Shaw Announces Second Quarter Financial and Operating Results and Updated 2013 Guidance

April 12, 2013

CALGARY, ALBERTA--(Marketwired - Apr 12, 2013) - Shaw Communications Inc. (TSX:SJR.B) (SJR) announced consolidated financial and operating results for the three and six months ended February 28, 2013 and February 29, 2012. Consolidated revenue for the three and six month periods of $1.25 billion and $2.57 billion, respectively, was up 2% over each of the comparable periods last year. Total operating income before amortization1of $538 million improved 9% over the comparable quarterly period and the year-to-date amount of $1.14 billion was up 8%.

Free cash flow1 for the three and six month periods was $161 million and $405 million, respectively, compared to $57 million and $176 million for the comparable periods last year. Increased operating income before amortization and lower capital investment during the first half of 2013 were the main drivers of the improvement.

Chief Executive Officer Brad Shaw said, "Our second quarter financial results were solid reflecting the underlying strength across our businesses as we focus on sustainable and profitable growth. We remain focused on providing an exceptional customer experience as we continue to leverage our leading network infrastructure and high quality content to enhance and expand innovative product offerings for our customers."

Mr. Shaw continued, "Over the past several months we announced several strategic transactions with each of Rogers and Corus that will provide estimated net proceeds to Shaw of approximately $800 million. We plan to invest up to $500 million of these net proceeds back into our core business over fiscal 2013, 2014 and 2015 accelerating our investment in certain strategic capital initiatives. Key investments to be accelerated include the completion of our Calgary data centre, further digitization of our network and additional bandwidth upgrades, development of IP delivery of video, expansion of our WiFi network, and additional innovative product offerings related to Shaw Go and other applications to provide an enhanced customer experience.

Most recently we announced entering into a transaction to acquire ENMAX Envision Inc. ("Envision"), a company providing leading telecommunication services to Calgary and surrounding area business customers, for approximately $225 million. This acquisition demonstrates our commitment to investing in and growing our Business Services. We look forward to serving our new customers and adding the Envision employees and management to our team."

Net income of $182 million or $0.38 per share for the quarter ended February 28, 2013 compared to $178 million or $0.38 per share for the same period last year. Improved operating income was partially offset by higher income taxes in the current quarter. Net income for the first six months of the year was $417 million or $0.88 per share compared to $380 million or $0.81 per share. Increased operating income before amortization accounted for the improvement.

Revenue in the Cable division of $814 million and $1.62 billion for the current three and six month periods increased 1% and 2%, respectively, over the comparable periods. Operating income before amortization for the quarter of $393 million was up 12% compared to the same quarter last year and the year-to-date period improved 8% to $789 million.

Satellite revenue of $209 million and $423 million for the three and six month periods, respectively, compared to $211 million and $420 million in the same periods last year. Operating income before amortization for the current quarter was $73 million compared to $71 million last year and the year-to-date amount was up 5% to $147 million.

Revenue and operating income before amortization in the Media division for the quarter of $249 million and $72 million, respectively, each increased 3% over the same period last year. On a year-to-date basis Media revenue improved 5% and operating income before amortization was up 7%.

Brad Shaw continued, "We announced preliminary guidance in October 2012 and are today updating our free cash flow guidance. With the first half of the year behind us and modest positive variances across service operating income before amortization, capital investment and interest and cash taxes, we now expect free cash flow to approximate $550 million. We expect our capital spend to ramp up during the last half of the year with the annual spend still expected to decline marginally from 2012 levels." (The accelerated capital investment funded through the accelerated capital fund is not included in free cash flow. See further discussion in Management's Discussion and Analysis.)

In January the Board of Directors approved a 5% increase in the equivalent annual dividend rate to $1.02 on Shaw's Class B Non-Voting Participating shares and $1.0175 on Shaw's Class A Participating shares. This new rate was effective commencing with the monthly dividends paid on March 27, 2013.

Mr. Shaw concluded, "We are operating in a dynamic competitive environment where driving performance through continuous improvement and leveraging opportunities as they arise is necessary. Financial performance for the first half of the year and the various strategic transactions recently announced demonstrate the ability of our leadership team to create value and sustainable long-term growth for our shareholders."

Shaw Communications Inc. is a diversified communications and media company, providing consumers with broadband cable television, High-Speed Internet, Home Phone, telecommunications services (through Shaw Business), satellite direct-to-home services (through Shaw Direct) and engaging programming content (through Shaw Media). Shaw serves 3.3 million customers, through a reliable and extensive fibre network. Shaw Media operates one of the largest conventional television networks in Canada, Global Television, and 19 specialty networks including HGTV Canada, Food Network Canada, History and Showcase. Shaw is traded on the Toronto and New York stock exchanges and is included in the S&P/TSX 60 Index (TSX:SJR.B) (SJR).

The accompanying Management's Discussion and Analysis forms part of this news release and the "Caution Concerning Forward Looking Statements" applies to all forward-looking statements made in this news release.

(1) See definitions and discussion under Key Performance Drivers in MD&A.

MANAGEMENT'S DISCUSSION AND ANALYSIS

FEBRUARY 28, 2013

April 11, 2013

Certain statements in this report may constitute forward-looking statements. Included herein is a "Caution Concerning Forward-Looking Statements" section which should be read in conjunction with this report.

The following Management's Discussion and Analysis ("MD&A") should also be read in conjunction with the unaudited interim Consolidated Financial Statements and Notes thereto of the current quarter, the 2012 Annual MD&A included in the Company's August 31, 2012 Annual Report including the Consolidated Financial Statements and the Notes thereto.

The financial information presented herein has been prepared on the basis of International Financial Reporting Standards ("IFRS") for interim financial statements and is expressed in Canadian dollars.

CONSOLIDATED RESULTS OF OPERATIONS

SECOND QUARTER ENDING FEBRUARY 28, 2013

Selected Financial Highlights

Three months ended Six months ended
($ millions Cdn except per share amounts) February 28, 2013 February 29, 2012 Change % February 28, 2013 February 29, 2012 Change %
Operations:
Revenue 1,251 1,231 1.6 2,570 2,510 2.4
Operating income before amortization (1) 538 493 9.1 1,139 1,059 7.6
Operating margin (1) (2) 43.0 % 40.0 % 3.0 44.3 % 42.2 % 2.1
Funds flow from operations (3) 386 164 >100.0 513 520 (1.3 )
Net income 182 178 2.2 417 380 9.7
Per share data:
Earnings per share
Basic 0.38 0.38 0.88 0.81
Diluted 0.38 0.38 0.87 0.80
Weighted average participating shares outstanding during period (millions)
446
440 445 439

(1) See definitions and discussion under Key Performance Drivers in MD&A.

(2) Operating margin for the current year includes the impact of an adjustment to align certain broadcast license fees with the CRTC billing period of approximately $14 million. Excluding the adjustment, operating margin would be 41.9% and 43.8% for the three and six months ended February 28, 2013, respectively.

(3) Funds flow from operations is before changes in non-cash working capital balances related to operations as presented in the unaudited interim Consolidated Statements of Cash Flows.

Subscriber Highlights1

Growth
Total Three months ended Six months ended
February 28, 2013 February 28,
2013
February 29,
2012
February 28,
2013
February 29,
2012
Subscriber statistics:
Video customers 2,136,707 (29,829 ) (9,946 ) (53,741 ) (32,714 )
Internet customers 1,910,185 7,800 21,328 13,756 30,371
Digital phone lines 1,375,707 13,090 51,359 30,435 69,956
DTH customers 907,330 1,328 1,274 (2,693 ) 1,805

(1) Subscriber numbers for the comparative period have been restated to remove pending installs and have also been adjusted to reflect the results of a pre-migration subscriber audit recently undertaken prior to the planned migration of customers to Shaw's new billing system. The audit adjustments relate primarily to periods prior to 2009 and reflect a reduction of approximately 28,600 and 1,800 Video and Internet customers, respectively, and an increase of 900 Digital phone lines. Also, given the growth in Digital cable penetration, the Company has now combined the reporting of Basic cable and Digital cable as a Video customer.

Consolidated Overview

Consolidated revenue of $1.25 billion and $2.57 billion for the three and six month periods, respectively, increased 1.6% and 2.4% over the same periods last year. Consolidated operating income before amortization for the three month period of $538 million was up 9.1% and on a year-to-date basis improved 7.6% to $1.14 billion. The revenue growth in the Cable and Satellite divisions, primarily driven by rate increases, was partially reduced by various expense increases including employee related amounts and higher programming. Media was up due to improved advertising and subscriber revenues partially reduced by increased programming costs. Within all segments, the current quarter also benefited from a one-time adjustment to align certain broadcast license fees with the CRTC billing period totaling approximately $14 million.

The Company's strategy is to balance financial results with maintenance of overall revenue generating units ("RGUs"). The Cable and Satellite divisions have over 6.3 million RGUs - which represents the number of products sold to customers. During the quarter, overall RGUs declined by 7,611. Video RGUs declined more than expected as reduced promotions and tight discipline was maintained on customer equipment offers. Going forward, the Company intends to focus more on providing equipment to customers, while refraining from overly promotional pricing. As part of this focus, the Company plans to offer contracts, with equipment offers, as an alternative for customers. In this regard, it is expected that success-based spending will ramp up in the second half of the year.

Net income was $182 million and $417 million for the three and six months ended February 28, 2013, respectively, compared to $178 million and $380 million for the same periods last year. Non-operating items affected net income in both periods. Outlined on the following page are further details on these and other operating and non-operating components of net income for each period.


($millions Cdn)
Six months ended Six months ended
February 28, 2013 Operating Non-operating February 29,
2012
Operating Non-operating
Operating income 720 720 - 658 658 -
Amortization of financing costs - long-term debt (2 ) (2 ) - (2 ) (2 ) -
Interest expense (159 ) (159 ) - (165 ) (165 ) -
Gain on derivative instruments - - - 1 - 1
Accretion of long-term liabilities and provisions (5 ) - (5 ) (7 ) - (7 )
Equity income from associates - - - 1 - 1
Other losses (6 ) - (6 ) (5 ) - (5 )
Income (loss) before income taxes 548 559 (11 ) 481 491 (10 )
Current income tax expense (recovery) 85 155 (70 ) 146 148 (2 )
Deferred income tax expense (recovery) 46 (9 ) 55 (45 ) (45 ) -
Net income (loss) 417 413 4 380 388 (8 )

($millions Cdn)
Three months ended Three months ended
February 28, 2013 Operating Non-operating February 29,
2012
Operating Non-operating
Operating income 327 327 - 286 286 -
Amortization of financing costs - long-term debt (1 ) (1 ) - (1 ) (1 ) -
Interest expense (77 ) (77 ) - (83 ) (83 ) -
Gain on derivative instruments - - - 1 - 1
Accretion of long-term liabilities and provisions (2 ) - (2 ) (3 ) - (3 )
Equity income from associates - - - 1 - 1
Other gains (losses) (2 ) - (2 ) 1 - 1
Income (loss) before income taxes 245 249 (4 ) 202 202 -
Current income tax expense (recovery) 47 75 (28 ) 62 64 (2 )
Deferred income tax expense (recovery) 16 (10 ) 26 (38 ) (40 ) 2
Net income (loss) 182 184 (2 ) 178 178 -

The changes in net income are outlined in the table below.

February 28, 2013 net income
compared to:
Three months ended Six months ended
($millions Cdn) November 30, 2012 February 29, 2012 February 29, 2012
Increased (decreased) operating income before amortization (63 ) 45 80
Increased amortization (3 ) (4 ) (18 )
Decreased interest expense 5 6 6
Change in net other costs and revenue (1) 3 (4 ) (1 )
Decreased (increased) income taxes 5 (39 ) (30 )
(53 ) 4 37

(1) Net other costs and revenue includes gain on derivative instruments, accretion of long-term liabilities and provisions, equity income from associates and other gains (losses) as detailed in the unaudited interim Consolidated Statements of Income.

Basic earnings per share were $0.38 and $0.88 for the current quarter and year-to-date, respectively, compared to $0.38 and $0.81 in the same periods last year. In the current quarter, improved operating income before amortization of $45 million was partially offset by higher income taxes of $39 million as the prior period benefited from a tax recovery related to the resolution of certain tax matters. The year-to-date increase was primarily due to improved operating income before amortization of $80 million, partially reduced by increased amortization of $18 million and higher income taxes of $30 million.

Net income in the current quarter decreased $53 million compared to the first quarter of fiscal 2013 driven by lower operating income before amortization of $63 million primarily due to seasonality in the Media business.

Free cash flow for the quarter and year-to-date periods of $161 million and $405 million, respectively, compared to $57 million and $176 million in the same periods last year. The improvement in both periods was primarily due to lower capital investment and improved operating income before amortization.

During the current quarter, the Company entered into agreements with Rogers Communications Inc. ("Rogers") to sell to Rogers its shares in Mountain Cablevision Limited ("Mountain Cable"); and grant to Rogers an option to acquire its wireless spectrum licenses; and, to purchase from Rogers its 33.3% interest in TVtropolis General Partnership ("TVtropolis"). The transactions are subject to applicable regulatory approvals. Regulatory approval was recently received for Mountain Cable and it is expected to close at the end of April. The TVtropolis transaction is expected to close later this year while the potential option exercise for the sale of the wireless spectrum licenses is expected to occur in fiscal 2015. Shaw expects to receive net proceeds of approximately $700 million from these transactions.

Recently, Shaw also announced it had entered into a number of transactions with Corus Entertainment Inc. ("Corus"), a related party subject to common voting control. In a series of agreements to optimize its portfolio of specialty channels, Shaw has agreed to sell to Corus its 49% interest in ABC Spark and 50% interest in its two French-language channels, Historia and Series+. In addition, Corus will sell to Shaw its 20% interest in Food Network Canada. Shaw expects to receive net proceeds of approximately $95 million from these transactions. The ABC Spark and Food Network Canada transactions are expect to close at the end of April while Historia and Series+ are expected to close later in the fourth quarter.

These transactions with Rogers and Corus are strategic in nature allowing the Company to use up to $500 million of the total expected net proceeds of approximately $800 million to accelerate certain capital investments to improve and strengthen its network advantage. Key investments include the completion of the Calgary data centre, further digitization of the network and additional bandwidth upgrades, development of IP delivery of video, expansion of the WiFi network, and additional innovative product offerings related to Shaw Go and other applications to provide an enhanced customer experience.

The Company has established an accelerated capital fund of up to $500 million and will track the accelerated spending against this as the investments are made. The accelerated capital will be excluded from the calculation of free cash flow as the initiatives are not being funded through cash generated from operations but instead through the net proceeds received on these transactions. Shaw plans to invest up to $500 million in fiscal 2013, 2014 and 2015 spending up to $100 million, $250 million and $150 million in each of the respective years. After this period of accelerated spending the Company expects that the baseline capital intensity for the Cable business will decline.

Most recently Shaw announced it had entered into a transaction to acquire ENMAX Envision Inc., a company providing leading telecommunication services to Calgary and surrounding area business customers, for approximately $225 million. The Company is committed to investing in and growing its Business Services. The acquisition is expected to close during the third quarter.

Key Performance Drivers

The Company's continuous disclosure documents may provide discussion and analysis of non-IFRS financial measures. These financial measures do not have standard definitions prescribed by IFRS and therefore may not be comparable to similar measures disclosed by other companies. The Company's continuous disclosure documents may also provide discussion and analysis of additional GAAP measures. Additional GAAP measures include line items, headings, and sub-totals included in the financial statements. The Company utilizes these measures in making operating decisions and assessing its performance. Certain investors, analysts and others, utilize these measures in assessing the Company's operational and financial performance and as an indicator of its ability to service debt and return cash to shareholders. The non-IFRS financial measures and additional GAAP measures have not been presented as an alternative to net income or any other measure of performance required by IFRS.

The following contains a listing of non-IFRS financial measures and additional GAAP measures used by the Company and provides a reconciliation to the nearest IFRS measure or provides a reference to such reconciliation.

Operating income before amortization and operating margin

Operating income before amortization is calculated as revenue less operating, general and administrative expenses and is presented as a sub-total line item in the Company's unaudited interim Consolidated Statements of Income. It is intended to indicate the Company's ability to service and/or incur debt, and therefore it is calculated before amortization (a non-cash expense) and interest. Operating income before amortization is also one of the measures used by the investing community to value the business. Operating margin is calculated by dividing operating income before amortization by revenue.

Free cash flow

The Company utilizes this measure to assess the Company's ability to repay debt and return cash to shareholders.

Free cash flow is calculated as operating income before amortization, less interest, cash taxes paid or payable, capital expenditures (on an accrual basis and net of proceeds on capital dispositions and adjusted to exclude amounts funded through the accelerated capital fund) and equipment costs (net), adjusted to exclude share-based compensation expense, less cash amounts associated with funding the new and assumed CRTC benefit obligations related to the acquisition of Shaw Media as well as excluding non-controlling interest amounts that are consolidated in the operating income before amortization, capital expenditure and cash tax amounts. Free cash flow also includes changes in receivable related balances with respect to customer equipment financing transactions as a cash item, and is adjusted for recurring cash funding of pension amounts net of pension expense. Dividends paid on the Company's Cumulative Redeemable Rate Reset Preferred Shares are also deducted.

Free cash flow has not been reported on a segmented basis. Certain components of free cash flow including operating income before amortization, capital expenditures (on an accrual basis net of proceeds on capital dispositions) and equipment costs (net), CRTC benefit obligation funding, and non-controlling interest amounts continue to be reported on a segmented basis. Other items, including interest and cash taxes, are not generally directly attributable to a segment, and are reported on a consolidated basis.

For free cash flow purposes the Company considers the discretionary pension funding to be a financing transaction and has not included the amount funded or the related cash tax recovery in the free cash flow calculation.

Accelerated capital fund

The Company established a notional fund, the accelerated capital fund, of up to $500 million with proceeds received, and to be received, from several strategic transactions with each of Rogers and Corus. The accelerated capital initiatives will be funded through this fund and not cash generated from operations. Key investments include the completion of the Calgary data centre, further digitization of the network and additional bandwidth upgrades, development of IP delivery of video, expansion of the WiFi network, and additional innovative product offerings related to Shaw Go and other applications to provide an enhanced customer experience. It is expected up to $500 million will used in fiscal 2013, 2014 and 2015 spending up to $100 million, $250 million and $150 million in each of the respective years.

Free cash flow is calculated as follows:

Three months ended Six months ended
($millions Cdn) February 28,
2013
February 29,
2012
Change
%
February 28,
2013
February 29,
2012
Change
%
Revenue
Cable 814 804 1.2 1,623 1,596 1.7
Satellite 209 211 (0.9 ) 423 420 0.7
Media 249 242 2.9 568 541 5.0
1,272 1,257 1.2 2,614 2,557 2.2
Intersegment eliminations (21 ) (26 ) (19.2 ) (44 ) (47 ) (6.4 )
1,251 1,231 1.6 2,570 2,510 2.4
Operating income before amortization (1)
Cable 393 352 11.6 789 729 8.2
Satellite 73 71 2.8 147 140 5.0
Media 72 70 2.9 203 190 6.8
538 493 9.1 1,139 1,059 7.6
Capital expenditures and equipment costs (net):
Cable 176 234 (24.8 ) 316 457 (30.9 )
Accelerated capital investment (10 ) - >100.0 (10 ) - >100.0
Adjusted Cable 166 234 (29.1 ) 306 457 (33.0 )
Satellite 21 25 (16.0 ) 46 50 (8.0 )
Media 6 7 (14.3 ) 10 13 (23.1 )
Total as per Note 3 to the unaudited interim Consolidated Financial Statements 193 266 (27.4 )
362

520

(30.4
)
Free cash flow before the following 345 227 52.0 777 539 44.2
Less:
Interest (76 ) (82 ) (7.3 ) (158 ) (164 ) (3.7 )
Cash taxes (75 ) (64 ) 17.2 (155 ) (148 ) 4.7
Other adjustments:
Non-cash share-based compensation 2 1 100.0 3 3 -
CRTC benefit obligation funding (15 ) (11 ) 36.4 (24 ) (21 ) 14.3
Non-controlling interests (10 ) (9 ) 11.1 (22 ) (20 ) 10.0
Pension adjustment 3 4 (25.0 ) 5 8 (37.5 )
Customer equipment financing (9 ) (5 ) 80.0 (14 ) (13 ) 7.7
Preferred share dividends (4 ) (4 ) - (7 ) (8 ) (12.5 )
Free cash flow (1) 161 57 >100.0 405 176 >100.0
Operating margin (1)
Cable 48.3 % 43.8 % 4.5 48.6 % 45.7 % 2.9
Satellite 34.9 % 33.6 % 1.3 34.8 % 33.3 % 1.5
Media 28.9 % 28.9 % - 35.7 % 35.1 % 0.6

(1) See definitions and discussion under Key Performance Drivers in MD&A.

Details on the accelerated capital fund and investment to date are as follows:

Estimated year of spend 2013 2014 2015 Total
($millions Cdn)
Fund Opening Balance 100 250 150 500
Accelerated capital investment (10 ) - - (10 )
Fund Closing Balance, February 28, 2013 90 250 150 490

CABLE

Financial Highlights

Three months ended Six months ended
($millions Cdn) February 28,
2013
February 29,
2012
Change
%
February 28,
2013
February 29, 2012 Change
%
Revenue 814 804 1.2 1,623 1,596 1.7
Operating income before amortization (1) 393 352 11.6 789 729 8.2
Capital expenditures and equipment costs (net):
New housing development 17 27 (37.0 ) 45 49 (8.2 )
Success based 44 75 (41.3 ) 79 165 (52.1 )
Upgrades and enhancement 77 91 (15.4 ) 137 178 (23.0 )
Replacement 11 10 10.0 20 21 (4.8 )
Buildings and other 27 31 (12.9 ) 35 44 (20.5 )
Total as per Note 3 to the unaudited interim Consolidated Financial Statements(2) 176 234 (24.8 )
316

457

(30.9
)
Operating margin (1) 48.3 % 43.8 % 4.5 48.6 % 45.7 % 2.9

(1) See definitions and discussion under Key Performance Drivers in MD&A.

(2) Includes $10 million related to certain capital investments that are being funded from the accelerated capital fund.

Operating Highlights

  • Digital Phone lines increased 13,090 during the three month period to 1,375,707 and Internet customers were up 7,800 totaling 1,910,185 as at February 28, 2013. During the quarter Video subscribers decreased 29,829.

Cable revenue for the three and six month periods of $814 million and $1.62 billion improved 1.2% and 1.7%, respectively, over the comparable periods last year. Rate increases, lower promotions and customer growth in Internet and Digital Phone, including Business growth, were partially offset by lower Video subscribers and On Demand due to the shortened NHL hockey schedule and fewer PPV events.

Operating income before amortization of $393 million for the quarter was up $41 million or 11.6% over the same period last year. Revenue related improvements, lower marketing and sales expenses, and reduced regulatory costs resulting from the CRTC mandated reduction in the Local Programming Improvement Fund ("LPIF") contribution from 1.5% to 1% were partially offset by increased programming amounts, related to new services and increased rates as contracts were renewed. The current quarter also benefited from an adjustment to align certain broadcast license fees with the CRTC billing period of approximately $7 million.

Operating income before amortization for the year-to-date period increased $60 million over last year. Revenue related growth, reduced marketing and sales expenses, lower LPIF, and the broadcast license fee adjustment, were partially offset by higher employee related amounts due to employee growth and annual merit increases, and higher programming costs due to new services and annual rate increases.

Revenue was comparable to the first quarter of fiscal 2013. Operating income before amortization was marginally lower compared to the prior quarter. Revenue related growth and the broadcast license fee adjustment were offset by higher employee related costs, increased marketing spend related to new brand initiatives, and higher various other expenses.

Total capital investment of $176 million in the current quarter decreased $58 million over the same period last year. Capital investment for the six month period of $316 million was $141 million lower than the same period last year. Capital investment in the current three and six month periods included $10 million funded through the accelerated investment fund established with net proceeds from the strategic transactions with each of Rogers and Corus.

Success-based capital declined $31 million and $86 million over the comparable three and six month periods, respectively, primarily due to lower video equipment rentals, reduced subsidies from higher pricing for video equipment sales, and lower internet modem purchases.

Investment in Upgrades and enhancement and Replacement categories combined decreased $13 million and $42 million for the quarter and year-to-date periods, respectively, compared to the same periods last year. The decline was due to lower spend on the digital network upgrade, residential telephony infrastructure and licensing, partially offset by higher business infrastructure investment.

Investment in Buildings and other declined $4 million and $9 million over the comparable three and six month periods last year. The decrease was primarily due to prior year investment in customer solution centre projects and lower current year spend on back office infrastructure replacement projects. The current year also benefited from an increased scientific research and experimental development tax credit.

Spending in New housing development decreased $10 million and $4 million over the comparable three and six month periods mainly due to lower activity.

Total capital investment of $176 million in the current quarter increased $36 million over the prior quarter. Success-based spend was up due to higher HD/HDPVR rental activity, Upgrades and enhancements increased on higher investment to reduce internet congestion and enhance business plant infrastructure, and Building and other was up due to increased activity on back office infrastructure replacement projects.

During the quarter Shaw continued with its digital network upgrade, converting analog tier customers to digital. The Company now has in excess of 90% digital penetration in its video customer base. As hubs are upgraded Shaw will offer customers industry leading internet, and enhanced video TV offerings with more On Demand and HD content.

The Company also continued with its Shaw Go video offerings with the launch of NBA League Pass app. The app is complimentary with an NBA League Pass subscription and lets customers watch both live and playback games on the go with their mobile device up to 48 hours after the game. The league's schedule of games is also available to browse. In addition, NBA League Pass is available as a complimentary package for Shaw Friends. Shaw Friends is a customer loyalty program for customers who subscribe to two or more Shaw services.

Subscriber Statistics

February 28, 2013
Three months ended Six months ended
February 28, 2013 August 31, 2012(1) Growth Change
%

Growth
Change
%
VIDEO:
Connected 2,136,707 2,190,448 (29,829 ) (1.4 ) (53,741 ) (2.5 )
Penetration as % of homes passed 53.1 % 55.2 %
INTERNET:
Connected and scheduled 1,910,185 1,896,429 7,800 0.4 13,756 0.7
Penetration as % of basic 89.4 % 86.6 %
Standalone Internet not included in basic cable 286,556 255,549 16,657 6.2 31,007 12.1
DIGITAL PHONE:
Number of lines (2) 1,375,707 1,345,272 13,090 1.0 30,435 2.3

(1) Internet and Digital Phone subscriber statistics have been restated to exclude scheduled and pending installations at August 31, 2012 and all categories have been adjusted to reflect the results of a pre-migration subscriber audit undertaken prior to the migration of customers to Shaw's new billing system.

(2) Represents primary and secondary lines on billing

SATELLITE

Financial Highlights(1)

Three months ended Six months ended
($millions Cdn) February 28,
2013
February 29,
2012
Change
%
February 28,
2013
February 29,
2012
Change
%
Revenue 209 211 (0.9 ) 423 420 0.7
Operating income before amortization (2) 73 71 2.8 147 140 5.0
Capital expenditures and equipment costs (net):
Success based (3) 18 22 (18.2 ) 40 45 (11.1 )
Buildings and other 3 3 - 6 5 20.0
Total as per Note 3 to the unaudited interim Consolidated Financial Statements 21 25 (16.0 )
46

50

(8.0
)
Operating margin(2) 34.9 % 33.6 % 1.3 34.8 % 33.3 % 1.5

(1) The Satellite segment was previously reported as DTH and Satellite Services. These segments have been combined into a single operating segment.

(2) See definitions and discussion under Key Performance Drivers in MD&A.

(3) Net of the profit on the sale of satellite equipment as it is viewed as a recovery of expenditures on customer premise equipment.

Operating Highlights

  • During the quarter Shaw Direct subscribers increased 1,328 and as at February 28, 2013 DTH customers totaled 907,330.

Revenue of $209 million for the three month period decreased 0.9% over the same period last year primarily due to lower customer growth and increased promotional activity. Revenue for the six month period of $423 million increased 0.7% over the same period last year primarily due to rate increases partially offset by increased promotional activity and lower customer growth.

Operating income before amortization of $73 million and $147 million for the three and six months, respectively, improved 2.8% and 5.0% over the same periods last year. The current periods each benefited from an adjustment of approximately $4 million to align certain broadcast license fees with the CRTC billing period. Excluding the adjustment, operating income before amortization for the quarter declined marginally and the year-to-date period improved 2%.

Revenue and operating income before amortization declined modestly over the first quarter. Reduced revenues due to higher promotional activity and customer package migration along with increased employee related costs were partially offset by the one-time broadcast license fee adjustment.

Total capital investment of $21 million and $46 million for the three and six month period compared to $25 million and $50 million, respectively, in the same periods last year. Success based capital was lower in each of the current periods primarily due to lower customer growth.

The launch of Anik G1 is currently scheduled for mid April and the satellite is expected to be in service shortly thereafter. With Anik G1 in service, Shaw Direct will carry over 200 HD channels.

Shaw Direct's Video-On-Demand service, which uses adaptive streaming through the satellite receiver, now has over 7,000 TV and movie viewing choices, and continues to add IP connected subscribers.

Subscriber Statistics

February 28, 2013
Three months ended Six months ended
February 28, 2013 August 31, 2012 Growth Change
%

Growth
Change
%
DTH customers (1) 907,330 910,023 1,328 0.1 (2,693 ) (0.3 )

(1) Including seasonal customers who temporarily suspend their service.

MEDIA

Financial Highlights

Three months ended Six months ended
($millions Cdn) February 28, 2013 February 29, 2012 Change
%
February 28,
2013
February 29, 2012 Change
%
Revenue 249 242 2.9 568 541 5.0
Operating income before amortization (1) 72 70 2.9 203 190 6.8
Capital expenditures:
Broadcast and transmission 2 3 (33.3 ) 3 6 (50.0 )
Buildings and other 4 4 - 7 7 -
Total as per Note 3 to the unaudited interim Consolidated Financial Statements
6
7
(14.3
)
10

13

(23.1
)
Other adjustments:
CRTC benefit obligation funding (15 ) (11 ) 36.4 (24 ) (21 ) 14.3
Non-controlling interests (10 ) (9 ) 11.1 (22 ) (20 ) 10.0
Operating margin(1) 28.9 % 28.9 % - 35.7 % 35.1 % 0.6

(1) See definitions and discussion under Key Performance Drivers in MD&A.

Operating Highlights

Revenue and operating income before amortization for the quarter were $249 million and $72 million, respectively, compared to $242 million and $70 million last year. Revenue for the quarter was up 2.9% due to higher conventional and specialty advertising revenues combined with increased subscriber revenues. Operating income before amortization improved 2.9% over the comparable period due an adjustment of approximately $3 million to align certain broadcast license fees with the CRTC billing period. Excluding the adjustment operating income before amortization declined marginally as the revenue growth was offset by higher programming, employee related and various other expenses.

For the six months ending February 28, 2013 revenue was $568 million and operating income before amortization was $203 million compared to $541 million and $190 million, respectively, for the same period last year. Improved advertising and subscriber revenues were partially reduced by higher programming and employee related costs. The current period also benefited from an expense adjustment of $3 million to align certain broadcast license fees with the CRTC billing period.

Compared to the first quarter of fiscal 2013, revenue and operating income before amortization decreased $70 million and $59 million, respectively. The decline was primarily due to the cyclical nature of the Media business, with higher advertising revenues in the first quarter driven by the fall launch of season premieres and high demand.

During the quarter, Global delivered solid programming results increasing the number of Top 10 and Top 20 positions nationally, with key shows such as Survivor, NCIS, NCIS LA, Hawaii 5-0, Elementary, Bones and Glee. The Grammy Awards and Bomb Girls have supported audience delivery.

Media's specialty portfolio continues to lead the channel rankings in the Adult 25-54 category with 4 of the Top 10 analog channels, including History maintaining the top entertainment position in Canada and 4 of the Top 5 Digital services. National Geographic, Action, MovieTime and Mystery hold four of the top five positions, with National Geographic and Action's audience results ranking the channels within the Top 20 analog services. In the quarter, Big Brother Canada premiered to strong audience results along with the launch of an interactive website which includes a 24/7 live feed with interactive gaming and voting that will influence the outcome of the show.

Global News continues to maintain its number one position in the Vancouver, Calgary and Edmonton markets. In the quarter, the Morning News shows launched in Halifax and Montreal along with a national half hour morning show. Most recently, on March 14, the BC all news channel, Global News:BC-1, went to air.

Capital investment continued on various projects in the quarter and included upgrading production equipment, infrastructure and facility investments.

OTHER INCOME AND EXPENSE ITEMS

Amortization

Three months ended Six months ended
($millions Cdn) February 28,
2013
February 29,
2012
Change
%
February 28,
2013
February 29,
2012
Change
%
Amortization revenue (expense) -
Deferred equipment revenue 30 28 7.1 60 56 7.1
Deferred equipment costs (64 ) (57 ) 12.3 (127 ) (110 ) 15.5
Property, plant and equipment, intangibles and other (177 )
(178
) (0.6 )
(352
) (347 )
1.4

Amortization of deferred equipment revenue and deferred equipment costs increased over the comparable periods due to the sales mix of equipment and changes in customer pricing on certain equipment.

Amortization of property, plant and equipment, intangibles and other increased over the comparative six-month period as the amortization of new expenditures exceeded the impact of assets that became fully depreciated.

Amortization of financing costs and Interest expense

Three months ended Six months ended
($millions Cdn) February 28,
2013
February 29,
2012
Change
%
February 28,
2013
February 29,
2012
Change
%
Amortization of financing costs - long-term debt 1
1
-
2

2

-
Interest expense 77 83 (7.2 ) 159 165 (3.6 )

Interest expense decreased over the comparable periods due to lower average debt levels.

Accretion of long-term liabilities and provisions

The Company records accretion expense in respect of the discounting of certain long-term liabilities and provisions which are accreted to their estimated value over their respective terms. The expense is primarily in respect of CRTC benefit obligations.

Other gains (losses)

This category generally includes realized and unrealized foreign exchange gains and losses on US dollar denominated current assets and liabilities, gains and losses on disposal of property, plant and equipment and minor investments, and the Company's share of the operations of Burrard Landing Lot 2 Holdings Partnership. The category also includes amounts in respect of the electrical fire and resulting water damage to Shaw Court that occurred during the fourth quarter of fiscal 2012. During the first quarter, the Company received insurance advances of $5 million related to its claim for costs that were incurred in the fourth quarter of fiscal 2012 and incurred additional costs of $10 million in respect of ongoing recovery activities during the current year.

Income taxes

Income taxes were higher in each of the current periods mainly due to a recovery in the prior periods related to the resolution of certain tax matters.

RISKS AND UNCERTAINTIES

The significant risks and uncertainties affecting the Company and its business are discussed in the Company's August 31, 2012 Annual Report under the Introduction to the Business - Known Events, Trends, Risks and Uncertainties in Management's Discussion and Analysis.

FINANCIAL POSITION

Total assets at February 28, 2013 were $12.6 billion compared to $12.7 billion at August 31, 2012. Following is a discussion of significant changes in the consolidated statement of financial position since August 31, 2012.

Current assets increased $165 million primarily due to the classification of Mountain Cable's assets as held for sale of $397 million and increases in accounts receivable of $82 million and inventories of $5 million partially offset by decreases in cash of $311 million and other current assets of $10 million. Assets held for sale is primarily comprised of property, plant and equipment, broadcast license and goodwill. Accounts receivable increased due to higher advertising revenue during the second quarter of the current year compared to the fourth quarter of the prior year, reclassification of advance bill payments to unearned revenue and timing of collection of trade receivables while inventories were higher due to timing of equipment purchases. Other current assets declined primarily due to a reduction in a tax indemnity upon resolution of the related income tax liabilities. Cash decreased as the cash outlay for investing and financing activities exceeded the funds provided by operations.

Investments and other assets increased $65 million due to the $59 million deposit paid relating to the acquisition of the non-controlling interest in the TVtropolis specialty channel and $7 million in respect of the purchase of a minor investment.

Property, plant and equipment decreased $116 million as amortization and the reclassification of Mountain Cable to assets held for sale exceeded current period capital investment.

Other long-term assets were up $9 million due to an increase in customer equipment financing receivables.

Intangibles decreased $187 million due to the reclassification of $245 million in respect of Mountain Cable to assets held for sale partially offset by higher program rights and advances. Additional investment in acquired rights and advances exceeded the amortization for the current year.

Goodwill decreased $81 million due to the reclassification of the amount in respect of Mountain Cable to assets held for sale.

Current liabilities increased $210 million due to the deposit of $250 million received from Rogers on the sale of Mountain Cable and classification of $78 million in respect of liabilities associated with the Mountain Cable assets held for sale as well as increases in accounts payable and accruals of $45 million and unearned revenue of $9 million, all of which were partially offset by decreases in income taxes payable of $72 million and current portion of long-term debt of $101 million. The liabilities associated with the assets held for sale is primarily comprised of deferred income taxes of $73 million. Accounts payable and accrued liabilities were up due to fluctuations in various accruals and other liabilities while unearned revenue increased due to reclassification of advance bill payments from accounts receivable. Income taxes payable declined due to tax installment payments and resolution of certain income tax liabilities which were partially offset by the current period provision. The current portion of long-term debt decreased due to the repayment of the 6.1% $450 million senior notes which were due in November 2012 partially offset by the reclassification of the 7.5% $350 million senior notes which are due in November 2013.

Long-term debt decreased $347 million due to the aforementioned reclassification of the 7.5% $350 million senior notes.

Other long-term liabilities decreased $310 million as the Company contributed $300 million to a retirement compensation arrangement trust ("the RCA") in order to partially fund its non-contributory defined benefit pension plan.

Deferred credits increased $52 million due to the $50 million received from Rogers for the purchase price of the option to acquire the wireless spectrum licenses.

Deferred income tax liabilities, net of deferred income tax assets, decreased $26 million due to the aforementioned reclassification of amounts in respect of Mountain Cable partially offset by current period expense.

Shareholders' equity increased $275 million primarily due to increases in share capital of $94 million, retained earnings of $167 million and non-controlling interests of $14 million. Share capital increased due to the issuance of 4,336,190 Class B Non-Voting Shares under the Company's option plan and Dividend Reinvestment Plan ("DRIP"). As of March 31, 2013, share capital is as reported at February 28, 2013 with the exception of the issuance of a total of 1,110,986 Class B Non-Voting Shares under the DRIP and upon exercise of options under the Company's option plan subsequent to the quarter end. Retained earnings increased due to current year earnings of $396 million partially offset by dividends of $229 million while non-controlling interests increased as their share of earnings exceeded the distributions declared during the period.

LIQUIDITY AND CAPITAL RESOURCES

In the current year, the Company generated $405 million of free cash flow. Shaw used its free cash flow along with cash of $311 million, the net proceeds of $241 million from the transactions with Rogers and proceeds on issuance of Class B Non-Voting Shares of $32 million to repay the 6.1% $450 million senior notes, fund $300 million in discretionary contributions to the RCA in respect of its non-contributory defined benefit pension plan, pay common share dividends of $159 million, invest an additional net $65 million in program rights, fund $10 million of accelerated capital spend and fund other net items of $5 million. Due to timing, the net proceeds to date from the Rogers transactions have been temporarily used in ongoing operations to the extent the cash was not required to fund accelerated capital investments.

On December 5, 2012 Shaw received the approval of the TSX to renew its normal course issuer bid to purchase its Class B Non-Voting Shares for a further one year period. The Company is authorized to acquire up to 20,000,000 Class B Non-Voting Shares during the period December 7, 2012 to December 6, 2013. No shares have been repurchased during the current year.

The Company issues Class B Non-Voting Shares from treasury under its DRIP which resulted in cash savings and incremental Class B Non-Voting Shares of $57 million during the six months ending February 28, 2013.

Based on available credit facilities and forecasted free cash flow, the Company expects to have sufficient liquidity to fund operations and obligations during the current fiscal year. On a longer-term basis, Shaw expects to generate free cash flow and have borrowing capacity sufficient to finance foreseeable future business plans and refinance maturing debt.

CASH FLOW

Operating Activities

Three months ended Six months ended
($millions Cdn) February 28,
2013
February 29,
2012
Change
%
February 28,
2013
February 29,
2012
Change
%
Funds flow from operations 386 164 >100.0 513 520 (1.3 )
Net decrease (increase) in non-cash working capital balances related to operations 48 40 20.0
(50
)
(7
)
>100.0
434 204 >100.0 463 513 (9.7 )

Funds flow from operations increased over the comparative three month period due to higher operating income before amortization and lower current income taxes in the current period and the settlement of the amended cross-currency interest agreements in the prior year. Funds flow from operations decreased over the comparative six month period as impact of the aforementioned items were more than offset by the $300 million in discretionary contributions to the RCA and higher program rights purchases. The net change in non-cash working capital balances related to operations fluctuated over the comparative periods due to changes in other current assets and the timing of payment of current income taxes payable and accounts payable and accrued liabilities as well as fluctuations in accounts receivable.

Investing Activities

Three months ended Six months ended
($millions Cdn) February 28,
2013
February 29,
2012
Decrease February 28,
2013
February 29,
2012

Decrease
Cash flow provided by (used in) investing activities 23 (320 ) 343
(183
)
(625
)
442

The cash used in investing activities decreased over the comparable three and six month periods due to the net receipt of $241 million in respect of the transactions with Rogers and lower cash outlays for capital expenditures and inventories.

Financing Activities

The changes in financing activities during the comparative periods were as follows:

...
Three months ended Six months ended
($millions Cdn) February 28,
2013
February 29,
2012
February 28, 2013