6-K 1 a18-13058_16k.htm 6-K

Table of Contents

 

 

 

FORM 6-K

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

REPORT OF FOREIGN PRIVATE ISSUER

 

PURSUANT TO RULE 13a-16 OR 15d-16 OF THE

SECURITIES EXCHANGE ACT OF 1934

 

FOR THE MONTH OF MAY 2018

 

VIDEOTRON LTD./VIDÉOTRON LTÉE

(Name of Registrant)

 

612 St-Jacques, Montreal, Canada, H3C 4M8

(Address of principal executive offices)

 

[Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.]

 

 

Form 20-F

x

Form 40-F

o

 

[Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g 3-2(b) under the Securities Exchange Act of 1934.]

 

 

Yes

o

No

x

 

[If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g 3-2(b): 82-            .]

 

 

 



Table of Contents

 

Quarterly Report for the Period Ending

March 31, 2018

VIDEOTRON LTD.

Filed in this Form 6-K

 

Documents index

 

1-

Quarterly report for the period ended March 31, 2018 of Videotron Ltd.

 



Table of Contents

 

 

 

QUARTERLY REPORT

2018 FISCAL YEAR

 

 

VIDEOTRON LTD.

 

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Three-month Period

January 1, 2018 – March 31, 2018

 

May 15, 2018

 



Table of Contents

 

VIDEOTRON LTD.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the three-month periods ended March 31, 2018 and 2017

(unaudited)

 

Condensed consolidated financial statements

 

 

 

Management discussion and analysis

3

 

 

Consolidated statements of income

20

 

 

Consolidated statements of comprehensive income

21

 

 

Consolidated statements of equity

22

 

 

Consolidated statements of cash flows

23

 

 

Consolidated balance sheets

25

 

 

Notes to condensed consolidated financial statements

27

 

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FINANCIAL REVIEW

 

CORPORATE PROFILE

 

We, Videotron Ltd. (“Videotron” or the “Corporation”), are a wholly owned subsidiary of Quebecor Media Inc.  (“Quebecor Media”), incorporated under the Business Corporations Act (Québec).  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 being the largest cable Internet service provider and a major provider of cable and mobile telephony and OTT video in the Province of Québec. Our cable network covers approximately 79% of the Province of Québec’s approximately 3.6 million residential and commercial premises. The deployment of our LTE 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.

 

Videotron Business is a premier full-service telecommunications provider and data center operator servicing small,   medium-sized and large-sized businesses, as well as telecommunications carriers. Products and services for small and medium-sized businesses are supported by extensive coaxial, fibre-optic and LTE wireless networks.

 

Videotron’s primary sources of revenue include: subscriptions for Internet access, cable television, cable and mobile telephony services, over-the-top video services (“Club illico”) and business services.

 

The following Management Discussion and Analysis (“MD&A”) covers the Corporation’s main activities in the first quarter of 2018 and the major changes from the previous financial year.

 

All amounts are stated in Canadian dollars unless otherwise indicated. This MD&A should be read in conjunction with the information in the Corporation’s Annual Report for the financial year ended December 31, 2017 (Form 20-F), which is available on the website of the U.S. Securities and Exchange Commission at <www.sec.gov>. Due to rounding, minor differences may exist between amounts shown in this MD&A and the condensed consolidated financial statements.

 

On January 1, 2018, the Corporation adopted on a fully retrospective basis the new rules under IFRS 15, Revenue from Contracts with Customers, which specify how and when an entity should recognize revenue. The adoption of IFRS 15 had significant impacts on the consolidated financial statements with regards to the timing of the recognition of its revenues, the classification of its revenues, as well as the capitalization of costs. Among other impacts, the adoption of IFRS 15 resulted in an increase in the revenue from the device sale and in a decrease in the mobile service revenue recognized over the contract term. As well, costs to obtain a contract and connection costs are now fully amortized as operating expenses over the contract term or over the period of time the customer is expected to maintain its services. A description of the new rules, along with the detail retrospective adjustments to the comparative figures, is presented in the section “Changes in Accounting Policies” of this MD&A. As well, to clarify the impact of IFRS 15 on non-IFRS measures, columns presenting the data without application of IFRS 15 have been added to the tables showing the calculation and reconciliation of the non-IFRS measures, as presented under “Non-IFRS Financial Measures.”

 

In the wake of the adoption of IFRS 15, and to take into account the evolution of its activities and services, including the growth of its mobile telephony services, the Corporation has reviewed the nature and definition of its key performance indicators. As a result, the previously used average monthly revenue per user (“ARPU”) metric has been discontinued, to be replaced by the new average billing per unit (“ABPU”). This measure will henceforth be used to evaluate the performance of the mobile activities and the performance of all the combined activities. The definition of the new ABPU is presented in the “Key Performance Indicator” section of this MD&A. A definition of the revenue generating unit measure (“RGU”) was also added in the same section, with no change in the nature and calculation of this measure.

 

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HIGHLIGHTS SINCE DECEMBER 31, 2017

 

·                                During the first quarter of 2018, revenues grew by 2.3% (or 3.6% without the impact of IFRS 15 adoption), adjusted operating income grew by 7.0% (or 10.9% without the impact of IFRS 15 adoption) and ABPU grew by 3.0%, all compared to the first quarter of 2017.

 

·                                As of March 31, 2018, 1,047,300 lines were activated on our mobile telephony service, an increase of 23,300 (2.3%) in the quarter and a year-over-year increase of 126,400 (13.7%). Furthermore, wireless ABPU grew by $0.61 (1.2%) year-over-year.

 

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

 

·                                According to a 2018 Ipsos-Infopresse study, Videotron ranks as the most influential Quebec brand in the telecommunications industry.  Videotron is also ranked among the top 5 most influential Quebec brands.

 

·                                On April 18, 2018, Quebecor Content and Club illico announced their intention to finance film production in the Province of Quebec. Starting this year, they lead the development of at least three feature films. The goal is to quickly make available this new content offer to customers, on all platforms of the group while premiering on Club illico.

 

NON-IFRS FINANCIAL MEASURES

 

The financial measures not standardized under International Financial Reporting Standards (“IFRS”) that are used by the Corporation to assess its financial performance, such as adjusted operating income, cash flows from segment operations and free cash flows from continuing operating activities, are not calculated in accordance with, or recognized by IFRS. The Corporation’s method of calculating these non-IFRS financial measures may differ from the 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.

 

On a transitional basis, to clarify the impact of retroactive adoption of IFRS 15, as described under “Changes in accounting policies”, columns have been added to the calculation and reconciliation tables for non-IFRS financial measures, where applicable. Accordingly, those tables also show the calculation and reconciliation of non-IFRS measures in 2018 and 2017, based on the former accounting policies with respect to revenue recognition, i.e. without the adjustments required by adoption of IFRS 15.

 

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 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.

 

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KEY PERFORMANCE INDICATOR

 

Revenue-generating unit (“RGU”)

 

The Corporation uses RGU, an industry metric, as a key performance indicator. A RGU represents, as the case may be, subscriptions to the cable Internet, cable television and Club illico services, and subscriber connections to the mobile telephony and cable telephony services. RGU is not a measurement that is consistent with IFRS and the Corporation’s definition and calculation of RGU may not be the same as identically titled measurements reported by other companies.

 

Average billing per unit (“ABPU”)

 

The Corporation uses ABPU, an industry metric, as a key performance indicator. This indicator is used to measure monthly average subscription billing per average RGU. ABPU is not a measurement that is consistent with IFRS and the Corporation’s definition and calculation of ABPU may not be the same as identically titled measurements reported by other companies.

 

The mobile ABPU is calculated by dividing the average subscription billing from the mobile telephony services by the average number of mobile RGU’s during the applicable period, and then dividing the resulting amount by the number of months in the applicable period.

 

The total ABPU is calculated by dividing the combined average subscription billing from cable Internet, cable television, Club illico, mobile telephony and cable telephony services, by the total average number of RGU from cable Internet, cable television, mobile telephony and cable telephony services, 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.

 

Table 1

Reconciliation of the adjusted operating income measure used in this report to the net income measure used in the condensed consolidated financial statements

(in millions of dollars)

 

 

 

Three months ended March 31

 

Three months ended March 31

 

 

 

With adoption of IFRS 15(1)

 

Excluding IFRS 15(2)

 

 

 

2018

 

2017

 

2018

 

2017

 

Adjusted operating income

 

$

410.2

 

$

383.3

 

$

417.6

 

$

376.5

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

(165.6

)

(155.5

)

(165.6

)

(155.5

)

 

 

 

 

 

 

 

 

 

 

Financial expenses

 

(40.2

)

(37.2

)

(40.2

)

(37.2

)

 

 

 

 

 

 

 

 

 

 

Loss on valuation and translation of financial instruments

 

(1.4

)

(0.4

)

(1.4

)

(0.4

)

 

 

 

 

 

 

 

 

 

 

Restructuring of operations, litigation and other items

 

 

(5.2

)

 

(5.2

)

 

 

 

 

 

 

 

 

 

 

Loss on debt refinancing

 

(2.7

)

12.3

 

(2.7

)

12.3

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

(48.3

)

(48.0

)

(48.3

)

(48.0

)

 

 

 

 

 

 

 

 

 

 

IFRS 15 impact

 

 

 

(7.4

)

6.8

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

152.0

 

$

149.3

 

$

152.0

 

$

149.3

 

 


1              Non-IFRS measures presented in these columns are calculated in accordance with IFRS 15, adopted by the Corporation on a retroactive basis and described under “Changes in accounting policies”.

2              Non-IFRS measures presented in these columns are calculated in accordance with the Corporation’s former accounting policies with respect to revenue recognition, i.e. without the impact of IFRS 15 adoption.

 

Analysis of Consolidated Results of Videotron

 

2018/2017 First Quarter Comparison

 

Customer statistics

 

Revenue-generating units — As of March 31, 2018, the total number of revenue-generating units stood at 5,900,400, an increase of 19,300 (0.3%) in the first quarter of 2018, compared with an increase of 30,000 (0.5%) in the same period last year. RGUs increased by 105,000 (1.8%) over the last twelve months.

 

Mobile telephony services As of March 31, 2018, 1,047,300 lines were activated on our mobile telephony network, an increase of 23,300 (2.3%) in the quarter, compared with an increase of 27,000 (3.0%) in the same quarter of 2017. Mobile telephony lines increased by 126,400 (13.7%) over the last twelve months.

 

Cable Internet access services — The number of subscribers to cable Internet access services stood at 1,674,600 as at the end of the first quarter of 2018, an increase of 8,100 (0.5%) in the quarter, compared with an increase of 15,300 (0.9%) in the same quarter of 2017. Cable Internet access customers increased by 46,500 (2.9%) over the last twelve months. As of March 31, 2018, the household penetration rate (number of subscribers as a proportion of the 2,879,500 total homes passed) for our cable Internet access services was 58.2%, compared with 57.2% as of March 31, 2017.

 

Cable television services — Our cable television subscribers decreased by 15,000 (0.9%) in the first quarter of 2018, compared with a decrease of 10,300 (0.6%) in the first quarter of 2017 and a year-over-year decrease of 55,100 (3.3%). As of March 31, 2018, our cable network household penetration rate was 56.5%, compared with 59.1% a year earlier.

 

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Cable telephony services The number of cable telephony lines stood at 1,169,600 as at the end of the first quarter of 2018, a decrease of 18,900 (1.6%) in the quarter, compared with a decrease of 11,800 (0.9%) in the same quarter of 2017. Cable telephony lines decreased by 71,700 (5.8%) over the last twelve months. As of March 31, 2018, our cable telephony service household penetration rate was 40.6%, compared with 43.6% as of March 31, 2017.

 

Club illico The number of subscribers to Club illico stood at 383,400 as at the end of the first quarter of 2018, an increase of 21,800 (6.0%) in the quarter, compared with an increase of 9,800 (3.1%) in the first quarter of 2017. Club illico customers increased by 58,900 (18.2%) over the last twelve months.

 

Table 2

Quarter-end RGU

(in thousands of units)

 

 

 

Mar. 18

 

Dec 17

 

Sept 17

 

June 17

 

Mar. 17

 

Dec. 16

 

Sept. 16

 

June 16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mobile telephony

 

1,047.3

 

1,024.0

 

990.3

 

953.3

 

920.9

 

893.9

 

867.7

 

828.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cable Internet

 

1,674.6

 

1,666.5

 

1,654.1

 

1,627.2

 

1,628.1

 

1,612.8

 

1,596.1

 

1,571.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cable television:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Analog

 

 

 

45.1

 

59.9

 

85.5

 

103.8

 

124.9

 

137.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Digital

 

1,625.5

 

1,640.5

 

1,603.9

 

1,596.8

 

1,595.1

 

1,587.1

 

1,570.8

 

1,559.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,625.5

 

1,640.5

 

1,649.0

 

1,656.7

 

1,680.6

 

1,690.9

 

1,695.7

 

1,697.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cable telephony

 

1,169.6

 

1,188.5

 

1,205.4

 

1,221.0

 

1,241.3

 

1,253.1

 

1,265.1

 

1,284.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Club illico

 

383.4

 

361.6

 

347.4

 

337.6

 

324.5

 

314.7

 

278.5

 

266.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

5,900.4

 

5,881.1

 

5,846.2

 

5,795.8

 

5,795.4

 

5,765.4

 

5,703.1

 

5,648.4

 

 

Revenues: $821.9 million, an increase of $18.6 million (2.3%) compared with the first quarter of 2017.

 

Revenues from mobile telephony services increased by $14.7 million (13.2%) to $125.8 million, essentially due to customer growth and higher billing per activated line, partially offset by higher amortization of contract assets following the adoption of the new IFRS 15 standard of revenue from contracts with customers.

 

Revenues from Internet access services increased by $11.1 million (4.4%) to $261.6 million. The favourable variance was mainly due to subscriber plan mix, rate increases on some packages, and by subscriber growth, partially offset by lower revenues from excess usage.

 

Revenues from cable television services decreased by $2.6 million (1.0%) to $248.7 million. This decrease was primarily due to the net customer base erosion and lower video-on-demand orders, partially offset by higher revenues from the leasing of digital set-top boxes and rate increases.

 

Revenues from cable telephony services decreased by $7.4 million (7.2%) to $95.2 million, mainly due to the net customer base erosion and lower long-distance revenues, partially offset by a favourable plan mix.

 

Revenues from Club illico increased by $2.1 million (23.3%) to 11.1 million, essentially due to customer growth.

 

Revenues from business segment increased by $0.4 million (1.3%) to $31.8 million mainly due to higher revenues from fibre-optic connectivity service businesses, partially offset by lower revenues from our data centers.

 

Revenues from sales of customer premises equipment increased by $0.4 million (0.9%) to $45.5 million.

 

Other revenues decreased by $0.1 million (4.2%) to $2.3 million.

 

Monthly combined ABPU: $48.82 in the first quarter of 2018, compared with $47.41 in the same quarter of 2017, an increase of $1.41 (3.0%). 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: $410.2 million in the first quarter of 2018, an increase of $26.9 million (7.0%) compared to the same quarter of 2017.

 

·                                This increase was primarily due to:

 

·                 revenue increase, as detailed above; and

 

·                 a favorable retroactive adjustment of mobile roaming charges following a CRTC decision.

 

Partially offset by:

 

·                 increase in operating expenses mainly related to engineering, advertising and administration costs.

 

Employee costs, expressed as a percentage of revenues: Stable at 12.4% year-over-year.

 

Purchase of goods and services, expressed as a percentage of revenues: 37.7% in 2018, compared with 39.8% in 2017.

 

·                                Purchase of goods and services expenses as a proportion of revenues decreased, primarily due to a favorable retroactive adjustment of mobile roaming charges following a CRTC decision.

 

Depreciation and amortization charge: $165.6 million, an increase of $10.1 million (6.5%) compared with $155.5 million in the first quarter of 2017.

 

·                                The increase was primarily due to a change in the estimate of the useful life of some network components, as well as an increase in assets related to our wireless and wireline networks and IT systems.

 

Financial expenses (primarily comprised of interest on long-term debt): $40.2 million in the first quarter of 2018, an increase of $3.0 million (8.1%) compared with the same quarter of 2017.

 

·                                The increase was mainly due to:

 

·                            $6.8 million increase in interest on long-term debt due to higher average indebtedness and higher average interest rate; and

 

·                            $0.8 million increase in loss on foreign currency translation of short-term monetary items.

 

Partially offset by:

 

·                            $3.7 million increase in interest revenues on cash-on-hand; and

 

·                            $0.8 million in interest revenue from our subordinated loan to our parent corporation.

 

Gain or loss on valuation and translation of financial instruments: Loss of $1.4 million in the first quarter of 2018, compared with a loss of $0.4 million in the same quarter of 2017, an unfavourable variance of $1.0 million.

 

Loss on debt refinancing: Nil in the first quarter of 2018, compared to a loss of $5.2 million in the same period of 2017, a favourable variance of a $5.2 million.

 

·                                In accordance with a notice issued on March 31, 2017, 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 the first quarter of 2017 in connection with this redemption.

 

Restructuring of operations, litigation and other items: $2.7 million charge recorded in the first quarter of 2018, compared with a $12.3 million gain in the same quarter of 2017, an unfavourable variance of $15.0 million.

 

·                                In the first quarter of 2018, a $2.7 million charge was recognized in connection with the decommissioning of our analog network infrastructure and cost-reduction programs.

 

·                                In the first quarter of 2017, a $12.3 million net gain was recognized in connection with developments in legal disputes, labour-cost reduction initiatives, and customer migration from analog to digital services.

 

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Income tax expense: $48.3 million (effective tax rate of 24.1%) in the first quarter of 2018, compared with $48.0 million (effective tax rate of 24.3%) in the same quarter of 2017.

 

·                                The increase of $0.3 million was mainly due to the effect of non-deductible charges and non-taxable income, partially offset by changes in tax consolidation arrangements with our parent corporation.

 

Net income attributable to shareholder: $152.0 million, an increase of $2.7 million (1.8%).

 

·                                The increase was mainly due to:

 

·                  $26.9 million increase in adjusted operating income; and

 

·                  $5.2 million favourable variance in loss on debt refinancing.

 

Partially offset by:

 

·                  $15.0 million unfavourable variance in restructuring of operations, litigation and other items;

 

·                  $10.1 million increase in depreciation and amortization charges;

 

·                  $3.0 million increase in financial expenses;

 

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

 

·                  $0.3 million increase 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.

 

Operating Activities

 

Cash flows provided by operating activities: $309.3 million in the first quarter of 2018, compared with $180.9 million in the same quarter of 2017, an increase of $128.4 million (71.0%).

 

·                                The increase was mainly due to:

 

·                  $176.9 million favourable variance in non-cash balances related to operations, mainly due to a favourable net variation in income taxes payable, favourable variations in provisions and accounts payable, and a favourable net variation in inventories, partially offset by an unfavourable variation in accounts receivables; and

 

·                  $26.9 million increase in adjusted operating income.

 

Partially offset by:

 

·                  $56.7 million increase in current income tax expenses, mainly due to the recognition of tax benefits in the first quarter of 2017; and

 

·                  $15.0 million unfavourable variance in restructuring of operations, litigation and other items, as explained above.

 

Working capital: $777.5 million as of March 31, 2018 compared with $630.0 million as of December 31, 2017. The difference is mainly explained by cash inflows provided by operating activities during the quarter, partially offset by current income tax expenses.

 

Investing Activities

 

Additions to fixed assets: $139.8 million in the first quarter of 2018, compared with $161.8 million in the same quarter of 2017. The decrease is mainly explained by a reduction in capital expenditures related to our set-top box rental program, and lower investments on our wireline and wireless networks.

 

Additions to intangible assets: $55.0 million in the first quarter of 2018, compared with $33.6 million in the same quarter of 2017. The increase is mainly explained by significant investments made on our IPTV project.

 

Financing Activities

 

Consolidated debt (long-term debt plus bank indebtedness): $59.5 million increase during the first quarter of 2018.

 

·                                Summary of debt increases during the first quarter of 2018:

 

·                  $62.6 million unfavourable impact of exchange rate fluctuations. This increase in long-term debt is offset by an increase in the asset (or a decrease in the liability) related to cross-currency interest rate swaps, recorded under “Derivative financial instruments”.

 

Assets and liabilities related to derivative financial instruments: Net asset of $287.0 million as of March 31, 2018, compared with a net asset of $259.0 million as of December 31, 2017, a $28.0 million favourable variance. The variance was mainly due to the net favourable impact of exchange rate and interest rate fluctuations on the value of derivative financial instruments.

 

Dividends: Stable at $25 million year-over-year in cash distributions to our parent corporation.

 

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Financial Position as of March 31, 2018

 

Net available liquidity: $1,869.7 million for the Corporation and its wholly owned subsidiaries, consisting of $904.7 million in cash and cash equivalents, and $965.0 million in unused availabilities under credit facilities.

 

Consolidated debt (long-term debt plus bank indebtedness): $3,329.8 million as of March 31, 2018, an increase of $59.5 million; $28.0 million favourable net variance in assets and liabilities related to derivative financial instruments (see “Financing Activities” above).

 

As of March 31, 2018, mandatory debt repayments on the Corporation’s long-term debt in the coming years are as follows:

 

Table 3

Mandatory debt repayments on Videotron’s long-term debt

Twelve-month period ending March 31

(in millions of dollars)

 

2019

 

$

5.4

 

2020

 

 

2021

 

 

2022

 

 

2023

 

1,030.8

 

2024 and thereafter

 

2,321.0

 

Total

 

$

3,357.2

 

 

The weighted average term of Videotron’s consolidated debt was approximately 6.8 years as of March 31, 2018 (7.0 years as of December 31, 2017). As of March 31, 2018 and December 31, 2017, after taking into account the hedging instruments, the debt consisted of approximately 94.1% fixed-rate debt and 5.9% floating-rate debt.

 

Videotron’s management believes that cash flows and available sources of financing should be sufficient to cover committed cash requirements for capital investments, including investments required for our wireline and wireless networks, working capital, interest payments, income tax payments, debt repayments, pension plan contributions, and dividends or distributions to shareholders in the future.  Videotron has access to cash flows generated by its subsidiaries through dividends or distributions and cash advances paid by its wholly owned subsidiaries. The Corporation believes it will be able to meet future debt maturities, which are staggered over the coming years.

 

We may (but are under no obligation to) from time to time seek to retire or purchase our outstanding senior notes in open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on our liquidity position and requirements, prevailing market conditions, contractual restrictions and other factors. The amounts involved may be material.

 

Pursuant to their financing agreements, the Corporation is required to maintain certain financial ratios. The key indicators listed in these financing agreements include debt service coverage ratio and debt ratio (long-term debt over adjusted operating income). As of March 31, 2018, the Corporation was in compliance with all required financial ratios.

 

Distributions to our shareholder: We paid $25.0 million in common dividends to our shareholder, Quebecor Media, in the first quarter of 2018 and 2017. We expect to make cash distributions to our shareholder in the future, as determined by our Board of Directors, and within the limits set by the terms of our indebtedness and applicable laws.

 

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Corporate reorganization

 

On January 3, 2018, Quebecor Media Inc. transferred and subsequently cancelled all of its 172,516,829 shares in the Corporation in the amount of $132.4 million to a newly fully owned subsidiary, 9370-5762 Québec Inc. in exchange for a convertible promissory note for a value of $3,908.6 million that is convertible into 3,908,569,822 common shares of 9370-5762 Québec Inc. The following day, the Corporation was merged with 9370-5762 Québec Inc. The new merged Corporation continues to operate under the name of Videotron Ltd.  Since this transaction resulted in no substantive changes in the parent corporation reporting group, the transaction was accounted for using the continuity of interest method. Under this method, all figures of the Corporation reflect the carrying values of the two merged entities.

 

On January 8, 2018, the convertible promissory note was converted into 3,908,569,822 common shares of the Corporation.

 

This corporate reorganization resulted in an increase of $3,776.2 million of capital stock and a decrease of retained earnings by the same amount.

 

Reduction of paid-up capital

 

On January 16, 2018, the Corporation reduced its paid-up capital for a cash consideration of $342.0 million. On the same day, Quebecor Media Inc. reimbursed the subordinated loan of $342.0 million from the Corporation.

 

Subsequent events on April 3 and May 11, 2018, the Corporation reduced its paid-up capital for additional cash considerations of $100.0 million and $1.0 billion respectively.

 

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Analysis of Consolidated Balance Sheets as of March 31, 2018

 

Table 4

Consolidated Balance Sheets of Videotron

Analysis of significant variances between March 31, 2018 and December 31, 2017

(in millions of dollars)

 

 

 

March 31, 2018

 

December 31, 2017

 

Variance

 

Variance detail

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

905.5

 

$

815.8

 

89.7

 

Cash inflows provided by operating and financing activities, less outflows used in investing activities

 

 

 

 

 

 

 

 

 

 

 

Investments

 

2,390.0

 

 

2,390.0

 

Investment in preferred shares of an affiliated corporation for tax consolidation purposes

 

 

 

 

 

 

 

 

 

 

 

Fixed assets

 

3,214.3

 

3,257.4

 

(43.1

)

Amortization expense less capital expenditure

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments1

 

287.0

 

259.0

 

28.0

 

See “Financing Activities” above

 

 

 

 

 

 

 

 

 

 

 

Subordinated loan to parent corporation

 

 

342.0

 

(342.0

)

Reimbursement by the parent corporation

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued charges

 

393.5

 

491.9

 

(98.4

)

Impact of current variances in activity

 

 

 

 

 

 

 

 

 

 

 

Income taxes payable (receivable)

 

33.0

 

(27.2

)

60.2

 

Recognition of tax benefits in 2017

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, including short-term portion

 

3,329.8

 

3,270.3

 

59.5

 

See “Financing Activities” above

 

 

 

 

 

 

 

 

 

 

 

Subordinated loan from parent corporation

 

2,390.0

 

 

2,390.0

 

Loan from parent corporation for tax consolidation purposes

 

 

 

 

 

 

 

 

 

 

 

Deferred income taxes

 

703.9

 

719.3

 

(15.4

)

Deferred income tax recovery recorded in net income

 

 

 

 

 

 

 

 

 

 

 

Capital stock

 

3,566.6

 

132.4

 

3,434.2

 

Corporate reorganization — See “Financial Position as of March 31, 2018” above

 

 

 

 

 

 

 

 

 

 

 

(Deficit) retained earnings

 

(1,804.3

)

1,844.9

 

(3,649.2

)

Corporate reorganization

 

 


1   Long-term assets less long-term liabilities

 

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ADDITIONAL INFORMATION

 

Contractual Obligations and Other Commercial Commitments

 

As of March 31, 2018, material contractual obligations included: capital repayment and interest payments on long-term debt, obligations related to derivative financial instruments, less estimated future receipts on derivative financial instruments, operating lease arrangements and capital asset purchases and other commitments.

 

Table 5 below shows a summary of our contractual obligations.

 

Table 5

Contractual obligations of the Corporation

Payments due by period as of March 31, 2018

(in millions of dollars)

 

 

 

Total

 

Less than
1 year

 

1-3 years

 

3-5 years

 

5 years
or more

 

 

 

 

 

 

 

 

 

 

 

 

 

Contractual obligations1

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued charges

 

$

393.5

 

$

393.5

 

$

 

$

 

$

 

Amounts payable to affiliated corporations

 

54.5

 

54.5

 

 

 

 

Export financing facility

 

5.4

 

5.4

 

 

 

 

5% Senior Notes due July 15, 2022

 

1,030.8

 

 

 

1,030.7

 

 

5 3/8% Senior Notes due June 15, 2024

 

773.0

 

 

 

 

773.0

 

5 5/8% Senior Notes due June 15, 2025

 

400.0

 

 

 

 

400.0

 

5 3/4% Senior Notes due January 15, 2026

 

375.0

 

 

 

 

375.0

 

5 1/8% Senior Notes due April 15, 2027

 

773.0

 

 

 

 

773.0

 

Interest payments2

 

1,110.2

 

117.5

 

336.1

 

308.4

 

348.2

 

Derivative financial instruments3

 

(310.6

)

 

 

(231.2

)

(79.4

)

Operating lease commitments

 

146.4

 

41.6

 

48.9

 

21.8

 

34.1

 

Services and capital equipment commitments

 

588.8

 

86.1

 

149.8

 

126.4

 

226.5

 

Total contractual cash obligations

 

$

5,339.9

 

$

698.6

 

$

534.8

 

$

1,256.1

 

$

2,850.4

 

 


1              Excludes obligations under subordinated loans due to Quebecor Media, our parent corporation; the proceeds of which are used to invest in preferred shares of an affiliated corporation for tax consolidation purposes for the Quebecor Media group.

 

2              Estimated interest payable on long-term debt, based on interest rates, hedging of interest rates and hedging of foreign exchange rates as of March 31, 2018.

 

3              Estimated future receipts, net of future disbursements, related to foreign exchange hedging using derivative financial instruments.

 

Material commitments included in Table 5

 

The Corporation leases sites for its LTE wireless network under operating lease contracts, and it has signed a set of service sharing and exchange agreements with Rogers Communications Inc., including a 20-year agreement to build out and operate a shared LTE wireless network in the Province of Québec and in the Ottawa Region. Also, the Corporation has signed an agreement with Comcast Corporation to deploy an innovative IP television service.  As of March 31, 2018, a total commitment of $579.6 million was outstanding under those agreements.

 

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Table of Contents

 

Related Party Transactions

 

The following describes transactions in which the Corporation and its directors, executive officers and affiliates are involved. We believe that each of the transactions described below was on terms no less favourable to Videotron than could have been obtained from independent third parties.

 

Operating transactions

 

In the first quarter of 2018, the Corporation and its subsidiaries incurred various expenses, including rent charges, from the parent and affiliated corporations in the amount of $28.9 million ($36.2 million in the same quarter of 2017), which are included in purchase of goods and services. The Corporation and its subsidiaries generated revenues from the parent and affiliated corporations in the amount of $1.5 million ($1.9 million in the first quarter of 2017). These transactions were concluded and accounted for at the consideration agreed between parties.

 

Management arrangements

 

Videotron has entered into management arrangements with its parent corporation. Under these management arrangements, the parent corporation provides management services on a cost-reimbursement basis.

 

Videotron incurred management fees of $13.2 million with its parent corporation in the first quarter of 2018 and 2017.

 

Financial Instruments

 

The Corporation uses a number of financial instruments, mainly cash and cash equivalents, accounts receivable, bank indebtedness, accounts payable and accrued charges, long-term debt, and derivative financial instruments.

 

In order to manage its foreign exchange and interest rate risks, the Corporation uses derivative financial instruments (i) to set in Canadian dollars future payments on debts denominated in U.S. dollars (interest and principal) and certain purchases of inventories and other capital expenditures denominated in a foreign currency, (ii) to achieve a targeted balance of fixed and floating rate debts. The Corporation does not intend to settle its derivative financial instruments prior to their maturity as none of these instruments is held or issued for speculative purposes.

 

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

 

The carrying value and fair value of long-term debt and derivative financial instruments as of March 31, 2018 and December 31, 2017 were as follows:

 

Table 6

Fair value of long-term debt and derivative financial instruments

(in millions of dollars)

 

 

 

March 31, 2018

 

December 31, 2017

 

 

 

Carrying
value

 

Fair
value

 

Carrying
value

 

Fair
value

 

Long-term debt 1

 

$

(3,357.2

)

$

(3,421.0

)

$

(3,294.6

)

$

(3,492.1

)

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

1.2

 

1.2

 

(4.5

)

(4.5

)

Cross-currency interest rate swaps

 

285.8

 

285.8

 

263.5

 

263.5

 

 


1              The carrying value of long-term debt excludes adjustments to record changes in the fair value of long-term debt related to hedged interest rate risk and financing fees.

 

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The fair value of long-term debt in table 6 is estimated based on quoted market prices when available or on valuation models. When the Corporation uses valuation models, the fair value is estimated using discounted cash flows using period-end market yields or the market value of similar instruments with the same maturity.

 

The fair value of derivative financial instruments recognized on the consolidated balance sheet is estimated as per the Corporation’s valuation models. These models project future cash flows and discount the future amounts to a present value using the contractual terms of the derivative financial instrument and factors observable in external markets data, such as period-end swap rates and foreign exchange rates. An adjustment is also included to reflect non-performance risk impacted by the financial and economic environment prevailing at the date of the valuation, in the recognized measure of the fair value of the derivative financial instruments by applying a credit default premium estimated using a combination of observable and unobservable inputs in the market to the net exposure of the counterparty or the Corporation.

 

The gain or loss on valuation and translation of financial instruments for the three months ended March 31, 2018 and 2017 is summarized in the following table.

 

Table 7

Loss on valuation and translation of financial instruments

(in millions of dollars)

 

 

 

Three months ended March 31

 

 

 

2018

 

2017

 

 

 

 

 

 

 

Loss on the ineffective portion of cash flow hedges

 

$

1.5

 

$

 

(Gain) loss on the ineffective portion of fair value hedges

 

(0.1

)

0.3

 

Loss on reversal of embedded derivatives upon debt redemption

 

0.0

 

0.1

 

 

 

$

1.4

 

$

0.4

 

 

A loss of $28.4 million was recorded under other comprehensive income in the first quarter of 2018 in relation to cash flow hedging relationships (loss of $7.3 million in the same quarter of 2017).

 

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CHANGES IN ACCOUNTING POLICIES

 

(i)        IFRS 9 — Financial Instruments

 

On January 1, 2018, the Corporation adopted the new rules under IFRS 9 which simplify the measurement and classification of financial assets by reducing the number of measurement categories in IAS 39, Financial Instruments: Recognition and Measurement. The new standard also provides for a fair value option in the designation of a non-derivative financial liability and its related classification and measurement, as well as for a new hedge accounting model more closely aligned with risk-management activities undertaken by entities.

 

Under the new rules, all financial assets and liabilities of the Corporation are now classified as subsequently measured at amortized cost.

 

The adoption of IFRS 9 had no impact on the consolidated financial statements.

 

(ii)     IFRS 15 — Revenue from Contracts with Customers

 

On January 1, 2018, the Corporation adopted on a fully retrospective basis the new rules under IFRS 15, Revenue from Contracts with Customers, which specify how and when an entity should recognize revenue as well as requiring such entities to provide users of financial statements with more informative disclosures. The standard provides a single, principles-based, five-step model under which the Corporation now account for a contract with a customer only when all of the following criteria are met:

 

·                                the parties to the contract have approved the contract (in writing, orally or in accordance with other customary business practices) and are committed to perform their respective obligations;

 

·                                the entity can identify each party’s rights regarding the goods or services to be transferred;

 

·                                the entity can identify the payment terms for the goods or services to be transferred;

 

·                                the contract has commercial substance (i.e. the risk, timing or amount of the entity’s future cash flows is expected to change as a result of the contract); and

 

·                                it is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.

 

The adoption of IFRS 15 had significant impacts on the consolidated financial statements of the Corporation with regards to the timing of the recognition of its revenues, the classification of its revenues, as well as the capitalization of costs, such as the costs to obtain a contract and connection costs.

 

Under IFRS 15, the total consideration from a contract with multiple deliverables is now allocated to all performance obligations in the contract based on the stand-alone selling price of each obligation, without being limited to a non-contingent amount. The Corporation provides mobile devices and services under contracts with multiple deliverables and for a fixed period of time. Under IFRS 15, promotional offers related to the sale of mobile devices previously accounted for as a reduction in related equipment sales on activation, are now considered in the total consideration to be allocated to all performance obligations. Among other impacts, the adoption of IFRS 15 results in an increase in the revenue from the device sale and in a decrease in the mobile service revenue recognized over the contract term. The timing of the recognition of these revenues therefore changes under IFRS 15. However, the total revenue recognized over a contract term relating to all performance obligations within the contract remains the same as under the previous rules. The portion of revenues that is earned without having been invoiced is now presented as contract assets in the consolidated balance sheets, which asset is realized over the term of the contract. The long term portion of contract assets is included in “Other Assets” in the consolidated balance sheets. All other types of revenues have not been impacted by the adoption of IFRS15.

 

In addition, under IFRS 15, certain costs to obtain a contract, mainly sales commissions, are capitalized and amortized as operating expenses over the contract term or over the period of time the customer is expected to maintain its services. Previously, such costs were expensed as incurred. Also, the capitalization of connection costs is no longer limited to the related connection revenues as it was under the previous rules. These capitalized costs are included in “Other Assets” as contract costs in the consolidated balance sheets.

 

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Table of Contents

 

The retroactive adoption of IFRS 15 had the following impacts on the comparatives financial figures:

 

Consolidated statements of income and comprehensive income

 

Increase (decrease)

 

Three months ended March 31, 2017

 

 

 

 

 

Revenues

 

$

5,047

 

Purchase of goods and services

 

(1,703

)

Deferred income tax expenses

 

1,789

 

Net income and comprehensive income attributable to shareholders

 

$

4,961

 

 

Consolidated balance sheets

 

Increase

 

December 31, 2017

 

December 31, 2016

 

 

 

 

 

 

 

Contract assets1

 

$

183,611

 

$

155,790

 

Contract costs2

 

92,528

 

85,457

 

Deferred income tax liability

 

73,176

 

63,930

 

Retained earnings

 

202,963

 

177,317

 

 


1 The current portion of contract assets is $132.8 million as of December 31, 2017 and $106.6 million as of December 31, 2016.

 

2The current portion of contract costs is $55.9 million as of December 31, 2017 and $49.4 million as of December 31, 2016.

 

The adoption of IFRS 15 had no impact on our cash flow from operating, investing or financing activities.

 

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Table of Contents

 

Cautionary Statement Regarding Forward-Looking Statement

 

This quarterly 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 those 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 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 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 services and Club illico, and our ability to protect such services from piracy, unauthorised 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 interpretation, which could result, among other things, in the loss (or reduction in value) of our licences 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 in the annual report on Form 20-F, under “Item 3. Key information — Risk Factors.” Each of these forward-looking statements speaks only as of the date of this report. We will not update these statements unless 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).

 

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Table of Contents

 

VIDEOTRON LTD.

CONSOLIDATED STATEMENTS OF INCOME

 

(in thousands of Canadian dollars)

(unaudited)

 

 

 

 

 

Three months ended March 31

 

 

 

Note

 

2018

 

2017

 

 

 

 

 

 

 

(restated, note 2)

 

Revenues

 

 

 

 

 

 

 

Cable television

 

 

 

$

248,661

 

$

251,260

 

Internet

 

 

 

261,639

 

250,471

 

Mobile telephony

 

 

 

125,814

 

111,073

 

Cable telephony

 

 

 

95,158

 

102,554

 

Over-the-top video

 

 

 

11,147

 

9,034

 

Business

 

 

 

31,750

 

31,364

 

Equipment sales

 

 

 

45,491

 

45,110

 

Other

 

 

 

2,258

 

2,438

 

 

 

 

 

821,918

 

803,304

 

 

 

 

 

 

 

 

 

Employee costs

 

3

 

101,644

 

100,013

 

Purchase of goods and services

 

3

 

310,073

 

319,938

 

Depreciation and amortization

 

 

 

165,635

 

155,548

 

Financial expenses

 

4

 

40,198

 

37,245

 

Loss on valuation and translation of financial instruments

 

 

 

1,424

 

430

 

Loss on debt refinancing

 

 

 

 

5,201

 

Restructuring of operations, litigation and other items

 

5

 

2,681

 

(12,343

)

Income before income taxes

 

 

 

200,263

 

197,272

 

 

 

 

 

 

 

 

 

Income taxes (recovery)

 

 

 

 

 

 

 

Current

 

 

 

60,990

 

4,261

 

Deferred

 

 

 

(12,687

)

43,752

 

 

 

 

 

48,303

 

48,013

 

 

 

 

 

 

 

 

 

Net income

 

 

 

$

151,960

 

$

149,259

 

 

 

 

 

 

 

 

 

Net income attributable to

 

 

 

 

 

 

 

Shareholder

 

 

 

$

151,979

 

$

149,252

 

Non-controlling interests

 

 

 

(19

)

7

 

 

See accompanying notes to condensed consolidated financial statements.

 

20



Table of Contents

 

VIDEOTRON LTD.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

(in thousands of Canadian dollars)

(unaudited)

 

 

 

 

 

Three months ended March 31

 

 

 

Note

 

2018

 

2017

 

 

 

 

 

 

 

(restated, note 2)

 

 

 

 

 

 

 

 

 

Net income

 

 

 

$

151,960

 

$

149,259

 

 

 

 

 

 

 

 

 

Other comprehensive loss:

 

 

 

 

 

 

 

Items that may be reclassified to income :

 

 

 

 

 

 

 

Cash flows hedges:

 

 

 

 

 

 

 

Loss on valuation of derivative financial instruments

 

 

 

(28,442

)

(7,325

)

Deferred income taxes

 

 

 

2,737

 

2,044

 

 

 

 

 

(25,705

)

(5,281

)

Comprehensive income

 

 

 

$

126,255

 

$

143,978

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to

 

 

 

 

 

 

 

Shareholder

 

 

 

$

126,274

 

$

143,971

 

Non-controlling interests

 

 

 

(19

)

7

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

 

VIDEOTRON LTD.

CONSOLIDATED STATEMENTS OF EQUITY

 

(in thousands of Canadian dollars)

(unaudited)

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

Equity attributable to shareholder

 

attributable

 

 

 

 

 

Capital
stock
(note 8)

 

Retained
earnings
(deficit)

 

Accumulated other
comprehensive
loss (note 11)

 

to non-
controlling
interests

 

Total equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2016, as previously reported

 

$

132,401

 

$

1,022,737

 

$

(83,907

)

$

509

 

$

1,071,740

 

Changes in accounting policies (note 2)

 

 

177,317

 

 

 

177,317

 

Balance as of December 31, 2016 , as restated

 

132,401

 

1,200,054

 

(83,907

)

509

 

1,249,057

 

Net income

 

 

149,252

 

 

7

 

149,259

 

Other comprehensive loss

 

 

 

(5,281

)

 

(5,281

)

Dividends

 

 

(25,000

)

 

 

(25,000

)

Balance as of March 31, 2017

 

132,401

 

1,324,306

 

(89,188

)

516

 

1,368,035

 

Net income

 

 

790,577

 

 

45

 

790,622

 

Other comprehensive income

 

 

 

47,360

 

 

47,360

 

Dividends

 

 

(270,000

)

 

 

(270,000

)

Balance as of December 31, 2017

 

132,401

 

1,844,883

 

(41,828

)

561

 

1,936,017

 

Net income

 

 

151,979

 

 

(19

)

151,960

 

Other comprehensive loss

 

 

 

(25,705

)

 

(25,705

)

Corporate reorganization (note 8)

 

3,776,170

 

(3,776,170

)

 

 

 

Reduction of paid-up capital (note 8)

 

(342,000

)

 

 

 

(342,000

)

Dividends

 

 

(25,000

)

 

(155

)

(25,155

)

Balance as of March 31, 2018

 

$

3,566,571

 

$

(1,804,308

)

$

(67,533

)

$

387

 

$

1,695,117

 

 

See accompanying notes to condensed consolidated financial statements.

 

22



Table of Contents

 

VIDEOTRON LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(in thousands of Canadian dollars)

(unaudited)

 

 

 

 

 

Three months ended March 31

 

 

 

Note

 

2018

 

2017

 

 

 

 

 

 

 

(restated, note 2)

 

Cash flows related to operating activities

 

 

 

 

 

 

 

Net income

 

 

 

$

151,960

 

$

149,259

 

Adjustments for:

 

 

 

 

 

 

 

Depreciation of fixed assets

 

 

 

143,773

 

135,295

 

Amortization of intangible assets

 

 

 

21,862

 

20,253

 

Loss on valuation and translation of financial instruments

 

 

 

1,424

 

430

 

Amortization of financing costs

 

4

 

1,109

 

989

 

Deferred income taxes

 

 

 

(12,687

)

43,752

 

Loss on debt refinancing

 

 

 

 

5,201

 

Other

 

 

 

1,599

 

2,358

 

 

 

 

 

309,040

 

357,537

 

Net change in non-cash balances related to operating activities

 

 

 

217

 

(176,644

)

Cash flows provided by operating activities

 

 

 

309,257

 

180,893

 

 

 

 

 

 

 

 

 

Cash flows related to investing activities

 

 

 

 

 

 

 

Additions to fixed assets

 

 

 

(139,834

)

(161,751

)

Additions to intangible assets

 

 

 

(55,023

)

(33,603

)

Business acquisition (net of cash acquired)

 

 

 

 

(5,553

)

Reduction in paid-up capital

 

8

 

(342,000

)

 

Acquisition of preferred shares of an affiliated corporation

 

7

 

(2,390,000

)

 

Other

 

 

 

404

 

470

 

Cash flows used in investing activities

 

 

 

(2,926,453

)

(200,437

)

 

 

 

 

 

 

 

 

Cash flows related to financing activities

 

 

 

 

 

 

 

Net change in bank indebtedness

 

 

 

 

35,106

 

Net change under revolving credit facility

 

 

 

 

190,686

 

Repayment of long-term debt

 

 

 

 

(181,017

)

Repayment of a loan by the parent corporation

 

9

 

342,000

 

 

Issuance of a loan from the parent corporation

 

 

 

2,390,000

 

 

Dividends

 

 

 

(25,000

)

(25,000

)

Other

 

 

 

(154

)

 

Cash flows provided by financing activities

 

 

 

2,706,846

 

19,775

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

 

89,650

 

231

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at the beginning of the period

 

 

 

815,848

 

961

 

Cash and cash equivalents at the end of the period

 

 

 

$

905,498

 

$

1,192

 

 

23



Table of Contents

 

VIDEOTRON LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

 

(in thousands of Canadian dollars)

(unaudited)

 

 

 

Three months ended March 31

 

 

 

2018

 

2017

 

 

 

 

 

 

 

Additional information on the consolidated statements of cash flows

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents consist of

 

 

 

 

 

Cash

 

$

905,198

 

$

143

 

Cash equivalents

 

300

 

1,049

 

 

 

$

905,498

 

$

1,192

 

 

 

 

 

 

 

Interest and taxes reflected as operating activities

 

 

 

 

 

Cash interest payments

 

$

35,254

 

$

37,129

 

Cash income tax payments (net of refunds)

 

662

 

49,489

 

 

See accompanying notes to condensed consolidated financial statements.

 

24



Table of Contents

 

VIDEOTRON LTD.

CONSOLIDATED BALANCE SHEETS

 

(in thousands of Canadian dollars)
(unaudited)

 

 

 

Note

 

March 31, 2018

 

December 31, 2017

 

December 31, 2016

 

 

 

 

 

 

 

(restated, note 2)

 

(restated, note 2)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

$

905,498

 

$

815,848

 

$

961

 

Accounts receivable

 

 

 

350,100

 

337,768

 

329,037

 

Contract assets

 

2

 

130,701

 

132,795

 

106,592

 

Amounts receivable from affiliated corporations

 

 

 

23,558

 

7,021

 

2,657

 

Income taxes

 

 

 

 

27,158

 

 

Inventories

 

 

 

91,200

 

89,590

 

86,064

 

Prepaid expenses

 

 

 

59,018

 

46,163

 

38,242

 

Other current assets

 

2

 

51,823

 

55,894

 

49,387

 

Total current assets

 

 

 

1,611,898

 

1,512,237

 

612,940

 

 

 

 

 

 

 

 

 

 

 

Non-current assets

 

 

 

 

 

 

 

 

 

Investments

 

7

 

2,390,000

 

 

 

Fixed assets

 

 

 

3,214,252

 

3,257,388

 

3,261,883

 

Intangible assets

 

 

 

922,692

 

907,972

 

1,123,257

 

Goodwill

 

 

 

535,932

 

535,932

 

535,932

 

Derivative financial instruments

 

 

 

311,900

 

293,157

 

417,788

 

Subordinated loan to parent corporation

 

9

 

 

342,000

 

 

Other assets

 

2

 

99,025

 

100,856

 

102,132

 

Total non-current assets

 

 

 

7,473,801

 

5,437,305

 

5,440,992

 

Total assets

 

 

 

$

9,085,699

 

$

6,949,542

 

$

6,053,932

 

 

25



Table of Contents

 

VIDEOTRON LTD.

CONSOLIDATED BALANCE SHEETS (continued)

 

(in thousands of Canadian dollars)

(unaudited)

 

 

 

Note

 

March 31, 2018

 

December 31, 2017

 

December 31, 2016

 

 

 

 

 

 

 

(restated, note 2)

 

(restated, note 2)

 

Liabilities and Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

Bank indebtnedness

 

 

 

$

 

$

 

$

10,118

 

Accounts payable and accrued charges

 

 

 

393,500

 

491,910

 

456,437

 

Amounts payable to affiliated corporations

 

 

 

54,549

 

54,675

 

66,534

 

Provisions

 

 

 

21,068

 

17,508

 

60,321

 

Deferred revenue

 

 

 

326,938

 

312,772

 

309,910

 

Income taxes

 

 

 

32,984

 

 

33,370

 

Current portion of long-term debt

 

6

 

5,357

 

5,357

 

10,714

 

Total current liabilities

 

 

 

834,396

 

882,222

 

947,404

 

 

 

 

 

 

 

 

 

 

 

Non-current liabilities

 

 

 

 

 

 

 

 

 

Long-term debt

 

6

 

3,324,429

 

3,264,973

 

3,152,394

 

Subordinated loan from parent corporation

 

7

 

2,390,000

 

 

 

Derivative financial instruments

 

 

 

24,926

 

34,129

 

 

Deferred income taxes

 

2

 

703,910

 

719,334

 

589,465

 

Other liabilities

 

 

 

112,921

 

112,867

 

115,612

 

Total non-current liabilities

 

 

 

6,556,186

 

4,131,303

 

3,857,471

 

Total liabilities

 

 

 

7,390,582

 

5,013,525

 

4,804,875

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

 

Capital stock

 

8

 

3,566,571

 

132,401

 

132,401

 

(Deficit) retained earnings

 

 

 

(1,804,308

)

1,844,883

 

1,200,054

 

Accumulated other comprehensive loss

 

11

 

(67,533

)

(41,828

)

(83,907

)

Equity attributable to shareholder

 

 

 

1,694,730

 

1,935,456

 

1,248,548

 

Non-controlling interests

 

 

 

387

 

561

 

509

 

Total equity

 

 

 

1,695,117

 

1,936,017

 

1,249,057

 

Subsequent events

 

13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and equity

 

 

 

$

9,085,699

 

$

6,949,542

 

$

6,053,932

 

 

See accompanying notes to condensed consolidated financial statements.

 

26



Table of Contents

 

VIDEOTRON LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the three-month periods ended March 31, 2018 and 2017

(tabular amounts in thousands of Canadian dollars, except for option data)

(unaudited)

 

Videotron Ltd. (the “Corporation”) is incorporated under the laws of Québec and is a wholly owned subsidiary of Quebecor Media Inc. (the parent corporation) and is a subsidiary of Quebecor Inc. (the ultimate parent corporation).  The Corporation’s head office and registered office is located at 612, rue Saint-Jacques, Montreal (Quebec), Canada.

 

The Corporation offers television distribution, Internet access, business solutions (including data centers), cable and mobile telephony and over-the-top video services in Canada and is engaged in the rental of movies and televisual products through its video-on-demand services.

 

1.                BASIS OF PRESENTATION

 

These condensed financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”), except that they do not include all disclosures required under IFRS for annual consolidated financial statements. In particular, these consolidated financial statements were prepared in accordance with IAS 34, Interim Financial Reporting, and accordingly, they are condensed consolidated financial statements. These condensed consolidated financial statements should be read in conjunction with the Corporation’s 2017 annual consolidated financial statements, which contain a description of the accounting policies used in the preparation of these financial statements.

 

These condensed consolidated financial statements were approved for issue by the Board of Directors of the Corporation on May 7, 2018.

 

Comparative figures for the three-month period ended March 31, 2017 have been restated to conform to the presentation adopted for the three-month period ended March 31, 2018.

 

2.                CHANGES IN ACCOUNTING POLICIES

 

(i)            IFRS 9Financial Instruments

 

On January 1, 2018, the Corporation adopted the new rules under IFRS 9, Financial Instruments, which simplify the measurement and classification of financial assets by reducing the number of measurement categories in IAS 39, Financial Instruments: Recognition and Measurement. The new standard also provides for a fair value option in the designation of a non-derivative financial liability and its related classification and measurement, as well as for a new hedge accounting model more closely aligned with risk-management activities undertaken by entities.

 

Under the new rules, all financial assets and liabilities of the Corporation are now classified as subsequently measured at amortized cost.

 

The adoption of IFRS 9 had no impact on the consolidated financial statements.

 

(ii)         IFRS 15Revenue from Contracts with Customers

 

On January 1, 2018, the Corporation adopted, on a fully retrospective basis the new rules under IFRS 15, Revenue from Contracts with Customers, which specifiy how and when an entity should recognize revenue, and which also require the entity to provide users of financial statements with more informative disclosures. The standard provides a single, principles-based, five-step model under which the Corporation now only accounts for a contract with a customer when all of the following criteria are met:

 

·                 the parties to the contract have approved the contract (in writing, orally or in accordance with other customary business practices) and are committed to performing their respective obligations;

 

·                 the entity can identify each party’s rights regarding the goods or services to be transferred;

 

27



Table of Contents

 

VIDEOTRON LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

For the three-month periods ended March 31, 2018 and 2017

(tabular amounts in thousands of Canadian dollars, except for option data)

(unaudited)

 

2.                CHANGES IN ACCOUNTING POLICIES (continued)

 

(ii)         IFRS 15 — Revenue from Contracts with Customers (continued)

 

·                 the entity can identify the payment terms for the goods or services to be transferred;

 

·                 the contract has commercial substance (i.e. the risk, timing or amount of the entity’s future cash flows is expected to change as a result of the contract); and

 

·                 it is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.

 

The adoption of IFRS 15 had significant impacts on the consolidated financial statements of the Corporation with regards to the timing of the recognition of its revenues, the classification of its revenues, as well as the capitalization of costs, such as the costs to obtain a contract and connection costs.

 

Under IFRS 15, the total consideration from a contract with multiple deliverables is now allocated to all performance obligations in the contract based on the stand-alone selling price of each obligation, without being limited to a non-contingent amount. The Corporation provides mobile devices and services under contracts with multiple deliverables and for a fixed period of time. Under IFRS 15, promotional offers related to the sale of mobile devices, previously accounted for as a reduction in related equipment sales on activation, are now considered in the total consideration to be allocated to all performance obligations. Among other impacts, the adoption of IFRS 15 results in an increase in the revenue from the device sale and in a decrease in the mobile service revenue recognized over the contract term. The timing of the recognition of these revenues therefore changes under IFRS 15. However, the total revenue recognized over a contract term relating to all performance obligations within the contract remains the same as under the previous rules. The portion of revenues that is earned without having been invoiced is now presented as contract assets in the consolidated balance sheets, which asset is realized over the term of the contract. The long-term portion of contract assets is included in “Other Assets” in the consolidated balance sheets. All other types of revenue have not been impacted by the adoption of IFRS15.

 

In addition, under IFRS 15, certain costs to obtain a contract, mainly sales commissions, are capitalized and amortized as operating expenses over the contract term or over the period of time the customer is expected to maintain its services. Previously, such costs were expensed as incurred. Also, the capitalization of connection costs is no longer limited to the related connection revenues as under the previous rules. These capitalized costs are included in “Other Assets” as contract costs in the consolidated balance sheets.

 

The retroactive adoption of IFRS 15 had the following impacts on the comparatives consolidated financial figures:

 

Consolidated statements of income and comprehensive income

 

Increase (decrease)

 

Three months ended March 31, 2017

 

 

 

 

 

Revenues

 

$

5,047

 

Purchase of goods and services

 

(1,703

)

Deferred income tax expenses

 

1,789

 

Net income and comprehensive income attributable to shareholders

 

$

4,961

 

 

28



Table of Contents

 

VIDEOTRON LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

For the three-month periods ended March 31, 2018 and 2017

(tabular amounts in thousands of Canadian dollars, except for option data)

(unaudited)

 

2.                CHANGES IN ACCOUNTING POLICIES (continued)

 

Consolidated balance sheets

 

Increase

 

December 31, 2017

 

December 31, 2016

 

 

 

 

 

 

 

Contract assets1

 

$

183,611

 

$

155,790

 

Contract costs2

 

92,528

 

85,457

 

Deferred income tax liability

 

73,176

 

63,930

 

Retained earnings

 

202,963

 

177,317

 

 


1          The current portion of contract assets is $132.8 million as of December 31, 2017 and $106.6 million as of December 31, 2016.

 

2          The current portion of contract costs is $55.9 million as of December 31, 2017 and $49.4 million as of December 31, 2016.

 

The adoption of IFRS 15 had no impact on cashflows from operating, investing, or financing activities.

 

3.                EMPLOYEE COSTS AND PURCHASE OF GOODS AND SERVICES

 

 

 

Three months ended March 31

 

 

 

2018

 

2017

 

 

 

 

 

(restated,
note 2)

 

 

 

 

 

 

 

Employee costs

 

$

148,899

 

$

147,256

 

Less employee costs capitalized to fixed assets and intangible assets

 

(47,255

)

(47,243

)

 

 

101,644

 

100,013

 

Purchase of goods and services

 

 

 

 

 

Royalties and rights

 

106,182

 

109,143

 

Cost of retail products

 

69,397

 

67,650

 

Subcontracting costs

 

25,584

 

29,463

 

Marketing and distribution expenses

 

13,384

 

12,008

 

Other

 

95,526

 

101,674

 

 

 

310,073

 

319,938

 

 

 

 

 

 

 

 

 

$

411,717

 

$

419,951

 

 

29



Table of Contents

 

VIDEOTRON LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

For the three-month periods ended March 31, 2018 and 2017

(tabular amounts in thousands of Canadian dollars, except for option data)

(unaudited)

 

4.                FINANCIAL EXPENSES

 

 

 

Three months ended March 31

 

 

 

2018

 

2017

 

 

 

 

 

 

 

Third parties:

 

 

 

 

 

Interest on long-term debt

 

$

41,790

 

$

35,036

 

Amortization of financing costs

 

1,109

 

989

 

Loss (gain) on foreign currency translation on short-term monetary items

 

476

 

(336

)

Other

 

(3,013

)

695

 

 

 

40,362

 

36,384

 

Affiliated corporations (note 9):

 

 

 

 

 

Interest expense

 

20,528

 

 

Dividend income

 

(20,744

)

 

Interest income

 

(773

)

 

 

 

(989

)

 

 

 

 

 

 

 

Interest on net defined benefit liability

 

825

 

861

 

 

 

$

40,198

 

$

37,245

 

 

5.                RESTRUCTURING OF OPERATIONS, LITIGATION AND OTHER ITEMS

 

During the first quarter of 2018, a net charge of $2.7 million was recorded relating mainly to various cost reduction initiatives across the organization (a net gain of $12.3 million in 2017 which was related to cost reduction initiatives, developments in certain litigations and the migration of subscribers from analog to digital services).

 

6.                LONG-TERM DEBT

 

Components of the long-term debt are as follows:

 

 

 

March 31, 2018

 

December 31, 2017

 

 

 

 

 

 

 

Bank credit facilities

 

$

5,357

 

$

5,357

 

Senior Notes

 

3,351,800

 

3,289,200

 

Total long-term debt

 

3,357,157

 

3,294,557

 

 

 

 

 

 

 

Change in fair value related to hedged interest rate risk

 

1,001

 

5,789

 

Financing cost, net of amortization

 

(28,372

)

(30,016

)

 

 

(27,371

)

(24,227

)

 

 

 

 

 

 

Less current portion

 

(5,357

)

(5,357

)

 

 

$

3,324,429

 

$

3,264,973

 

 

30



Table of Contents

 

VIDEOTRON LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

For the three-month periods ended March 31, 2018 and 2017

(tabular amounts in thousands of Canadian dollars, except for option data)

(unaudited)

 

7.                  INVESTMENTS AND SUBORDINATED LOAN FROM PARENT CORPORATION

 

On February 27, 2018, the Corporation contracted a subordinated loan of $2.39 billion from Quebecor Media Inc., bearing interest at a rate of 9.5%, payable every six months on June 20 and December 20, and maturing on February 27, 2048. On the same day, the Corporation invested the total proceeds of $2.39 billion into 2,390,000 preferred shares, Series C, of 9346-9963 Québec Inc. These shares carry the right to receive an annual dividend of 9.6%, payable semi-annually. This transaction was carried out for tax consolidation purposes of Quebecor Media Inc. and its subsidiaries.

 

8.                CAPITAL STOCK

 

(a)           Authorized capital stock

 

An unlimited number of common shares, without par value, voting and participating.

 

An unlimited number of preferred shares, Series B, Series C, Series D, Series E, Series F, and Series H, without par value, ranking prior to the common shares with regards to payment of dividends and repayment of capital, non-voting, non-participating, a fixed monthly non-cumulative dividend of 1%, retractable and redeemable.

 

An unlimited number of preferred shares, Series G, ranking prior to all other shares with regards to payment of dividends and repayment of capital, non-voting, non-participating carrying the rights and restrictions attached to the class as well as a fixed annual cumulative preferred dividend of 11.25%, retractable and redeemable.

 

(b)           Issued and outstanding capital stock

 

 

 

Common Shares

 

 

 

Number

 

Amount

 

Balance as of December 31, 2017

 

172,516,829

 

$

132,401

 

Corporate reorganization

 

 

 

 

 

Cancellation of shares

 

(172,516,829

)

(132,401

)

Issuance of shares

 

3,908,569,822

 

3,908,571

 

Reduction in paid-up capital

 

 

(342,000

)

Balance as of March 31, 2018

 

3,908,569,822

 

$

3,566,571

 

 

Corporate reorganization

 

On January 3, 2018, Quebecor Media Inc. transferred and subsequently cancelled all of its 172,516,829 shares in the Corporation in the amount of $132.4 million to a newly fully owned subsidiary, 9370-5762 Québec Inc. in exchange for a convertible promissory note for a value of $3,908.6 million that is convertible into 3,908,569,822 common shares of 9370-5762 Québec Inc. The following day, the Corporation was merged with 9370-5762 Québec Inc. The new merged Corporation continues to operate under the name of Videotron Ltd.  Since this transaction resulted in no substantive changes in the parent corporation reporting group, the transaction was accounted for using the continuity of interest method. Under this method, all figures of the Corporation reflect the carrying values of the two merged entities.

 

On January 8, 2018, the convertible promissory note was converted into 3,908,569,822 common shares of the Corporation.

 

This corporate reorganization resulted in an increase of $3,776.2 million of capital stock and a decrease of retained earnings by the same amount.

 

Reduction of paid-up capital

 

On January 16, 2018, the Corporation reduced its paid-up capital for a cash consideration of $342.0 million.

 

31



Table of Contents

 

VIDEOTRON LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

For the three-month periods ended March 31, 2018 and 2017

(tabular amounts in thousands of Canadian dollars, except for option data)

(unaudited)

 

9.                SUBORDINATED LOAN TO PARENT COPORATION

 

On April 12, 2017, the Corporation issued to Quebecor Media Inc. a $342.0 million subordinated loan, bearing interest at 5.5%, payable every six months on April 12 and October 12, and maturing on April 12, 2019.

 

On January 16, 2018, Quebecor Media Inc. reimbursed its subordinated loan of $342.0 million to the Corporation.

 

10.         STOCK-BASED COMPENSATION PLAN

 

Outstanding options

 

The following table provides details of changes to outstanding options in the principal stock-based compensation plans in which management of the Corporation participates, for the three-month period ended March 31, 2018:

 

 

 

Outstanding options

 

 

 

Number

 

Weighted average
exercise price

 

 

 

 

 

 

 

Quebecor Inc.

 

 

 

 

 

As of December 31, 2017 and March 31, 2018

 

100,000

 

$

12.75

 

Vested options as of March 31, 2018

 

100,000

 

$

12.75

 

 

 

 

 

 

 

Quebecor Media Inc.

 

 

 

 

 

As of December 31, 2017

 

158,227

 

$

65.08

 

Transferred

 

9,300

 

64.31

 

Exercised

 

(23,000

)

65.80

 

As of March 31, 2018