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Shaw Announces Fourth Quarter and Full Year Fiscal 2019 Results and Introduces Fiscal 2020 Financial Guidance

  • Record Wireless net subscriber additions of 90,700 in the fourth quarter resulting in over 266,000 new customers during the year
  • Wireless revenue exceeds $1 billion in fiscal 2019 and Wireless operating income before restructuring and amortization grows 45% year-over-year to over $205 million
  • Continued growth in Broadband customers, including 11,400 Consumer Internet additions in the fourth quarter, and delivery of efficiency initiatives, lead to solid Wireline results for the year and a 90-basis point improvement in operating margin to 45.5%
  • Adjusted fiscal 2019 results in line with guidance, including consolidated operating income before restructuring costs and amortization growth of 6.3% year-over-year and free cash flow of approximately $570 million
  • Company releases fiscal 2020 guidance, including consolidated operating income before restructuring costs and amortization growth to range between 11% - 12%, capital investment of approximately $1.1 billion and free cash flow of approximately $700 million

CALGARY, Alberta, Oct. 25, 2019 (GLOBE NEWSWIRE) -- Shaw Communications Inc. (“Shaw” or the “Company”) announces consolidated financial and operating results for the quarter ended August 31, 2019, reported in accordance with the IFRS 15 accounting standard, Revenue from contracts with customers (IFRS 15).  Consolidated revenue increased by 1.9% to $1.35 billion and operating income before restructuring costs and amortization decreased 3.4% year-over-year to $537 million.

Fiscal 2019 consolidated revenue increased by 3.0% to $5.35 billion and operating income before restructuring costs and amortization increased 5.1% year-over-year to $2.16 billion. Adjusting for certain items including the $15 million payment to address certain intellectual property (IP) licensing matters in the third quarter of fiscal 2019 and a $10 million charge related to CRTC regulatory matters in the fourth quarter, consolidated operating income before restructuring costs and amortization decreased 1.6% in the quarter and increased 6.3% for the full year.

“In all areas across our organization, we made significant progress in fiscal 2019. We have firmly established Freedom Mobile as the industry innovator and recognized champion of wireless affordability for Canadians. Through years of thoughtful and strategic capital investing, we have built a high quality, facilities-based wireless network that is capable of meeting the evolving needs of our customers and continuing to fuel Freedom’s momentum,” said Brad Shaw, Chief Executive Officer. “In our Wireline business, we have cemented our status as a technology leader with our BlueCurve and SmartSuite products. Throughout our digital transformation, we have made it easier to interact with our customers and to self-install our services. We also continue to work hard to streamline and simplify manual processes that improve the customer experience and day-to-day operations for our employees. This focus has played an instrumental role in executing our overall VDP program, which is approximately 70% complete as at the end of fiscal 2019.”

In the fourth quarter, Freedom Mobile delivered the strongest period of customer growth in company history, adding a record 90,700 new customers during the highly competitive back-to-school season. Subscriber momentum is attributable to the continued success of our Big Gig data plans, further complemented by the newly launched Big Gig Unlimited and Absolute Zero campaigns. Throughout the year, the Company continued to materially improve the customer network experience with the deployment of 700 MHz spectrum, with approximately 70% of the build complete in Western Canada, resulting in significant postpaid churn improvement of 22-basis points to 1.32% in fiscal 2019. In addition, Freedom Mobile launched 19 new wireless markets in Alberta, British Columbia and Ontario covering an additional population of 1.4 million Canadians.

In the Wireline segment, Consumer added approximately 35,000 Internet customers in fiscal 2019, including 11,400 net additions in the fourth quarter. The Company continues to expand its IPTV service, which is now available in approximately 70% of its footprint, and expects to complete the roll out over the next several months. Business segment revenue grew approximately 5% for the year to nearly $600 million primarily due to continued growth of SmartSuite services and the launch of new products in fiscal 2019. Effective August 1, 2019 Shaw Business sold its Calgary-1 data center and will continue to focus on growing its market share.

Mr. Shaw continued, “In an industry that remains competitive, with increasing regulatory uncertainty, we delivered solid fiscal 2019 results and improved execution. On an adjusted basis we achieved our targets for the year, including strong free cash flow, underpinning our overall strategy to deliver long term, sustainable growth.”

Selected Financial Highlights

Fiscal 2019 and restated fiscal 2018 results are reported in accordance with IFRS 15. Supplementary information is provided in the accompanying Management’s Discussion and Analysis (“MD&A”), under the heading “Accounting Standards,” which discusses our previous revenue recognition policies and the changes on adoption of the new standard.

  Three months ended August 31, Year ended August 31,
(millions of Canadian dollars except per share amounts) 2019   2018
(restated)(1)
  Change %   2019   2018
(restated)(1)
  Change %
Revenue 1,352   1,327   1.9   5,347   5,189   3.0
Operating income before restructuring costs and amortization(2) 537   556   (3.4 ) 2,161   2,057   5.1
Operating margin(2) 39.7 % 41.9 % (5.3 ) 40.4 % 39.6 % 2.0
Free cash flow(2) 45   31   45.2   545   385   41.6
Net income from continuing operations 167   196   (14.8 ) 738   39   >100.0
Net loss from discontinued operations, net of tax         (6 ) 100.0
Net income 167   196   (14.8 ) 738   33   >100.0
Basic earnings per share 0.32   0.38     1.42   0.05    
Diluted earnings per share 0.32   0.38     1.42   0.05    

(1) Fiscal 2018 reported figures have been restated applying IFRS 15 and also reflect a change in accounting policy related to the treatment of digital cable terminals (“DCTs”) to record them as property, plant and equipment rather than inventory upon acquisition. See “Accounting Standards” in the accompanying MD&A.
(2) See definitions and discussion under “Non-IFRS and additional GAAP measures” in the accompanying MD&A.

In the quarter, the Company added approximately 90,700 net Wireless RGUs, consisting of 75,900 postpaid and 14,800 prepaid additions. The increase in the postpaid subscriber base reflects the seasonally active back-to-school period and continued customer demand for our Big Gig data-centric pricing and packaging options. The increase in the prepaid customer base reflects the success of the new plans that were launched in early April.

Wireless service revenue for the three and twelve-month periods increased 19.1% and 24.3% respectively, to $187 million and $701 million over the comparable periods in fiscal 2018 due to an increased subscriber base and growing penetration of our Big Gig data plans. Wireless equipment revenue for the three and twelve-month periods increased 14.3% and 4.7% respectively, to $96 million and $353 million as more customers secure a device through Freedom Mobile. Fourth quarter ABPU grew approximately 3.9% year-over-year to $42.58 and ARPU grew 0.5% to $38.59 reflecting the back-to-school promotions, including Absolute Zero, and prepaid customer growth.

Fourth quarter Wireless operating income before restructuring costs and amortization of $54 million improved 38.5% year-over-year due primarily to increased service revenue. For the twelve-month period, Wireless operating income before restructuring costs and amortization increased 45.1% to $206 million.

Wireline RGUs declined by approximately 54,400 in the quarter compared to a loss of approximately 59,200 in the fourth quarter of fiscal 2018. The current quarter includes growth in Consumer Internet RGUs of approximately 11,400 whereas the mature products within the Consumer division, including Video, Satellite and Phone declined in the aggregate by 69,300 RGUs. The Company remains focused on growing Internet subscribers, primarily through two-year ValuePlans, and on attracting and retaining high quality Video subscribers which supports its Consumer profitability objectives.

Fourth quarter Wireline revenue and operating income before restructuring costs and amortization of $1,071 million and $483 million decreased 1.5% and 6.6%, respectively, year-over-year. Consumer revenue of $923 million decreased 2.0% compared to the prior year as contributions from rate adjustments and growth in Internet revenue were offset by declines in Video, Satellite and Phone subscribers and revenue. Business revenue increased 2.1% year-over-year to $148 million, reflecting continued demand for the SmartSuite of business products. Excluding the impact of the $10 million charge related to CRTC regulatory matters in the fourth quarter, Wireline operating income before restructuring costs and amortization decreased 4.6%.

For the twelve-month period, Wireline revenue of $4,300 million was comparable to the prior year and operating income before restructuring costs and amortization of $1,955 million increased 2.1% resulting in a Wireline operating margin of 45.5%, an improvement of 90-basis points over fiscal 2018. Excluding both the $15 million IP license payment to address certain IP licensing matters in the third quarter and the $10 million charge related to CRTC regulatory matters in the fourth quarter, full year Wireline operating income before restructuring costs and amortization increased 3.4% year-over-year.

Capital expenditures in the fourth quarter of $382 million compared to $433 million a year ago. Wireline capital spending decreased by approximately $96 million primarily due to lower network investments. Wireless spending increased by approximately $45 million year-over-year due to continued deployment of 700 MHz spectrum and expansion of the wireless network into new markets. Consolidated fiscal 2019 capital expenditures of $1,212 million decreased by $149 million compared to the previous year mainly due to a decrease of $191 million in Wireline partially offset by a $42 million increase in Wireless.

Free cash flow for the quarter of $45 million compared to $31 million in the prior year. The increase was largely due to lower capital expenditures and lower cash taxes, offset in part by lower operating income before restructuring costs and amortization and lower dividends received from equity accounted associates. Free cash flow for fiscal 2019 of $545 million was $160 million higher than the prior year due to growth in operating income before restructuring costs and amortization and lower capital expenditures in fiscal 2019.

Net income for the fourth quarter of fiscal 2019 of $167 million compared to $196 million in the fourth quarter of fiscal 2018. The decrease of $29 million was primarily due to lower equity income associated with the investment in Corus and gains on the dispositions of certain assets in fiscal 2018 partially offset by a decrease in restructuring costs in fiscal 2019. Net income for fiscal 2019 of $738 million was $705 million higher than the prior year primarily due to the $446 million restructuring charge recorded in fiscal 2018 and a $137 million decrease in losses relating to the Company’s investment in Corus.

In the fourth quarter of fiscal 2019, approximately 300 employees exited the Company, bringing the total number of employees who departed under the Voluntary Departure Program (“VDP”) to approximately 2,300 since the program commenced in March 2018. In fiscal 2019, the Company achieved operating cost savings of approximately $98 million and capital cost savings of approximately $37 million. See also “Introduction,” “Other Income and Expense Items,” and “Caution Concerning Forward Looking Statements,” in the accompanying MD&A for a discussion of the Total Business Transformation (“TBT”), the VDP and the risks and assumptions associated therewith.

The Company is introducing its fiscal 2020 guidance which includes our preliminary estimate of the impact of IFRS 16, Leases (IFRS 16). Financial results for fiscal 2019 will not be restated with the impact of IFRS 16; however, we estimate that our operating income before restructuring costs and amortization for 2019 would have been approximately $155 million higher under IFRS 16 (approximately 55% attributable to Wireline and approximately 45% to Wireless). With the adoption of IFRS 16, our definition of free cash flow will be adjusted to remove the increase to operating income before restructuring costs and amortization attributable to IFRS 16 to ensure a consistent focus on free cash flow generation.

Consolidated Fiscal 2020 Guidance
as reported 1
Fiscal 2020 Guidance
excluding IFRS 16 1
Operating Income before Restructuring Costs and Amortization 11% to 12% 4% to 5%
Capital Expenditures 2 Approximately $1.1 billion Approximately $1.1 billion
Free Cash Flow 3 Approximately $700 million Approximately $700 million
  1. Fiscal 2020 guidance reflects our preliminary estimate of the impact of the implementation of IFRS 16, Leases. While financial results for fiscal 2019 will not be restated, our preliminary estimate is that 2019 consolidated operating income before restructuring costs and amortization would have increased by approximately $155 million to $2,316 million. When applying the estimated IFRS 16 impact to fiscal 2019, our fiscal 2020 consolidated operating income before restructuring costs and amortization represents growth of 4% to 5% as referenced in the table above.
  2. Capital Expenditure guidance excludes expenditures for spectrum licenses.
  3. Definition of Free Cash Flow has been adjusted to remove the estimated increase to operating income before restructuring costs and amortization attributable to IFRS 16 to ensure a consistent focus on free cash flow generation

The Company’s guidance also includes assumptions related to cost savings that will be achieved through the TBT initiative (specifically VDP savings) and are expected to amount to a combined $200 million in fiscal 2020 (approximately $125 million attributable to operating expenses and $75 million attributable to capital expenditures) which is materially in line with the original estimate of $215 million. See also “Caution Concerning Forward Looking Statements” in the accompanying MD&A.

“As we continue to make progress on our transformation initiatives, we are improving the customer experience across both Wireline and Wireless and, at the same time, we are removing significant operating and capital expenses from the business. Our foundation is solid, and we will continue to drive growth across our Wireless, Broadband and Business segments which we believe will translate into long-term sustainable free cash flow growth.  Fiscal 2020 represents a significant inflection point in our free cash profile, growing to an expected $700 million compared to $545 million in fiscal 2019 and $385 million in fiscal 2018, and a testament that the significant transformation undertaken in the past few years is yielding meaningful results that are flowing to the bottom line,” said Brad Shaw.

As at the end of fiscal 2019, leverage stood at 1.9x compared to its target leverage range of 2.0 to 2.5x.  On October 1, 2019, the Company repaid $1.25 billion of maturing senior notes with cash on hand and has no debt maturities in the next 12 months. Considering the current leverage position along with strengthening free cash flow profile, Shaw is pleased to announce that it intends to implement a normal course issuer bid (“NCIB”) program to purchase up to 24,758,127 Class B Non-Voting Shares (“Class B Shares”) representing 5% of all of the issued and outstanding Class B Shares. The NCIB program has been approved by the Board of Directors but remains subject to approval by the Toronto Stock Exchange (“TSX”) and, if accepted, will be conducted in accordance with the applicable rules and policies of the TSX and applicable Canadian securities law. 

In accordance with the terms of the Dividend Reinvestment Plan (“DRIP”), the Company is also announcing that, in lieu of issuing shares, it will satisfy its share delivery obligations under the DRIP by purchasing Class B Shares on the open market thus avoiding future equity dilution and creating synergies with the contemplated NCIB program. In addition, Shaw will reduce the DRIP discount from 2% to 0% for shares delivered under the DRIP. These changes to the DRIP will apply to the dividends payable on November 28, 2019 to shareholders of record on November 15, 2019.

Shaw Communications Inc. is a leading Canadian connectivity company. The Wireline division consists of Consumer and Business services. Consumer serves residential customers with broadband Internet, Shaw Go WiFi, video and digital phone. Business provides business customers with Internet, data, WiFi, digital phone and video services. The Wireless division provides wireless voice and LTE data services through an expanding and improving mobile wireless network infrastructure.  

Shaw is traded on the Toronto and New York stock exchanges and is included in the S&P/TSX 60 Index (Symbol: TSX - SJR.B, SJR.PR.A, SJR.PR.B, NYSE – SJR, and TSXV – SJR.A). For more information, please visit www.shaw.ca

The accompanying MD&A forms part of this news release and the “Caution concerning forward-looking statements” applies to all the forward-looking statements made in this news release. 

For more information, please contact:
Shaw Investor Relations
Investor.relations@sjrb.ca

 _______________________________________________________

  1. See definitions and discussion under “Non-IFRS and additional GAAP measures” in the accompanying MD&A.
  2. See definitions and discussion of ABPU, ARPU, RGUs and Wireless Postpaid Churn under “Key Performance Drivers” in the accompanying MD&A.


MANAGEMENT’S DISCUSSION AND ANALYSIS
For the three and twelve months ended August 31, 2019

October 25, 2019

Contents

Introduction 10
Selected financial and operational highlights 13
Overview 16
Outlook 19
Non-IFRS and additional GAAP measures 19
Discussion of operations 23
Supplementary quarterly financial information 26
Other income and expense items 27
Financial position 29
Liquidity and capital resources 30
Accounting standards 33
Related party transactions 43
Financial instruments 43
Internal controls and procedures 43
Risks and uncertainties 44
Government Regulations and Regulatory 44

Advisories

The following Management’s Discussion and Analysis (“MD&A”) of Shaw Communications Inc. is dated October 25, 2019 and should be read in conjunction with the unaudited interim Consolidated Financial Statements and Notes thereto for the quarter ended August 31, 2019 and the 2018 Annual Consolidated Financial Statements, the Notes thereto and related MD&A included in the Company’s 2018 Annual Report. 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 unless otherwise indicated. References to “Shaw,” the “Company,” “we,” “us,” or “our” mean Shaw Communications Inc. and its subsidiaries and consolidated entities, unless the context otherwise requires.

Caution concerning forward-looking statements

Statements included in this MD&A that are not historic constitute “forward-looking information” within the meaning of applicable securities laws. Such statements can generally be identified by words such as “anticipate,” “believe,” “expect,” “plan,” “intend,” “target,” “goal” and similar expressions (although not all forward-looking statements contain such words). Forward looking statements in this MD&A include, but are not limited to statements related to:

  • future capital expenditures;
  • proposed asset acquisitions and dispositions;
  • expected cost efficiencies;
  • financial guidance and expectations for future performance;
  • business and technology strategies and measures to implement strategies;
  • competitive strengths;
  • expected project schedules, regulatory timelines, completion/in-service dates for the Company’s capital and other projects;
  • the expected number of retail outlets;
  • the expected impact of new accounting standards, recently adopted or expected to be adopted in the future;
  • the expected impact of government regulations or regulatory developments on the Company’s business, operations, and/or financial performance;
  • timing of new product and service launches;
  • the deployment of: (i) network infrastructure to improve capacity and coverage and (ii) new technologies, including but not limited to next generation wireless and wireline technologies such as 5G and IPTV, respectively;
  • the expected growth in the Company’s market share;
  • the expected growth in subscribers and the products/services to which they subscribe;
  • the cost of acquiring and retaining subscribers and deployment of new services;
  • the total restructuring charges (related primarily to severance and employee related costs as well as additional costs directly associated with the Company’s Total Business Transformation (“TBT”) initiative);
  • the anticipated annual cost reductions related to the Voluntary Departure Program (“VDP”) (including reductions in operating and capital expenditures) and the timing of realization thereof;
  • the impact that employee exits will have on Shaw’s business operations;
  • the outcome of the TBT initiative, including the timing thereof and the total savings at completion; and
  • the expansion and growth of the Company’s business and operations and other goals and plans. 

All of the forward-looking statements made in this report are qualified by these cautionary statements.

Forward-looking statements are based on assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments as well as other factors it believes are appropriate in the circumstances as of the current date. The Company’s management believes that its assumptions and analysis in this MD&A are reasonable and that the expectations reflected in the forward-looking statements contained herein are also reasonable based on the information available on the date such statements are made and the process used to prepare the information. These assumptions, many of which are confidential, include but are not limited to management expectations with respect to:

  • general economic, market and business conditions;
  • future interest rates;
  • previous performance being indicative of future performance;
  • future income tax rates;
  • future foreign exchange rates;
  • technology deployment;
  • future expectations and demands of our customers;
  • subscriber growth;
  • the Company being able to successfully deploy: (i) network infrastructure required to improve capacity and coverage and (ii) new technologies, including but not limited to next generation wireless and wireline technologies such as 5G and IPTV, respectively;
  • short-term incremental costs associated with growth in Wireless handset sales;
  • pricing, usage and churn rates;
  • availability of devices;
  • content and equipment costs;
  • industry structure, conditions and stability;
  • government regulation and legislation;
  • the completion of proposed transactions;
  • the TBT initiative being completed in a timely and cost-effective manner and yielding the expected results and benefits, including: (i) resulting in a leaner, more integrated and agile company with improved efficiencies and execution to better meet Shaw’s consumers’ needs and expectations (including the products and services offered to its customers) and (ii) realizing the expected cost savings;
  • the Company being able to complete the employee exits pursuant to the VDP with minimal impact on business operations within the anticipated timeframes and for the budgeted amount;
  • the cost estimates for any outsourcing requirements and new roles in connection with the VDP;
  • the Company being able to gain access to sufficient retail distribution channels;
  • the Company being able to access the spectrum resources required to execute on its current and long term strategic initiatives; and
  • the integration of acquisitions.

You should not place undue reliance on any forward-looking statements. Many risk factors, including those not within the Company's control, may cause the Company's actual results to be materially different from the views expressed or implied by such forward-looking statements, including but not limited to:

  • changes in general economic, market and business conditions;
  • changes in laws, regulations and decisions by regulators that affect the Company or the markets in which it operates;
  • changing interest rates, income taxes and exchange rates;
  • technology, privacy, cyber security and reputational risks;
  • changes in the competitive environment in the markets in which the Company operates and from the development of new markets for emerging technologies;
  • changing industry trends, technological developments, and other changing conditions in the entertainment, information and communications industries;
  • disruptions to service, including due to network failure or disputes with key suppliers;
  • the Company’s ability to execute its strategic plans and complete capital and other projects by the completion date;
  • the Company’s ability to grow subscribers;
  • the Company’s ability to grow market share;
  • the Company’s ability to close any transactions;
  • the Company’s ability to have the spectrum resources required to execute on its current and long-term strategic initiatives;
  • the Company’s ability to gain sufficient access to retail distribution channels;
  • the Company ability to complete the deployment of: (i) network infrastructure required to improve capacity and coverage and (ii) new technologies, including but not limited to next generation wireless and wireline technologies such as 5G and IPTV, respectively;
  • the Company’s ability to achieve cost efficiencies;
  • the Company’s ability to implement the TBT initiative as planned and realize the anticipated benefits therefrom, including: (i) the failure of the TBT to result in a leaner, more integrated and agile company with improved efficiencies and execution to better meet Shaw’s consumers’ needs and expectations (including the products and services offered to its customers) and (ii) the failure to realize the expected cost savings;
  • the Company’s ability to complete employee exits pursuant to the VDP with minimal impact on operations;
  • the Company’s ability to recognize and adequately respond to climate change concerns or public and governmental expectations on environmental matters;
  • opportunities that may be presented to and pursued by the Company;
  • the Company’s status as a holding company with separate operating subsidiaries; and
  • other factors described in this MD&A under the heading “Risks and Uncertainties” and in the MD&A for the year ended August 31, 2018 under the heading “Known events, Trends, Risks, and Uncertainties.” 

The foregoing is not an exhaustive list of all possible risk factors.

Should one or more of these risks materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results may vary materially from those described herein.

This MD&A provides certain future-oriented financial information or financial outlook (as such terms are defined in applicable securities laws), including the financial guidance and assumptions disclosed under “Outlook,” the expected annualized savings to be realized from the VDP and the total anticipated TBT restructuring costs for fiscal 2020. Shaw discloses this information because it believes that certain investors, analysts and others utilize this and other forward-looking information to assess Shaw's expected operational and financial performance, and as an indicator of its ability to service debt and pay dividends to shareholders. The Company cautions that such financial information may not be appropriate for this or other purposes.

Any forward-looking statement speaks only as of the date on which it was originally made and, except as required by law, the Company expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement to reflect any change in related assumptions, events, conditions or circumstances. All forward-looking statements contained in this MD&A are expressly qualified by this statement.

Additional Information

Additional information concerning the Company, including the Company’s Annual Information Form is available through the Internet on SEDAR which may be accessed at www.sedar.com. Copies of such information may also be obtained on the Company’s website at www.shaw.ca, or on request and without charge from the Corporate Secretary of the Company, Suite 900, 630 – 3rd Avenue S.W., Calgary, Alberta, Canada T2P 4L4, telephone (403) 750-4500.

Non-IFRS and additional GAAP measures

Certain measures in this MD&A do not have standard meanings prescribed by IFRS and are therefore considered non-IFRS measures. These measures are provided to enhance the reader’s overall understanding of our financial performance or current financial condition.  They are included to provide investors and management with an alternative method for assessing our operating results in a manner that is focused on the performance of our ongoing operations and to provide a more consistent basis for comparison between periods. These measures are not in accordance with, or an alternative to, IFRS and do not have standardized meanings. Therefore, they are unlikely to be comparable to similar measures presented by other entities. 

Please refer to “Non-IFRS and additional GAAP measures” in this MD&A for a discussion and reconciliation of non-IFRS measures, including operating income before restructuring costs and amortization, free cash flow, and the net debt leverage ratio.

Introduction

In fiscal 2019, we continued to make progress on our transformation initiatives by improving the customer experience across both our Wireline and Wireless divisions while, at the same time, removing significant operating and capital expenses from the business. Through our focus on execution, we are growing our wireless and broadband customers, identifying sustainable cost savings in our core Wireline business, and making the appropriate investments to capitalize on future growth. The disposal of our entire equity investment in Corus Entertainment Inc. (“Corus”) in the year further solidifies our balance sheet and allows us to continue our transformation into an agile, lean and digital-first organization that is focused on providing a seamless connectivity experience that meets the needs of its customers now and into the future. With our successful acquisition of 600 MHz spectrum across our wireless operating footprint, we can continue to improve our LTE experience, provide affordable options for our customers, and lay the foundation for 5G services.

Wireless

We made significant progress in our Wireless business in fiscal 2019 and have firmly established Freedom Mobile as the industry innovator and recognized champion of wireless affordability for Canadians. Through years of thoughtful and strategic capital investing, we are expanding and improving our facilities-based wireless network that is capable of meeting the evolving needs of our customers and continuing to fuel Freedom Mobile’s momentum. In fiscal 2019, we launched 19 new wireless markets in Alberta, British Columbia, and Ontario covering an additional population of 1.4 million. Our footprint now covers approximately 18 million people in some of Canada’s largest urban centres, or almost half of the Canadian population.

In the fourth quarter, Freedom Mobile delivered the strongest period of customer growth in company history, adding a record 90,700 new customers during the highly competitive back-to-school season. Subscriber momentum is attributable to the continued success of our Big Gig data plans, further complemented by the newly launched Big Gig Unlimited and Absolute Zero campaigns all of which continue to attract high lifetime value customers to Freedom Mobile. In April, the Company launched new prepaid service plans that better align with current market offers which have been successful in attracting and growing our prepaid customer base. The growth and retention of our subscriber base and improving financial performance reflect the appeal of our differentiated value proposition. In addition, our Wireless service is accessible to more Canadians through the addition of approximately 240 locations in 2018, with national retail partners including Loblaws’ “The Mobile Shop” and Walmart. When combined with our existing corporate and dealer store network, Freedom Mobile had over 650 retail locations operational at the end of 2019.

Supporting our Wireless revenue growth and improved Wireless postpaid churn results are the significant investments in our network and customer service capabilities. We are executing on our operating plan to improve our network and deploy spectrum in the most efficient way. Throughout the year, the Company continued to materially improve the customer network experience with the deployment of our Extended Range LTE, leveraging our 700 MHz spectrum, which provides customers with improved in-building service and extends service at the edge of the current coverage area. This enhanced service resulted in postpaid churn of 1.32%, which is a 22-basis point improvement over the previous year. At the end of fiscal 2019, approximately 70% of the build is complete in Western Canada, with the remaining deployment of our 700 MHz spectrum is expected to continue throughout fiscal 2020.

The Company also continues to deploy small cell technology (low-powered wireless transmitters and receivers with a range of 100 meters to 200 meters), designed to provide network coverage to smaller areas. As tall high-power macro towers keep the network signal strong across large distances, small cells suit more densely developed areas like city centres and popular venues by providing LTE/voice-over-LTE (“VoLTE”) quality, speed, capacity and coverage improvements in these high traffic areas. These network investments support continued growth in our Wireless business by significantly enhancing the customer experience while consistently reducing churn and are the building blocks for emerging technologies, such as 5G.

Wireline

In our Wireline business, we have cemented our status as a technology leader with our BlueCurve and SmartSuite products. Throughout our digital transformation, we have made it easier to interact with our customers and to self-install our services. We also continue to work hard to streamline and simplify manual processes that improve the customer experience and day-to-day operations for our employees. This focus has played an instrumental role in executing our overall VDP program, which is approximately 70% complete as at the end of fiscal 2019.

Our focus remains on the execution and delivery of stable and profitable Wireline results. This includes growing internet subscribers, primarily through two-year ValuePlans, and attracting and retaining high quality video subscribers which support our Consumer profitability objectives.

Our team is modernizing several aspects of our operations as we work to better meet the needs of today’s customer. We are leveraging insights from data to help us better understand customer preferences and provide them with the services they want, including the recently introduced Shaw BlueCurve Gateway (DOCSIS 3.1 modem), Home App, and Pods. We are shifting customer interactions to digital platforms and driving more self-help, self-install and self-service. At the end of fiscal 2019, 45% of customers elected to self-install their services.

The Company announced several significant Wireline enhancements related to its broadband service for its customers in fiscal 2019. In late November, Shaw doubled Internet speeds of its top residential tiers and, in April, the Company unveiled Shaw BlueCurve, a technology that provides customers greater control over their home Wi-Fi experience through the BlueCurve Home App and Pods.

Shaw BlueCurve is a simple and powerful new technology that gives customers more coverage and greater control over their home Wi-Fi experience while at the same time helping redefine their relationship with in-home connected devices. The BlueCurve Home App is the latest innovative product that Shaw has introduced to market through its partnership with Comcast, and it is available with Shaw’s BlueCurve Gateway modem – the hub of our customers’ in-home content and connectivity experience. Shaw BlueCurve Pods expand in-home coverage by creating a mesh Wi-Fi network which blankets your home with wireless coverage and reduces the challenges of Wi-Fi dead spots.

The launch of Shaw BlueCurve technology is aligned with the Company’s strategic initiative regarding a more agile, innovative, and customer-centric approach to modernizing all aspects of its operations, including a more efficient delivery of products and services. Building on the BlueCurve gateway modem, the Company launched IPTV in Calgary in May and continues to expand this service, which is now available in approximately 70% of its Western Canadian footprint. The Company expects to complete the roll out over the next several months.

Due to these enhancements and our focus on improving execution, our Consumer division added approximately 35,000 Internet customers in fiscal 2019, including 11,400 net additions in the fourth quarter. In an industry that remains competitive, with increasing regulatory uncertainty, we delivered solid fiscal 2019 results and improved execution. As we continue on our journey towards a modern Shaw, we are encouraged by the progress we have made as we improve upon the fundamentals of our Wireline business, further supporting the delivery of our broadband strategy through fiscal 2019.

We are capitalizing on the network investments that we have made, and continue to make, in pursuit of providing customers with an enhanced connectivity experience. The launch of Shaw BlueCurve is the latest way in which we are delivering more value to our customers with speed, coverage and control. Our BlueCurve platform is the foundation on which we will continue to introduce more innovations and, through this enhanced customer experience, we can more effectively differentiate ourselves from the competition and drive broadband growth, while building upon our journey to a modern Shaw.

Our Wireline Business division contributed solid results, leveraging our SmartSuite products that deliver enterprise-grade services to small and medium size businesses. Our SmartSuite products can scale to larger businesses, giving us opportunities to deliver services across Canada. Shaw Business customers also benefit from speed increases from Business Internet and SmartWiFi 150 and 300 plans moving to 300Mbps and 600Mbps, respectively. Shaw Business also provides download speeds of up to one gigabit, which will help customers keep up with the demands of their growing businesses.

Effective August 1, 2019 Shaw Business sold its Calgary-1 data center and will continue to focus on growing its market share.

Fiscal 2020

The year ahead represents a significant inflection point in our free cash flow profile and a testament that the significant transformation undertaken in the past few years is yielding meaningful results. Our foundation is solid, and we will continue to drive growth across our Wireless, Broadband and Business segments which should translate into long-term sustainable free cash flow growth.

Selected financial and operational highlights

Fiscal 2019 and restated fiscal 2018 results are reported in accordance with the newly adopted IFRS 15, Revenue from contracts with customers (“IFRS 15”). Supplementary information is provided in "Accounting Standards", reflecting the previous revenue recognition policies and the changes from the adoption of the new standard.

Basis of presentation

On May 31, 2017, the Company entered into an agreement to sell a group of assets comprising the operations of Shaw Tracking, a fleet tracking operation reported within the Company’s Wireline segment, to an external party. The transaction closed on September 15, 2017.

Accordingly, the operating results and operating cash flows for the Shaw Tracking business (an operating segment within the Wireline division) are presented as discontinued operations separate from the Company’s continuing operations. This MD&A reflects the results of continuing operations, unless otherwise noted.

Financial Highlights
             
  Three months ended August 31, Year ended August 31,
(millions of Canadian dollars except per share amounts) 2019   2018
(restated)(1)
  Change %   2019   2018
(restated)(1)
  Change %
Operations:            
Revenue 1,352   1,327   1.9   5,347   5,189   3.0
Operating income before restructuring costs and amortization(2) 537   556   (3.4 ) 2,161   2,057   5.1
Operating margin(2) 39.7 % 41.9 % (5.3 ) 40.4 % 39.6 % 2.0
Net income from continuing operations 167   196   (14.8 ) 738   39   >100.0
Loss from discontinued operations, net of tax     -     (6 ) 100.0
Net income 167   196   (14.8 ) 738   33   >100.0
Per share data:            
Basic earnings (loss) per share            
Continuing operations 0.32   0.38     1.42   0.06    
Discontinued operations         (0.01 )  
  0.32   0.38     1.42   0.05    
Diluted earnings (loss) per share            
Continuing operations 0.32   0.38     1.42   0.06    
Discontinued operations         (0.01 )  
  0.32   0.38     1.42   0.05    
Weighted average participating shares for basic earnings per share outstanding during period (millions) 515   505     511   502    
Funds flow from continuing operations(3) 430   422   1.9   1,784   1,177   51.6
Free cash flow(2) 45   31   45.2   545   385   41.6

(1) Fiscal 2018 reported figures have been restated applying IFRS 15 and also reflect a change in accounting policy related to the treatment of digital cable terminals (“DCTs”) to record them as property, plant and equipment rather than as inventory upon acquisition. See “Accounting Standards.”
(2) See definitions and discussion under “Non-IFRS and additional GAAP measures.”
(3) Funds flow from operations is before changes in non-cash balances related to operations as presented in the unaudited interim Consolidated Statements of Cash Flows. 

Key Performance Drivers

Shaw measures the success of its strategies using a number of key performance drivers which are defined and described under “Key Performance Drivers - Statistical Measures” in the 2018 Annual MD&A and in this MD&A below, which includes a discussion as to their relevance, definitions, calculation methods and underlying assumptions.  The following key performance indicators are not measurements in accordance with IFRS, should not be considered alternatives to revenue, net income or any other measure of performance under IFRS and may not be comparable to similar measures presented by other issuers.

In fiscal 2019, we commenced disclosing Wireless average billing per subscriber unit (“ABPU”) and Wireless postpaid churn (as defined below) as key performance indicators. 

Subscriber (or revenue generating unit (“RGU”)) highlights
               
      Change   Change
      Three months ended   Year ended
  August 31,
2019
August 31,
2018
August 31,
2019
August 31,
2018
  August 31,
2019
August 31,
2018
Wireline – Consumer              
Video – Cable 1,478,371 1,585,232 (29,837 ) (33,990 )   (106,861 ) (86,045 )
Video – Satellite 703,223 750,403 (11,794 ) (7,399 )   (47,180 ) (23,139 )
Internet 1,911,703 1,876,944 11,401   (3,481 )   34,759   15,935  
Phone 767,745 853,847 (27,712 ) (26,160 )   (86,102 ) (71,684 )
Total Consumer 4,861,042 5,066,426 (57,942 ) (71,030 )   (205,384 ) (164,933 )
Wireline – Business              
Video – Cable 41,843 49,606 (1,743 ) (77 )   (7,763 ) (1,433 )
Video – Satellite 35,656 34,831 63   1,947     825   3,296  
Internet 173,686 172,859 592   1,734     827   2,215  
Phone 379,434 354,912 4,669   8,195     24,522   27,713  
Total Business 630,619 612,208 3,581   11,799     18,411   31,791  
Total Wireline 5,491,661 5,678,634 (54,361 ) (59,231 )   (186,973 ) (133,142 )
Wireless              
Postpaid(1) 1,313,828 1,029,720 75,913   84,882     287,929   265,629  
Prepaid(1) 344,357 373,138 14,831   132     (21,688 ) (9,944 )
Total Wireless 1,658,185 1,402,858 90,744   85,014     266,241   255,685  
Total Subscribers 7,149,846 7,081,492 36,383   25,783     79,268   122,543  

(1)  The Company reduced the August 31, 2019 ending balance by 10,914 due to account cancellations dating back to 2016 previously not reported. The cancellations were comprised of 3,821 postpaid and 7,093 prepaid subscribers. In the Company’s view, the cancellations were not significant in relation to previously reported amounts.

In Wireless, the Company continued to add subscribers, gaining a record net combined 90,744 postpaid and prepaid subscribers in the quarter. The increase in the postpaid subscriber base reflects the seasonally active back-to-school period and continued customer demand for the Big Gig data-centric pricing and packaging options, including Absolute Zero. The increase in the prepaid customer base reflects the success of the new plans that were launched in the market in early April.

Wireline RGUs declined by 54,361 in the quarter compared to a loss of 59,231 RGUs in the fourth quarter of 2018. The current quarter includes growth in Consumer Internet RGUs of approximately 11,400 whereas the mature products within the Consumer division, including Video, Satellite and Phone declined in the aggregate by 69,300 RGUs. The Company remains focused on growing Internet subscribers, primarily through two-year ValuePlans, and on attracting and retaining higher quality Video subscribers which supports its Consumer profitability objectives.

Wireless Postpaid Churn

To assist in understanding the performance of our Wireless business, in fiscal 2019 we commenced disclosing Wireless postpaid subscriber or RGU churn (“postpaid churn”).  Subscriber churn measures success in retaining subscribers. Wireless postpaid churn is a measure of the number of postpaid subscribers that deactivated during a period as a percentage of the average postpaid subscriber base during a period, calculated on a monthly basis. It is calculated by dividing the number of Wireless postpaid subscribers that deactivated (in a month) by the average number of postpaid subscribers during the month. When used or reported for a period greater than one month, postpaid churn represents the sum of the number of subscribers deactivating for each period incurred divided by the sum of the average number of postpaid subscribers of each period incurred.

Postpaid churn of 1.47% in the fourth quarter of fiscal 2019 compares to 1.49% in the fourth quarter of fiscal 2018 reflecting the active back-to-school period. Postpaid churn improved 22-basis points in fiscal 2019 to 1.32% reflecting the ongoing enhancements to the wireless customer experience including our expanding and improving network, the Big Gig data-centric pricing and packaging options, and the increased competitive environment experienced during the quarter. 

Wireless average billing per subscriber unit (“ABPU”)

To assist in understanding the underlying economics of our Wireless business, this fiscal year we commenced disclosing Wireless average billing per subscriber per month (“ABPU”). This measure is an industry metric that is useful in assessing the operating performance of a wireless entity. We use ABPU as a measure that approximates the average amount the Company invoices an individual subscriber unit on a monthly basis. ABPU helps us to identify trends and measures the Company’s success in attracting and retaining higher lifetime value subscribers. Wireless ABPU is calculated as service revenue (excluding the allocation of the device subsidy attributable to service revenue under IFRS 15) plus the monthly re-payments of the outstanding device balance owing from customers on contract, divided by the average number of subscribers on the network during the period and is expressed as a rate per month.

ABPU of $42.58 in the fourth quarter of fiscal 2019 compares to $41.00 in the fourth quarter of fiscal 2018, while fiscal 2019 ABPU of $42.05 compares to $39.19 in the prior year. ABPU growth in the year reflects the increased number of customers that are subscribing to higher value service plans and purchasing a device through Freedom Mobile.

Wireless average revenue per subscriber unit (“ARPU”)

Wireless ARPU is calculated as service revenue divided by the average number of subscribers on the network during the period and is expressed as a rate per month. This measure is an industry metric that is useful in assessing the operating performance of a wireless entity. ARPU also helps to identify trends and measure the Company’s success in attracting and retaining higher-value subscribers.

ARPU of $38.59 in the fourth quarter of fiscal 2019 compares to $38.38 in the fourth quarter of fiscal 2018, while fiscal 2019 ARPU of $38.29 compares to $37.11 in the prior year. ARPU growth in the year reflects the impact of changes in accounting policies upon the adoption of IFRS 15, whereby a portion of the device subsidy, previously fully allocated as a reduction to equipment revenue, is now partially allocated as a reduction to service revenue.

Overview

For detailed discussion of divisional performance see “Discussion of operations”. Highlights of the consolidated fourth quarter financial results are as follows:  

Revenue

Revenue for the fourth quarter of fiscal 2019 of $1.35 billion increased $25 million or 1.9% from $1.33 billion for the fourth quarter of fiscal 2018, highlighted by the following:

  • The year-over-year increase in revenue was primarily due to a $42 million or 17.4% increase in the Wireless division driven by higher service revenues which contributed an incremental $30 million or 19.1% to consolidated revenue primarily due to higher postpaid RGUs (approximately 288,000 since August 31, 2018) and a 3.9% and 0.5% year-over-year increase in ABPU to $42.58 and ARPU to $38.59, respectively. There was also a $12 million or 14.3% increase in equipment revenue compared to the fourth quarter of fiscal 2018.
  • The Business division contributed $3 million or 2.1% growth over the fourth quarter of fiscal 2018 to consolidated revenue reflecting continued demand for the SmartSuite of business products.
  • Consumer division revenue for the quarter decreased $19 million or 2.0% compared to the fourth quarter of fiscal 2018 as contributions from rate adjustments and growth in Internet revenue were offset by declines in Video, Satellite and Phone subscribers and revenue.   

Compared to the third quarter of fiscal 2019, consolidated revenue for the quarter increased 2.1% or $28 million. The increase in revenue over the prior quarter relates primarily to an increase of $9 million in service revenue in the Wireless division, higher ABPU (up from $42.30 in the third quarter of fiscal 2019 to $42.58 in the current quarter) and higher ARPU (up from $38.36 in the third quarter of fiscal 2019 to $38.59 in the current quarter) and a $23 million increase in Wireless equipment revenues partially offset by a $4 million decrease in Wireline revenues.

Revenue for the twelve-month period ended August 31, 2019 of $5.35 billion increased $158 million or 3.0% from $5.19 billion for the comparable period in fiscal 2018.

  • The year-over-year improvement in revenue was primarily due to the Wireless division which contributed an incremental $153 million or 17.0% to consolidated revenue, comprised of higher service revenues of $137 million and higher equipment revenues of $16 million, driven primarily by higher postpaid RGUs, higher ARPU and higher ABPU.
  • The Business division contributed $26 million or 4.6% to the consolidated revenue improvements for the twelve-month period driven primarily by customer growth. 
  • Consumer division revenues decreased $18 million for the twelve-month period for the reasons noted above.

Operating income before restructuring costs and amortization

Operating income before restructuring costs and amortization for the fourth quarter of fiscal 2019 of $537 million decreased by $19 million or 3.4% from $556 million for the fourth quarter of fiscal 2018, highlighted by the following: 

  • The year-over-year improvement in the Wireless division of $15 million was mainly due to postpaid RGU growth and the 3.9% increase in ABPU.
  • The year-over-year decrease in the Wireline division of $34 million was mainly due to the decrease in revenue, a $10 million provision related primarily to the CRTC decision to reduce wholesale broadband rates available to third party internet providers from 2016 onward, and higher programming costs.

Operating margin for the fourth quarter of 39.7% decreased 220-basis points compared to 41.9% in the fourth quarter of fiscal 2018 mainly due to a 250-basis points decrease in the Wireline operating margin for the reasons noted above, partially offset by a 290-basis points increase in the Wireless operating margin primarily due to increased service revenues.

Compared to the third quarter of fiscal 2019, operating income before restructuring costs and amortization for the current quarter increased $7 million primarily due to an $8 million increase in the Wireline division mainly as a result of the impact of the $15 million payment to address certain IP licensing matters in the prior quarter partially offset a $10 million provision related primarily to the CRTC decision to reduce wholesale broadband rates available to third party internet providers from 2016 onward in the current quarter, partially offset by a $1 million decrease in the Wireless division.

For the twelve-month period ended August 31, 2019, operating income before restructuring costs and amortization of $2.16 billion increased $104 million or 5.1% from $2.06 billion for the comparable prior year period.

  • Wireless operating income before restructuring costs and amortization for the twelve-month period increased $64 million or 45.1% over the comparable period driven primarily by subscriber growth, higher equipment margins and ABPU growth, partially offset by higher distribution channel costs and the impact of the $13 million credit for a retroactive domestic roaming rate adjustment in the prior year.
  • Wireline operating income before restructuring costs and amortization for the twelve-month period increased $40 million or 2.1% over the comparable period primarily as a result of lower operating costs mainly related to VDP partially offset by the $10 million provision related primarily to the CRTC decision to reduce wholesale broadband rates available to third party internet providers from 2016 onward and the impact of the $15 million payment to address certain IP licensing matters.

Free cash flow

Free cash flow for the fourth quarter of fiscal 2019 of $45 million increased $14 million from $31 million in the fourth quarter of fiscal 2018, mainly due to a $51 million decrease in capital expenditures and lower cash taxes partially offset by an $19 million decrease in operating income before restructuring costs and amortization and lower dividends received from equity accounted associates.

For the twelve-month period, free cash flow of $545 million increased $160 million or 41.6% from $385 million for the comparable period, mainly due to a planned decrease in capital expenditures of $149 million and an increase in operating income before restructuring costs and amortization of $104 million partially offset by an $82 million decrease in dividends from equity accounted associates.

Net income (loss)

Net income of $167 million and $738 million for the three and twelve months ended August 31, 2019, compared to a net income of $196 million and $33 million for the same periods in fiscal 2018. The changes in net income are outlined in the following table.

       
  August 31, 2019 net income compared to:
  Three months ended Year ended
(millions of Canadian dollars) May 31, 2019   August 31, 2018
(restated)(1)
  August 31, 2018
(restated)(1)
 
Increased (decreased) operating income before restructuring costs and amortization(2) 7   (19 ) 104  
Decreased restructuring costs 10   26   455  
Decreased (increased) amortization 13   10   (13 )
Change in net other costs and revenue(3) 34   (39 ) 145  
Decreased (increased) income taxes (126 ) (7 ) 8  
Increased income from discontinued operations, net of tax -   -   6  
  (62 ) (29 ) 705  

(1) Fiscal 2018 reported figures have been restated applying IFRS 15 and also reflect a change in accounting policy. See “Accounting Standards”
(2) See definitions and discussion under “Non-IFRS and additional GAAP measures”
(3) Net other costs and revenue include equity income (loss) of an associate or joint venture, business acquisition costs, accretion of long-term liabilities and provisions, debt retirement costs, realized and unrealized foreign exchange differences and other losses as detailed in the unaudited Consolidated Statements of Income

Restructuring costs in the fourth quarter of fiscal 2018 of approximately $16 million related to further organizational restructuring under the TBT initiative and VDP program offered in the second quarter of fiscal 2018. The costs primarily relate to severance and other employee costs as well as other costs directly associated with the TBT initiative. The $10 million recovery of restructuring costs in the fourth quarter of fiscal 2019 is the result of approximately 90 employees either rescinding their acceptance of the VDP package with the approval of the Company or forgoing their package to expedite their departure date.

Net other costs and revenue in the twelve-month period of fiscal 2019 includes a $109 million loss related to the disposition of the Company’s equity investment in Corus Entertainment Inc. (“Corus”) in the third quarter of fiscal 2019 while the twelve-month period of fiscal 2018 included a $284 million impairment from the Company’s investment in Corus.

Outlook

The Company is introducing its fiscal 2020 guidance which includes our preliminary estimate of the impact of IFRS 16, Leases (IFRS 16). Financial results for fiscal 2019 will not be restated with the impact of IFRS 16; we estimate that our operating income before restructuring costs and amortization for 2019 would have been approximately $155 million higher under IFRS 16 (approximately 55% attributable to Wireline and approximately 45% to Wireless). With the adoption of IFRS 16, our definition of free cash flow will be adjusted to remove the increase to operating income before restructuring costs and amortization attributable to IFRS 16 to ensure a consistent focus on free cash flow generation.

Consolidated Fiscal 2020 Guidance
as reported 1
Fiscal 2020 Guidance
excluding IFRS 16 1
Operating Income before Restructuring Costs and Amortization 11% to 12% 4% to 5%
Capital Expenditures 2 Approximately $1.1 billion Approximately $1.1 billion
Free Cash Flow 3 Approximately $700 million Approximately $700 million
  1. Fiscal 2020 guidance reflects our preliminary estimate of the impact of the implementation of IFRS 16, Leases. While financial results for fiscal 2019 will not be restated, our preliminary estimate is that 2019 consolidated operating income before restructuring costs and amortization would have increased by approximately $155 million to $2,316 million. When applying the estimated non-cash IFRS 16 impact to fiscal 2019, our fiscal 2020 consolidated operating income before restructuring costs and amortization represents growth of 4% to 5% as referenced in the table above.
  2. Capital Expenditure guidance excludes expenditures for spectrum licenses.
  3. Definition of Free Cash Flow has been adjusted to remove the estimated non-cash increase to operating income before restructuring costs and amortization attributable to IFRS 16 to ensure a consistent focus on free cash flow generation

The Company’s guidance also includes assumptions related to cost savings that will be achieved through the TBT initiative (specifically VDP savings) and are expected to amount to a combined $200 million in fiscal 2020 (approximately $125 million attributable to operating expenses and $75 million attributable to capital expenditures) which is materially in line with the original estimate of $215 million.

See “Caution concerning forward-looking statements.”

Non-IFRS and additional GAAP measures

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 revenue, net income or any other measure of performance required by IFRS.

Below is a discussion of the 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 restructuring costs and amortization

Operating income before restructuring costs and amortization is calculated as revenue less operating, general and administrative expenses. It is intended to indicate the Company’s ongoing ability to service and/or incur debt and is therefore calculated before items such as restructuring costs, equity income/loss of an associate or joint venture, amortization (a non-cash expense) and interest. Operating income before restructuring costs and amortization is one measure used by the investing community to value the business.

  Three months ended August 31, Year ended August 31,
(millions of Canadian dollars) 2019   2018
(restated)(1)
  2019   2018
(restated)(1)
 
Operating income from continuing operations 297   281   1,132   586  
Add back (deduct):        
Restructuring costs (10 ) 16   (9 ) 446  
Amortization:        
Deferred equipment revenue (5 ) (6 ) (21 ) (30 )
Deferred equipment costs 19   25   85   110  
Property, plant and equipment, intangibles and other 236   240   974   945  
Operating income before restructuring costs and amortization 537   556   2,161   2,057  

(1) Fiscal 2018 reported figures have been restated applying IFRS 15 and also reflect a change in accounting policy. See “Accounting Standards”

Operating margin

Operating margin is calculated by dividing operating income before restructuring costs and amortization by revenue. Operating margin is also one of the measures used by the investing community to value the business.

  Three months ended August 31, Year ended August 31,
  2019   2018
(restated)(1)
  Change %   2019   2018
(restated)(1)
  Change %
Wireline 45.1 % 47.6 % (5.3 ) 45.5 % 44.6 % 2.0
Wireless 19.1 % 16.2 % 17.9   19.5 % 15.8 % 23.4
Combined Wireline and Wireless 39.7 % 41.9 % (5.3 ) 40.4 % 39.6 % 2.0

(1)  Fiscal 2018 reported figures have been restated applying IFRS 15. See “Accounting Standards”

Income from discontinued operations before restructuring costs, amortization, taxes and other non-operating items

Income from discontinued operations before restructuring costs, amortization, taxes and other non-operating items is calculated as revenue less operating, general and administrative expenses from discontinued operations.  This measure is used in the determination of free cash flow.

  Three months ended August 31,   Year ended August 31,
(millions of Canadian dollars) 2019 2018   2019 2018  
Loss from discontinued operations, net of tax    
Add back (deduct):          
Loss on divestiture, net of tax   (6 )
Loss from discontinued operations before restructuring costs, amortization, taxes and other non-operating items   (6 )

Net debt leverage ratio

The Company uses this ratio to determine its optimal leverage ratio. Refer to “Liquidity and capital resources” for further detail.

Free cash flow

The Company utilizes this measure to assess the Company’s ability to repay debt and pay dividends to shareholders.

Free cash flow is comprised of operating income before restructuring costs and amortization, adding dividends from equity accounted associates, changes in receivable related balances with respect to wireline customer equipment financing transactions as a cash item and deducting capital expenditures (on an accrual basis and net of proceeds on capital dispositions) and equipment costs (net), interest, cash taxes paid or payable, dividends paid on the preferred shares, recurring cash funding of pension amounts net of pension expense and adjusted to exclude share-based compensation expense. 

Free cash flow has not been reported on a segmented basis. Certain components of free cash flow from continuing operations, including operating income before restructuring costs and amortization continue to be reported on a segmented basis. Capital expenditures and equipment costs (net) are also 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.

Free cash flow is calculated as follows:            
             
  Three months ended August 31, Year ended August 31,
(millions of Canadian dollars) 2019   2018
(restated)(1)
  Change %   2019   2018
(restated)(1)
  Change %  
Revenue            
Consumer 923   942   (2.0 ) 3,707   3,725   (0.5 )
Business 148   145   2.1   593   567   4.6  
Wireline 1,071   1,087   (1.5 ) 4,300   4,292   0.2  
Service 187   157   19.1   701   564   24.3  
Equipment 96   84   14.3   353   337   4.7  
Wireless 283   241   17.4   1,054   901   17.0  
  1,354   1,328   2.0   5,354   5,193   3.1  
Intersegment eliminations (2 ) (1 ) 100.0   (7 ) (4 ) 75.0  
  1,352   1,327   1.9   5,347   5,189   3.0  
Operating income before restructuring costs and amortization(2)            
Wireline 483   517   (6.6 ) 1,955   1,915   2.1  
Wireless 54   39   38.5   206   142   45.1  
  537   556   (3.4 ) 2,161   2,057   5.1  
Capital expenditures and equipment costs (net):(3)            
Wireline 234   330   (29.1 ) 827   1,018   (18.8 )
Wireless 148   103   43.7   385   343   12.2  
  382   433   (11.8 ) 1,212   1,361   (10.9 )
Free cash flow before the following 155   123   26.0   949   696   36.4  
Less:            
Interest (66 ) (63 ) 4.8   (256 ) (247 ) 3.6  
Cash taxes (41 ) (50 ) (18.0 ) (160 ) (166 ) (3.6 )
Other adjustments:            
Dividends from equity accounted associates    23   (100.0 ) 10   92   (89.1 )
Non-cash share-based compensation 1     100.0   3   2   50.0  
Pension adjustment (2 ) (1 ) 100.0   7   11   (36.4 )
Customer equipment financing   1   (100.0 ) 1   5   (80.0 )
Preferred share dividends (2 ) (2 )   (9 ) (8 ) 12.5  
Free cash flow 45   31   45.2   545   385   41.6  

(1)  Fiscal 2018 reported figures have been restated applying IFRS 15 and also reflect a change in accounting policy. See “Accounting Standards”
(2)  See definitions and discussion under “Non-IFRS and additional GAAP measures”
(3)  Per Note 3 to the unaudited interim Consolidated Financial Statements

Discussion of operations

Wireline

  Three months ended August 31, Year ended August 31,
(millions of Canadian dollars) 2019   2018
(restated)(1)
  Change %   2019   2018
(restated)(1)
  Change %  
Consumer 923   942   (2.0 ) 3,707   3,725   (0.5 )
Business 148   145   2.1   593   567   4.6  
Wireline revenue 1,071   1,087   (1.5 ) 4,300   4,292   0.2  
Operating income before restructuring and amortization(2) 483   517   (6.6 ) 1,955   1,915   2.1  
Operating margin(2) 45.1 % 47.6 % (5.3 ) 45.5 % 44.6 % 2.0  
(1)  Fiscal 2018 reported figures have been restated applying IFRS 15. See “Accounting Standards”
(2)  See definitions and discussion under “Non-IFRS and additional GAAP measures”

In the fourth quarter of fiscal 2019, Wireline RGUs decreased by 54,361 compared to a 59,231 RGU loss in the fourth quarter of fiscal 2018. The current quarter includes growth in Consumer Internet RGUs of approximately 11,400 whereas the mature products within the Consumer division, including Video, Satellite and Phone declined in the aggregate by 69,300 RGUs. The Company remains focused on growing Internet subscribers, primarily through two-year ValuePlans, and on attracting and retaining high quality Video subscribers which supports its Consumer profitability objectives.

Revenue highlights include:

  • Consumer revenue for the fourth quarter of fiscal 2019 decreased by $19 million or 2.0%, compared to the fourth quarter of fiscal 2018 as contributions from rate adjustments and growth in Internet revenue were offset by declines in Video, Satellite and Phone subscribers and revenue.   
    • As compared to the third quarter of fiscal 2019, the current quarter revenue decreased by $2 million or 0.2%.
  • Business revenue of $148 million for the fourth quarter of fiscal 2019 was up $3 million or 2.1% over the fourth quarter of fiscal 2018, reflecting continued demand for the SmartSuite of business products.
    • As compared to the third quarter of fiscal 2019, the current quarter revenue decreased $2 million or 1.3%. 

Operating income before restructuring costs and amortization highlights include:

  • Operating income before restructuring costs and amortization for the fourth quarter of fiscal 2019 of $483 million was down 6.6% or $34 million from $517 million in the fourth quarter of fiscal 2018.  The decrease relates primarily to the decrease in revenue, including the $10 million provision related primarily to the CRTC decision to reduce wholesale broadband rates available to third party internet providers from 2016 onward, and higher programming costs.
    • As compared to the third quarter of fiscal 2019, Wireline operating income before restructuring costs and amortization for the current quarter increased by $8 million mainly as a result of the impact of the $15 million payment to address certain IP licensing matters in the prior quarter partially offset by a $10 million provision related primarily to the CRTC decision to reduce wholesale broadband rates available to third party internet providers from 2016 onward in the current quarter.
Wireless            
  Three months ended August 31, Year ended August 31,
(millions of Canadian dollars) 2019   2018
(restated)(1)
  Change % 2019   2018
(restated)(1)
  Change %
Service 187   157   19.1 701   564   24.3
Equipment and other 96   84   14.3 353   337   4.7
Wireless revenue 283   241   17.4 1,054   901   17.0
Operating income before restructuring and amortization(2) 54   39   38.5 206   142   45.1
Operating margin(2) 19.1 % 16.2 % 17.9 19.5 % 15.8 % 23.4

The Wireless division added 90,744 RGUs in the fourth quarter of fiscal 2019 as compared to 85,014 RGUs gained in the fourth quarter of fiscal 2018. The increase in the postpaid subscriber base reflects the seasonally active back-to-school period and continued customer demand for the Big Gig data-centric pricing and packaging options, including Absolute Zero. The increase in the prepaid customer base reflects the success of the new plans that were launched in the market in early April.

Revenue highlights include:

  • Revenue of $283 million for the fourth quarter of fiscal 2019 increased $42 million or 17.4% over the fourth quarter of fiscal 2018. The increase was driven mainly by higher service revenues which contributed an incremental $30 million or 19.1% to consolidated revenue primarily due to higher postpaid RGUs (approximately 288,000 since August 31, 2018) and a 3.9% and 0.5% year-over-year increase in ABPU to $42.58 and ARPU to $38.59, respectively. There was also a $12 million or 14.3% increase in equipment revenue.
    • As compared to the third quarter of fiscal 2019, the current quarter revenue increased $32 million or 12.7%, while ABPU increased by $0.28 or 0.7% (ABPU of $42.30 in the third quarter of fiscal 2019), and ARPU increased by $0.23 or 0.6% (ARPU of $38.36 in the third quarter of fiscal 2019).  The quarter-over-quarter increase in both ABPU and ARPU was driven primarily by our expanding and improving network and customer demand for the Big Gig data-centric pricing and packaging options.

Operating income before restructuring costs and amortization highlights include:

  • Operating income before restructuring costs and amortization of $54 million for the fourth quarter of fiscal 2019 improved by $15 million over the fourth quarter of fiscal 2018. The improvements were mainly due to postpaid RGU growth and the 3.9% increase in ABPU. 
    • As compared to the third quarter of fiscal 2019, operating income before restructuring costs and amortization for the current quarter decreased $1 million or 1.8%.
               
Capital expenditures and equipment costs              
  Three months ended August 31,   Year ended August 31,
(millions of Canadian dollars) 2019 2018
(restated)1
Change %     2019 2018
(restated)1
Change %  
Wireline              
New housing development 39 35 11.4     138 124 11.3  
Success-based 66 64 3.1     256 278 (7.9 )
Upgrades and enhancements 90 185 (51.4 )   346 493 (29.8 )
Replacement 10 9 11.1     28 31 (9.7 )
Building and other 29 37 (21.6 )   59 92 (35.9 )
Total as per Note 3 to the unaudited interim consolidated financial statements 234 330 (29.1 )   827 1,018 (18.8 )
Wireless              
Total as per Note 3 to the unaudited interim consolidated financial statements 148 103 43.7     385 343 12.2  
Consolidated total as per Note 3 to the unaudited interim consolidated financial statements 382 433 (11.8 )   1,212 1,361 (10.9 )
(1)  Fiscal 2018 reported figures have been restated as a result of a change in accounting policy. See “Accounting Standards"

In the fourth quarter of fiscal 2019, capital investment of $382 million decreased $51 million compared to the prior year period. Wireline capital spending decreased by approximately $96 million primarily due to lower network investments. Wireless spending increased by approximately $45 million year-over-year due to the continued deployment of 700 MHz spectrum and the expansion of the wireless network into new markets. 

Wireline highlights include:

  • For the quarter, investment in combined upgrades, enhancements and replacement categories was $100 million, a $94 million or 48.5% decrease over the prior year driven by lower planned
    Wireline spend on system network infrastructure.
  • Investments in new housing development was $39 million, comparable to the prior period, driven by residential and commercial customer network growth and acquisition.

Wireless highlights include:

  • Capital investment of $148 million in the fourth quarter increased relative to the fourth quarter of fiscal 2018 by $45 million, primarily due to the planned increase in Wireless spending in the current year. In fiscal 2019, the Company continued to focus on investment in the Wireless network and infrastructure, specifically the deployment of 700 MHz spectrum, LTE and small cells as well as retail expansion in new and existing markets and enhancements to the back-office systems.
               
 Supplementary quarterly financial information
Quarter Revenue Operating
income before
restructuring
costs and
amortization(2)
Net income (loss)
from continuing
operations
attributable to
equity
shareholders
Net income
 (loss)
attributable
to equity
shareholders
Net income
(loss)(3)
Basic and
Diluted earnings
(loss) per share
from continuing
operations
Basic and
Diluted
earnings
(loss) per
share
(millions of Canadian dollars except per share amounts)      
2019              
Fourth 1,352 537 167   167   167   0.32   0.32  
Third 1,324 530 227   227   229   0.44   0.44  
Second 1,316 549 155   155   155   0.30   0.30  
First 1,355 545 187   187   187   0.36   0.36  
2018              
Fourth(1) 1,326 555 194   194   194   0.38   0.38  
Third(1) 1,289 538 (99 ) (99 ) (99 ) (0.20 ) (0.20 )
Second(1) 1,329 483 (175 ) (175 ) (175 ) (0.35 ) (0.35 )
First(1) 1,245 480 117   111   111   0.23   0.22  
(1) Fiscal 2018 reported figures have been restated applying IFRS 15 and also reflect a change in accounting policy. See “Accounting Standards”.
(2) See definition and discussion under “Non-IFRS and additional GAAP measures.”
(3) Net income attributable to both equity shareholders and non-controlling interests


   
F19 Q4
vs
F19 Q3
In the fourth quarter of fiscal 2019, net income decreased $62 million compared to the third quarter of fiscal 2019 mainly due to a $21 million increase in current taxes in the fourth quarter, a $41 million gain on the disposal of property, plant and equipment to a related party, a $15 million gain on the sale of a portfolio investment, and the $102 million impact of a tax rate change on deferred taxes partially offset by a $109 million loss on the disposal of the Company’s entire equity investment in Corus all recorded in the third quarter.
F19 Q3
vs
F19 Q2
In the third quarter of fiscal 2019, net income increased $74 million compared to the second quarter of fiscal 2019 mainly due to a $41 million gain on the disposal of property, plant and equipment to a related party, a $15 million gain on the sale of a portfolio investment and the $102 million impact of a tax rate change on deferred taxes partially offset by a $109 million loss on the disposal of the Company’s investment in Corus all recorded in the third quarter.
F19 Q2
vs
F19 Q1
In the second quarter of fiscal 2019, net income decreased $32 million compared to the first quarter of fiscal 2019 mainly due to a $20 million decrease in equity income related to the Company’s investment in Corus in the quarter and higher income taxes.
F19 Q1
vs
F18 Q4
In the first quarter of fiscal 2019, net income decreased $7 million compared to the fourth quarter of fiscal 2018 mainly due to a $10 million decrease in operating income before restructuring costs and amortization and a decrease in other gains mainly related to a $16 million gain on the sale of certain wireless spectrum licenses in the fourth quarter of fiscal 2018. These decreases were partially offset by a $10 million increase in equity income related to the Company’s investment in Corus in the first quarter.
F18 Q4
vs
F18 Q3
In the fourth quarter of fiscal 2018, net income improved by $293 million compared to the third quarter of fiscal 2018 primarily due to an impairment charge of $284 million related to the Company’s investment in Corus recorded in the third quarter.
F18 Q3
vs
F18 Q2
In the third quarter of fiscal 2018, the net loss decreased $76 million compared to the second quarter of fiscal 2018 mainly due to a decrease in third quarter restructuring costs of $404 million and an increase in operating income before restructuring costs and amortization. The increase was partially offset by an impairment charge of $284 million related to the Company’s investment in Corus and higher income taxes in the third quarter.
F18 Q2
vs
F18 Q1
In the second quarter of fiscal 2018, net income decreased $286 million compared to the first quarter of fiscal 2018 mainly due to $417 million of restructuring costs recorded during the second quarter related to the Company’s TBT initiative and composed primarily of the costs associated with the VDP, including severance and other employee related costs. The decrease was partially offset by increased wireless revenues of $93 million.

Other income and expense items

Restructuring costs

Restructuring costs generally include severance, employee related costs and other costs directly associated with a restructuring program. For the three and twelve months ended August 31, 2019, the category included a recovery of $10 and $9 million respectively in restructuring charges related to the Company’s TBT initiative for a total of $437 million since the beginning of the program in March 2018, of which $292 million has been paid up to and including August 31, 2019. 

As a first step in the TBT, the VDP was offered to eligible employees in the second quarter of fiscal 2018. The outcome of the program had approximately 3,300 Shaw employees accepting the VDP package, representing approximately 25% of all employees at that time. The costs related to this program make up the majority of the restructuring costs recorded in the prior year; however, in the first quarter of fiscal 2019, further organizational changes in the execution of TBT resulted in additional restructuring costs of $1 million. In addition, approximately 90 employees either rescinded their acceptance of the VDP package with the approval of the Company or declined their package in order to expedite their departure date resulting in a $10 million recovery of restructuring costs in fiscal 2019.

In the fourth quarter of fiscal 2019, approximately 300 employees exited the Company, bringing the total number of employees who have departed under the VDP to approximately 2,300 employees.

               
Amortization              
  Three months ended August 31,   Year ended August 31,
(millions of Canadian dollars) 2019   2018
(restated)(1)
  Change %     2019   2018
(restated)(1)
  Change %  
Amortization revenue (expense)              
Deferred equipment revenue 5   6   (16.7 )   21   30   (30.0 )
Deferred equipment costs (19 ) (25 ) (24.0 )   (85 ) (110 ) (22.7 )
Property, plant and equipment, intangibles and other (236 ) (240 ) (1.7 )   (974 ) (945 ) 3.1  
(1) Fiscal 2018 reported figures have been restated as a result of a change in accounting policy. See “Accounting Standards”

Amortization of property, plant and equipment, intangibles and other decreased 1.7% and increased 3.1% for the three and twelve months ended August 31, 2019, respectively. The amortization of new expenditures exceeded the amortization of assets that became fully amortized during the year.

               
Amortization of financing costs and interest expense        
  Three months ended August 31,   Year ended August 31,
(millions of Canadian dollars) 2019 2018 Change %     2019 2018 Change %
Amortization of financing costs – long-term debt 1 2 (50.0 )   3 3 -
Interest expense 66 64 3.1     258 248 4.0

Interest expense for the three and twelve months ended August 31, 2019, was higher than the comparable periods primarily due to higher average outstanding debt balances in the current year.

Equity income (loss) of an associate

For the three and twelve months ended August 31, 2019, the Company recorded equity income of $nil and $46 million, respectively, related to its interest in Corus, compared to equity income of $13 million and an equity loss of $200 million for the comparable periods. The year-over-year decrease substantially reflects a $284 million impairment from the Company’s investment in Corus recorded in the third quarter of fiscal 2018.

On May 31, 2019, the Company sold all of its 80,630,383 Class B non-voting participating shares of Corus at a price of $6.80 per share. Proceeds, net of transaction costs, were $526 million, which resulted in a loss of $109 million for the twelve months ended August 31, 2019.

Other gains/losses

This category generally includes realized and unrealized foreign exchange gains and losses on U.S. 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.

During the twelve-month period ended August 31, 2019, the Company recorded a net $32 million gain on the disposal of property, plant and equipment, a $6 million gain on the disposal of a non-core business, as well as a $15 million gain on the disposal of a minor portfolio investment.

Income taxes

Income taxes are higher in the quarter compared to the fourth quarter of fiscal 2018 mainly due to miscellaneous tax adjustments.

Financial position

Total assets were $15.6 billion at August 31, 2019, compared to $14.4 billion at August 31, 2018. The following is a discussion of significant changes in the consolidated statement of financial position since August 31, 2018. 

Current assets increased $1.16 billion primarily due to increases in cash of $1.06 billion, receivables of $34 million, inventory of $25 million, other current assets of $18 million, and current portion of contract assets of $16 million. Cash increased primarily due to the issuance of $1 billion of senior notes, netting proceeds of $993 million, proceeds of $551 million collected from the sale of Corus and other portfolio investments, proceeds of $59 million on the disposal of property, plant and equipment as well as funds provided by continuing operations. This was partially offset by cash outlays for the spectrum acquisition of $492 million and other capital additions.

Other current assets increased over the period mainly due to an increase in Wireless subscribers participating in the Company’s MyTab Boost, a plan that allows customers to pay less for their handset upfront if they pay a predetermined incremental amount on a monthly basis. This increase continues to be driven by growth in handset sales.

The current portion of contract assets increased over the period mainly due to an increase in Wireless subscribers participating in the Company’s discretionary wireless handset discount program, MyTab. Under IFRS 15, the portion of this discount relating to the handset is applied against equipment revenue at the point in time that the handset is transferred to the customer while the portion relating to service revenue is recorded as a contract asset and amortized over the life of the contract against future service revenues.

Investments and other assets decreased by $623 million due to the disposal of the Company’s investment in Corus and another minor portfolio investment. Property, plant and equipment increased $181 million due to capital investments in excess of amortization.  Intangible assets increased $497 million primarily due to the acquisition of spectrum for $492 million.

Current liabilities increased $1.21 billion during the period primarily due to an increase in the current portion of long-term debt of $1.25 billion due to the reclassification of a $1.25 billion senior note due in October 2019, and accounts payable and accrued liabilities of $45 million, partially offset by decreases in provisions of $21 million, income taxes payable of $51 million and current portion of contract liabilities of $10 million.

Accounts payable and accruals increased due to the timing of payment and fluctuations in various payables including capital expenditures, interest and programming costs. The decrease in current provisions was mainly due to the payment of restructuring costs related to the TBT. In connection with the VDP, the Company recorded a total of $437 million in restructuring charges in fiscal 2018 and 2019 primarily related to severance and other related costs, of which $292 million has been paid, $142 million is included in current provisions and $1 million is included in long-term provisions. Income taxes payable decreased due to normal course tax installment payments, partially offset by the current period provision.

Long-term debt decreased $253 million primarily due to the change in classification of the $1.25 billion senior note to current liabilities, partially offset by the issuance of $1 billion in senior notes, with $500 million due in 2023 and $500 million due in 2028. 

Shareholders’ equity increased $320 million mainly due to an increase in share capital of $256 million and retained earnings of $118 million partially offset by an increase in accumulated other comprehensive loss of $55 million. Share capital increased due to the issuance of 10,147,427 Class B non-voting participating shares (“Class B Non-Voting Shares”) under the Company’s stock option plan and Dividend Reinvestment Plan (“DRIP”). Retained earnings increased due to current year income of $736 million partially offset by dividends of $618 million.

As at October 15, 2019, there were 494,400,771 Class B Non-Voting Shares, 10,012,393 Series A Shares, 1,987,607 Series B Shares and 22,372,064 Class A Shares issued and outstanding. As at October 15, 2019, 8,231,823 Class B Non-Voting Shares were issuable on exercise of outstanding options. Shaw is traded on the Toronto and New York stock exchanges and is included in the S&P/TSX 60 Index (Trading Symbols: TSX – SJR.B, SJR.PR.A, SJR.PR.B, NYSE – SJR, and TSXV – SJR.A). For more information, please visit www.shaw.ca.

Liquidity and capital resources

In the twelve-month period ended August 31, 2019, the Company generated $545 million of free cash flow. Shaw used its free cash flow along with $551 million net proceeds from the sale of its investment in Corus Class B Shares and another minor portfolio investment, $993 million net proceeds from a senior note issuance, and proceeds on issuance of Class B Non-Voting Shares of $35 million to fund the net working capital change of $120 million, pay common share dividends of $389 million, purchase $492 million in spectrum licenses, and pay $124 million in restructuring costs. 

Debt structure and financial policy

On November 2, 2018, the Company solidified its balance sheet through the issuance of $1 billion in senior notes, comprised of $500 million at a rate of 3.80% due November 2, 2023 and $500 million at a rate of 4.40% due November 2, 2028. The funds will be used for general corporate purposes which may include the repayment of indebtedness. On November 21, 2018, the Company amended the terms of its $1.5 billion bank credit facility to extend the maturity date to December 2023. The facility can be used for working capital and general corporate purposes, including to issue letters of credit.

The Company issued Class B Non-Voting Shares from treasury under its DRIP which resulted in cash savings and incremental Class B Non-Voting Shares of $217 million during the twelve-month period ending August 31, 2019.  Subsequent to year-end, on October 25, 2019, and in accordance with the terms of our Dividend Reinvestment Plan (the “DRIP”), the Company announced that in lieu of issuing shares from treasury, it will satisfy its share delivery obligations under the DRIP by purchasing Class B Shares on the open market. In addition, the Company will reduce its discount from 2% to 0% for the Class B Shares delivered under the DRIP. These changes to the DRIP will apply to the dividends payable on November 28, 2019 to shareholders of record on November 15, 2019.

Effective May 29, 2019, the Company amended the terms of its accounts receivable securitization program to extend the term of the program to May 29, 2022 and increase the sales committed up to a maximum of $200 million. As at August 31, 2019, $40 million was drawn under the program and, pursuant to the terms of the amendment, the Company will also be required to draw an additional $40 million (for a total of $80 million) under the program by November 1, 2019. The Company continues to service and retain substantially all of the risks and rewards relating to the trade receivables sold, and therefore, the trade receivables remain recognized on the Company’s Consolidated Statement of Financial Position and the funding received is recorded as a current liability (revolving floating rate loans) secured by the trade receivables. The buyer’s interest in the accounts receivable ranks ahead of the Company’s interest and the program restricts it from using the trade receivables as collateral for any other purpose. The buyer of the trade receivable has no claim on any other assets of the Company.

As at August 31, 2019, the net debt leverage ratio for the Company was 1.9x. Considering the prevailing competitive, operational and capital market conditions, the Board of Directors has determined that having this ratio in the range of 2.0 to 2.5x would be optimal leverage for the Company in the current environment. Should the ratio fall below this, other than on a temporary basis, the Board may choose to recapitalize back into this optimal range. The Board may also determine to increase the Company’s debt above these levels to finance specific strategic opportunities such as a significant acquisition or repurchase of Class B Non-Voting Shares in the event that pricing levels were to drop precipitously.

Subsequent to year-end, on October 1, 2019, the Company repaid the $1.25 billion of 5.65% senior notes.

Subsequent to year-end, on October 25, 2019, the Company announced that it intends to implement a normal course issuer bid (“NCIB”) program to purchase up to 24,758,127 Class B Shares representing 5% of all of the issued and outstanding Class B Shares. The NCIB program has been approved by the Board of Directors but remains subject to approval by the Toronto Stock Exchange (“TSX”) and, if accepted, will be conducted in accordance with the applicable rules and policies of the TSX and applicable Canadian securities law.

The Company calculates net debt leverage ratio as follows(1):      
       
(millions of Canadian dollars) August 31, 2019     August 31, 2018
(restated)(3)
 
Short-term borrowings 40     40  
Current portion of long-term debt 1,251     1  
Long-term debt 4,057     4,310  
50% of outstanding preferred shares 147     147  
Cash (1,446 )   (384 )
(A) Net debt(2) 4,049     4,114  
Operating income before restructuring costs and amortization 2,161     2,056  
Corus dividends 10     92  
(B) Adjusted operating income before restructuring costs  and amortization(2) 2,171     2,148  
(A/B) Net debt leverage ratio 1.9x     1.9x  
(1) The following contains a description of the Company’s use of non-IFRS financial measures, provides a reconciliation to the nearest IFRS measure or provides a reference to such reconciliation.
(2) These financial measures do not have standard definitions prescribed by IFRS and therefore may not be comparable to similar measures disclosed by other companies and have not been presented as an alternative to liquidity prescribed by IFRS.
(3) Fiscal 2018 reported figures have been restated applying IFRS 15 and also reflect a change in accounting policy. See “Accounting Standards”

Shaw’s credit facilities are subject to customary covenants which include maintaining minimum or maximum financial ratios.

    Covenant Limit
Shaw Credit Facilities    
Total Debt to Operating Cash Flow(1) Ratio   < 5.00:1
Operating Cash Flow(1) to Fixed Charges(2) Ratio   > 2.00:1

(1) Operating Cash Flow, for the purposes of the covenants, is calculated as net earnings before interest expense, depreciation, amortization, restructuring, and current and deferred income taxes, excluding profit or loss from investments accounted for on an equity basis, for the most recently completed fiscal quarter multiplied by four, plus cash dividends and other cash distributions received in the most recently completed four fiscal quarters from investments accounted for on an equity basis.
(2) Fixed Charges are defined as the aggregate interest expense for the most recently completed fiscal quarter multiplied by four.

As at August 31, 2019, Shaw is in compliance with these covenants and based on current business plans, the Company is not aware of any condition or event that would give rise to non-compliance with the covenants over the life of the borrowings which currently mature in December of 2023.

Based on the aforementioned financing activities, available credit facilities and forecasted free cash flow, the Company expects to have sufficient liquidity to fund operations, obligations, working capital requirements, including maturing debt, during the upcoming 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.

On December 4, 2018, the Company entered into new unsecured letter of credit facilities, under which letters of credit were issued in favour of and filed with Innovation, Science and Economic Development Canada (“ISED”) to fulfill the pre-auction financial deposit requirement with respect to its application to participate in the 600 MHz spectrum auction which occurred during the period from March 14, 2019 to April 10, 2019.  The Company’s wireless subsidiary, Freedom Mobile Inc., acquired 11 paired blocks of 20-year 600 MHz spectrum, across its wireless operating footprint, for a total price of $492 million.  In accordance with 600 MHz auction terms, 20% ($98 million) was paid to ISED on April 26, 2019 and the re...