MTS Allstream Reports Third Quarter 2011 Results

Stock Symbol:  MBT

Q3 highlights include

  • MTS Allstream is on track to meet its 2011 financial outlook for all metrics
  • Annualized cost savings meet annual target and reach $25.1 million
  • MTS wireless revenues grow 7.3% in Q3, driven by 47.8% increase in wireless data revenue
  • MTS IPTV revenues up 19.9% in Q3
  • Allstream achieves fourth consecutive quarter of year-over-year EBITDA growth at 6.2% in Q3
  • Allstream converged IP revenues climb 9.8% in Q3
  • Board of Directors declares $0.425 per share Q4 cash dividend

WINNIPEG, November 3, 2011 /CNW/ - Manitoba Telecom Services Inc. (TSX: MBT) (the "Company" or "MTS Allstream"), including its two operating divisions MTS and Allstream, today reported solid third quarter 2011 financial results that are on track to meet the Company's updated financial outlook for 2011.

"While year-over-year consolidated results are negatively impacted by one-time recoveries in the third quarter of 2010, the Company delivered another strong quarter with solid performance at both MTS and Allstream. We achieved strong revenue growth in the third quarter from each of our strategic lines of business," said Pierre Blouin, Chief Executive Officer. "We are delivering on our strategic objectives and expect to meet the improved 2011 outlook ranges we provided last quarter."

Quarterly Financial Highlights

                    2011               2010
(in millions $, except EPS and capital
expenditures/revenue)
          Q3       Q2       Q1       Q4       Q3
Revenues           443.2       443.7       439.3       446.7       451.0
EBITDA1           146.9       150.8       149.8       135.5       159.9
EPS ($)2           0.56       0.76       0.67       0.46       0.76
Free cash flow3           29.3       57.8       24.4       (64.1)       44.3
Capital expenditures/revenue           18.3%       12.3%       15.4%       29.0%       17.4%

All financial metrics in this table are presented on a consolidated basis and reported in accordance with International Financial Reporting Standards ("IFRS").

MTS Allstream reported strong wireless, broadband and converged IP revenue growth in the third quarter, which was offset by declines in revenues from traditional services, such as local access, long distance and legacy data services. Revenues were consistent with expectations for the full year, totalling $443.2 million in the third quarter and $1,326.2 million for the first nine months of the year. The Company achieved $25.1 million in annualized cost savings in the first nine months of the year, already reaching the 2011 guidance range of $25 million to $35 million in annualized cost savings.

MTS Allstream's EBITDA was up 1.4 per cent in the third quarter of 2011 excluding favourable one-time items that occurred in the third quarter of 2010 (which include a $5 million deferral account rebate adjustment as a result of the CRTC's deferral account rebate decision and a $10 million one-time wireless transition recovery).  In total, EBITDA was $146.9 million in the third quarter compared to $159.9 million in 2010.  EPS was also affected by these one-time items, down $0.20 year-over-year in the third quarter. Excluding these one-time items, EPS was down $0.05, when compared to the same period of last year due to higher depreciation and amortization expense.

Free cash flow was $29.3 million in the third quarter, compared to $44.3 million a year ago, due primarily to the $15 million of one-time items recognized in the third quarter of 2010 and an increase in wireless costs of acquisition related to wireless data growth and strong smartphone adoption. Free cash flow was $111.5 million in the first nine months of the year, up from $98.2 million in the same period of 2010. This increase was due to lower capital expenditures (including the impact of the $20.7 million one-time scientific research and experimental development investment tax credit achieved in the second quarter of 2011) and higher EBITDA, partly offset by higher pension funding in the first quarter of 2011 and higher year-over-year wireless costs of acquisition.

On September 27, 2011, the Company successfully issued $200.0 million of 4.59 per cent Medium Term Notes which mature on October 1, 2018. Proceeds were used to repay the long-term debt that matured on September 27, 2011.

MTS

MTS saw strong year-over-year revenue growth from strategic services - wireless, high-speed Internet and IPTV - in the third quarter and first nine months of the year.

Wireless revenue growth was 7.3 per cent in the third quarter, driven by a 47.8 per cent increase in wireless data revenues combined with increased subscribers. MTS's extensive 4G wireless network, together with the planned deployment of Long Term Evolution ("LTE") technology in Winnipeg and Brandon next year, is expected to drive strong wireless data revenues in the coming years. Planning and infrastructure development for the initial urban LTE deployment will be accommodated within normal capital funding for 2011 and coming years.

Broadband and converged IP revenues grew 12.7 per cent in the third quarter, driven by strong growth in Internet and IPTV. Internet revenues grew 8.3 per cent year-over-year in the third quarter, while IPTV grew 19.9 per cent, due to fewer customers on promotional plans, subscriber growth, and price increases. Demand continues to grow for premium broadband services; Ultimate TV subscribers now represent nearly 60 per cent of MTS's IPTV customer base.

"Our customers are upgrading to higher-value services - whether it is smartphones, high-speed Internet or premium IPTV services. This is solid evidence that our strategy is working," said Kelvin Shepherd, President of MTS. "We are making the right investments to maintain our leading position within Manitoba through best-in-class infrastructure and an unparalleled bundle offer."

MTS has the most complete bundle offer in the Manitoba telecom market with five services eligible for the bundle discount, including wireless, high-speed Internet, IPTV, home phone and security services. Customers opting for bundled services grew 3.8 per cent year-over-year. By continuing with a disciplined bundle strategy, MTS has achieved industry-leading customer retention and ARPU growth that has resulted in overall revenue growth.

Allstream

Allstream's EBITDA increased by 6.2 per cent to $27.5 million in the third quarter of 2011, the fourth consecutive quarter of significant year-over-year improvement. The improved EBITDA is mainly due to higher gross margins from increased on-net IP sales wins and lower restructuring expenses.

Allstream is focused on winning high-margin, on-net IP revenues and exiting certain low-margin legacy services, while reinvesting cash flows from declining legacy services into IP platforms. Converged IP revenues grew strongly in the third quarter, up 9.8 per cent to $59.4 million, representing approximately 30 per cent of Allstream's total revenues. Due to the strategic decision to transition away from low-margin products and services, overall revenues declined year-over-year in the third quarter. Converged IP sales remained strong in the third quarter. Over 55 per cent of new IP circuits sold in 2011 were on-net, a threefold increase over the proportion of on-net circuits in the base. This increase in on-net IP sales has contributed to the year-over-year gross margin improvement at Allstream.

"Our IP strategy is working. Our sales team has done a great job and increased on-net IP sales year over year," said Dean Prevost, President of Allstream.  "In the third quarter, they saw real success winning second and third contracts in newly-connected fibre-fed buildings."

The Company continued to make targeted, success-based investments in Allstream's IP fibre network to extend its on-net reach and provide incremental, high-margin revenue opportunities. Allstream added a total of 102 buildings to the IP fibre network in the third quarter of 2011.  This increased Allstream's total number of fibre-fed buildings to 2,313 at September 30, 2011. These investments are expected to drive growth in markets where Allstream has a proven track record of success.

Dividend

The Company's Board of Directors declared a cash dividend of $0.425 per share for the fourth quarter of 2011, which is payable on January 13, 2012 to shareholders of record on December 15, 2011. The fourth quarter dividend is designated as an "eligible dividend" under the Income Tax Act (Canada) and any corresponding provincial legislation. Under this legislation, individuals resident in Canada may be entitled to enhanced dividend tax credits that reduce income tax otherwise payable.

Quarterly Conference Call

MTS Allstream's third quarter 2011 conference call with the investment community is scheduled for 9:00 a.m. (Eastern Time) on Thursday, November 3, 2011.  Investors, media and the public are invited to listen to the conference call.  The dial-in number is 1-888-231-8191.  A live audio Webcast of the conference call can be accessed by visiting the Investors section of the MTS Allstream website (www.mtsallstream.com).  A replay of the conference call will be available until midnight (Eastern Time) on November 17, 2011, and can be accessed by dialing 1-855-859-2056 or 1-416-849-0833 (access code 19102460).

Note

MTS Allstream's interim Management's Discussion and Analysis ("MD&A") for the three and nine months ended September 30, 2011 and supplementary financial information are available in the Investors section of the MTS Allstream website at www.mtsallstream.com.

About Manitoba Telecom Services Inc.

Manitoba Telecom Services Inc., through its wholly-owned subsidiary MTS Allstream Inc., is one of Canada's leading national communication solutions companies, providing innovative communications for the way Canadians live and work today. The Company has more than 100 years of experience, with 5,500 employees across Canada dedicated to a mission of delivering true value as seen through the eyes of our customers. MTS Allstream has nearly two million customer connections spanning business customers across Canada and residential consumers throughout the province of Manitoba. The Company's extensive national broadband and fibre optic network spans almost 30,000 kilometres. Manitoba Telecom Services Inc.'s common shares are listed on the Toronto Stock Exchange (trading symbol: MBT). Customers, stakeholders and investors who want to learn more about MTS Allstream are encouraged to visit: www.mtsallstream.com.

Forward-looking Statements Disclaimer

This news release includes forward-looking statements and information (collectively, the "statements") about our corporate direction, business opportunities, operations, financial objectives and future financial results and performance that are subject to risks, uncertainties and assumptions.  As a consequence, actual results in the future may differ materially from any conclusion, forecast or projection in such forward-looking statements. Therefore, forward-looking statements should be considered carefully and undue reliance should not be placed on them. Examples of statements that constitute forward-looking information may be identified by words such as "believe", "expect", "project", "should", "anticipate", "could", "target", "forecast", "intend", "plan", "outlook", "see", "set", "pending", and other similar terms.

Factors that could cause anticipated opportunities and actual results to differ materially include, but are not limited to, matters identified in the "Risks and Uncertainties" section and elsewhere in our interim MD&As for the first, second and third quarters of 2011, as well as our 2010 annual MD&A, and our Annual Information Form, all of which are available on SEDAR at www.sedar.com.

Please note that forward-looking statements reflect our expectations as at the date hereof.  We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise except as required by law.  This news release and the financial information contained herein have been reviewed by our Audit Committee and approved by our Board of Directors.

Footnotes:

  1. EBITDA is earnings before interest, taxes, depreciation and amortization and other income (expense). Refer to the "Non-IFRS measures of performance" section of MTS Allstream's third quarter 2011 interim MD&A for more information.
  2. EPS is earnings per share.
  3. MTS Allstream defines free cash flow as cash flows from operating activities, less capital expenditures, and excluding changes in working capital.  Refer to the "Non-IFRS measures of performance" section of MTS Allstream's third quarter 2011 interim MD&A for more information.

MANAGEMENT'S DISCUSSION AND ANALYSIS

This Management's Discussion and Analysis ("MD&A") of our financial results comments on our operations, performance and financial condition for the three ("Q3") and nine months ("year to date" or "YTD") ended September 30, 2011 and 2010.  This MD&A is based on financial statements that reflect the adoption of International Financial Reporting Standards ("IFRS").  Prior to 2011, our consolidated financial statements were presented in accordance with previous Canadian generally accepted accounting principles ("GAAP").  All financial amounts, unless otherwise indicated, are in Canadian dollars and in accordance with IFRS.

Unless otherwise indicated, this MD&A for the three and nine months ("interim period") ended September 30, 2011 is as at November 2, 2011.  In preparing this MD&A, we have taken into account information available to us up to November 2, 2011.  In this MD&A, "we", "our", and "us" refer to Manitoba Telecom Services Inc. (the "Company" or "MTS Allstream").  This interim MD&A should be read in conjunction with our condensed interim consolidated financial statements for the period ended September 30, 2011. We also encourage you to read the MD&A that accompanies our audited consolidated financial statements for the year ended December 31, 2010 dated March 3, 2011.  You will also find more information about us, including our annual information form for the year ended December 31, 2010 dated March 3, 2011, on our website at www.mtsallstream.com and on SEDAR at www.sedar.com.

Regarding forward-looking statements
This interim MD&A includes forward-looking statements and information (collectively, the "statements") about our corporate direction, business opportunities, operations, financial objectives, future financial results and performance, future cash flows and distributions to shareholders that are subject to risks, uncertainties and assumptions.  As a consequence, actual results in the future may differ materially from any conclusion, forecast or projection in such forward-looking statements.  Examples of statements that constitute forward-looking information may be identified by words such as "believe", "expect", "project", "should", "anticipate", "could", "target", "forecast", "intend", "plan", "outlook", "see", "set", "pending", and other similar terms.

Factors that could cause anticipated opportunities and actual results to differ materially include, but are not limited to, matters identified in our 2010 Annual MD&A.

Please note that forward-looking statements reflect our expectations as at the date hereof.  We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise except as required by law.  This interim MD&A and the financial information contained herein have been reviewed by our Audit Committee and approved by our Board of Directors.


OVERVIEW OF OUR BUSINESS

MTS Allstream is a leading national communications provider in Canada and the market leader in Manitoba.  Our company is organized into two principal business segments: MTS, operating in Manitoba; and Allstream, operating nationally.  Our common shares are listed on the Toronto Stock Exchange (trading symbol: MBT) and our website is www.mtsallstream.com.

MTS
MTS leads every telecommunications market segment in Manitoba, delivering a full suite of wireless, high-speed Internet, Internet protocol television ("IPTV"), converged Internet protocol ("IP"), unified communications, security, home alarm monitoring, local access and long distance services.  This complete range of products is unmatched by any other provider in the province.  MTS serves both residential and business customers in Manitoba.

Allstream
Allstream is a leading competitor in the national business and wholesale markets, offering small, medium and large businesses and government organizations a portfolio of telecommunications solutions tailored to meet their needs.  Allstream's main products are IP-based communications, unified communications, voice and data connectivity, and security services.  Allstream operates an extensive national broadband fibre optic network that spans 30,000 kilometres and provides international connections through strategic alliances and interconnection agreements with other international service providers.


THIRD QUARTER IN REVIEW

Summary of results

(in millions $, except EPS and
capital expenditures/revenues)
              Q3 2011       Q2 2011       Q1 2011       Q4 2010       Q3 2010
Revenues               443.2       443.7       439.3       446.7       451.0
EBITDA1               146.9       150.8       149.8       135.5       159.9
EPS2               $0.56       $0.76       $0.67       $0.46       $0.76
Free cash flow3               29.3       57.8       24.4       (64.1)       44.3
Capital expenditures/revenues               18.3%       12.3%       15.4%       29.0%       17.4%
In accordance with IFRS                                                

1 EBITDA (earnings before interest, taxes, depreciation and amortization, and other income (expense)) is a non-IFRS measure of performance. See the section titled "Non-IFRS measures of performance" for further information.

2 Earnings per share ("EPS") is based on weighted average shares outstanding of 65.7 million for the three months ended September 30, 2011, 65.4 million for the three months ended June 30, 2011, 65.2 million for the three months ended March 31, 2011, 64.9 million for the three months ended December 31, 2010, and 64.7 million for the three months ended September 30, 2010. Increases in the number of weighted shares outstanding are mainly due to participation in our dividend reinvestment program.

3 We define free cash flow as cash flows from operating activities, less capital expenditures, and excluding changes in working capital.  See the section titled "Non-IFRS measures of performance" for further information.

MTS Allstream delivered solid results in the third quarter of 2011; we expect to be within our updated financial guidance ranges for 2011 on all key metrics. We saw strong wireless, broadband and converged IP revenue growth in the third quarter, which was offset by declines in revenues from traditional services, such as local access, long distance and legacy data services. Consolidated revenues were consistent with expectations for the full year, totalling $443.2 million in the third quarter and $1,326.2 million for the first nine months of the year. EBITDA of $146.9 million in the third quarter of 2011 was consistent with our performance in the third quarter of 2010 once the one-time $5 million deferral account rebate and $10 million wireless recovery recognized in the third quarter of 2010 are excluded.

EPS was affected by the one-time items received in the third quarter of 2010, down $0.20 in the third quarter when compared to the same period of the prior year. Excluding these one-time items, EPS was down $0.05 in the third quarter over the prior year. Year-to-date, EPS increased by $0.27 when compared to the same period of the prior year due to lower restructuring costs and the favourable impact of a one-time adjustment to a scientific research and experimental development ("SR&ED") investment tax credit ("ITC") recognized in the second quarter of 2011, partly offset by the impact of the deferral account rebate and wireless recovery in the third quarter of 2010. Excluding the impact of these one-time items, EPS was $1.87 for the first nine months of the year, up 19.1% from $1.57 for the same period last year.

Free cash flows in the third quarter of 2011 were stable year over year excluding the net impact of one-time EBITDA items. Free cash flows for the first nine months of 2011 were up $13.3 million due to higher EBITDA and lower capital spending (including the impact of the $20.7 million SR&ED ITC adjustment), partly offset by higher pension solvency funding and wireless costs of acquisition, when compared to the same period of 2010. 

Strategic objectives
At MTS Allstream, we are committed to remaining a leading national telecommunications provider and the market leader in Manitoba. To this end, we are concentrating on three strategic objectives in 2011.  By meeting these strategic objectives, we expect to continue to produce strong cash flows in support of our dividend policy. In the third quarter of 2011, we made the following progress on our three strategic objectives:

  1. Maintain our industry-leading position in Manitoba. 

    In Manitoba, we are the market leader because of our strong brand recognition, customer loyalty, exclusive distribution channels, product leadership, and unmatched bundling capabilities. To maintain our product leadership, we continued to invest in our wireless and broadband networks and to enhance our unmatched bundling capabilities.

    Our 4G wireless network in Manitoba was launched on March 31, 2011 and delivers high-speed data to 97% of Manitoba's population. This, combined with the most extensive dealer network in the province, gives us an unmatched presence in Manitoba. We continue to see increased demand for wireless data with 47.8% growth in the third quarter over the same period last year. We recently announced that we expect to deploy Long Term Evolution ("LTE") technology in Winnipeg and Brandon in 2012, further enhancing our wireless services and strengthening our product leadership in Manitoba.  We continue to be the only provider in Manitoba that can include all major telecommunications products, including wireless, in our bundle offerings.  In the third quarter of 2011, our wireless subscribers increased by 3.8% and our average revenue per user ("ARPU") increased by 3.9%, when compared to the same period of 2010. Our advanced wireless networks are expected to meet demand for smartphones and drive continuing growth in wireless data services for years to come.

    A strong broadband network is a competitive advantage, creates growth opportunities, and allows MTS to provide high-speed Internet and IPTV services. At September 30, 2011, our premium IPTV service, Ultimate TV, was available to 95% of Winnipeg households as well as 94% and 99% of households in each of Portage La Prairie and Brandon, respectively. In 2010, we announced plans to invest $125 million over the next five years to deploy fibre to the home ("FTTH") to approximately 120,000 homes in over 20 Manitoba communities.  The first community to receive FTTH under this initiative was Selkirk, Manitoba. Our FTTH coverage in Selkirk is currently at 67%, with one third of eligible households subscribing to Ultimate TV. In 2011, we are deploying FTTH to targeted new communities in Manitoba where we currently do not have very-high-bit-rate digital subscriber line ("VDSL") which will create growth opportunities for MTS. In the third quarter of 2011, MTS's ARPU for high-speed Internet and IPTV services increased by 9.7% and 17.0%, while the subscriber bases rose by 2.2% and 4.1%, respectively, when compared to the same period of the previous year.

  2. Drive growth in IP-based services and improve profitability.

    Allstream continued to grow converged IP revenues, achieving 9.8% growth in the third quarter of 2011 when compared to the same period of 2010. We are supporting this growth with success-based, targeted investments to expand our IP fibre network. In the third quarter of 2011, we extended fibre to 102 buildings and increased the total number of fibre-fed buildings to 2,313 as at September 30, 2011.  These investments extend our on-net reach and provide us with incremental high-margin revenue opportunities. Through our new building programs, the transitioning of existing customers to IP services, and new customer sales into existing buildings, we have maintained high levels of sales activity and are well positioned to achieve strong IP revenue growth in 2011.

  3. Deliver superior customer service, while aggressively improving our cost structure.

    In 2011, we remain committed to delivering superior customer service and improving the customer experience. MTS continued to meet its targets for customer service in the third quarter of 2011.  Allstream continued to be among industry leaders when it comes to customer satisfaction and, in the third quarter of 2011, improved on its customer service and delivery metrics when compared to the same period of 2010.

    In the first nine months of 2011, we reached our target range of $25 million to $35 million in annualized cost savings for the year, having achieved $25.1 million as at September 30, 2011 through operational efficiency programs mainly associated with legacy product lines and restructuring initiatives.


DISCUSSION OF OPERATIONS

CONSOLIDATED STATEMENTS OF INCOME

(in millions $, except EPS)           Q3
2011
      Q3
2010
      %
change
      YTD
2011
      YTD
2010
      %
change
Operating revenues           443.2       451.0       (1.7)       1,326.2       1,335.9       (0.7)
Operations expense           296.3       291.1       1.8       878.7       906.6       (3.1)
EBITDA           146.9       159.9       (8.1)       447.5       429.3       4.2
Depreciation and amortization           80.4       73.6       9.2       219.5       215.8       1.7
Other income (expense)           1.9       (1.3)       n.m.       3.4       (4.0)       n.m.
Finance costs           (16.1)       (15.5)       3.9       (48.3)       (47.6)       1.5
Income before income taxes           52.3       69.5       (24.7)       183.1       161.9       13.1
Income tax expense           15.3       20.6       (25.7)       52.9       50.4       5.0
Net income for the period           37.0       48.9       (24.3)       130.2       111.5       16.8
Other comprehensive loss for the period, net of tax           (147.6)       (24.7)       n.m.       (101.7)       (120.5)       (15.6)
Total comprehensive income (loss) for the period           (110.6)       24.2       n.m.       28.5       (9.0)       n.m.
EPS1           $0.56       $0.76       (26.3)       $1.99       $1.72       15.7
In accordance with IFRS                                                    

1 Earnings per share is based on weighted average shares outstanding of 65.7 million for the three months ended September 30, 2011 and 64.7 million for the three months ended September 30, 2010. Earnings per share is based on weighted average shares outstanding of 65.4 million for the nine months ended September 30, 2011 and 64.7 million for the nine months ended September 30, 2010. Increases in the number of weighted shares outstanding are mainly due to participation in our dividend reinvestment program.

Operating revenues

(in millions $)                     Q3
2011
        Q3
2010
        %
change
      YTD
2011
      YTD
2010
      %
change
MTS                     243.8         242.0         0.7       717.9       702.5       2.2
Allstream                     199.4         209.0         (4.6)       608.3       633.4       (4.0)
Total operating revenues                     443.2         451.0         (1.7)       1,326.2       1,335.9       (0.7)
In accordance with IFRS                                                                  

In the third quarter of 2011, MTS revenues increased year over year as growth in wireless, high-speed Internet and IPTV services offset declines in local, long distance and legacy data revenues. Allstream revenues decreased $9.6 million due to legacy revenue declines, partly offset by strong growth in converged IP revenues. As a result, third quarter consolidated revenues were in-line with expectations for the year, down $7.8 million, or 1.7%, when compared to the third quarter of 2010.

In the first nine months of 2011, MTS operating revenues increased by $15.4 million year over year, driven by 8.6% growth in wireless revenues and 10.0% growth in broadband and converged IP revenues, partly offset by declines in local access, long distance and legacy data revenues. At Allstream, 9.4% growth in high-margin converged IP revenues partly offset the 9.8% managed revenue declines in our local, long distance, legacy data and other lines of business, resulting in a $25.1 million revenue decrease for the nine months ended September 30, 2011 when compared to the same period of the prior year.

Operations expense
Operations expense increased by $5.2 million in the third quarter of 2011 compared to the same period of 2010, mainly due to a one-time $10 million wireless recovery in 2010.  Furthermore, certain project costs were expensed in the third quarter of 2011, resulting in additional operations expense over the prior year. Operations expense decreased by $27.9 million in the first nine months of the year when compared to the same period last year, mainly due to lower restructuring and other costs, resulting from operational efficiency and restructuring initiatives completed in previous periods, and lower direct costs as a result of higher margins and lower revenues at Allstream.

Restructuring expenses are expected to be up to $10 million in 2011, which is lower than our total restructuring and other expenses of $35.5 million in 2010.  We continue to remove costs from our business and, in the first nine months of 2011, we achieved $25.1 million of annualized savings from our operational efficiency programs mainly associated with legacy product lines and restructuring initiatives.  We therefore have already achieved our total planned annualized cost reductions in 2011 of $25 million to $35 million.

EBITDA

(in millions $)                                 Q3
2011
        Q3
2010
      %
change
      YTD
2011
        YTD
2010
      %
change
MTS                                 121.8         133.9       (9.0)       367.0         367.6       (0.2)
Allstream                                 27.5         25.9       6.2       84.3         62.1       35.7
Other                                 (2.4)         0.1       n.m.       (3.8)         (0.4)       n.m.
Total EBITDA                                 146.9         159.9       (8.1)       447.5         429.3       4.2
In accordance with IFRS                                                                  

The year-over-year decrease of MTS Allstream's EBITDA in the third quarter was mainly due to a $5.0 million deferral account rebate adjustment and $10.0 million one-time wireless recovery recognized in the third quarter of 2010. Excluding these one-time items, EBITDA increased $2.0 million, or 1.4%, in the third quarter and $33.2 million, or 8.0% year to date.  The year-over-year increase of MTS Allstream's EBITDA for the nine months ended September 30, 2011 was due to improving margins at Allstream, growth in MTS revenues, improvements to our cost structure (from operational efficiency initiatives implemented in previous years), as well as lower restructuring expenses and other costs.

At MTS, the decrease in EBITDA was primarily due to a $5.0 million deferral account rebate and a $10.0 million one-time wireless recovery recognized in the third quarter of 2010. Excluding one-time items, EBITDA increased $2.9 million, or 2.4%, in the third quarter and $14.4 million, or 4.1%, year to date when compared to the same periods of 2010. These increases were due to higher revenues from wireless, IPTV and Internet lines of business, partly offset by increased operations expense mainly associated with our growth lines of business.

At Allstream, the increases in EBITDA were mainly due to improved margins in the third quarter of 2011 compared to the same period of 2010.  We continued to focus on increasing on-net IP revenues, managing the decline of low-margin, off-net and legacy revenues, and removing costs from the business.  Direct costs decreased by 12.1% in the third quarter of 2011 compared to the same period of 2010, while revenues decreased by 4.6% as part of Allstream's plan to exit less profitable lines of business.  Overall, Allstream's gross margin increased to 57.4% in the third quarter of 2011 from 53.8% in the same period of 2010. This trend is also reflected in our year-to-date results; in the first nine months of the year, direct costs decreased by 9.4%, while revenue was lower by 4.0%. Allstream's gross margin for the first nine months of the year increased to 56.9%, up from 54.3% for the same period last year. Allstream's EBITDA year-to-date was up 35.7% year over year due to lower restructuring costs, lower operating costs, and improved margins.

Depreciation and amortization
Depreciation and amortization expense increased by $6.8 million, or 9.2%, in the third quarter of 2011, and by $3.7 million, or 1.7%, in the first nine months of 2011 compared to the same periods of 2010.  These increases reflected growth in our asset base and higher amortization of our wireless costs of acquisition related to wireless data growth. The year-to-date increase was partly offset by the impact of the one-time adjustment to SR&ED ITC recognized in the second quarter of 2011.

Other income (expense)
Other income in the third quarter of 2011 was $1.9 million compared to other expense of $1.3 million in the same period of the previous year.  This increase was due to gains on foreign currency forward contracts and the 2010 losses related to Allstream's sale of its non-telecommunications information technology consulting group.

Year-to-date other income was $3.4 million compared to other expense of $4.0 million in the previous year.  This increase was mainly due to losses related to Allstream's sale of its non-telecommunications information technology consulting group in 2010, a one-time wireless recovery of a previous year's expenditure in the first quarter of 2011, and gains on foreign currency forward contracts.

Finance costs
Finance costs remained consistent when compared to the same periods of 2010.  Finance costs were $16.1 million and $15.5 million in the third quarters of 2011 and 2010, respectively, and $48.3 million and $47.6 million year to date in 2011 and 2010, respectively.

Income tax expense
Income tax expense decreased by $5.3 million, or 25.7%, to $15.3 million in the third quarter of 2011 compared to the same period of 2010, mainly due to lower income before taxes. Year-to-date income tax expense was $52.9 million, an increase of $2.5 million, or 5.0%, compared to the same period of 2010, mainly due to higher income before taxes due to lower operations expense.

The Company continues to have substantial capital cost allowance ("CCA") pools and tax losses.  By utilizing our CCA deductions and tax losses, we expect to fully offset our taxable income and not pay cash taxes before 2019, with the present value of our tax asset being approximately $310 million.

Net income and EPS
Net income and EPS decreased by $11.9 million and $0.20 in the third quarter of 2011 compared to the same period of 2010.  These decreases were mainly due to lower EBITDA and higher depreciation and amortization expense, partly offset by lower income tax expense and an increase in other income. Net income and EPS increased by $18.7 million and $0.27 year to date compared to the same period of 2010, mainly due to EBITDA growth and an increase in other income, partially offset by increased income taxes and higher depreciation and amortization expense.

Other comprehensive income (loss)
Other comprehensive income (loss) represents actuarial gains and losses arising from changes in the present value of our defined benefit plans' obligations and changes in the fair value of our defined benefit plans' assets. These items are recognized in other comprehensive income net of tax, and therefore, do not have an impact on our net income or EPS.

DIVISIONAL ANALYSIS

MTS operating revenues

(in millions $)           Q3
2011
        Q3
2010
      %
change
      YTD
2011
        YTD
2010
      %
change
Wireless           91.5         85.3       7.3       263.5         242.7       8.6
Broadband and converged IP           51.6         45.8       12.7       149.0         135.5       10.0
Unified communications, security and monitoring           8.1         9.3       (12.9)       24.4         25.8       (5.4)
Local access           68.4         77.1       (11.3)       206.9         222.8       (7.1)
Long distance and legacy data           21.1         22.0       (4.1)       64.7         67.2       (3.7)
Other           3.1         2.5       24.0       9.4         8.5       10.6
Total MTS operating revenues           243.8         242.0       0.7       717.9         702.5       2.2
In accordance with IFRS                                                      

Wireless
Our wireless portfolio consists of cellular, wireless data, paging and group communications services that we offer in the Manitoba market.

Wireless revenues increased $6.2 million and $20.8 million in the three and nine months ended September 30, 2011, respectively, when compared to the same periods of the prior year. These increases were mainly due to higher wireless ARPU and growth in our subscriber base.  Year-over-year wireless ARPU growth was driven by higher wireless data usage, resulting in an increase in wireless data revenues of 47.8% and 46.3% in the three and nine months ended September 30, 2011, respectively, when compared to the same periods of the prior year.

Our advanced wireless networks are expected to meet demand for smartphones and drive continuing growth in wireless data services for the future.  At September 30, 2011, we had 494,462 wireless subscribers, a 3.8% increase over the prior year. Wireless ARPU was $59.14 for the first nine months of 2011, an increase of 3.7% from $57.02 for the same period of 2010. This increase primarily reflected higher wireless data services revenues, partly offset by lower network charges resulting from the removal of system access fees on new plans.

Broadband and converged IP
Broadband and converged IP services include revenues earned from providing high-speed Internet and IPTV services to residential customers in Manitoba, as well as IP-based connectivity to business customers based in Manitoba.

Broadband and converged IP revenues increased significantly due to IPTV and high-speed Internet revenue growth.

Revenues from our IPTV services increased by $3.0 million, or 19.9%, and by $8.0 million, or 18.3%, in the three and nine months ended September 30, 2011, respectively, when compared to the same periods of 2010. These increases reflected year-over-year ARPU and subscriber growth.  Our ARPU for IPTV services was $63.90 for the third quarter of 2011, an increase of 17.0% from $54.61 in the third quarter of 2010, mainly due to fewer subscribers on promotional plans and price increases.  At September 30, 2011, we had a total of 93,244 IPTV subscribers, representing a year-over-year increase of 4.1%.  Nearly 60% of these customers subscribe to our premium IPTV service, Ultimate TV, which generates higher ARPU compared to our Classic TV service.

Internet services revenue grew $2.0 million, or 8.3%, in the third quarter of 2011 and $4.6 million, or 6.4%, in the first nine months of the year, reflecting higher ARPU due to fewer subscribers on promotional plans, price increases, as well as an increase in subscribers. At September 30, 2011, our high-speed Internet subscriber base remained strong at 187,604, an increase of 2.2% from the prior year.

Revenues from converged IP services for the three and nine months ended September 30, 2011 increased slightly year over year for both periods due to increased demand for MPLS services.

Unified communications, security and monitoring
Unified communications, security and monitoring services consist of revenues earned from the provision of IP products and services to business customers in Manitoba. This line of business also includes revenues earned from the installation and monitoring of alarm services to residential and business customers in Manitoba.

Unified communications revenues decreased due to the timing of equipment sales. Security and monitoring services revenues for the three and nine months ended September 30, 2011 remained consistent with the same periods of 2010.

Local access
Local access services include revenues earned for the provision of both residential and business voice connectivity including calling features, payphone revenue, and wholesale revenue within Manitoba.

Local access services revenues decreased mainly due to a 5.2% decline in residential local access lines resulting from local competition and wireless substitution and a 2.4% decrease in business local access lines.

Long distance and legacy data
Long distance and legacy data services include revenues earned from the provision of long distance calling along with legacy data services, such as private line networks, that we offer to business customers in Manitoba.

Long distance and legacy data services revenues decreased as a result of customer migration to lower-priced long distance plans and reduced volumes as customers continue to substitute long distance calling with alternative methods of communication, such as email, text messaging, and social networking.  Legacy data services revenues were stable when compared to the same periods of the prior year due to an increase in demand for digital private lines, largely offset by migration to IP products and the decommissioning of legacy products.

Other
Other services include revenues earned from customer late payment charges, facilities rental and other miscellaneous items.

The other services revenues were consistent year over year.

Allstream operating revenues

(in millions $)                     Q3
2011
        Q3
2010
      %
change
      YTD
2011
        YTD
2010
      %
change
Converged IP                     59.4         54.1       9.8       175.4         160.3       9.4
Unified communications and security                     21.8         20.5       6.3       66.1         66.3       (0.3)
Local access                     49.3         50.2       (1.8)       149.8         151.6       (1.2)
Long distance and legacy data                     51.4         59.2       (13.2)       161.1         182.3       (11.6)
Other                     17.5         25.0       (30.0)       55.9         72.9       (23.3)
Total Allstream operating revenues                     199.4         209.0       (4.6)       608.3         633.4       (4.0)
In accordance with IFRS

Converged IP
Converged IP services include revenues earned from the provision of IP-based networking and related products and services to business customers nationally.

Converged IP revenues increased $5.3 million, or 9.8%, in the third quarter and $15.1 million, or 9.4% in the first nine months of the year, due to an increase in IP sales wins which began in June 2010 and has continued throughout the first nine months of 2011. Although sales were lower in the third quarter than they were in the second quarter of 2011, we have achieved over 20% growth in IP sales in the first nine months of the year, when compared to the same period of 2010.

Unified communications and security
Unified communications and security services include revenues earned from the provision of IP telephony products and services along with revenues from our IP-based security offerings to national business customers.

Unified communications and security services revenues increased in the third quarter due to higher hosting revenue and an increase in unified communications product sales, which offset lower security services product sales. Year-to-date revenues were stable year over year as an increase in hosting revenue largely offset the decrease in one-time product sales due to management's actions to exit low-margin resale product lines at Allstream.

Local access
Local access services include revenues earned for the provision of business voice connectivity, including calling features, to national business and wholesale customers.

Local access revenues declined primarily due to decreases in local access rates, partially offset by continued growth in the number of small- and medium-sized business customers subscribing to bundled services and increased volumes.

Long distance and legacy data
Long distance and legacy data services include revenues earned from the provision of long distance calling along with legacy data services, such as private line networks, to business customers nationally.

Long distance services declined $3.7 million, or 12.6% in the third quarter, and $9.5 million, or 10.6%, in the first nine months of 2011. These expected declines were mainly due to lower domestic and cross-border rates along with decreased volumes in the domestic, cross-border and international markets.

Legacy data revenues decreased $4.1 million, or 13.8% in the third quarter, and $11.7 million, or 12.7%, in the first nine months of 2011 mainly due to our customers' continued transition to broadband and other IP-based services.  We continue to implement our strategy to improve profitability of our legacy services by exiting low-margin services, reducing costs, and transitioning our customers to IP-based services.

Other
Other services include wholesale revenues earned from the routing and exchange of long distance network traffic, customer late payment charges, and other miscellaneous items.

Other services revenue decreased due to lower international rates for global hubbing. Continued decreases are expected as part of our decision to reduce our participation in low-margin lines of businesses.

SUMMARY OF QUARTERLY RESULTS

Our financial results for our eight most recently completed quarters are presented below:

                          IFRS       IFRS       IFRS       IFRS
(in millions $, except EPS)                         Q3 2011       Q2 2011       Q1 2011       Q4 2010
Operating revenues                         443.2       443.7       439.3       446.7
EBITDA                         146.9       150.8       149.8       135.5
Net income                         37.0       49.8       43.4       29.8
Basic and diluted EPS1                         $0.56       $0.76       $0.67       $0.46
                                                   
                          IFRS       IFRS       IFRS       Previous
GAAP
(in millions $, except EPS)                         Q3 2010    
Q2 2010
      Q1 2010    
Q4 2009
Operating revenues                         451.0       442.9       442.0       453.8
EBITDA                         159.9       138.8       130.6       137.3
Net income                         48.9       35.2       27.4       6.7
Basic and diluted EPS1                         $0.76       $0.54       $0.42       $0.10

1 Earnings per share is based on weighted average shares outstanding of 65.7 million for the three months ended September 30, 2011, 65.4 million for the three months ended June 30, 2011, 65.2 million for the three months ended March 31, 2011, 64.9 million for the three months ended December 31, 2010, and 64.7 million for the three months ended September 30, 2010, June 30, 2010, March 31, 2010, and December 31, 2009.

Our consolidated financial results for the eight most recently completed quarters reflected the following significant transactions and trends:

  • In general, over the last eight quarters, operating revenues reflected strong growth in MTS's strategic services (wireless, high-speed Internet and IPTV) in Manitoba, along with strong growth in Allstream's converged IP services, and declines in total legacy services revenues.  We have seen an increase in demand for IP-based telecommunications services, with Allstream showing five quarters of sequential IP revenue growth beginning in the third quarter of 2010.  Allstream revenues, particularly those generated from our long distance and legacy data services and our unified communications portfolio, were negatively impacted by the economic downturn and slow pace of economic recovery from the second quarter of 2009 to the second quarter of 2010.

  • Over the past several years, we have improved our cost structure through operational efficiency and restructuring initiatives.  Expenses related to these ongoing cost reduction initiatives resulted in decreases in EBITDA.  In 2011, restructuring expenses were $1.4 million in the third quarter. In 2010, restructuring and transition expenses were $12.6 million in the first quarter, $8.2 million in the second quarter, $1.7 million in the third quarter, and $13.0 million in the fourth quarter.  In 2009, restructuring and transition expenses were $5.8 million in the fourth quarter.

  • In the second quarter of 2011, we recognized $20.7 million of additional SR&ED ITC due to the completion of CRA's audit for the 2005 to 2008 taxation years. The impact of the SR&ED ITC reduced depreciation expense by $10.3 million in the second quarter of 2011, partially offset by income tax expense of $2.7 million, resulting in an increase to net income of $7.6 million.

  • In the third quarter of 2010, the CRTC reduced our requirements to rebate customers by $5.0 million related to a previous decision on the dispersal of deferral account funds, resulting in an increase in operating revenues.

  • In 2010, MTS executed a comprehensive settlement agreement with Bell Mobility in respect of various historical disputes.  Under this settlement, we received a $10.0 million one-time cash payment from Bell Mobility in the third quarter of 2010, which resulted in an increase in EBITDA.  We also incurred expenses over the past several years in relation to the transition of certain wireless service requirements away from Bell Mobility and to new suppliers and our wireless platform which totalled $3.7 million to the fourth quarter of 2009.

  • In 2010, we completed the sale of the majority of our Allstream non-telecommunications IT consulting group.  We recognized losses, net of tax, associated with this line of business in the amounts of $1.0 million and $1.4 million in the first and second quarters of 2010, respectively, and $2.3 million in the fourth quarter of 2009.  These losses resulted in decreases in net income and EPS.

  • In the fourth quarter of 2009, under previous GAAP, we recognized deferred income tax expense of $23.4 million to reflect a decrease in the value of our income tax asset as a result of reductions in future income tax rates and rate differentials on temporary differences.  This transaction resulted in a decrease in net income and EPS.


LIQUIDITY AND CAPITAL RESOURCES

SUMMARY OF CASH FLOWS

(in millions $)             Q3
2011
        Q3
2010
      $
change
      YTD
2011
      YTD
2010
      $
change
Cash flows from (used in):                                                        
Operating activities             157.8         118.4       39.4       260.0       319.0       (59.0)
Investing activities             (82.0)         (79.3)       (2.7)       (226.5)       (224.0)       (2.5)
Financing activities             (56.6)         (52.0)       (4.6)       (83.7)       (135.0)       51.3
Change in cash and cash equivalents for the period             19.2         (12.9)       32.1       (50.2)       (40.0)       (10.2)
In accordance with IFRS

Operating activities
Cash flows from operating activities refer to cash we generate from our normal business activities.

The $39.4 million increase in cash flows from operating activities in the third quarter of 2011 was mainly due to the reversal of the impact of delayed processing of customer payments related to the postal strike in the second quarter and lower year-over-year pension funding, partly offset by lower EBITDA and a $3.6 million increase in wireless costs of acquisition related to growth in wireless data plans, when compared to the same period last year.

The $59.0 million decrease in cash flows from operating activities for the first nine months of 2011 was mainly due to cash used in the first quarter for trade accounts payable associated with higher capital expenditures on our 4G wireless network in the fourth quarter of 2010 compared to the fourth quarter of 2009, higher year-over-year pension funding, and an $11.2 million year-over-year increase in wireless costs of acquisition related to growth in wireless data plans.

Investing activities
Investing activities represent cash used for acquiring, and cash received from disposing of, long-term assets and other long-term investments.

Cash flows used in investing activities increased by $2.7 million in the third quarter and $2.5 million on a year-to-date basis, when compared to the same periods of the prior year.

Capital expenditures increased $2.5 million in the third quarter of 2011 when compared to the same period of the prior year. Capital spending in the three and nine months ended September 30, 2011 was focused on our strategic lines of business.  At MTS, our capital spending was focused on our 4G wireless network and billing implementation, deploying fibre to the home, and increasing the functionality of our broadband products.  At Allstream, we focused our capital spending on Allstream's IP fibre network where we are making targeted investments to extend fibre to select multi-tenant buildings and to enhance our Ethernet capabilities in our co-location areas.

The $29.1 million year-to-date decrease in capital expenditures was mainly due to a $20.7 million one-time adjustment to SR&ED ITC claims for the 2005 to 2008 taxation years recognized in the second quarter of 2011 and higher capital expenditures in 2010 related to our 4G wireless network build.  The reduction in capital expenditures related to the SR&ED ITC adjustment is offset in investing activities by a $20.7 million increase in a long-term receivable relating to the SR&ED ITC reported as "Other, net".  The ITC will be utilized when the Company becomes taxable in future years.

Capital spending is expected to increase in the fourth quarter of 2011 due to seasonality. However, our capital intensity ratio is expected to be lower than it was in the fourth quarter last year as capital spending in the fourth quarter of 2010 was particularly high due to the completion of the wireless HSPA network build. We expect our capital intensity ratio for the year to remain within our 2011 guidance range.

Financing activities
Financing activities refer to actions we undertake to fund our operations through equity capital and borrowings.

Cash flows used in financing activities increased by $4.6 million in the third quarter mainly due to the repayment of long-term debt and notes payable, partially offset by a decrease in our quarterly dividend, strong participation in our dividend reinvestment program ("DRIP"), and an issuance of long-term debt when compared to the same period of 2010.

Cash flows used in financing activities decreased by $51.3 million in the nine months ended September 30, 2011, when compared to the same period of 2010, due to an issuance of long-term debt, a decrease in our quarterly dividend, strong participation in our DRIP, partly offset by repayment of long-term debt.

In the third quarter of 2011, we successfully issued $200.0 million of seven-year 4.59% Medium-Term Notes which matures on October 1, 2018. Proceeds were used to pay the $220.0 million debt that matured on September 27, 2011.

In the first, second, and third quarters of 2011, as well as the third and fourth quarters of 2010, cash dividends paid were based on a quarterly dividend of $0.425 per outstanding common share as approved by our Board of Directors.  This was compared to a quarterly dividend paid of $0.65 per outstanding common share in the first and second quarters of 2010.

In the second quarter of 2010, we established a DRIP with a 3% discount, which enables eligible holders of the Company's common shares to automatically reinvest their regular quarterly dividends in additional common shares of the Company without incurring brokerage fees.  Participation in our DRIP was 28% in the third quarter of 2011 and resulted in $7.9 million additional cash available for operations.

Free cash flow
Free cash flow refers to cash flows from operating activities, less capital expenditures, and excluding changes in working capital. Free cash flow is the amount of discretionary cash flow that we have for purchasing additional assets beyond our annual capital expenditure program, paying dividends, buying back shares, and/or retiring debt.

(in millions $)             Q3
2011
        Q3
2010
      $
change
      YTD
2011
      YTD
2010
      $
change
Cash flows from operating activities             157.8         118.4       39.4       260.0       319.0       (59.0)
Add (Deduct): Changes in non-cash working capital             (47.4)         4.5       (51.9)       54.9       11.7       43.2
Deduct: Capital expenditures             (81.1)         (78.6)       (2.5)       (203.4)       (232.5)       29.1
Free cash flow for the period             29.3         44.3       (15.0)       111.5       98.2       13.3
In accordance with IFRS

The $15.0 million year-over-year decrease in free cash flow in the third quarter of 2011 was primarily due to $15 million in positive one-time recoveries that occurred in the third quarter of 2010, a $2.5 million increase in capital expenditures, and a $3.6 million increase in wireless costs of acquisition related to wireless data growth, partly offset by $5.4 million lower year-over-year pension funding.

The $13.3 million increase in free cash flow for the first nine months of 2011 was primarily due to higher EBITDA and lower capital spending (including the impact of the SR&ED ITC adjustment), partly offset by an increase in pension solvency funding and increased wireless costs of acquisition, when compared to the same period of 2010. Excluding the impact of the SR&ED ITC, free cash flow was down $7.2 million in the first nine months of the year, when compared to the same period in 2010. The year-to-date decrease reflected the additional pension solvency payments made in the first quarter of 2011 and higher wireless costs of acquisition, partly offset by higher EBITDA and lower capital spending. Free cash flow for the full year 2011 is expected to be in line with our guidance range of $110 million to $150 million. Contributing to the expected positive free cash flow in the fourth quarter of 2011 are substantial reductions in HSPA capital spending, pension solvency funding, and restructuring costs that were incurred in the fourth quarter of 2010.

CAPITAL MANAGEMENT

Credit facilities
We have arrangements in place that allow us to access the debt capital markets for funding when required.  Borrowings under these facilities typically are used to fund new initiatives, refinance maturing debt, and manage cash flow fluctuations.

(in millions $)                             Capacity at
September 30, 2011
      Utilized at
September 30, 2011
Medium term note program                             500.0       200.0
Revolving credit facility                             400.0       37.4
Letter of credit facility                             150.0       133.1
Accounts receivable securitization                             110.0       -
Total                             1,160.0       370.5
In accordance with IFRS

We renewed our medium term note program on August 23, 2011 for $500.0 million and we utilized $200.0 million of this facility to issue debt in September 2011.  We also have a $400.0 million revolving credit facility, of which $150.0 million is available to back-stop our commercial paper program.  As of September 30, 2011, we had utilized $37.4 million of our revolving credit facility for undrawn letters of credit.  We also have a $150.0 million credit facility, which is used solely for the issuance of letters of credit.  As at September 30, 2011, we utilized $133.1 million of this facility for undrawn letters of credit.  In addition to these programs and facilities, we have a $110.0 million accounts receivable securitization program, none of which was utilized at September 30, 2011.  On April 22, 2011, we renewed our accounts receivable securitization program, decreasing the amount available under this facility from $150.0 million to $110.0 million.

Of the $170.5 million in total letters of credit outstanding at September 30, 2011, $140.4 million represents letters of credit issued in accordance with the Pension Benefits Standards Act, 1985 (Canada), which permits the use of letters of credit in lieu of cash funding for solvency special payments to our defined benefit pension plans.  Effective April 1, 2011, new federal pension regulations allowing letters of credit to satisfy a portion of pension solvency obligations came into force, and the letters of credit previously issued under the Solvency Funding Relief Regulations are now considered letters of credit under the new federal pension regulations.  We expect to issue letters of credit to satisfy our pension solvency funding obligations for the remainder of 2011.

Capital structure

(in millions $)                 September 30, 2011         December 31, 2010
Bank indebtedness (cash and cash equivalents)                 0.2         (50.0)
Finance lease obligations, including current portion                 16.9         16.4
Long-term debt, including current portion                 1,020.6         1,040.6
Total debt                 1,037.7         1,007.0
Shareholders' equity                 815.7         848.0
Total capitalization                 1,853.4         1,855.0
Debt to capitalization                 56.0%         54.3%
In accordance with IFRS

Our capital structure illustrates the amount of our assets that are financed by debt versus equity.  Our debt to total capitalization ratio of 56.0% at September 30, 2011 continues to represent financial strength and flexibility.

Credit ratings

                                S&P           DBRS
Senior debentures                               BBB (stable)           BBB (stable)
Commercial paper                               A-2           R-2 (high)

Our credit ratings remain unchanged from those disclosed in our 2010 Annual MD&A.

Outstanding share data

                                As at October 21,
2011
          As at September 30,
2011
Common shares outstanding                               65,936,973           65,720,778
Stock options outstanding                               2,853,294           2,853,294
Stock options exercisable                               1,743,661           1,743,661

Contractual obligations, financial instruments, off-balance sheet arrangements, and other financial arrangements
Our contractual obligations, financial instruments, off-balance sheet arrangements, and other financial arrangements remain substantially unchanged from those disclosed in our 2010 Annual MD&A, except for:

Foreign currency forward contracts
We use foreign currency forward contracts to manage our foreign currency exchange exposure. These instruments hedge anticipated transactions and are not recorded on our balance sheet. As at September 30, 2011, we have outstanding foreign currency forward contracts to purchase US$18.1 million compared to the US$48.6 million as at December 31, 2010.


CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS

Our critical accounting estimates and assumptions remain substantially unchanged from those disclosed in our 2010 Annual MD&A.


CHANGES IN ACCOUNTING POLICIES

2011 adoption of IFRS
In 2008, the Canadian Accounting Standards Board confirmed January 1, 2011 as the date for IFRS to replace Canadian GAAP for publicly accountable enterprises.  In May 2011, the Company filed its interim condensed consolidated financial statements for the three months ended March 31, 2011, which represent the initial presentation of its results and financial position under IFRS.  These interim condensed consolidated financial statements for the period ended September 30, 2011 are prepared using the same accounting policies as applied in the Company's interim condensed consolidated financial statements for the period ended March 31, 2011.

Further information regarding the financial impact of our conversion to IFRS is available in note 10 to the condensed interim consolidated financial statements for the three and nine months ended September 30, 2011 and in our 2010 Annual MD&A.


OUR REGULATORY ENVIRONMENT

The telecommunications and broadcast industries in which we operate are federally regulated pursuant to both the Telecommunications Act and the Broadcasting Act.  The primary regulatory agency we are subject to is the CRTC.  The Government of Canada ("the Government"), through the Departments of Industry and Canadian Heritage, exercises legislative oversight of the CRTC.  We are subject to policy decisions taken by the Government from time to time, as well as any amendments to applicable legislation or regulatory instruments.  We operate as an incumbent local exchange carrier ("ILEC") in Manitoba and as a competitive local exchange carrier ("CLEC") outside of Manitoba.  We also operate as a broadcasting distribution undertaking ("BDU") in parts of Manitoba, including Winnipeg and the surrounding area.  The following describes significant developments relating to regulatory and policy proceedings:

Broadcasting policy
On July 7, 2010, the Federal Court of Appeal unanimously determined that retail Internet service providers ("ISPs") do not carry on, in whole or in part, "broadcasting undertakings" subject to the Broadcasting Act when, in their role as ISPs, they provide access through the Internet to "broadcasting" requested by end-users.  On September 30, 2010, opposing parties sought leave to appeal this decision to the Supreme Court of Canada, which was granted on March 24, 2011.  We agree with the Federal Court of Appeal's decision that ISPs are not subject to the Broadcasting Act and that the CRTC does not have the authority to impose a levy on ISPs to support Canadian broadcasting.  Therefore, we will participate with other Internet service providers as respondents in the appeal.

On February 28, 2011, the Federal Court of Appeal, in a majority decision, ruled that the Broadcasting Act empowers the CRTC to establish a regime where private local television stations negotiate with BDUs a fair value in exchange for the distribution of the programming services they broadcast.  On September 29, 2011 the Supreme Court of Canada agreed to hear an appeal of this decision.  MTS Allstream will participate in this process, which will commence in 2012.

Vertical integration 
On September 21, 2011, the CRTC issued a decision outlining the regulatory framework for the large vertically integrated broadcasting companies that have ownership and control of both programming services and distribution services. In order to prevent vertically integrated companies from imposing unreasonable terms and conditions on BDUs like MTS Allstream, the CRTC introduced a Code of conduct to guide negotiations between large vertically integrated companies and non-integrated companies. The CRTC also strengthened its arbitration process should negotiations between vertically integrated and non-integrated BDUs fail to produce mutually acceptable agreements. We are happy with this decision because we believe it supports competition and provides customers with more access to content across the country. The decision included a number of follow-up proceedings to implement the Code of Conduct and other safeguards in the Decision.  We will participate in the CRTC proceedings and expect these will last throughout most of 2012.

Telecommunications policy

Usage-based billing
On January 25, 2011, the CRTC issued a decision permitting incumbent carriers to apply usage-based billing ("UBB") rates on their wholesale residential high-speed Internet access services at a discount of 15% from the carrier's comparable UBB rates for its retail Internet services.  Subsequent to the decision the issues were examined by the parliamentary Standing Committee on Industry, Science and Technology.

On February 8, 2011, the CRTC put implementation of its UBB decision on hold and initiated a review of billing practices for wholesale residential high-speed access or broadband services.  MTS Allstream participated in the proceeding, including the public hearing in July 2011.  A decision is expected before the end of the year.

Unbundled local loops
Throughout 2010, the CRTC conducted a detailed review of how to set prices for competitors who use the ILEC's copper facilities, known as unbundled local loops, to provide local telephone service to customers.  The review, which was triggered by an application submitted on June 2, 2009 by Bell Canada and Bell Aliant Regional Communications, Limited Partnership, considered the issue of obsolescence of copper facilities in light of greatly expanded deployment of fibre in the applicants' access networks.

On January 12, 2011, the CRTC issued Telecom Decision CRTC 2011-24 approving new rates for unbundled local loops leased from the applicants.  The new prices reflect recovery of the applicants' net book values of copper facilities over the assumed remaining useful life.  There is also a possibility of additional applications for other services using copper facilities or applications from other ILECs.  We have identified certain issues with the CRTC's analysis and calculations and filed an application on March 7, 2011 to review and vary the decision, with the expectation of reducing or eliminating the price increase. A decision on the application is pending.

On May 13, 2011, the Bell companies filed their own application to review and vary the methodology used by the CRTC and to introduce new data, with the aim of protecting or growing the price increase. The process around the Bell application has been subject to multiple rounds of questions.  The process is currently scheduled to close in November 2011.  MTS Allstream is also participating in an application filed on June 2, 2011 by Bell Aliant, seeking increases to Bell Aliant's residential primary exchange service ("PES") costs in high-cost serving areas ("HCSAs") and the associated HCSA subsidy requirement.  Approval of Bell Aliant's application would result in a higher revenue contribution percentage, thus increasing the amount of funds MTS Allstream is required to contribute to fund HCSAs outside of Manitoba.  As well, TELUS has put the CRTC on notice that it intends to file a similar application.

Deferral account
On August 31, 2010, the CRTC issued Decision 2010-638 approving our plan to use the funds remaining in our deferral account to roll-out broadband to 16 rural Manitoban communities by the end of August 2014, and to rebate any remaining deferral amounts to residential urban customers in Manitoba.  This decision concludes the process associated with the Company's deferral account. MTS Allstream also has an obligation to invest $1.2 million of deferral account funds to improve accessibility to telecommunications services for persons with disabilities.  We submitted a plan to complete this obligation by the end of 2012 to the CRTC for approval on July 29, 2011.

Review of network interconnection regulatory regimes
The CRTC has initiated a proceeding to review the regulatory and compensation regimes for network interconnection between local, toll, and wireless service providers.  The proceeding will consider technological neutrality, enhancements to competition, and benefits to customers which could arise from the consolidation, modification, or simplification of these regimes.  The proceeding will also consider how, if at all, the network interconnection requirements based on circuit-switched technologies should be modified in light of the industry's increasing use of IP technology.  The proceeding will last through the remainder of 2011, with a decision expected in early 2012.

Industry Canada radio spectrum consultations
The Government has identified that making suitable spectrum available for next-generation wireless networks and services is a key component of its digital economy strategy.  Accordingly, in November 2010, the Government initiated consultations on the policy and technical framework that will govern the wireless spectrum auctions for the 700 MHz spectrum band.  As well, on February 10, 2011, the Government initiated a similar consultation for the 2500-2690 MHz spectrum band, which may be auctioned jointly with the 700 MHz spectrum.  The timing and sequencing of the auction(s) remains to be determined.  The Government has also indicated that it will link its decision on foreign investment to the policy and structure of these auctions.  We participated in both consultations, which concluded in May 2011, and we will participate in subsequent consultation(s) on the licensing framework for the auctioning of the spectrum.

As in our submissions in other forums, we continue to advocate for pro-competitive auction measures and conditions of licence that will contribute to sustainable competition in the Canadian telecommunications marketplace for the benefit of all Canadians in all regions.

Foreign Investment Restrictions
Industry Canada, in the context of the 700 MHz spectrum auction, also sought further comments on the options to partially or completely eliminate foreign investment restrictions in Canadian telecommunications carriers. The comments were focused on the options that formed part of the Government's June 2010 consultation on the matter. It is anticipated that the Government will announce whether it intends to adopt one of the three options: i) completely eliminate restrictions on foreign investment in Canadian telecommunications carriers; ii) eliminate the investment restrictions on telecommunications carriers that have less than 10% of the national market share; or iii) make a minor change to existing restrictions that essentially retains the status quo. There is some possibility that the Government could announce its position on foreign investment in conjunction with the announcement of the spectrum auction rules.  The interpretation of the current rules governing the foreign investment in telecommunications is also at issue as Public Mobile has made an application to the Supreme Court of Canada for leave to appeal the Federal Court of Appeal ruling agreeing that the ownership structure of wireless new entrant Globalive Wireless Management Corp. meets the existing foreign investment rules.  A decision as to whether the Supreme Court will hear the Public Mobile appeal is expected before the end of the year or early in 2012.  A decision to hear the application heightens the uncertainty around interpretation of the current rules and strengthens the case for elimination of the rules under either of the Government's first two options.

Manitoba Consumer Protection Office Consultation
In December 2010, the Manitoba Consumer Protection Office launched a public consultation on potential new rules governing cell phone and wireless device contracts. MTS Allstream, as a member of the Canadian Wireless Telecommunications Association ("CWTA"), contributed to, and supported, an industry-backed submission on January 14, 2011, highlighting the range of consumer-friendly practices which CWTA members have implemented or begun implementing.  Flowing from the consultation, the Government of Manitoba introduced Bill 35, The Consumer Protection Amendment Act (Cell Phone Contracts) on May 16, 2011.  Bill 35, as drafted, imposes several new legal obligations on cell phone service providers, including allowing consumers to cancel contracts before the end of term; prohibiting unreasonable cancellation fees, while allowing cost recovery for equipment provided or subsidized as a contract incentive; prohibiting unilateral amendments to a material element of a contract if the change does not benefit the customer; and requiring the minimum monthly cost of services to be included in advertisements.

On June 8, 2011, MTS Allstream presented its views on Bill 35 to the Legislative Assembly of Manitoba Standing Committee on Social and Economic Development. MTS Allstream, which already operates in close alignment with the key provisions of Bill 35, supports the objectives and intended outcomes of the measures included in Bill 35.  The Bill passed third reading in the legislature on June 15, 2011, and we will continue to work constructively with public officials in the coming months in any consultations on regulations made under the Bill.


RISKS AND UNCERTAINTIES

Our risks and uncertainties remain substantially unchanged from those disclosed in our 2010 Annual MD&A.


NON-IFRS MEASURES OF PERFORMANCE

In this MD&A, we provide information concerning EBITDA and free cash flow because we believe investors use them as measures of our financial performance.  These measures do not have a standardized meaning as prescribed by IFRS and are not necessarily comparable to similarly titled measures used by other companies.

EBITDA
We define EBITDA as earnings before interest, taxes, depreciation and amortization, and other income (expense).  EBITDA should not be construed as an alternative to operating income or to cash flows from operating activities (as determined in accordance with IFRS) as a measure of liquidity.

Free cash flow
We define free cash flow as cash flows from operating activities, less capital expenditures, and excluding changes in working capital.  Free cash flow is the amount of discretionary cash flow that we have for purchasing additional assets beyond our annual capital expenditure program, paying dividends, buying back shares, and/or retiring debt.


CONTROLS AND PROCEDURES

Internal control over financial reporting
There have been no changes in our internal control over financial reporting during our most recent interim period ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


FOURTH QUARTER DIVIDEND

On November 3, 2011, the Board of Directors of MTS Allstream declared a quarterly cash dividend of $0.425 per common share.  The fourth quarter dividend is payable on January 13, 2012 to shareholders of record at the close of business on December 15, 2011.  The fourth quarter dividend is designated as an "eligible" dividend under the Income Tax Act (Canada) and any corresponding provincial legislation. Under this legislation, individuals resident in Canada may be entitled to enhanced dividend tax credits that reduce income tax otherwise payable.

Notes

  1. Supplementary financial information is available in the Investors section of the MTS Allstream website at www.mtsallstream.com.
  2. MTS Allstream's third quarter 2011 conference call with the investment community is scheduled for 9:00 a.m. (Eastern Time) Thursday, November 3, 2011.  The dial-in number is 1-888-231-8191.  A live audio webcast of the investor conference call can be accessed by visiting the Investors section of the MTS Allstream website (www.mtsallstream.com).  A replay of the conference call will be available until midnight November 17, 2011 and can be accessed by calling 1-855-859-2056 or 1-416-849-0833 (access code: 19102460).  The audio webcast will be archived on MTS Allstream's website.


 
MANITOBA TELECOM SERVICES INC.
CONDENSED CONSOLIDATED STATEMENTS OF NET INCOME
AND OTHER COMPREHENSIVE INCOME (LOSS)
(unaudited)
 
Periods ended September 30               Three months ended     Nine months ended
(in millions of Canadian dollars, except earnings per share)           Note   2011   2010     2011   2010
                               
Operating revenues             $ 443.2 $ 451.0   $ 1,326.2 $ 1,335.9
                               
Operating expenses                              
  Operations               296.3   291.1     878.7   906.6
  Depreciation and amortization               80.4   73.6     219.5   215.8
                376.7   364.7     1,098.2   1,122.4
                               
Operating income               66.5   86.3     228.0   213.5
                               
Other income (expense)               1.9   (1.3)     3.4   (4.0)
Finance costs               (16.1)   (15.5)     (48.3)   (47.6)
                               
Income before income taxes               52.3   69.5     183.1   161.9
                               
Income tax expense           4   15.3   20.6     52.9   50.4
                               
Net income for the period             $ 37.0 $ 48.9   $ 130.2 $ 111.5
                               
Other comprehensive income                              
Net actuarial losses from defined benefit plans and other
employee benefits
            $ (199.7) $ (33.5)   $ (137.6) $ (195.1)
Change in the effect of the minimum funding requirement               -   -     -   32.0
Deferred taxes on items in other comprehensive income               52.1   8.8     35.9   42.6
Other comprehensive loss for the period, net of tax               (147.6)   (24.7)     (101.7)   (120.5)
                               
Total comprehensive income (loss) for the period             $ (110.6) $ 24.2   $ 28.5 $ (9.0)
                               
Basic and diluted earnings per share           6 $ 0.56 $ 0.76   $ 1.99 $ 1.72
                               
                               
                                                     
MANITOBA TELECOM SERVICES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(unaudited)                      
                                                     
                  Share       Contributed                        
(in millions of Canadian dollars)       Note         capital       surplus         Deficit         Total
                                                     
Balance at December 31, 2010             $     1,275.0     $ 20.1     $     (447.1)     $     848.0
                                                     
Net income for the period                   -       -           130.2           130.2
Other comprehensive loss for the period                   -       -           (101.7)           (101.7)
Total comprehensive income for the period                   -       -           28.5           28.5
Share-based compensation                   -       0.4           -           0.4
Issuance of shares                   22.3       -           -           22.3
Dividends declared       7           -       -           (83.5)           (83.5)
                                                     
Balance at September 30, 2011             $     1,297.3     $ 20.5     $     (502.1)     $     815.7
                                                     
Balance at January 1, 2010             $     1,266.9     $ 19.3     $     (338.5)     $     947.7
                                                     
Net income for the period                   -       -           111.5           111.5
Other comprehensive loss for the period                   -       -           (120.5)           (120.5)
Total comprehensive loss for the period                   -       -           (9.0)           (9.0)
Share-based compensation                   -       0.7                     0.7
Issuance of shares                   1.7       -                     1.7
Dividends declared       7           -       -           (111.7)           (111.7)
                                                     
Balance at September 30, 2010             $     1,268.6     $ 20.0     $     (459.2)     $     829.4
                                                     
                                                     
                                           
MANITOBA TELECOM SERVICES INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(unaudited)                
                                           
                              September 30,           December 31,
(in millions of Canadian dollars)                     Note       2011           2010
                                           
Assets                                          
Current assets                                          
Cash and cash equivalents                           $         $ 50.0
Accounts receivable                             155.2           152.3
Prepaid expenses                             34.0           33.1
Inventories                             27.2           25.4
                              216.4           260.8
                                           
Property, plant and equipment                             1,522.3           1,497.6
Intangible assets                             300.2           279.5
Other assets                             66.8           43.0
Deferred tax assets                             533.0           549.7
                                           
Total assets                           $ 2,638.7         $ 2,630.6
                                           
Liabilities and shareholders' equity                                          
                                           
Current liabilities                                          
Bank indebtedness                           $ 0.2         $
Accounts payable and accrued liabilities                             302.0           343.4
Advance billings and payments                             54.2           55.3
Current provisions                             25.1           29.9
Current portion of long-term debt                     5       100.0           220.0
Current portion of finance lease obligations                             7.4           4.9
                              488.9           653.5
                                           
Long-term debt                     5       920.6           820.6
Long-term portion of finance lease obligations                             9.5           11.5
Long-term provisions                             5.9           5.7
Employee benefits                             348.6           256.2
Other long-term liabilities                             48.5           34.0
Deferred tax liabilities                             1.0           1.1
                                           
Total liabilities                             1,823.0           1,782.6
                                           
Shareholders' equity                                          
Share capital                     8       1,297.3           1,275.0
Contributed surplus                             20.5           20.1
Deficit                             (502.1)           (447.1)
                              815.7           848.0
                                           
Total liabilities and shareholders' equity                           $ 2,638.7         $ 2,630.6
                                         

                                   
MANITOBA TELECOM SERVICES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)                        
                                     
Periods ended September 30               Three months ended       Nine months ended
(in millions of Canadian dollars)       Note       2011   2010       2011     2010
                                   
Cash flows from operating activities                                  
  Net income             $ 37.0 $ 48.9     $ 130.2   $ 111.5
  Add items not affecting cash                                  
    Depreciation and amortization                 80.4   73.6       219.5     215.8
    Deferred income tax expense       4       15.0   20.6       52.6     49.0
    Loss on disposal of assets               0.4   1.0       1.5     3.8
  Deferred wireless costs               (16.0)   (12.4)       (44.3)     (33.1)
  Pension funding and net pension expense               (7.2)   (11.1)       (48.4)     (18.0)
  Other, net               0.8   2.3       3.8     1.7
  Changes in non-cash working capital               47.4   (4.5)       (54.9)     (11.7)
  Cash flows from operating activities               157.8   118.4       260.0     319.0
                                   
Cash flows from investing activities                                  
  Capital expenditures               (81.1)   (78.6)       (203.4)     (232.5)
  Proceeds on disposal of assets held for sale                           10.5
  Other, net               (0.9)   (0.7)       (23.1)     (2.0)
  Cash flows used in investing activities               (82.0)   (79.3)       (226.5)     (224.0)
                                   
Cash flows from financing activities                                  
  Dividends paid               (27.9)   (42.1)       (83.2)     (126.2)
  Repayment of notes payable               (13.0)   -       -     -
  Issuance of long-term debt       5       200.0   -       200.0     -
  Repayment of long-term debt       5       (220.0)   (11.9)       (220.0)     (11.9)
  Issuance of share capital       8       7.9   1.4       22.3     1.7
  Other, net               (3.6)   0.6       (2.8)     1.4
  Cash flows used in financing activities               (56.6)   (52.0)       (83.7)     (135.0)
                                   
Change in cash and cash equivalents               19.2   (12.9)       (50.2)     (40.0)
                                   
Cash and cash equivalents (bank indebtedness), beginning of period               (19.4)   83.1       50.0     110.2
                                   
(Bank indebtedness) cash and cash equivalents, end of period             $ (0.2) $ 70.2     $ (0.2)   $ 70.2
                                   

MANITOBA TELECOM SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(unaudited)
All amounts are in millions of Canadian dollars, unless otherwise indicated


1. CORPORATE INFORMATION

Manitoba Telecom Services Inc. (the "Company") is incorporated in Manitoba, Canada, and its Common Shares are listed on the Toronto Stock Exchange.  The Company's head and registered office is located at 333 Main Street, P.O. Box 6666, Winnipeg, Manitoba, Canada, R3C 3V6.

2. SIGNIFICANT ACCOUNTING POLICIES

Statement of compliance
These interim condensed consolidated financial statements have been prepared in accordance with International Accounting Standards ("IAS") 34, Interim Financial Reporting, International Financial Reporting Standards ("IFRS") 1, First-time Adoption of International Financial Reporting Standards and the same accounting policies as those disclosed in note 2 of the Company's interim condensed consolidated financial statements for the three months ended March 31, 2011.  These policies are based on the standards as issued by the International Accounting Standards Board ("IASB"), and which have been incorporated by the Canadian Accounting Standards Board into current generally accepted accounting principles ("GAAP") for publicly accountable enterprises.

In May 2011, the Company filed its interim condensed consolidated financial statements for the three months ended March 31, 2011, which represent the initial presentation of its results and financial position under IFRS.  These interim condensed consolidated financial statements for the period ended September 30, 2011 should be read in conjunction with the Company's interim condensed consolidated financial statements for the period ended March 31, 2011.  As the Company's interim consolidated financial statements were previously prepared in accordance with previous GAAP, disclosure of the transition from previous GAAP to IFRS is included in note 10.

These interim condensed consolidated financial statements were approved by the Board of Directors on November 3, 2011.

Basis of presentation
These interim condensed consolidated financial statements have been prepared on a historical cost basis, which is generally based on the fair value of the consideration at the time of the transaction.  These interim condensed consolidated financial statements are presented in millions of Canadian dollars unless otherwise indicated.

3. ACCOUNTING STANDARDS ISSUED BUT NOT YET EFFECTIVE

The Company has not yet adopted certain standards, interpretations to existing standards and amendments which have been issued but have an effective date of later than January 1, 2011. Many of these updates are not relevant to the Company and are therefore not discussed. The Company reasonably expects the following standards and amendments described below to be applicable to its consolidated financial statements at a future date:

IFRS 9, Financial Instruments
IFRS 9, Financial Instruments, issued by the IASB in November 2009 and amended in October 2010 introduces new requirements for the classification and measurement of financial assets and liabilities.  IFRS 9 requires all financial assets within the scope of IAS 39 Financial Instruments - Recognition and Measurement to be subsequently measured at amortized cost or fair value replacing the multiple classification options in IAS 39. IFRS 9 also requires an entity choosing to measure a financial liability at fair value to present the portion of the change in its fair value due to changes in the entity's own credit risk in the other comprehensive income section of the income statement, rather than within the statement of net income.

IFRS 9 reflects the first phase of a project to replace IAS 39.  In subsequent phases, the IASB will address hedge accounting and the impairment of financial assets. IFRS 9 is effective for annual periods beginning on or after January 1, 2013, with earlier application permitted.

IFRS 10, Consolidated Financial Statements
IFRS 10, Consolidated Financial Statements, issued by the IASB in May 2011, provides a single consolidation model that identifies control as the basis for consolidation for all types of entities.  IFRS 10 replaces IAS 27 Consolidated and Separate Financial Statements and Standing Interpretations Committee ("SIC") 12 Consolidation - Special Purpose Entities.  IFRS 10 is to be applied retrospectively and is effective for annual periods beginning on or after January 1, 2013, with earlier application permitted.

IFRS 11, Joint Arrangements
IFRS 11, Joint Arrangements, issued by the IASB in May 2011, describes the accounting for arrangements in which there is joint control by focusing on the rights and obligations of the arrangement, rather than its legal form.  IFRS 11 also removes the ability to use proportionate consolidation for joint ventures.  IFRS 11 replaces IAS 31 Interests in Joint Ventures and SIC 13 Jointly Controlled Entities - Non-Monetary Contributions by Venturers, and is effective for annual periods beginning on or after January 1, 2013, with earlier application permitted.  When adoption of IFRS 11 requires a change in accounting, the impact of the change is calculated at the beginning of the earliest period presented and the comparative periods are restated.

IFRS 12, Disclosure of Interests in Other Entities
IFRS 12, Disclosure of Interests in Other Entities, issued by the IASB in May 2011, is a new standard that addresses the disclosure requirements for all interests in other entities, including subsidiaries, joint arrangements, associates, and unconsolidated structured entities. IFRS 12 is effective for annual periods beginning on or after January 1, 2013, with earlier application permitted.

IFRS 13, Fair Value Measurement
IFRS 13, Fair Value Measurement, issued by the IASB in May 2011, replaces the fair value measurement guidance currently dispersed across different IFRS standards with a single definition of fair value and a comprehensive framework for measuring fair value when such measurement is required under other IFRSs.  It also establishes disclosure requirements about fair value measurements.  IFRS 13 is to be applied prospectively and is effective for annual periods beginning on or after January 1, 2013, with earlier application permitted.

Amendments to IAS 1, Presentation of Financial Statements
The amendments to IAS 1, Presentation of Financial Statements, issued by the IASB in June 2011, requires companies preparing financial statements to group together items within other comprehensive income ("OCI") on the basis of whether they may be reclassified to the profit or loss section of the income statement.  The amendments also reaffirm existing requirements that items in OCI and profit or loss should be presented as either a single statement or two consecutive statements.  The amendments are effective for annual periods beginning on or after July 1, 2012, with earlier application permitted.

Amended IAS 19, Employee Benefits
The amended version of IAS 19, Employee Benefits, issued by the IASB in June 2011 amends the accounting for pensions and other post-employment benefits.  It changes the method of calculating the net interest component of pension expense and also expands disclosure requirements for defined benefit plans, providing better information about the characteristics and associated risks of defined benefit plans. The accounting treatment for termination benefits has also been modified, specifically the point in time when an entity would recognize a liability for termination benefits. The amended version of IAS 19 comes into effect for annual periods beginning on or after January 1, 2013, with earlier application permitted.

The Company is currently evaluating the impact of the above standards on its financial statements. 

4. INCOME TAX EXPENSE

Income tax expense is comprised of the following:

Nine months ended September  30                               2011           2010
Current income tax expense                               0.3           1.4
Deferred income tax expense                               52.6           49.0
Income tax expense                               52.9           50.4

5. LONG-TERM DEBT

            September  30, 2011           December 31, 2010
Medium Term Note, 5.20%, due September 27, 2011           -           220.0
Medium Term Note, 5.05%, due May 11, 2012           100.0           100.0
Loan payable, 6.59%, due May 14, 2014           75.0           75.0
Medium Term Note, 6.15%, due June 10, 2014           200.0           200.0
Medium Term Note, 6.65%, due May 11, 2016           250.0           250.0
Medium Term Note, 5.625%, due December 16, 2019           200.0           200.0
Medium Term Note, 4.59%, due October 1, 2018           200.0           -
            1,025.0           1,045.0
Less:  deferred costs associated with the issuance of long-term debt           (4.4)           (4.4)
            1,020.6           1,040.6
Less:  current portion of long-term debt           (100.0)           (220.0)
            920.6           820.6

On September 27, 2011 the Company issued $200.0 million of 4.59% Medium Term Notes under its new Trust Indenture, which mature on October 1, 2018.

6. EARNINGS PER SHARE

The following table provides a reconciliation of the information used to calculate basic and diluted earnings per share:

                  2011           2010
Net income for the period                              
Basic and diluted                 130.2           111.5
Weighted average shares outstanding (in millions)                              
Weighted average number of shares outstanding - basic and diluted                 65.4           64.7
Earnings per share ($)                              
Basic and diluted earnings per share                 1.99           1.72

As at September 30, 2011, 3.0 million stock options have an anti-dilutive effect (2010 - 3.2 million), and therefore, are excluded from the diluted weighted average number of shares outstanding.

7. DIVIDENDS

On November 3, 2011, the Company's Board of Directors declared a quarterly cash dividend of $0.425 per share (2010 - $0.425 per share) which is payable on January 13, 2012 to shareholders of record on December 15, 2011.

8. SHARE CAPITAL

As at September 30, 2011, share capital consists of 65,720,778 issued and outstanding Common Shares (December 31, 2010 - 64,959,635).

During the nine months ended September 30, 2011, 746,252 Common Shares were issued under the Company's Dividend Reinvestment Plan and Share Purchase Plan. These shares were issued for net proceeds of $21.7 million and credited to share capital.

During the nine months ended September 30, 2011, 15,600 stock options to purchase Common Shares were exercised for cash consideration of $0.5 million, of which $0.6 million was credited to share capital and $0.1 million was charged to contributed surplus.

9. SEGMENTED INFORMATION

As at September 30, 2011, the Company had two reportable operating segments: MTS and Allstream.  MTS provides a full range of wireless, broadband, high-speed Internet, IPTV, converged IP, unified communications, security, home alarm monitoring, local access and long distance services to residential and business customers in Manitoba.  Allstream provides IP-based communications, unified communications, voice and data connectivity, and security services to business customers in Canada.

The Company evaluates performance based on EBITDA (earnings before interest, taxes, depreciation and amortization, and other income (expense)).  EBITDA, as reported below, includes intersegment revenues and expenses.  The Company accounts for intersegment revenues and expenses at either prices that approximate current market prices or cost, depending on the type of service.

The following tables provide further segmented information:

        MTS       Allstream       Other     Total
Three months ended September 30       2011       2010       2011       2010       2011       2010     2011     2010
Operating revenues
      External
      243.8       242.0       199.4       209.0       -       -     443.2     451.0
      Internal       0.1       -       -       -       9.2       9.5     9.3     9.5
EBITDA       121.8       133.9       27.5       25.9       (2.4)       0.1     146.9     159.9
Depreciation and amortization       57.3       55.5       22.9       18.0       0.2       0.1     80.4     73.6
Capital expenditures       51.4       46.6       29.5       31.9       0.2       0.1     81.1     78.6
                                                             
        MTS       Allstream       Other     Total
Nine months ended September 30       2011       2010       2011       2010       2011       2010     2011     2010
Operating revenues
      External
      717.9       702.5       608.3       633.4       -       -     1,326.2     1,335.9
      Internal       0.2       0.2       -       -       27.6       28.5     27.8     28.7
EBITDA       367.0       367.6       84.3       62.1       (3.8)       (0.4)     447.5     429.3
Depreciation and amortization       159.8       161.4       59.3       54.1       0.4       0.3     219.5     215.8
Capital expenditures       122.3       150.4       80.7       81.6       0.4       0.5     203.4     232.5

Reconciliation to consolidated income before income taxes is as follows:

                    Three months ended
September 30
      Nine months ended
September 30
                    2011       2010       2011       2010
Income before income taxes                                            
Total EBITDA                   146.9       159.9       447.5       429.3
Depreciation and amortization                         (80.4)       (73.6)       (219.5)       (215.8)
Other income (expense)                         1.9       (1.3)       3.4       (4.0)
Finance costs                         (16.1)       (15.5)       (48.3)       (47.6)
Income before income taxes                         52.3       69.5       183.1       161.9

10. TRANSITION TO IFRS

These interim condensed consolidated financial statements for the period ended September 30, 2011 are prepared in accordance with IFRS.  As such, these financial statements have been prepared in accordance with IFRS 1, as well as the accounting policies as described in note 2 of the Company's interim condensed consolidated financial statements for the three months ended March 31, 2011.

Prior to 2011, the Company's consolidated financial statements were prepared in accordance with previous GAAP, which differs in certain areas from IFRS.  Therefore, in preparing the consolidated opening statement of financial position at January 1, 2010, the Company's date of transition to IFRS (the "Transition Date"), certain adjustments have been made to amounts previously reported in the consolidated financial statements under previous GAAP.  An explanation of how the transition from previous GAAP to IFRS has affected the Company's financial position and financial results is set out in this note.

(a) Exemptions upon IFRS adoption
On adoption of IFRS, entities are required to implement accounting policies that are in accordance with IFRS and apply these policies retrospectively.  IFRS 1 allows first-time adopters of IFRS to apply certain optional exemptions to this retrospective application.  The relevant exemptions applied by the Company are as follows:

  (i)  Business combinations
The Company elected not to apply IFRS 3, Business Combinations, retrospectively to business combinations that occurred prior to the Transition Date.
   
  (ii)  Employee benefits
The Company elected to recognize all cumulative actuarial gains or losses and transitional assets on pension and other non-pension future employee benefits in opening retained earnings at the Transition Date.  The Company also elected to disclose amounts required by paragraph 120A(p) of IAS 19, Employee Benefits, as the amounts are determined for each accounting period prospectively from the Transition Date.
   
  (iii)  Share-based payments
The Company elected to apply IFRS 2, Share-based Payments, retrospectively to all stock options granted after November 7, 2002, and which were not fully vested at the Transition Date.
   
  (iv)  Borrowing costs
The Company elected to apply IAS 23 Borrowing Costs, as it relates to the determination of the capitalization rate prospectively from the Transition Date.

(b)  Notes to explain the effects of IFRS in the financial statements

In adopting IFRS, the Company has applied accounting policies that are in accordance with IFRS.  These policies that differ from the previous application of GAAP and the related impact on the Company's financial statements are as follows:

  A.  Employee benefits

Actuarial gains and losses
At the Transition Date, the Company applied the exemption in IFRS 1 and recognized all cumulative actuarial gains and losses and transitional assets and obligations on pension and other non-pension future employee benefits in opening retained earnings.  Under IFRS, the Company recognizes all actuarial gains and losses arising from changes in the present value of the defined benefit obligation and the fair value of plan assets immediately in other comprehensive income.  This is different than previous GAAP where the corridor approach was used, and the excess of the net actuarial gain or loss over 10% of the greater of the benefit obligation and the market-related value of plan assets was amortized over the expected average remaining service life of active employees.  The amount of this amortization comprised one of the components of pension expense under previous GAAP.  As a result, pension expense recognized in the consolidated statement of net income under IFRS excludes the amortization of actuarial gains and losses.  Under IFRS, these actuarial gains and losses are recognized immediately in other comprehensive income.
 
Minimum funding requirements
At the Transition Date, the Company determined that the minimum funding requirements of its defined benefit pension plans resulted in the recognition of a defined benefit obligation in its opening IFRS statement of financial position.  Under IFRS, any changes in this defined benefit obligation are recognized in other comprehensive income.
 
Measurement of plan assets
Under IFRS, the expected return on plan assets is measured based on the fair value of pension fund assets.  Under previous GAAP, the Company measured the expected return on plan assets based on a market-related value of pension fund assets.  This difference in the measurement of plan assets results in a change in pension expense recognized in the consolidated statement of net income.
 

B.  Property, plant and equipment

Components and depreciation methodology
Under IFRS, each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item must be depreciated separately.  This may result in differences in the individual components of property, plant and equipment between IFRS and previous GAAP.  Upon transition to IFRS, the Company reclassified certain items of property, plant and equipment into IFRS-compliant components.  The Company also changed its depreciation methodology from a straight-line basis where depreciation expense was calculated based on the pooling of assets, to a separate unit straight-line methodology.  As a result of the retrospective application of these changes, the Company adjusted accumulated depreciation in its opening IFRS statement of financial position, resulting in an increase in the net book value of its property, plant and equipment.  This adjustment in depreciation methodologies also results in a change in depreciation expense recognized in the consolidated statement of net income.
 





Capitalization
Certain expenditures that are appropriate to capitalize as property, plant and equipment under previous GAAP do not qualify for capitalization under IFRS.  As a result of retrospectively implementing this change in accounting policy, the Company adjusted the cost and accumulated depreciation of its property, plant and equipment in its opening IFRS statement of financial position, resulting in a decrease in the net book value of its property, plant and equipment.  This adjustment also results in a change in operations expense and depreciation expense recognized in the consolidated statement of net income.
 
Contributions from customers
Under IFRS, contributions from customers related to the construction of assets should be recognized initially as a liability and recognized as revenue in the period the related service is provided.  Under previous GAAP, the Company credited amounts received from customers against the cost of construction of property, plant and equipment.  This change in accounting policy results in a change in property, plant and equipment and liabilities on the consolidated statement of financial position and a change in revenues and depreciation expense recognized in the statement of net income.
 

C.  Impairment

Under IFRS, a one-step approach is used to test for, and to measure impairment of long-lived assets, with the carrying value of assets compared to its recoverable amount, which is defined as the higher of value in use and fair value less costs to sell.  Value in use is measured using discounted cash flows.  This is different from the two-step approach followed under previous GAAP, where an entity is required to compare carrying values to undiscounted cash flows to assess whether any impairment exists, and then to measure the impairment using discounted cash flows.
  Under IFRS, a first-time adopter is required to test goodwill for impairment at the Transition Date.  The Company's impairment testing as at the Transition Date under IFRS resulted in the recognition of an impairment loss in Allstream which was reflected as decreases in goodwill ($14.1 million), other intangible assets ($18.4 million) and property, plant and equipment ($101.2 million).  This adjustment also results in a decrease in depreciation and amortization expense recognized in the consolidated statement of net income.
  In performing the impairment testing of the Allstream cash-generating unit at the Transition Date, the Company measured the recoverable amount of the cash-generating unit based on a value in use calculation using certain key management assumptions.  Cash flow projections, which were made over a five-year period based on financial budgets approved by the Board, include key assumptions about revenues, expenses and other cash flows.  Revenue forecasts were based on management's estimate of growth in the markets served and are not considered to exceed the long-term average growth rates for those markets.  Operating expenses were estimated based upon past experience, adjusted for the increase in activity levels supporting the cash flow projections.  Discount rates applied to the cash flow forecasts are derived from the unit's pre-tax weighted average cost of capital, adjusted to reflect management's estimate of the specific risk profiles of the individual cash-generating units.  The cash flows related to Allstream were discounted using pre-tax rates of 15.0% to 16.2%.
 

D.  Leases

Sale-leaseback transactions
Under IFRS, in a sale-leaseback transaction where the leaseback is classified as an operating lease, any gain on sale is recognized immediately in income.  This accounting treatment differs from previous GAAP, where any gain on sale is deferred and recognized in income over the term of the operating lease.  The Company had one such sale-leaseback transaction, and upon transition to IFRS this deferred gain has been derecognized.  This adjustment results in an increase in operations expense as recognized in the consolidated statement of net income.
 

E.  Revenues

Revenue recognition
Under IFRS, the Company has recorded an adjustment to recognize a liability for customer prepayments related to wireless activation fees.  These fees are deferred and recognized as revenue over the period of the customer contract.
 

F.  Decommissioning provisions

Measurement
Under IFRS, the discount rate to be used for measuring decommissioning provisions should be based on current market rates at the time of initial recognition and updated each reporting period.  This measurement basis is slightly different than that required under previous GAAP, so a minor adjustment to the decommissioning provision and corresponding item of property, plant and equipment is recognized at the Transition Date.
 

G.  Share-based compensation

Forfeitures
In determining share-based compensation expense related to stock options, IFRS requires that the number of awards expected to vest be estimated at the time the award is granted.  This estimate may be revised based on subsequent information regarding the number of awards expected to vest.  Under previous GAAP, the Company recognizes forfeitures of awards as they occur.  As a result of retrospectively applying this change in accounting, a minor adjustment to retained earnings at the Transition Date has been recognized.
 

H.  Income taxes

Income tax effect of other adjustments at the Transition Date
As a result of the differences between previous GAAP and IFRS for each of the financial statement items identified above, deferred taxes under IFRS have been adjusted, where applicable.

(c) Reconciliations of GAAP to IFRS

As a first-time adopter of IFRS, the Company is required to reconcile previously reported GAAP to IFRS for equity and comprehensive income.

A reconciliation of shareholders' equity from previous GAAP to IFRS is as follows:

         Reference     December 31, 2010     September 30, 2010
Shareholders' equity under previous GAAP   1,286.5 1,299.3
Adjustments to shareholders' equity to conform with IFRS:      
    Employee future benefits A (645.9) (658.9)
    Property, plant and equipment B 146.5 135.6
    Impairment C (119.6) (133.7)
    Leases D 21.9 22.3
    Revenues E (4.9) (4.6)
    Decommissioning provisions F 0.9 1.1
    Income taxes H 162.6 168.3
Total reduction in shareholders' equity   (438.5) (469.9)
Shareholders' equity under IFRS   848.0 829.4

A reconciliation of earnings and comprehensive income from previous GAAP to IFRS is as follows:

  Reference Three months ended
  September 30, 2010  
Nine months ended
September 30, 2010
Net income and comprehensive income under previous GAAP   43.0 91.6
Adjustments to net income to conform with IFRS:      
    Employee future benefits A (0.4) (1.3)
    Property, plant and equipment B 9.4 30.0
    Impairment C - -
    Leases D (0.5) (1.3)
    Revenues E (0.3) (0.5)
    Decommissioning provisions F (0.1) (0.1)
    Share-based compensation G - 0.1
    Income taxes H (2.2) (7.0)
Total increase in net income   5.9 19.9
Net income under IFRS   48.9 111.5
Adjustments to other comprehensive income to conform
with IFRS:
     
    Employee future benefits  A (33.5) (163.1)
    Taxes H 8.8 42.6
Total comprehensive income (loss) under IFRS   24.2 (9.0)

 

For further information:

Investors:  


      Paul Peters
Investor Relations
(204) 941-6178
investor.relations@mtsallstream.com
         
Media:  



      Selena Hinds
Corporate Communications
(416) 345-3576 or
(204) 941-8576
media.relations@mtsallstream.com

Profil de l'entreprise

MTS Allstream Inc.

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Manitoba Telecom Services Inc.

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