light of developments in tax audits, jurisprudence and tax legislation; and

 

·                  $3.2 million increase due to changes in tax consolidation arrangements with our parent corporation.

 

Net income attributable to shareholder: $547.2 million, a decrease of $38.6 million (6.6%).

 

·                                The decrease was mainly due to:

 

·                 $145.6 million unfavourable variance in restructuring of operations, litigation and other items; and

 

·                 $1.6 million unfavourable variance in gain or loss on valuation and translation of financial instruments.

 

Partially offset by:

 

·                 $64.6 million increase in adjusted operating income;

 

·                 $29.3 million decrease in depreciation and amortization charges;

 

·                 $5.9 million decrease in financial expenses;

 

·                 $4.9 million favourable variance in gain or loss on debt refinancing; and

 

·                 $3.8 million decrease in income taxes.

 

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CASH FLOW AND FINANCIAL POSITION

 

This section provides an analysis of sources and uses of cash flows, as well as a financial position analysis as of the balance sheet date. This section should be read in conjunction with the discussions on trends under “Trend Information” above, on the Corporation’s risks under “Item 3. Key Information — B. Risk Factors” below and on the Corporation’s financial risks under “Financial Instruments and Financial Risk Management” below.

 

Operating activities

 

2017 Financial Year

 

Cash flows provided by operating activities: $1,271.7 million in 2017, compared with $1,244.1 million in 2016, an increase of $27.6 million (2.2%).

 

·                                The increase was mainly due to:

 

·                 $157.2 million decrease in current income tax expenses;

 

·                 $85.6 million increase in adjusted operating income;

 

·                 $12.7 million favourable variance on cash interest expenses; and

 

·                 $10.0 million decrease in restructuring of operations, litigation and other items.

 

Partially offset by:

 

·                 $238.6 million unfavourable variance in non-cash balances related to operations, mainly due to an unfavourable net variation in income taxes payable, in accounts payable and accrued charges, in inventories and in accounts payable and receivables with corporations under common control.

 

Working capital: $441.3 million as of December 31, 2017, compared with negative $490.4 million as of December 31, 2016. The difference is mainly explained by the cash proceeds from the sale of spectrum licences to Rogers Communications Inc. and Shaw Communications Inc., the disbursement of income tax instalments related to the 2016 fiscal year and cash generated through the Corporation’s operating activities.

 

2016 Financial Year

 

Cash flows provided by operating activities: $1,244.1 million in 2016, compared with $1,208.0 million in 2015, an increase of $36.1 million (3.0%).

 

·                                The increase was mainly due to:

 

·                 $210.1 million favourable variance in non-cash balances related to operations, mainly due to a $64.1 million favourable variation in inventories and a $140.0 million favourable variation related to income taxes payable;

 

·                 $64.6 million increase in adjusted operating income; and

 

·                 $7.1 million favourable variance on cash interest expenses.

 

Partially offset by:

 

·                 $145.6 million unfavourable variance in restructuring of operations, litigation and other items; and

 

·                  $99.6 million increase in current income tax expenses.

 

Working capital: Negative $490.4 million as of December 31, 2016, compared with negative $380.9 million as of December 31, 2015. The difference mainly reflects the increase in income taxes payable, a decrease in inventories and an increase in trade payables and accruals.

 

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Investing Activities

 

2017 Financial Year

 

Additions to fixed assets: $574.3 million in 2017, compared with $666.7 million in 2016. The decrease is mainly explained by investments made in 2016 in our data centers and lower investments in our LTE wireless network.

 

Additions to intangible assets: $132.3 million in 2017, compared with $125.5 million in 2016. The increase is mainly explained by acquisitions of software, licences and investments made on our various IT systems and platforms.

 

Proceeds from the disposal of assets: $619.9 million in 2017, compared with $3.4 million in 2016.

 

·                  On June 20, 2017, the Corporation sold its AWS spectrum licence in the Toronto region to Rogers Communications Inc. for a cash consideration of $184.2 million, pursuant to the transfer option held since 2013. The sale resulted in a gain on disposal of $87.8 million.

 

·                  On July 24, 2017, the Corporation sold its seven 2500 MHz and 700 MHz wireless spectrum licences outside Québec to Shaw Communications Inc. for a cash consideration of $430.0 million. The sale resulted in a gain on disposal of $243.0 million.

 

Business acquisition: $5.6 million in 2017, compared with $118.9 million in the same period of 2016. In January 2016, the Corporation acquired Fibrenoire, a company that provides businesses with fibre-optic connectivity services, for a purchase price of $125.0 million. At closing, the Corporation paid an amount of $119.1 million, net of cash acquired of $1.8 million. A post-closing adjustment of $0.2 million was received in the second quarter of 2016. The purchase price balance was paid in February 2017 for an amount of $5.6 million.

 

2016 Financial Year

 

Additions to fixed assets: $666.7 million in 2016, compared with $630.1 million in 2015. The increase is mainly explained by investments in our data centers and our wireless and wireline networks, partially offset by a decrease related to our illico Digital set-top boxes rental program.

 

Additions to intangible assets: $125.5 million in 2016, compared with $312.1 million in 2015. Excluding the disbursement of $218.8 million in 2015 for the acquisition of spectrum licences, the increase of $32.2 million is explained by the acquisition of licences related to various IT platforms and LTE wireless capacity.

 

Business acquisition: $118.9 million in 2016, compared with $35.2 million in 2015.

 

·                                In January 2016, the Corporation acquired Fibrenoire, a company that provides fibre-optic connectivity services, for a cash consideration of $118.9 million, net of cash acquired and a balance payable of $5.6 million. The transaction enabled Videotron Business and Fibrenoire to join forces to continue to meet the growing demand from business customers for fibre-optic connectivity.

 

·                                In March 2015, the Corporation acquired 4Degrees Colocation and its data center for a total consideration of $35.2 million, net of cash acquired and working capital adjustments. This acquisition enabled the Corporation to continue to meet its business customers’ growing technological and hosting needs.

 

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Financing Activities

 

2017 Financial Year

 

Consolidated debt (long-term debt plus bank indebtedness): $97.1 million increase in 2017.

 

·                                Summary of debt increase in 2017:

 

·                  issuance, on April 13, 2017, of US$600.0 million aggregate principal amount of Senior Notes for net proceeds of $794.5 million, net of financing fees of $9.9 million. The Notes bear interest at 5.125% per annum and mature on
April 15, 2027.

 

·                                Summary of debt decreases during the same period:

 

·                 redemption and retirement, on May 1, 2017 and January 5, 2017, of $300.0 million aggregate principal amount of our 6.875% Senior Notes due in July 2021;

 

·                 $209.3 million decrease in drawings under our revolving credit facility;

 

·                 $170.1 million favourable impact of exchange rate fluctuations. This decrease in long-term debt is offset by a decrease in the asset (or an increase in the liability) related to cross-currency interest rate swaps, recorded under “Derivative financial instruments”;

 

·                 $10.1 million favourable net change in bank indebtedness; and

 

·                 repayment of $10.7 million of borrowings under our export financing facility.

 

In May 2017, the Corporation transferred all then existing commitments under its unsecured revolving credit facility to its secured revolving credit facility, hence increasing its secured facility from $630.0 million to $965.0 million and terminating its unsecured facility.

 

Assets and liabilities related to derivative financial instruments: Net asset of $259.0 million as of December 31, 2017, compared with a net asset of $417.8 million as of December 31, 2016, a $158.8 million unfavourable variance. The variance was mainly due to the unfavourable impact of exchange rate and interest rate fluctuations on the value of derivative financial instruments.

 

Dividends: Net increase of $13.0 million in cash distributions to our parent corporation in 2017 compared with 2016.

 

2016 Financial Year

 

Consolidated debt (long-term debt plus bank indebtedness): $105.1 million decrease in 2016.

 

·                                Summary of debt decreases in 2016:

 

·                 $57.7 million favourable impact of exchange rate fluctuations. This decrease in long-term debt is offset by a decrease in the asset (or an increase in the liability) related to cross-currency interest rate swaps, recorded under “Derivative financial instruments”;

 

·                 $37.4 million decrease in drawings under our secured revolving credit facility; and

 

·                 repayment of $10.7 million of borrowings under our export financing facility.

 

In June 2016, the Corporation amended its secured revolving credit facility and unsecured revolving credit facility to extend their maturity to July 2021.  Some of the terms and conditions related to these credit facilities were also amended.

 

Assets and liabilities related to derivative financial instruments: Net asset of $417.8 million as of December 31, 2016, compared with a net asset of $494.2 million as of December 31, 2015, a $76.4 million unfavourable variance. The variance was mainly due to the unfavourable impact of exchange rate and interest rate fluctuations on the value of derivative financial instruments.

 

Dividends: Net decrease of $383.0 million in cash distributions to our parent corporation in 2016 compared with 2015.

 

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Financial Position as of December 31, 2017

 

Net available liquid assets: $1,778.9 million for the Corporation and its wholly owned subsidiaries, consisting of $813.9 million in cash and cash equivalents, and $965.0 million in unused availabilities under credit facilities.

 

Uses of Liquidity and Capital Resources

 

Our principal liquidity and capital resource requirements consist of:

 

·                                capital expenditures to maintain and upgrade our network in order to support the growth in our customer base and the launch and expansion of new or additional services, including the expansion and upgrade of our wireless and wireless networks;

 

·                                servicing and repayment of debt;

 

·                                tax consolidation arrangements; and

 

·                                distributions to our shareholder.

 

Capital expenditures: $706.6 million in 2017, a decrease of $85.6 million (10.8%) compared with 2016.

 

·                                The decrease was mainly due to:

 

·                 investments made in 2016 in our data centers and lower investments in our LTE wireless network.

 

Table 3

 

Additions to fixed and intangible assets

(in millions of dollars)

 

 

 

2017

 

2016

 

2015

 

Customer premises equipment

 

$

228.8

 

$

231.7

 

$

239.1

 

Scalable infrastructure

 

205.0

 

238.5

 

253.5

 

Line extensions

 

50.1

 

62.3

 

58.7

 

Upgrade/rebuild

 

58.8

 

67.4

 

62.9

 

Support capital and other

 

163.9

 

192.3

 

327.9

 

Total additions to fixed and intangible assets

 

$

706.6

 

$

792.2

 

$

942.1

 

 

Consolidated long-term debt (long-term debt plus bank indebtedness): $3,270.3 million as of December 31, 2017, an
increase of $97.1 million; $158.8 million unfavourable net variance in assets and liabilities related to derivative financial instruments (see “Financing Activities” above).

 

As of December 31, 2017, mandatory debt repayments on the Corporation’s long-term debt in the coming years are as follows:

 

Table 4

 

Minimum principal payments on Videotron’s long-term debt

12 months ending December 31

(in millions of dollars)

 

2018

 

$

5.4

 

2019

 

 

2020

 

 

2021