Manitoba Telecom Services Inc. Reports Second Quarter and First Half 2009 Results



    
    This news release contains forward-looking statements. For a description
      of the related risk factors and assumptions, please see the section
      entitled "Forward-looking Statements Disclaimer" later in this news
     release. This release discusses results from Manitoba Telecom Services
        Inc.'s continuing operations. The results, and the definition of
       continuing operations, should be read in conjunction with Manitoba
        Telecom Services Inc.'s second quarter 2009 interim Management's
          Discussion & Analysis dated August 6, 2009 (available at the
              Investors section of www.mtsallstream.com) which is
                   incorporated by reference in this release.


    Highlights include:

    -  Consumer Markets division providing stable foundation for business
       with continued best-in-class results, 1.8% increase in revenues and
       3.2% increase in EBITDA in H1
    -  Enterprise Solutions division positioning for recovery with lower
       costs, converged IP growth of 13% in Q2
    -  Long-term strategic position enhanced through agreement with
       Rogers, cost-effective HSPA deployment plan,  and ability to add
       Allstream business national wireless solution
    -  Continued cost structure improvements, with $27.3 million in
       annualized savings achieved to date
    -  Successfully raised $350 million in medium term notes following
       challenging conditions in corporate debt market
    -  Second half 2009 performance expected to approximately match first
       half 2009
    -  Declared dividend of $0.65 per share
    

    WINNIPEG, Aug. 7 /CNW/ - Manitoba Telecom Services Inc. (TSX: MBT), which
includes its principal operating subsidiary, MTS Allstream Inc. (the "Company"
or "MTS Allstream") one of Canada's leading national communications companies,
today announced its results for the second quarter ended June 30, 2009.
    "Our overall results reflect the impact of difficult economic conditions
seen across Canada but we are well supported by a growing Manitoba business,
and we have concluded key agreements on wireless which have strengthened our
long-term strategic position," said Pierre Blouin, Chief Executive Officer.
"Our predominantly Manitoba-based Consumer Markets division is providing a
solid foundation for our business in challenging times, posting what we
believe are best-in-class results. Our national Enterprise Solutions division
experienced more recessionary pressure in the second quarter than we
anticipated at the start of the year, but it continues to be positioned to
benefit from a recovery in enterprise spending once the economy improves."
Added Mr. Blouin, "Key growth products in both divisions continue to deliver
strong performance, and now represent close to half of our total revenues. We
are well on track to meet our increased targets for cost reductions, and over
the coming months, we will continue our work on processes to further reduce
our cost structure and further improve productivity. Even after taking into
consideration the weaker than anticipated second quarter, we expect
performance in the second half of 2009 to be comparable to the first six
months of the year."

    First Half Results

    Revenue from continuing operations totaled $947.2 million in the first
half of 2009, down 1.9% from $965.2 million a year earlier.  A decline in
Enterprise Solutions division revenue that more than offset the gain in
Consumer Markets division revenue.

    MTS Allstream's cost reduction plan is continuing to generate annualized
savings in line with its increased cost reduction targets for the year, with
$27.3 million in annualized savings achieved as at June 30, 2009. Since the
fourth quarter of 2008, the Company has announced the reduction of 330
positions in its Enterprise Solutions division, representing 10% of its
workforce. The division is pursuing various cost reduction initiatives to
continue to realign its cost structure to recent market realities.
    Overall, EBITDA from continuing operations in the first six months of
2009 was down on a consolidated basis by 5.1% from the same period a year
earlier, reflecting the impact that the overall economic conditions in Canada
are having on the results in the Enterprise Solutions division. The Company
continues to closely monitor the effects of the economy and is focused on
prudent management of operating costs and capital spending.
    MTS Allstream continues to maintain one of the strongest balance sheets
in the industry, with a debt to EBITDA ratio of 1.4 to 1. During the quarter,
the Company successfully completed a $350 million medium term note offering.
MTS Allstream was one of the first corporate issuers in the telecommunications
industry to complete such an offering following the challenging conditions
that had been present in the corporate debt markets. This speaks once again to
the continuing stability of the Company's operational performance and balance
sheet, and illustrates its ongoing ability to access capital.

    
    QUARTERLY FINANCIAL RESULTS(*)

    (*)From continuing operations

    -------------------------------------------------------------------------
                                           2009                 2008
    (in millions $, except EPS3)(*)
                                        Q2      Q1       Q4      Q3      Q2

    -------------------------------------------------------------------------

    Growth services revenues          216.7   227.2    212.5   213.1   214.9

    Legacy services revenues          247.6   255.7    263.9   266.8   271.5

    Revenue                           464.3   482.9    476.4   479.9   486.4

    EBITDA                            159.3   163.2    156.7   165.1   171.3

    Free cash flow(4)                  59.9    68.7     39.4    70.8    72.4

    EPS                                0.67    0.71     0.59    0.74    0.81

    Revenue/capital expenditures        14%     12%      19%     14%     14%

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    


    Strategic Wireless Agreement with Rogers

    On July 28, 2009, the Company announced a strategic agreement with Rogers
Wireless ("Rogers") that will see both companies share the cost to deploy a
Universal Mobile Telecommunications Systems/High Speed Packet Access ("HSPA")
wireless network across the existing MTS Allstream regional wireless
footprint. The agreement also allows MTS Allstream to leverage Rogers'
purchasing scope and scale to gain cost effective access to new network
technology and HSPA handsets. MTS Allstream's HSPA customers will have access
to the best national and international roaming capabilities as a Rogers
roaming partner. In addition to these benefits, the agreement also provides
MTS Allstream with the opportunity to launch a national wireless business
offering under the Allstream brand through a competitive wholesale
arrangement.
    "This innovative agreement is very positive for our business," said Mr.
Blouin. "We are now able to proceed with a cost-effective deployment of an
HSPA network across a much broader footprint in Manitoba than we would have
otherwise built on our own broadening our revenue growth opportunity, while
our customers will benefit from access to HSPA handsets and some of the best
available national and international roaming. We also have an opportunity to
add a wireless solution to our national business product portfolio in a
prudent, cost-effective fashion, which should contribute to improved
performance in the Enterprise Solutions division."

    
    DIVISIONAL HIGHLIGHTS(*)

    (*)From continuing operations

    -------------------------------------------------------------------------
                           Three months               Six months

    (in millions of $)    ended June 30     change   ended June 30     change

                        -----------------          ------------------
                          2009     2008              2009     2008

    -------------------------------------------------------------------------

    Consumer Markets division ("CMD")
    -------------------------------------------------------------------------
      CMD growth
       services revenue   103.5     97.0     6.7%    205.3    188.7     8.8%
    -------------------------------------------------------------------------
      CMD legacy
       services revenue   104.3    107.9    (3.3%)   206.6    215.9    (4.3%)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
      CMD total revenue   207.8    204.9     1.4%    411.9    404.6     1.8%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
      CMD EBITDA          108.1    105.4     2.6%    214.4    207.8     3.2%
    -------------------------------------------------------------------------
    Enterprise Solutions division ("ESD")
    -------------------------------------------------------------------------
      ESD growth
       services revenue   113.2    117.9    (4.0%)   238.6    231.1     3.2%
    -------------------------------------------------------------------------
      ESD legacy
       services revenue   143.3    163.6   (12.4%)   296.7    329.5   (10.0%)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
      ESD total revenue   256.5    281.5    (8.9%)   535.3    560.6    (4.5%)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
      ESD EBITDA           51.0     65.5   (22.1%)   107.7    130.6   (17.5%)
    -------------------------------------------------------------------------
    MTS Allstream totals
    -------------------------------------------------------------------------
      Revenue             464.3    486.4    (4.5%)   947.2    965.2    (1.9%)
    -------------------------------------------------------------------------
      EBITDA              159.3    171.3    (7.0%)   322.5    340.0    (5.1%)
    -------------------------------------------------------------------------

    Consumer Markets division (continuing operations)
    -------------------------------------------------
    
    The Consumer Markets division continues to serve as a solid and stable
foundation for the Company, delivering strong and best-in-class results.
Revenue in the second quarter totaled $207.8 million, up 1.4% from a year
earlier. This very positive level of performance was driven by solid increases
in the division's growth services - wireless, consumer high-speed Internet and
digital TV. EBITDA in the second quarter grew by 2.6% to $108.1 million
year-over-year. These results reflect the resilience of the Manitoba economy,
which has continued to outperform the Canadian economy as a whole.
    In the second quarter of 2009, wireless delivered strong growth with a
9.3% increase in subscribers and 5.7% increase in revenues, while high-speed
Internet delivered revenue growth of 8.8%, and revenues from the Company's
digital television service rose by 8.0% when compared to the second quarter of
2008.
    The Consumer Markets division continued with its disciplined bundling
approach which has produced solid results in a very competitive local
marketplace. During the second quarter the Company focused its marketing and
customer service efforts on the launch of its new MTS HDTV platform in
Winnipeg, and accelerating the expansion of the network footprint to support
this new service in Winnipeg. MTS Allstream now has more than 1,800 customers
on the new HDTV service and as the Company rolls out this service in its major
markets, further growth is expected in our TV subscriber base.
    "Our results for the second quarter reflect the strong value proposition
we bring to our customers in Manitoba," said Kelvin Shepherd, President
Consumer Markets division. "We alone offer a full suite of services including
local voice, wireless, high-speed Internet, HDTV, and home security, which
give us an outstanding bundle proposition our competitors cannot match. We
have strengthened our business through agreements with Sprint Nextel in
wireless and with Microsoft Windows Live which will improve our broadband
product offering, together with our upcoming launch of MTS HDTV in Brandon,
another major Manitoba market."

    The agreement with Sprint Nextel will allow MTS Allstream to take
advantage of Sprint's handset lineup, vendor relationships and buying power to
provide an enhanced handset and service offering to MTS Mobility customers in
Manitoba. This agreement, announced during the second quarter, will help
ensure MTS Allstream's CDMA-based regional wireless service retains its
leading position in Manitoba even as the Company moves to deploy a new HSPA
wireless network.
    In the second quarter of 2009, the Company acquired the residential alarm
accounts of SecurTek's customers in Manitoba and sold accounts controlled by
MTS Allstream's home security affiliate, AAA Alarm Systems Ltd. ("AAA
Alarms"), in Alberta to SecurTek. The transaction will help to enhance MTS
Allstream's strategic position as the leading full service provider in
Manitoba.

    
    Enterprise Solutions division (continuing operations)
    -----------------------------------------------------
    
    Through the second quarter of 2009, the Enterprise Solutions division has
continued to position for recovery in the Canadian economy. Quarterly metrics
for the division reflect the impact of the economic conditions prevalent
across most of Canada throughout the first six months of 2009. Revenue was
$256.5 million and EBITDA was $51.0 million, both down from the second quarter
of 2008, due primarily to declines in legacy revenues that have outpaced gains
in key growth services. This decline in legacy revenues has been accelerated
by recessionary conditions.
    Despite the recession, standout performance was delivered by the
Enterprise Solutions division's largest and most significant revenue line,
converged IP. For the second quarter of 2009, converged IP revenue increased
by 13.0% over the second quarter of 2008. The division's growth services
increased to 44.1% of its total revenues in the second quarter of 2009 as
compared to 41.9% in the second quarter of 2008.
    "We have delivered good performance in our next generation product lines
but continue to be impacted by reduced business from exit customers, declining
volumes from some of our U.S.-based long distance customers, and the overall
impact of a slowing economy," said Dean Prevost, President Enterprise
Solutions division. "We continue to win significant new contracts and sustain
our overall sales momentum while proceeding with ongoing process improvements
and realignment of our cost structure. The number of new customers signing
contracts in key growth areas like converged IP confirms that we are building
a solid base of business to bring back growth as customers resume spending
once the economy recovers."
    The Enterprise Solutions division won significant new business through
the second quarter of 2009, announcing sales wins with Sleeman Breweries,
Calforex Currency Services, the Rural Information Services Initiative, the
City of Brandon, the Calgary Worldskills Competition, and Hudson's Bay
Company.
    The core operating strength of the Enterprise Solutions division was
recognized once again in the second quarter of 2009. MTS Allstream was named
as a Mitel Premier Partner of the Year for 2009 and honoured as the Growth
Partner of the Year by Tandberg, a leading provider of visual communication
solutions technology. MTS Allstream was also honoured by Canada's premier
professional disaster recovery organizations with the 2009 Award of Excellence
from the Disaster Recovery Institute of Canada - a first for a telecom
provider.

    
    Outlook
    -------
    
    The Company expects to meet the lower end of its 2009 outlook for
revenue, EBITDA and free cash flow from continuing operations based on the
expectation that results in the second half of 2009 should be similar to the
first half of 2009. Capital expenditures from continuing operations will be
scaled back to reflect expected revenue and will be reduced by an additional
10% in the Enterprise Solutions division.
    For EPS from continuing operations, the Company's outlook is now for
approximately $2.80 a share in 2009, which is slightly below the low end of
the original 2009 outlook. This is based on first half performance, the second
half outlook and the impact of a $350 million debt refinancing with a medium
term note offering on May 11, 2009. While the new rates are favourable,
overall interest charges are higher than the rates on which our original EPS
outlook was based.
    As previously announced, the Company also expects to implement further
cost reductions and has increased its cost reduction target for 2009 to
between $50 million and $60 million, up from the original target of $35
million to $45 million on an annualized basis.
    The Company expects to generate strong free cash flow well in excess of
its dividend, which provides one of the highest yields on the TSX. Additional
cash requirements including pension solvency, wireless transition, and
restructuring costs are also expected to be funded from free cash flow, while
additional debt will be incurred for the recently announced HSPA deployment.
    The Company continues to benefit from large tax assets, which have a
present value of approximately $370 million and are expected to shelter the
Company from paying cash taxes until 2015.
    For more details on the Company's expectations for the balance of the
year, please refer to the accompanying interim MD&A.

    
    Dividend
    --------
    The Company's Board of Directors declared a cash dividend of $0.65 per
share for the third quarter of 2009, which is payable on October 15, 2009 to
shareholders of record on September 15, 2009.

    Other developments

    The following are various announcements made recently by the Company.

    Corporate announcements

    -  On July 28, 2009, MTS Allstream announced an innovative agreement with
       Rogers that will see both companies share the cost to deploy an HSPA
       wireless network across the existing MTS Allstream regional wireless
       footprint. The agreement also provides MTS Allstream with the
       opportunity to launch a national wireless business offering under the
       Allstream brand through a competitive wholesale arrangement.

    -  On July 24, 2009, MTS Allstream kicked off a campaign to actively
       support speed skater Cindy Klassen, four-time World Champion and
       Canada's greatest Olympian, as she prepares to win even more medals
       during the 2009/2010 season.

    -  On July 7, 2009, MTS Allstream expressed serious concern in the wake
       of Canadian Radio-television and Telecommunications Commission
       decisions that represent a tax of at least $50 to $100 per year on
       television customers. This increased tax would result from mandated
       local television contributions and the potential fee that broadcasters
       could charge service providers for television signals that are
       currently delivered over the air for free.

    -  On June 23, 2009, MTS Allstream was honoured by Canada's premier
       professional disaster recovery organization with the 2009 Award of
       Excellence from the Disaster Recovery Institute of Canada.

    -  On June 22, 2009, MTS Allstream announced it was the official
       telecom sponsor of Pollution Probe's 2009 Clean Air Commute.

    -  On June 3, 2009, MTS Allstream and Red River College announced a
       renewal of their strategic alliance, a five-year relationship worth
       approximately $1 million.

    -  On May 22, 2009, MTS Allstream announced a 10-year sponsorship with
       Cercle Molière that will help provide state-of-the-art
       telecom, including security solutions from AAA Alarms, as
       well as a portion of the operating costs for this equipment for Cercle
       Molière's new theatre project.

    -  On May 13, 2009, MTS Allstream supported Rise Again 2009: The Red
       Cross Manitoba Flood Relief Concert in aid of Manitoba's 2009 flood
       victims.

    Enterprise Solutions division announcements

    -  On July 16, 2009, MTS Allstream announced it has been selected by
       Sleeman Breweries Ltd. to implement a standardized software
       application solution for its international and North American
       operations.

    -  On July 13, 2009, MTS Allstream announced that it has been named the
       Canadian Mitel(R) premier PARTNER of the Year for 2009 for
       demonstrating business performance, expertise, and high levels of
       sales achievement and customer satisfaction.

    -  On July 7, 2009, MTS Allstream announced that it had been honoured
       with the Top Growth Partner of the Year for Canada Award at the
       Tandberg Partner Summit. The award is given to the Tandberg Partner
       who has the highest year-over-year growth. Tandberg is a leading
       provider of visual communication solutions technology.

    -  On July 7, 2009, MTS Allstream announced it had been selected by
       Calforex Currency Services, to provide a unified communications
       solution for its coast to coast operations in Canada.

    -  On July 2, 2009, MTS Allstream announced a contract with the Rural
       Information Services Initiative for a new Unified Communications
       solution providing an online information system network,
       videoconferencing, and other communication opportunities to 80 rural
       libraries and other public locations in southern Alberta.

    -  On June 26, 2009, MTS Allstream announced it had been selected to
       supply FleetNet 800(TM) mobile and portable radios to the Brandon
       Police Service.

    -  On June 25, 2009, MTS Allstream announced it had won a contract to
       provide WorldSkills Calgary 2009 with a secure and reliable,
       information technology network.

    -  On June 3, 2009, MTS Allstream launched Virtual Workplace Solutions.
       The complete suite of end-to-end solutions allow business customers of
       all sizes to meet the challenges of globalization and ever-growing
       mobility with a virtual work environment.

    -  On May 8, 2009, MTS Allstream announced the signing of a three-year,
       multi-million dollar contract with Hudson's Bay Company. MTS Allstream
       will continue to provide local voice lines with the addition of
       multiprotocol label switching, Internet, and voice communications
       including toll-free and long distance services.

    Consumer Markets division announcements

    -  On August 7, 2009, MTS Allstream announced it would be the first
       telecommunications company in Canada to provide customers with access
       to the latest generation of Microsoft's Windows Live services using an
       MTS e-mail address. Windows Live is an integrated set of online
       services that includes e-mail services, as well as several online and
       downloadable applications, that allow customers to share photos, save
       and share files online, create personal profile pages, plan events
       through an online calendar, chat with friends by instant messaging,
       and much more.

    -  On July 2, 2009, MTS Allstream became the first telecommunications
       company in Canada to offer wireless subscribers who are members of the
       Canadian Forces and are being deployed on international operations the
       ability to put their contracts on hold, while the time of their
       contract continues, during their call of duty overseas.

    -  On June 24, 2009, an agreement was announced between MTS Allstream
       affiliate AAA Alarms and SecurTek, a wholly-owned SaskTel subsidiary,
       whereby AAA Alarms will acquire SecurTek's Manitoba customer accounts
       and a cash payment of approximately $1.5 million from SecurTek in
       exchange for AAA Alarm's accounts outside of Manitoba.

    -  On June 16, 2009, MTS Allstream announced it had been awarded a
       Marketing Excellence Award for the second year in a row by the
       Broadband Multimedia Marketing Association for its marketing efforts
       in introducing an additional layer of security to their ZoneAlarm
       ForceField service.

    -  On June 9, 2009, MTS Allstream announced the signing of an agreement
       with Sprint's Global Alliance program that will allow MTS Allstream to
       take advantage of Sprint's handset lineup, vendor relationships and
       buying power to provide an enhanced handset and service offering for
       MTS Mobility customers in Manitoba.

    -  On May 15, 2009, MTS Allstream announced a new MTS Internet To Go plan
       that gives MTS residential and business high-speed Internet customers
       unlimited access to Wi-Fi and EVDO where coverage exists in Manitoba
       and throughout Canada.
    

    Quarterly conference call

    MTS Allstream's second quarter 2009 conference call with the investment
community is scheduled for 9:00 a.m. (Eastern Time) on August 7, 2009.
Investors are invited to listen to the conference call. The dial-in number is
1-800-732-0232. A live audio Webcast of the investor conference call can be
accessed by visiting the Investors section of the MTS Allstream Web site
(www.mtsallstream.com). A replay of the conference call will be available
until midnight (Eastern Time) on August 18, 2009 and can be accessed by
dialing 1-877-289-8525 or 1-416-640-1917 and enter the access code 21310275
followed by the pound sign (No.) when prompted.
    MTS Allstream's interim MD&A for the six months ended June 30, 2009 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 want to
live and work today. The Company has more than 100 years of experience, with
6,000 employees across Canada dedicated to a mission of delivering true value
as seen through the eyes of our customers. In 2008, MTS Allstream had nearly
two million total 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. MTS Allstream is a proud sponsor of Cindy Klassen, 2006
World Champion and Canada's greatest Olympian, and a proud contributor to the
Canadian Museum for Human Rights. 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 services, markets, community commitments and record of creating
shareholder value 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, operating and dispute resolution activities, 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. Forward-looking statements reflect our
expectations as at August 6, 2009. 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 from those expected, and the material factors or assumptions
that were applied in drawing a conclusion or making a forecast or projection
set out in such forward-looking statements, include, but are not limited to,
the items identified in our interim MD&A for the first quarter and second
quarter of 2009, and our 2008 annual MD&A. Except as required by law, 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.
    Factors that could cause anticipated opportunities and actual results to
differ materially include, but are not limited to, the intensity of
competitive activity from both traditional and new competitors (competitive
conditions); the ability to retain major customers (customer relationships);
decisions by the federal regulator that affect our ability to compete
effectively or to enter into new business opportunities (developments in
federal regulation); general economic and market conditions and the level of
consumer confidence and spending, and the demand for, and prices of, our
products and services (market conditions and economic fluctuations);
fluctuations in pension plan funding requirements (pension solvency funding);
the ability to manage labour relations effectively (collective agreements);
the ability to anticipate, and respond to, changes in technology (technology);
and other risk factors listed from time to time in our comprehensive public
disclosure documents, including our 2008 Annual Report and in other filings
with the Canadian securities regulatory authorities. Unless otherwise stated,
all amounts are expressed in Canadian dollars. For further information, refer
to the "Risks and Uncertainties" sections in our 2008 annual MD&A and our
interim MD&A for the second quarter of 2009.
    Additional information relating to our Company, including our Annual
Information Form, is available on SEDAR at www.sedar.com. This news release
and the financial information contained herein have been reviewed by our Audit
Committee and approved by our Board of Directors.

    
    (1) EBITDA is earnings before interest, taxes, amortization, and other
        income. EBITDA should not be construed as an alternative to operating
        income or to cash flows from operating activities (as determined in
        accordance with Canadian generally accepted accounting principles) as
        a measure of liquidity.
    (2) Refer to MTS Allstream's second quarter 2009 interim MD&A for the
        definition of continuing operations.
    (3) EPS is earnings per share.
    (4) Refer to MTS Allstream's second quarter 2009 interim MD&A for the
        definition of free cash flow.
    


    Management's Discussion and Analysis

    Unless otherwise indicated, this Management's Discussion and Analysis
("MD&A") of our financial results for the interim period ended June 30, 2009
is as at August 6, 2009. In this MD&A, "we", "our", and "us" refer to Manitoba
Telecom Services Inc. ("MTS"). This interim MD&A should be read in conjunction
with our interim consolidated financial statements and the discussion and
analysis that accompanies our audited consolidated financial statements for
the year ended December 31, 2008. This interim MD&A for the six months ended
June 30, 2009 updates the information contained in our first quarter 2009
interim MD&A, and our 2008 annual MD&A. Unless otherwise stated, all amounts
are expressed in Canadian dollars.

    Disclaimer Regarding Forward-Looking Statements

    This interim MD&A includes forward-looking statements and information
(collectively, the "statements") about our corporate direction, business
opportunities, operating and dispute resolution activities, 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. 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, the intensity of
competitive activity from both traditional and new competitors (competitive
conditions); the ability to retain major customers (customer relationships);
decisions by the federal regulator that affect our ability to compete
effectively or to enter into new business opportunities (developments in
federal regulation); general economic and market conditions and the level of
consumer confidence and spending, and the demand for, and prices of, our
products and services (market conditions and economic fluctuations);
fluctuations in pension plan funding requirements (pension solvency funding);
the ability to manage labour relations effectively (collective agreements);
the ability to anticipate, and respond to, changes in technology (technology);
and other risk factors listed from time to time in our comprehensive public
disclosure documents, including our 2008 Annual Report and in other filings
with the Canadian securities regulatory authorities.
    For further information, please refer to the "Risks and Uncertainties"
section in this interim MD&A, our first quarter 2009 interim MD&A, our 2008
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 August 6, 2009. 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.

    
    NON-GAAP MEASURES OF PERFORMANCE
    --------------------------------
    

    In this MD&A, we provide information concerning continuing operations,
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 Canadian generally accepted accounting principles ("GAAP"),
and are not necessarily comparable to similarly titled measures used by other
companies.

    
    -   Continuing Operations - We provide information that refers to our
        performance from continuing operations to assist investors in
        understanding the performance of our company.

        In the first six months of 2009, continuing operations excludes
        restructuring costs; the costs to transition certain wireless service
        requirements away from Bell Mobility to new suppliers and to our
        wireless platform; costs related to our wireless evolution; costs
        related to certain regulatory proceedings; certain costs associated
        with our transition from Canadian GAAP to International Financial
        Reporting Standards ("IFRS"); and solvency funding to our pension
        plans.

        In the first six months of 2008, continuing operations excluded the
        costs of transitioning certain wireless service requirements away
        from Bell Mobility to new suppliers and to our wireless platform as
        well as costs associated with the advanced wireless services ("AWS")
        spectrum auction; restructuring and integration costs; the impact of
        changes in income tax rates on our tax asset; and solvency funding to
        our pension plans.

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

    -   Free Cash Flow - We define free cash flow as cash flow 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.

    OVERVIEW
    --------
    

    MTS is a leading national communications provider in Canada and the
market leader in Manitoba. We are organized into two reportable operating
segments, the Consumer Markets division and the Enterprise Solutions division.
Our common shares are listed on The Toronto Stock Exchange (trading symbol:
MBT). Our website is www.mtsallstream.com.

    Consumer Markets division

    The Consumer Markets division leads every telecommunications market
segment in Manitoba, delivering a full suite of next generation wireless,
high-speed Internet and data, digital television and wireline voice services
under the MTS brand, as well as security and alarm monitoring services through
AAA Alarm Systems Ltd., a subsidiary of MTS. This complete range of products
is unmatched by any other provider in Manitoba. In addition, the Consumer
Markets division is an important service provider in the national small
business telecommunications market, providing customers in targeted major
Canadian centres with a range of innovative business Internet, data and voice
services under the Allstream brand.

    Enterprise Solutions division

    The Enterprise Solutions division, which operates under the Allstream
brand nationally and under the MTS Allstream brand in Manitoba, is a leading
competitor in the national business and wholesale markets. This division's
main customer base is medium and large businesses and government organizations
and its key products are Internet protocol ("IP")-based communications,
unified communications, voice and data connectivity, and professional
services. The Enterprise Solutions division operates an extensive national
broadband fibre optic network that spans more than 27,900 kilometres, and
provides international connections through strategic alliances and
interconnection agreements with other international service providers.

    
    STRATEGIC PRIORITIES UPDATE
    ---------------------------

    In summary, during the first six months of 2009 we made the following
progress on four core priorities:

    1.  Focus on smart profitable growth

        Our Consumer Markets division's growth services revenues increased by
        8.8% for the first six months as compared to the year earlier while
        our Enterprise Solutions division's growth services revenues
        increased by 3.2%.

    2.  Improve the customer experience and gain market share

        Our key converged IP enterprise data products delivered 11.9% growth
        in the first two quarters as compared to last year. In Manitoba,
        our Internet subscriber base continued to grow with a 3.6% increase
        in high-speed Internet subscribers.

    3.  Align cost structure to new market realities

        Our revised and increased target for 2009 is to generate $50 million
        to $60 million in annualized cost savings. We are on schedule to meet
        our target having achieved $27.3 million in annualized cost savings
        from these initiatives in the first six months of the year.

    4.  Drive the transition from legacy to growth services

        Growth services accounted for 46.9% of our total revenue in the first
        two quarters of 2009, up from 43.5% a year earlier.

    2009 OUTLOOK UPDATE
    -------------------
    

    This outlook and the financial information contained herein have been
reviewed by our Audit Committee and should be read in conjunction with the
"Disclaimer Regarding Forward-Looking Statements" and the "Risks and
Uncertainties" sections in this interim MD&A, as well as similar sections of
our first quarter 2009 interim MD&A, our 2008 Annual MD&A and our 2008 Annual
Information Form.
    Our financial outlook from continuing operations as announced on December
17, 2008 is detailed below:


    
    -------------------------------------------------------------------------
               2009 Financial Outlook - Continuing Operations
    -------------------------------------------------------------------------
    Revenues                                $1.900 billion to $1.980 billion
    EBITDA                                  $645 million to $685 million
    EPS                                     $2.90 to $3.20
    Free cash flow                          $250 million to $280 million
    Capital expenditures                    13% to 15% of revenues
    -------------------------------------------------------------------------
    

    While the economy deteriorated sharply following the release of our
financial outlook on December 17, 2008, after the first six months of 2009 we
were halfway to the lower end of our guidance for four of our five key
metrics: revenue, EBITDA, free cash flow and capital expenditures. For the
fifth key metric, earnings per share ("EPS"), the six months results trended
slightly below what was required to be halfway to the lower end of our target.
Key factors affecting our performance in the second quarter and first half of
2009 were the intensity of the recession and the continuing reduction in the
utilization of legacy services in the Enterprise Solutions division.
    As an example of the economic deterioration following our December 2008
outlook, the Conference Board of Canada changed its forecast of 2009 national
gross domestic product ("GDP") from 1.5% growth, when our outlook was
developed, to a decrease of 1.9% in July 2009. While we have undertaken to
significantly reduce our cost structure, most of the impact of these
reductions will not be fully-reflected until 2010. More recently, economists
are beginning to see indications of a very slight economic improvement in the
second half of 2009, including a report by the Bank of Canada on July 21,
2009, which stated that "recovery is nascent."
    The performance of the Company and the current economic conditions
through the first half of the year suggests that results in the second half
should be similar to the first half of the year which we expect would allow us
to meet the lower end of our 2009 outlook for revenue, EBITDA and free cash
flow. Our capital expenditures from continuing operations have been scaled
back to reflect expected revenue and are expected to be lower by an additional
10% in the Enterprise Solutions division.
    During the quarter, we took the opportunity to refinance $350 million in
short-term debt with a medium term note offering on May 11, 2009. While the
new rates are favourable, they are higher than the rates on which our EPS
outlook was based. Considering the expected performance of the Company and the
additional cost of financing, we expect our 2009 EPS from continuing
operations to be below our outlook at approximately $2.80.

    HSPA Announcement

    On July 28, 2009, we made a significant announcement regarding our
wireless strategy going forward for both divisions of the company. We entered
into a strategic wireless arrangement with Rogers Wireless Partnership
("Rogers Wireless") that will see both companies share the cost to deploy a
universal mobile telecommunications systems/high-speed packet access ("HSPA")
wireless network across the existing Manitoba wireless footprint. The
agreement also allows us to leverage Rogers Wireless's purchasing scope and
scale to gain cost effective access to the new network technology and
leading-edge HSPA handsets. Our customers will have access to the best
national and international roaming capabilities as a Rogers Wireless roaming
partner, and both companies will share roaming revenues from the HSPA network
in Manitoba. The agreement also provides us with the opportunity to launch a
national wireless business offering under the Allstream brand through a
competitive wholesale arrangement. Over the upcoming quarters, management will
finalize our analysis of the opportunity for the launch of a national
Allstream-branded business wireless service and provide more information to
stakeholders when available.
    On July 28, 2009, we issued a material change report in respect of this
transaction, which is available on SEDAR at www.sedar.com. This material
change report is incorporated by reference herein.

    Consumer Markets division

    In our Consumer Markets division, our emphasis is on growth products and
bundles in areas such as high-speed Internet, wireless, home security and
digital television services. Bundling is a strategic advantage as our
competitors cannot match our broad range of services.
    Geographically, the Consumer Markets division is affected mainly by the
Manitoba economy, which in the first half of 2009 outperformed the Canadian
economy as a whole. Even as local competition intensified during the first six
months of 2009, our Consumer Markets division has outperformed most other
telecommunications providers in Canada. Our goal is to maintain our position
as the one-stop provider of clear choice to Manitoba households and consumers
by delivering stable growth in our Internet, digital television and wireless
services in 2009. We have been forborne in a few markets, including the local
market in Winnipeg, which has enhanced our ability to compete against new
market entrants.
    MTS HDTV, which we launched in Winnipeg and Portage la Prairie, is one of
the leading North American digital television services offering such advanced
features as personal video recorder, and more HD channels.  Because our new
MTS HDTV service exceeds the capabilities of our competitors in many ways, we
expect it will strengthen our subscriber growth rates going forward.

    Enterprise Solutions division

    In our Enterprise Solutions division, we will build on our established
leadership in advanced IP, multiprotocol label switching ("MPLS") solutions
and unified communications services. As part of this strategy, we will strive
to reduce our direct costs through the migration of customers from facilities
leased on our competitors' networks to our network, and we will continue to
improve our productivity and cost structure. From a growth perspective, we
forecast that revenue from our IP connectivity product line will continue to
grow at a double-digit rate.
    Geographically, our Enterprise Solutions division is affected by the
national economy, which underperformed the economy of Manitoba. While certain
customers have postponed purchases of communications solutions and products
during the first six months of 2009 due to weakness in the national economy,
we anticipate that demand momentum will slowly rebuild with economic recovery,
which may soon be underway.

    Cost Reductions

    For the first six months of the year, we have achieved $27.3 million in
annualized cost savings. Our initial target for 2009 was to generate $35
million to $45 million in cost savings. We now expect to achieve $50 million
to $60 million in savings from these initiatives. This will result in our
restructuring costs for 2009 to be approximately $25 million to $35 million as
compared to our initial estimate of $10 million to $20 million. These
restructuring costs were not included in our 2009 financial outlook from
continuing operations.
    Since the fourth quarter of 2008, we have announced the reduction of 330
positions in our Enterprise Solutions division, representing 10% of this
division's workforce, and we are pursuing various cost reduction initiatives
to continue to realign our cost structure to recent market realities.

    Material Assumptions

    We have made a number of assumptions in preparing our financial outlook
and making certain other forward-looking statements, which include, but are
not limited to, the following assumptions:

    Economic Assumptions

    The business prospects and performance of the Canadian economy, and to a
greater extent, the Manitoba economy, have an impact on our business
performance. When we were developing our financial outlook from continuing
operations for 2009 in October 2008, the Conference Board of Canada was
forecasting a national growth rate of approximately 1.5% for GDP and a growth
rate of 2.4% for GDP for the province of Manitoba. More recent forecasts such
as the July 15, 2009, Manitoba Department of Finance forecasts for GDP 
included a decrease of 2.3% for the national average and a decrease of 0.4%
for Manitoba. The actual performance of the Canadian economy and the Manitoba
economy may impact the assumptions we used in the development of our business
plan, which may have a negative impact on our actual results in 2009.

    Market Assumptions

    As competition in the overall marketplace continues, the broad market
segment trends that have taken shape in recent years will also persist in
2009.
    Growth for our Consumer Markets division in such services as Internet and
digital television is expected to continue at similar levels in 2009. We are
assuming that there will not be any material changes to the continued growth
of wireless services in 2009, notwithstanding anticipated changes to
relationships and market dynamics. In addition, we have forecasted no
meaningful new competitor in wireless services in Manitoba in 2009 and
competitive pressures to continue upon local and long distance services.
Although competition from an incumbent cable operator is expected to continue
in the Manitoba residential market, we are confident that we have prudently
prepared our operations and strategies to counter these threats. Through our
broadband network initiative, our bundling leadership, and our residential
service offerings, which include local and long distance, wireless, Internet,
digital television and home security services, we believe that we are
well-positioned to compete successfully.
    With respect to our Enterprise Solutions division, we are expecting
growth to continue in 2009 for IP-based next generation services. In addition,
the competitive pressure experienced in traditional legacy services, which
include data connectivity, local and long distance services will continue in
similar trends as it did in 2008. Likewise, we anticipate that customer demand
will continue to migrate to next generation services. To face the continued
strong competition in the enterprise markets, we have been refining our market
focus, creating innovative IP solutions, reducing our cost structure, and
investing selectively in high-margin opportunities.

    Financial and Operational Assumptions

    Our financial and operating assumptions are based on our 2009 financial
outlook from continuing operations above.

    Cost Reduction Assumptions

    Our cost reduction assumptions, and changes from the prior quarter, are
discussed above under "Cost Reductions."

    Liquidity and Capital Resources Assumptions

    Our operations historically have delivered strong cash flows, and we
expect this positive trend to continue in 2009. We will continue to invest in
our core operations with a focus on our growth products and services to ensure
success in the markets in which we operate. We have adopted a prudent
expenditure and investment strategy that is scalable and provides flexibility
to adjust the pace of investment according to economic conditions. Significant
investments have been made in modernizing our network infrastructure, both in
Manitoba and nationally. In 2005, we saw the completion of a five-year, $300
million fibre optic broadband expansion program in Manitoba, which
demonstrates our leadership in bringing fibre closer to the home and also, has
positioned our network capabilities second to none in Canada. These
investments, in addition to the investment choices we are making nationally,
are placing us in a favourable position in terms of capital requirements going
forward. In 2009, our capital program is expected to comprise 13% to 15% of
our revenues from continuing operations.
    On July 28, 2009, we announced a strategic arrangement with Rogers
Wireless that will see both companies share the cost of building an HSPA
network over our existing Manitoba wireless footprint. The cost of our
regional HSPA network upgrade is expected to be up to $70 million ending in
early 2011, approximately $20 million of which will be funded by our existing
capital envelope.
    In conjunction with our HSPA roll-out in Manitoba, we will be
implementing a new integrated billing platform with the capability for
multiple services, creating the opportunity for significant future cost
savings. Wireless customers will be the first to be served over the new
platform, and the cost to migrate our wireless customers to this platform will
be approximately $40 million over the next three years.
    Our cash requirements for 2009 include two non-recurring obligations of
approximately $25 million to $35 million for restructuring programs; and $13.7
million for wireless transition costs, a program that is now completed. We
expect our pension solvency funding requirement to be approximately $35
million, which is lower than our previously expected range of $40 million to
$50 million.

    Tax Assumptions

    We have been able to reduce our taxable income by utilizing our
substantial capital cost allowance ("CCA") pools and available tax losses. By
utilizing our deferred CCA deductions, we project that we will not pay cash
taxes before 2015.
    The present value of our tax asset is approximately $370 million. On
March 26, 2009, the province of Ontario announced plans to reduce its
corporate tax rate from the current rate of 14% to 10% by 2013. When the new
rates are substantively enacted, the effect will be to reduce the book value
of our future tax asset by $17.5 million.


    
    RESULTS OF OPERATIONS
    ---------------------

    -------------------------------------------------------------------------
                                            2009                2008
    (in millions $, except EPS)(*)       Q2      Q1      Q4      Q3      Q2
    -------------------------------------------------------------------------
    Growth services revenues           216.7   227.2   212.5   213.1   214.9
    Legacy services revenues           247.6   255.7   263.9   266.8   271.5
    Revenue                            464.3   482.9   476.4   479.9   486.4
    EBITDA                             159.3   163.2   156.7   165.1   171.3
    Free cash flow                      59.9    68.7    39.4    70.8    72.4
    EPS                                 0.67    0.71    0.59    0.74    0.81
    Revenue/capital expenditures         14%     12%     19%     14%     14%
    -------------------------------------------------------------------------
    (*) All financial metrics in this table are from continuing operations.
    

    Our growth and legacy services were negatively affected by the slowing of
the economy in the second quarter of 2009. This contributed to the sequential
and year-over-year decline in the key metrics listed in the table above. Even
so, our results for the first six months mostly remained on trend with the
lower end of our guidance range for 2009 as a whole.
    Capital expenditures as a percentage of revenue has remained within our
guidance range in the second quarter and first six months of 2009 as we have
reduced our capital programs to reflect reduced revenue. The performance of
other metrics is discussed in more detail below.


    
    Divisional Highlights (continuing operations)
    -------------------------------------------------------------------------
                                                     three months
    (in millions $)                                 ended June 30     change
                                                  2009       2008
    -------------------------------------------------------------------------
    Consumer Markets division ("CMD")
      CMD growth services revenues(1)            103.5       97.0       6.7%
      CMD legacy services revenues(2)            104.3      107.9      (3.3%)
      CMD total revenues                         207.8      204.9       1.4%
      CMD EBITDA                                 108.1      105.4       2.6%
    -------------------------------------------------------------------------
    Enterprise Solutions division ("ESD")
      ESD growth services revenues(3)            113.2      117.9      (4.0%)
      ESD legacy services revenues(2)            143.3      163.6     (12.4%)
      ESD total revenues                         256.5      281.5      (8.9%)
      ESD EBITDA                                  51.0       65.5     (22.1%)
    -------------------------------------------------------------------------
    MTS totals
      Revenues                                   464.3      486.4      (4.5%)
      EBITDA(4)                                  159.3      171.3      (7.0%)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
                                                       six months
    (in millions $)                                 ended June 30     change
                                                  2009       2008
    -------------------------------------------------------------------------
    Consumer Markets division ("CMD")
      CMD growth services revenues(1)            205.3      188.7       8.8%
      CMD legacy services revenues(2)            206.6      215.9      (4.3%)
      CMD total revenues                         411.9      404.6       1.8%
      CMD EBITDA                                 214.4      207.8       3.2%
    -------------------------------------------------------------------------
    Enterprise Solutions division ("ESD")
      ESD growth services revenues(3)            238.6      231.1       3.2%
      ESD legacy services revenues(2)            296.7      329.5     (10.0%)
      ESD total revenues                         535.3      560.6      (4.5%)
      ESD EBITDA                                 107.7      130.6     (17.5%)
    -------------------------------------------------------------------------
    MTS totals
      Revenues                                   947.2      965.2      (1.9%)
      EBITDA(5)                                  322.5      340.0      (5.1%)
    -------------------------------------------------------------------------
    (1) Consists mainly of wireless, consumer Internet and digital television
        services.
    (2) Consists mainly of local, long distance and data services.
    (3) Consists mainly of converged IP and unified communications services.
    (4) Includes other EBITDA of $0.2 million in the second quarter of 2009
        as compared to $0.4 million in the second quarter of 2008.
    (5) Includes other EBITDA of $0.4 million in the first six months of 2009
        as compared to $1.6 million in the first six months of 2008.
    

    Summary

    We believe our Consumer Markets division achieved market-leading results
in the second quarter and first six months of 2009 as compared to a year
earlier. While legacy services revenues continued to follow the long-term
industry trend of year-over-year declines, these reductions were more than
offset by gains in growth services in both the second quarter and the first
six months of the year. Successfully managing cable competition in the
Manitoba market, our Consumer Markets division's performance has continued to
be market-leading in our industry.
    Our strategy of attractively bundling the products and services offered
by our Consumer Markets division contributed to deliver growth. In the second
quarter of 2009, the number of customers selecting our product bundles
increased by 4.7% over the same period last year.
    Our Enterprise Solutions division continued to experience double-digit
growth in converged IP services in the three and six months ended June 30,
2009 over the previous year. However, this strong growth was offset by a
slowing economy and the ongoing reduction in network traffic from Rogers
Communications Inc. ("Rogers") and AT&T Corp. ("AT&T") as they continued to
migrate their communication needs to their respective networks.

    
    REVENUES

    By Segment (continuing operations)
    -------------------------------------------------------------------------
                                                                        Q2/09
                                                                          chg
    (in millions $)                                  Q2/09      Q2/08   Q2/08
    -------------------------------------------------------------------------
    Revenues                                         464.3      486.4  (4.5%)
    -------------------------------------------------------------------------
    CMD growth services revenues                     103.5       97.0   6.7%
    ESD growth services revenues                     113.2      117.9  (4.0%)
    Total growth services revenues                   216.7      214.9   0.8%
    -------------------------------------------------------------------------
    CMD legacy services revenues                     104.3      107.9  (3.3%)
    ESD legacy services revenues                     143.3      163.6 (12.4%)
    Total legacy services revenues                   247.6      271.5  (8.8%)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Summary

    Growth services revenues continued to show improvement overall for the
second quarter and the first six months of 2009, as compared to the same
periods a year earlier. Even with the weak economy, we experienced high demand
for converged IP services within our Enterprise Solutions division growth
services portfolio.

    Growth Services Revenues

    Solid demand for the products we offer within our growth services
portfolio continued and is reflected by increases of 0.8% or $1.8 million and
5.7% or $24.1 million for the three and six months ended June 30, 2009 as
compared to the prior year. Contributing to this performance are higher, often
market-leading, year-over-year revenues from converged IP, consumer Internet,
wireless and digital television services on a quarterly and year to date
basis, which were partially offset by lower revenues from unified
communications, and security and professional services.

    Legacy Services Revenues

    As we continue to see the impact of declining revenues from legacy
services contracts with Rogers and AT&T, we are also experiencing the effects
of re-pricing and lower volumes in the enterprise legacy market and
competitive losses in the consumer market. We are also seeing a decline in
legacy services revenues related to the slowing economy as some of our
enterprise customers who are based or have operations in the U.S. are reducing
their business volumes.
    The expected migration of communications traffic by Rogers and AT&T to
their own respective networks has continued, which has resulted in revenues
from these customers decreasing to $17.0 million in the second quarter and
$35.2 million year to date as compared to $24.8 million and $51.3 million in
the same periods last year, respectively. For the three and six months ended
June 30, 2009, our legacy services revenues declined by 8.8% and 7.7%,
respectively. However, if Rogers and AT&T are excluded, revenues from our
legacy services would have decreased by 6.5% and 5.3% for these periods.


    
    Operating Revenues (continuing operations)
    -------------------------------------------------------------------------
    (in millions $)                              Q2/09      Q2/08   % change
    -------------------------------------------------------------------------
    Wireless                                      76.0       71.9        5.7
    Data                                         167.9      178.6       (6.0)
    Local                                        129.8      132.5       (2.0)
    Long distance                                 68.1       82.6      (17.6)
    Other                                         22.5       20.8        8.2
                                             --------------------------------
    Total                                        464.3      486.4       (4.5)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    (in millions $)                             YTD/09     YTD/08   % change
    -------------------------------------------------------------------------
    Wireless                                     153.8      140.0        9.9
    Data                                         345.8      352.5       (1.9)
    Local                                        259.4      263.7       (1.6)
    Long distance                                145.1      167.8      (13.5)
    Other                                         43.1       41.2        4.6
                                             --------------------------------
    Total                                        947.2      965.2       (1.9)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Wireless Services
    -------------------------------------------------------------------------
    (in millions $)                               2009       2008   % change
    -------------------------------------------------------------------------
    Q2                                           76.0        71.9        5.7
    YTD                                         153.8       140.0        9.9
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Our wireless portfolio consists of cellular, wireless data, paging and
    group communications services that we offer in the Manitoba market.
    

    Primarily driving the year-over-year increases in our wireless services
revenues is growth in our wireless subscriber base. As at June 30, 2009, our
wireless subscriber base had reached 446,293 subscribers, growing by 9.3% over
last year. In addition, increased subscriber usage of individual and bundled
features such as data, texting, voicemail and call display contributed to the
year-over-year increases in our wireless services revenues. Enhancing our
performance on a year to date basis is a $3.4 million one-time sale of
FleetNet 800(TM) handsets to the City of Winnipeg which occurred in the first
quarter this year.
    Our average revenue per user ("ARPU") of $55.98 decreased by 0.9% or
$0.48 for the six months ended June 30, 2009. We have continued to see
increased airtime usage along with strong increases in wireless data services
and calling-feature utilization however, this positive performance was
impacted by the presence of aggressively-priced plans from competitors in the
fourth quarter of 2008 and first quarter of this year, as well as a reduction
in wholesale revenues from competitors. We remained disciplined with our
pricing strategy but we were forced to partly respond to these plans for a
limited time, withdrawing our promotion in February 2009.
    We continue to see growth potential for our wireless services revenues in
Manitoba. Our MTS Mobility network provides strong brand awareness, network
reach and customer service, in addition, the high-value product bundles that
we offer customers cannot be matched by our competitors. These factors along
with increasing consumer adoption of wireless products provide an environment
for further growth in Manitoba. For example, at the end of the second quarter
of 2009, wireless penetration in Manitoba was approximately 63% as compared to
our estimate of the Canadian penetration rate of approximately 67%.
    Revenues from our wireless data services continued to experience strong
year-over-year growth, increasing 21.8% for the six months ended June 30,
2009. Primarily driving this increase are higher revenues from wireless
Internet access services, attractive wireless data bundles and service
features such as text messaging.


    
    Data Services
    -------------------------------------------------------------------------
    (in millions $)                               2009       2008   % change
    -------------------------------------------------------------------------
    Q2                                           167.9      178.6       (6.0)
    YTD                                          345.8      352.5       (1.9)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Our data line of business includes revenues earned from providing data,
    Internet, converged IP and professional services. Data services connect
    data, video and voice networks to establish private connections across
    office locations and to integrate traffic over highly secure networks. We
    provide a wide range of Internet connectivity services to meet the needs
    of residential customers in Manitoba and business customers across the
    country. We also offer hosting and security services to business
    customers across Canada.
    

    Strong demand is continuing for key data applications such as our
converged IP services, which experienced increased revenues of 13.0% and 11.9%
for the second quarter and year to date periods this year and our consumer
Internet services with increases in revenues of 8.8% and 10.2% in the second
quarter and year to date. However, offsetting this growth were the effects of
lower legacy data services revenues resulting from customer transition to next
generation growth services and the slowing of the economy as many enterprise
customers are experiencing lower business volumes and postponing purchases of
unified communications and professional services. In addition, the continuing
migration of legacy data communications traffic by Rogers and AT&T to their
respective networks has further impacted the year-over-year declines in our
data services revenues. Our data services revenues decreased by 6.0% and 1.9%
in the second quarter and year to date, respectively. If the data services
revenues of Rogers and AT&T were excluded, our data services revenues would
have shown a decline of 3.5% in the second quarter and growth of 1.1% year to
date this year.
    Year-over-year revenues from our next generation data services, which
include converged IP and unified communications services, grew by 5.6% year to
date. Customers are continuing to migrate to IP solutions that utilize our
state-of-the-art IP MPLS network and customer service capabilities. Converged
IP services represents the largest revenue stream for our Enterprise Solutions
division.
    The capabilities of the suite of products offered by our Enterprise
Solutions division continued to be demonstrated by solid growth in our
IP-virtual private network ("IP-VPN") customer base. As at June 30, 2009, we
were supporting 338 IP-VPN customers, a 19.9% increase over last year.
    Our consumer Internet services revenue continued to grow in the second
quarter and first six months of the year with increases of 8.8% to $22.2
million and 10.2% to $44.4 million, respectively. Contributing to this growth
was an increase of 3.6% in our consumer high-speed Internet customer base,
which reached 178,996 customers as at June 30, 2009, and a 9.0% year-over-year
increase in ARPU. Similar to our national peers, increasing penetration in the
high-speed Internet market is slowing our subscriber activations.


    
    Local Services
    -------------------------------------------------------------------------
    (in millions $)                               2009       2008   % change
    -------------------------------------------------------------------------
    Q2                                           129.8      132.5       (2.0)
    YTD                                          259.4      263.7       (1.6)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Local services revenues include basic voice connections for residential
    customers, including enhanced calling features (such as Call Answer, Call
    Display, Call Waiting and 3-Way Calling), payphone revenue, wholesale
    revenues from services provided to third parties, as well as a full range
    of local services to business customers. These services allow customers
    to complete calls in their local calling areas and to access long
    distance, cellular networks and the Internet.
    

    We believe that we have positioned ourselves for long-term success in our
markets by bundling our residential services in attractive offerings. The
popularity of our residential service bundle packages, which can include
wireless, Internet, digital television and alarm services bundles, continues
to provide a unique value proposition for our customers. Customers utilizing
our bundled service packages grew by 4.7% in the second quarter of 2009 as
compared to the same period in 2008. Through the success of these programs, we
continued to deliver "best in class" performance against cable company
competitors, and are minimizing the reduction in our local services revenues.
Our overall customer connections, which include network access services,
high-speed Internet, wireless and digital television subscribers, increased
year-over-year by 1.3% as compared to the second quarter of 2008.
    The reduction in local services revenues results from a decrease in
residential network access lines through local competition while the revenues
from our business local services have remained stable year-over-year and
continue to perform well in the markets in which we do business. Our
year-over-year line loss is among the lowest in Canada at 4.9% and
demonstrates the success of our service bundle and consumer marketing
strategies in this market. Westman Communication Group launched digital phone
service in the Brandon, Manitoba market late in 2008, which has contributed to
the decline in local services revenues in 2009.


    
    Long Distance Services
    -------------------------------------------------------------------------
    (in millions $)                               2009       2008   % change
    -------------------------------------------------------------------------
    Q2                                            68.1       82.6     (17.6)
    YTD                                          145.1      167.8     (13.5)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Long distance services enable residential customers in Manitoba and
    business customers across Canada to communicate with destinations outside
    the local exchange. Our long distance voice service portfolio includes
    basic, domestic, cross-border and international outbound long distance,
    basic and enhanced toll-free services, calling cards and audio
    conferencing, as well as a variety of enhanced long distance services and
    features.
    

    Competitive pricing pressures, customer losses and the impact of a
slowing economy continued to impact revenues from our long distance services
in all market segments that we service. Lower long distance revenue in our
Consumer Markets division is largely due to customer migration to lower-priced
long distance plans, volume reductions and customer losses. Our Enterprise
Solutions division long distance revenue was primarily impacted by decreased
usage and rates in the domestic market as well as lower usage in international
and cross-border markets, partly offset by higher international rates. Lower
domestic and cross-border volumes are attributable to exiting customers and
reduced use by our customers that are based or have operations in the U.S. and
have been negatively affected by reduced business activity.


    
    Other Revenues
    -------------------------------------------------------------------------
    (in millions $)                               2009       2008    % change
    -------------------------------------------------------------------------
    Q2                                            22.5       20.8        8.2
    YTD                                           43.1       41.2        4.6
    -------------------------------------------------------------------------
    Other revenues consist of revenues earned from our digital television and
    home security services, and miscellaneous items. Our digital television
    service is offered across our broadband network platform and is targeted
    at residential customers in Winnipeg and Portage la Prairie.
    Miscellaneous revenues primarily consist of the sale and maintenance of
    terminal equipment.
    

    Year-over-year increases in other revenues were driven by growth in our
digital television revenues. Revenues from our digital television services
increased by 8.0% or $1.0 million, and 7.3% or $1.8 million in the second
quarter and year to date, respectively.
    Growth in digital television subscribers was partly offset by a decrease
in average revenue per subscriber ("ARPS") of 0.2% to $50.72 in the first six
months of the year. This decrease in ARPS was due mainly to an increased
number of subscribers on promotional pricing plans, which was partially offset
by an increase of $0.22 from more purchases of pay-per-view events and
services year to date. We continue to see our digital television services as a
steady growth stream for revenues even during tough economic times, as it
provides an entertainment option that is less-expensive than theatre or
cinema, in particular as we pursue the roll-out of our recently launched
industry-leading MTS HDTV service in Winnipeg.
    In the first quarter of this year, we became the first company in Canada
to have launched the next generation of HDTV, a digital television service
that includes combined technology from Alcatel-Lucent Canada Inc. and the
award-winning Microsoft Mediaroom Internet Protocol Television software
platform. With this milestone of having launched the most advanced television
experience in Canada to our customers, we not only provide next generation
HDTV but also personal video recorder, improved guide features and other
television advancements. The addition of these features places our television
product in a better position to match and exceed those of our competitors and
helps to drive subscriber growth rates going forward. We successfully launched
this new leading-edge service in Winnipeg and Portage la Prairie in the first
quarter of 2009, with plans to expand our offering of premium HDTV to Brandon
later in the year.
    Year-over-year, our digital television subscriber base increased by 4.2%
reaching 83,677 subscribers as at June 30, 2009 and our market share increased
to 34% as compared to 32% in the same period last year.


    
    EBITDA
    -------------------------------------------------------------------------
    (in millions $)                              Q2/09      Q2/08   % change
    -------------------------------------------------------------------------
    EBITDA (continuing operations)               159.3      171.3       (7.0)
    Wireless transition costs and AWS
     spectrum auction costs                       (6.3)     (10.3)     (38.8)
    Restructuring and other costs                (12.7)         -        n.m.
                                               ------------------------------
    EBITDA                                       140.3      161.0      (12.9)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    (in millions $)                             YTD/09     YTD/08   % change
    -------------------------------------------------------------------------
    EBITDA (continuing operations)               322.5      340.0       (5.1)
    Wireless transition and AWS spectrum
     auction costs                               (13.7)     (10.3)      33.0
    Restructuring and other costs                (18.8)         -        n.m.
                                               ------------------------------
    EBITDA                                       290.0      329.7      (12.0)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Our EBITDA from continuing operations was $159.3 million this quarter and
$322.5 million on a year to date basis. Solid performance by our growth
services portfolio has continued in the three and six months ended June 30,
2009 with increased revenues from our wireless, digital television and
consumer Internet services, as well as double-digit growth in revenues from
our converged IP services. However, reduced business from Rogers and AT&T,
lower cross-border long distance volumes and the impact of a slowing economy
on our Enterprise Solutions division primarily offset these gains. We continue
to closely monitor the effects of the current economy on our industry by
focusing on our management of our cost structure, revenue retention and
prudent capital spending, while progressing with our long-term strategic
objectives to increase revenues from growth services and create efficiencies
in all areas of our business.
    Lower consolidated EBITDA was primarily driven by higher year-over-year
restructuring costs, and the costs associated with the transition away from
Bell Mobility to new suppliers and our wireless platform.
    Our cost reduction program is ahead of schedule and delivering more
savings than originally forecasted and as a result, we increased our initial
cost savings target for 2009 of $35 million to $45 million to the range of $50
million to $60 million. As at June 30, 2009, we generated $27.3 million in
annualized savings and have re-engineered and streamlined production processes
to improve capacity output. At the end of June 2009, 200 of the 330 announced
position reductions have been completed. We expect our restructuring costs for
2009 to be approximately $25 million to $35 million.
    Additionally, due to the early success of our initial cost reduction
program, we were able to start on another phase of our cost reduction program
that targets additional areas of our business that were not reviewed in our
previous initiatives. We have not yet quantified the annualized savings this
new program will generate, but believe that there are significant
opportunities to streamline and gain efficiencies from these areas of the
business later in 2009 and in 2010.


    
    EPS
    -------------------------------------------------------------------------
    (in $)                                       Q2/09      Q2/08   % change
    -------------------------------------------------------------------------
    EPS (continuing operations)                   0.67       0.81      (17.3)
    Wireless transition costs and AWS
     spectrum auction costs                      (0.07)     (0.10)     (30.0)
    Restructuring and other costs                (0.13)         -        n.m.
    Future tax rate adjustment                       -      (0.12)       n.m.
                                               ------------------------------
    Basic EPS                                     0.47       0.59      (20.3)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    (in $)                                      YTD/09     YTD/08   % change
    -------------------------------------------------------------------------
    EPS (continuing operations)                   1.38       1.65      (16.4)
    Wireless transition and AWS spectrum
     auction costs                               (0.14)     (0.10)      40.0
    Future tax rate adjustment                       -      (0.12)       n.m.
    Restructuring and other costs                (0.20)         -        n.m.
                                               ------------------------------
    Basic EPS                                     1.04       1.43      (27.3)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Note: EPS for the three and six months ended June 30 is based on weighted
    average shares outstanding of 64.7 million for 2009, and 64.6 million for
    2008.
    

    On a year-over-year basis, EPS from continuing operations decreased by
17.3% in the second quarter and 16.4% year to date as a result of lower EBITDA
and higher debt charges. Our debt charges are up due to our decision to issue
long-term debt at attractive rates. These rates are higher than short-term
rates but represent excellent financing costs for us.
    Basic EPS decreased to $0.47 and $1.04 in the second quarter and first
six months of 2009. This performance reflects impacts of the costs to
transition certain wireless service requirements away from Bell Mobility to
new suppliers and our wireless platform, and restructuring costs related to
our cost saving initiatives as well as a tax rate adjustment which occurred in
the second quarter of 2008.

    
    OPERATING EXPENSES


    Operations Expense (continuing operations)
    -------------------------------------------------------------------------
    (in millions $)                               2009       2008   % change
    -------------------------------------------------------------------------
    Q2                                           305.0      315.1       (3.2)
    YTD                                          624.7      625.2       (0.1)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Operating expenses in the second quarter and year to date were down 3.2%
and 0.1%, respectively, as compared to the same periods in the prior year.
These decreases are primarily due to our continued focus on cost reduction
initiatives in both salaries and benefits, and indirect expenses. These
savings are partly offset by higher direct costs resulting from an increase in
lower margin revenues in our Enterprise Solutions division, foreign exchange
rate changes and a reduction in high-margin revenues from Rogers and AT&T.
    We are continuing to make progress with our 2009 cost reduction program,
where we expect to achieve $50 million to $60 million in cost savings or $15
million more than originally forecasted for 2009. As at June 30, 2009, we
generated $27.3 million in annualized savings and have re-engineered and
streamlined production processes to improve capacity output. In addition, we
are seeing success with our cost reduction program that is focusing on areas
of our business not impacted by the previous initiatives and expect to
generate further savings in the future. At the end of June 2009, 200 of the
330 announced position reductions have been completed.


    
    Restructuring and Transition
    -------------------------------------------------------------------------
    (in millions $)                               2009       2008   % change
    -------------------------------------------------------------------------
    Q2                                            19.0       10.3       84.5
    YTD                                           32.5       10.3        n.m.
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    We incurred restructuring costs in the amounts of $12.7 million and $18.8
million in the second quarter and year to date, respectively. These costs
represent a continuation of the cost reduction initiative that we commenced in
the fourth quarter of 2008 with the aim to achieve process improvements and
further cost reductions, and include facilities consolidation of select real
estate. In addition, costs of $6.3 million and $13.7 million in the three and
six months ended June 30, 2009, respectively, were incurred to transition
certain wireless service requirements away from Bell Mobility to new suppliers
and our wireless platform. This is outlined in Note 2 to our consolidated
financial statements.


    
    Amortization Expense
    -------------------------------------------------------------------------
    (in millions $)                               2009       2008   % change
    -------------------------------------------------------------------------
    Q2                                            81.1       82.2       (1.3)
    YTD                                          163.1      162.7        0.2
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Amortization expense was lower in the second quarter this year due to a
decrease in the composite rate. Year to date, increases in property, plant and
equipment, offset by a decrease in the composite rate and a charge taken in
the first quarter of 2009 related to an accounting change in AAA Alarm Systems
Ltd., resulted in a slight increase in amortization expense.


    
    Other Income
    -------------------------------------------------------------------------
    (in millions $)                               2009       2008   % change
    -------------------------------------------------------------------------
    Q2                                             2.9        1.0        n.m.
    YTD                                            4.4        5.1      (13.7)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Other income was higher in the second quarter of 2009 primarily due to
the gain of $3.1 million, which includes a cash payment we received of
approximately $1.5 million, related to the sale of our alarm customers outside
of Manitoba in exchange for Manitoba-based customers of SecurTek Monitoring 
Solutions Inc. ("SecurTek"), a wholly-owned subsidiary of Saskatchewan
Telecommunications. This transaction will enhance our strategic position as
the leading communications provider in the province of Manitoba by allowing us
to concentrate on our alarm services in our home market. Offsetting this gain
on a year to date basis, is the impact of gains on foreign exchange hedging
contracts last year in the first quarter, which did not occur this year.


    
    Debt Charges
    -------------------------------------------------------------------------
    (in millions $)                               2009       2008   % change
    -------------------------------------------------------------------------
    Q2                                            15.7       12.1       29.8
    YTD                                           28.8       24.6       17.1
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Debt charges increased in the second quarter primarily due to debt
issuance costs as well as higher interest rates and higher average debt
levels. We refinanced $350 million in debt on May 11, 2009 in a difficult
market. These rates, while attractive, are higher than the debt that was
refinanced and accordingly, results in higher debt costs in 2009.


    
    Income Tax Expense
    -------------------------------------------------------------------------
    (in millions $)                               2009       2008   % change
    -------------------------------------------------------------------------
    Q2                                            16.3       29.7      (45.1)
    YTD                                           35.4       55.3      (36.0)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    As a result of our acquisition of Allstream Inc. in 2004 along with its
income tax loss carryforwards, we were able to reduce our taxable income
without utilizing our substantial and growing CCA pools. These tax loss
carryforwards were fully-utilized by the end of the second quarter of 2009.
However, by utilizing our deferred CCA deduction, we project that we will not
pay cash taxes before 2015.
    Income tax expense decreased by 45.1% or $13.4 million to $16.3 million
in the second quarter of 2009 and 36.0% or $19.9 million on a year to date
basis as compared to the same periods in 2008. These decreases were driven
primarily by lower income before tax and a $7.5 million charge related to a
change in provincial tax rates that was required in the second quarter of
2008.
    On March 26, 2009, the province of Ontario announced plans to reduce its
corporate tax rate from the current rate of 14% to 10% by 2013. When the new
rates are substantively enacted, the effect will be to reduce the book value
of our future tax asset by $17.5 million.

    CONSOLIDATED QUARTERLY DATA

    Unaudited quarterly financial data for our eight most recently completed
quarters is presented below:


    
    -------------------------------------------------------------------------
    (in millions $, except earnings        Q2        Q1        Q4        Q3
     per share)                           2009      2009      2008      2008
    -------------------------------------------------------------------------
    Operating revenues                   464.3     482.9     476.4     479.9
    Operating income                      59.2      67.7      50.3      66.6
    Net income and comprehensive income   30.1      37.0      13.7      38.1
    Earnings per share                    0.47      0.57      0.21      0.59
    Diluted earnings per share            0.47      0.57      0.21      0.59
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    (in millions $, except earnings        Q2        Q1        Q4        Q3
     per share)                           2008      2008      2007      2007
    -------------------------------------------------------------------------
    Operating revenues                   486.4     478.8     489.2     475.9
    Operating income                      78.8      88.2      72.1      82.5
    Net income and comprehensive income   38.0      54.2      14.3      45.5
    Earnings per share                    0.59      0.84      0.22      0.70
    Diluted earnings per share            0.58      0.83      0.22      0.70
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Our consolidated financial results for the eight most recently completed
quarters reflect the ongoing performance of our business in the marketplace,
as well as the following:

    -   The recording of $7.4 million and $6.3 million in costs in relation
        to the transition of certain wireless service requirements away from
        Bell Mobility to new suppliers and to our wireless platform in the
        first and second quarters of 2009, respectively. We recorded costs in
        the amounts of $10.3 million, $7.5 million and $9.3 million in the
        second, third and fourth quarters of 2008, respectively, for this
        transition and costs associated with the AWS spectrum auction.

    -   The recognition of restructuring costs for our ongoing cost reduction
        initiatives including the amount of $5.4 million in the first quarter
        of 2009, which is related to the continuation of the cost reduction
        initiative that we commenced in the fourth quarter of 2008;
        restructuring costs in the amount of $12.3 million in the second
        quarter of 2009; restructuring costs related to our 2008 efficiency
        program in the amounts of $7.1 million and $13.7 million in the third
        and fourth quarters of 2008, respectively; and restructuring costs
        for our 2007 efficiency program in the third and fourth quarters of
        2007 in the amounts of $2.3 million and $3.0 million, respectively.

    -   An adjustment in the amount of $25.7 million for a reduction to our
        tax asset valuation allowance in the fourth quarter of 2007.

    -   The recording of charges to reflect decreases in the value of our
        income tax asset as a result of reductions in future income tax rates
        or rate differential on temporary differences, consisting of
        $7.5 million and $9.0 million in the second and fourth quarters of
        2008, respectively, and $49.6 million in the fourth quarter of 2007.

    LIQUIDITY AND CAPITAL RE

SOURCES ------------------------------- Cash Flows from Operating Activities ------------------------------------------------------------------------- (in millions $) 2009 2008 $ change ------------------------------------------------------------------------- Q2 58.1 141.0 (82.9) YTD 103.4 234.8 (131.4) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash flows from operating activities refer to cash we generate from our normal business activities. The decrease in cash flows from operating activities in the second quarter and year to date are primarily due to lower utilization of our accounts receivable securitization program resulting in decreased cash from working capital, decreased consolidated EBITDA, increased pension solvency funding, increased deferred wireless costs and increased debt charges. Cash Flows used in Investing Activities ------------------------------------------------------------------------- (in millions $) 2009 2008 $ change ------------------------------------------------------------------------- Q2 69.9 70.3 (0.4) YTD 127.1 129.2 (2.1) ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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 declined in the second quarter primarily due to the proceeds from the transaction with SecurTek, offset by the timing of capital expenditures. Year to date, cash flows used in investing activities declined primarily due to the impact of our acquisition of ICU Technologies Inc. in 2008 and the proceeds from the transaction with SecurTek, which were offset by the timing of capital expenditures. Our capital expenditures from continuing operations in the second quarter of 2009 were $63.3 million as compared to $70.1 million in the same quarter in 2008 and on a year to date basis were $119.3 million as compared to $124.9 million. Free Cash Flow ------------------------------------------------------------------------- (in millions $) Q2/09 Q2/08 % change ------------------------------------------------------------------------- Free cash flow (continuing operations) 59.9 72.4 (17.3) Restructuring and other costs (12.7) - n.m. Pension solvency funding (8.8) (7.5) 17.3 Wireless evolution capital expenditures (7.5) - n.m. Wireless transition costs and AWS spectrum auction costs (6.3) (10.3) (38.8) Restructuring capital expenditures (0.4) - n.m. ------------------------------ Consolidated free cash flow 24.2 54.6 (55.7) ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- (in millions $) YTD/09 YTD/08 % change ------------------------------------------------------------------------- Free cash flow (continuing operations) 128.6 151.1 (14.9) Restructuring and other costs (18.8) - n.m. Pension solvency funding (17.5) (11.4) 53.5 Wireless transition and AWS spectrum auction costs (13.7) (10.3) 33.0 Wireless evolution capital expenditures (7.5) - n.m. Restructuring capital expenditures (1.0) - n.m. ------------------------------ Consolidated free cash flow 70.1 129.4 (45.8) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Free cash flow refers to cash flow from operating activities, less capital expenditures, and excluding changes in working capital. Year-over-year decreases in free cash flow from continuing operations in the three and six months ended June 30, 2009 primarily resulted from lower EBITDA from continuing operations, increased deferred wireless costs and higher debt charges which were partially offset by lower capital expenditures. Consolidated free cash flow decreased to $24.2 million and $70.1 million in the second quarter and first six months of this year, respectively, and includes items not from continuing operations as detailed in the table above. Cash Flows from (used in) Financing Activities ------------------------------------------------------------------------- (in millions $) 2009 2008 $ change ------------------------------------------------------------------------- Q2 23.1 (65.0) 88.1 YTD 24.2 (107.1) 131.3 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Financing activities refer to actions we undertake to fund our operations through equity capital and borrowings. The year-over-year increases in cash flows from financing activities are due primarily to the issuance of long-term debt in the second quarter of this year which was partly offset by repayment of notes payable. Credit Facilities ------------------------------------------------------------------------- utilized at June 30, (in millions $) capacity 2009 ------------------------------------------------------------------------- Medium term note program 350.0 350.0 Accounts receivable securitization 150.0 75.0 Revolving credit facility 350.0 106.9 --------------------- Total 850.0 531.9 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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. We were one of the first corporate issuers in the telecommunications industry to successfully complete a medium term note offering in 2009 following challenging market conditions in the corporate debt market. On May 11, 2009, we issued $350 million of medium term notes which fully-utilized our $350 million medium term note program. This issue consisted of $100 million of three-year notes and $250 million of seven-year notes, with coupon rates of 5.05% and 6.65%, respectively. We intend to renew our medium term note program in the third quarter of 2009. Upon the issuance of our medium term notes, our revolving credit facility was decreased from $600.0 million to $350.0 million, of which $150.0 million is available to back-stop our commercial paper program. In addition to these programs and facilities, we have an accounts receivable securitization program of $150.0 million. As at June 30, 2009, we utilized $75.0 million of our accounts receivable securitization program, and $106.9 million of our revolving credit facility due to $106.9 million in undrawn letters of credit. Of this amount, $80.7 million represents letters of credit issued under the Solvency Funding Relief Regulations enacted in 2006 under the Pension Benefits Standards Act, 1985 (Canada), which permit the extension of pension solvency payments from a five-year amortization period to a 10-year amortization period for our defined benefit pension plans. Capital Structure ------------------------------------------------------------------------- June December (in millions $) 30, 2009 31, 2008 ------------------------------------------------------------------------- Cash and cash equivalents (7.0) (6.5) Proceeds from accounts receivable securitization 75.0 127.0 Notes payable - 95.0 Capital lease obligations, including current portion 19.1 18.8 Long-term debt, including current portion 852.4 650.2 -------------------- Total debt 939.5 884.5 Shareholders' equity 1,365.8 1,382.0 -------------------- Total capitalization 2,305.3 2,266.5 -------------------- -------------------- Debt to capitalization 40.8% 39.0% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Our capital structure illustrates the amount of our assets that are financed by debt versus equity. Our debt to total capitalization ratio of 40.8% as at June 30, 2009 continues to represent excellent financial strength and flexibility. Credit Ratings ------------------------------------------------------------------------- S&P - Senior debentures BBB+ ------------------------------------------------------------------------- S&P - Commercial paper A-2 ------------------------------------------------------------------------- DBRS - Senior debentures BBB ------------------------------------------------------------------------- DBRS - Commercial paper R-2 (high) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Two leading rating agencies, Standard & Poor's ("S&P") and DBRS Limited ("DBRS"), analyze us and assign ratings based on their assessments. We consistently have been assigned solid investment grade credit ratings. In conjunction with our most recent debt offering, S&P confirmed our credit ratings on our long-term corporate credit and senior unsecured debt of "BBB+", and our commercial paper of "A-2". The outlook remained unchanged at negative. In addition, DBRS confirmed our credit ratings at "BBB" on our senior debentures and "R-2 (high)" on our commercial paper, and maintained its stable outlook. Outstanding Share Data as at July 28, 2009 Authorized: - Unlimited number of Preference Shares of two classes issuable in one or more series - Unlimited number of Common Shares of a single class ------------------------------------------------------------------------- Issued: ------------------------------------------------------------------------- Book Value Shares Number (in millions $) ------------------------------------------------------------------------- Common 64,659,917 1,266.8 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Stock options: ------------------------------------------------------------------------- Weighted Average Exercise Price Options Number Per Share ------------------------------------------------------------------------- Outstanding 2,454,762 $40.79 Exercisable 1,202,875 $41.28 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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 that were disclosed in our first quarter 2009 interim MD&A, and our 2008 annual MD&A. For additional details, please consult our first quarter 2009 interim MD&A, and our 2008 annual MD&A, which are available on our Web site at www.mtsallstream.com. CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS --------------------------------------------- Our critical accounting estimates and assumptions remain substantially unchanged from those that were disclosed in our first quarter 2009 interim MD&A, and our 2008 annual MD&A. For additional details, please consult our first quarter 2009 interim MD&A, and our 2008 annual MD&A, which are available on our Web site at www.mtsallstream.com. CHANGES IN ACCOUNTING POLICIES, INCLUDING INITIAL ADOPTION ---------------------------------------------------------- Our accounting policies, including initial adoption, remain substantially unchanged from those that were disclosed in our first quarter 2009 interim MD&A, and our 2008 annual MD&A. For additional details, please consult our first quarter 2009 interim MD&A, and our 2008 annual MD&A, which are available on our Web site at www.mtsallstream.com. IFRS In February 2008, the Canadian Accounting Standards Board confirmed January 1, 2011 as the date IFRS will replace Canadian GAAP for publicly accountable enterprises. Currently, there are a number of areas where accounting standards under IFRS are different from those under Canadian GAAP. Also, because IFRS continues to evolve, it is expected that IFRS at the transition date will differ from current IFRS. Our first financial statements under IFRS will be for periods commencing January 1, 2011. We commenced our IFRS changeover project in 2008 and have developed a detailed IFRS changeover plan. A project governance structure has been established, which includes a steering committee, consisting of senior management from our finance, information technology ("IT"), network services, enterprise risk management and treasury departments. Our project team includes certain dedicated resources, employees who contribute as required by the project plan, as well as external consultants who have been engaged for project management and technical accounting expertise. The project team reports regularly to the Audit Committee of the Board of Directors of MTS regarding the status of the project and implications of the changeover to IFRS. Throughout the execution of our IFRS plan, there is ongoing training and communication to affected employees and other internal and external stakeholders. Our IFRS changeover plan consists of the following four phases. Phase 1: Diagnostic Gap Assessment Phase 1 consists of a high-level diagnostic gap and impact analysis of the differences between Canadian GAAP and IFRS applicable to us. The key activities of Phase 1 include: - Identification of significant technical accounting and disclosure differences; - Identification of key IFRS accounting policy alternatives; and - Identification of major operational and system impacts. We completed Phase 1 of our IFRS changeover plan in June 2008. Phase 2: Design and Planning Phase 2 entails a detailed analysis of relevant Canadian GAAP and IFRS differences, as well as an assessment of the implications of implementing new standards. The key activities of Phase 2 include: - Detailed evaluation of accounting and disclosure options, including review of estimated impacts on our financial position and results of operations, key performance indicators, and business activities; - Selection of IFRS-compliant accounting policies, including IFRS 1 policy choices and continuing accounting policies; - Assessment of implications to systems, processes and controls in sufficient detail to support solution development in Phase 3; and - Identification of a dual reporting solution to maintain parallel records during 2010. We have substantially completed Phase 2 activities to assess and select accounting policies. The detailed evaluation of the impacts of certain accounting policy options is ongoing, along with the selection of these accounting policies. As IFRS continues to evolve, further evaluation may also be required. We have identified a dual reporting solution. Phase 3: Solution Development During Phase 3, we will design and test solutions that will be implemented as a result of the changeover to IFRS. The key activities of Phase 3 include: - Design, development and execution of testing strategies for changes to accounting and business processes and IT solutions; - Design, development and execution of a testing strategy for our dual reporting solution; and - Revision of internal controls, as required, resulting from changes to ongoing accounting policies and the one-time adjustments to our opening balance sheet on changeover to IFRS. We have started certain Phase 3 activities, including the design of a solution for dual reporting in 2010. We also have commenced design and development activities related to IT system changes resulting from the changes in accounting standards for property, plant and equipment. We expect that Phase 3 will be substantially completed by the end of the fourth quarter of 2009. Phase 4: Implementation During Phase 4, we will implement IFRS-compliant accounting policies and related systems, processes and controls. The key activities of Phase 4 include: - Implementation of changes to accounting policies; - Preparation of IFRS-compliant opening balance sheet as at January 1, 2010; - Preparation of IFRS-compliant financial statements and related note disclosures; and - Implementation of changes to systems, processes and controls. Phase 4 of the IFRS changeover plan is expected to commence in the third quarter of 2009 and will continue until the end of the first quarter of 2011. During these phases of our IFRS project, we will complete the necessary work required to quantify the impact of the changeover to IFRS on our financial position and results of operations. We will monitor changes to IFRS and assess the impacts that these new standards will have on our financial results and on our IFRS changeover project. The financial impacts on changeover to IFRS may be material to our financial statements, and we expect the impacts to be of similar nature to our competitors. Based on our work to date, we believe that the areas of highest impact are property, plant and equipment and employee benefits. RISKS AND UNCERTAINTIES ----------------------- Our risks and uncertainties remain substantially unchanged from those that were disclosed in our first quarter 2009 interim MD&A, and our 2008 annual MD&A, except as noted below. For additional details, please consult our first quarter 2009 interim MD&A, and our 2008 annual MD&A, which are available on our Web site at www.mtsallstream.com. Bell Mobility Agreement We and Bell Mobility have been parties to a wireless alliance that addresses competition and reciprocal services in our respective territories and provides us with access to various wireless-related platforms and products. On March 5, 2008, we provided notice of termination to Bell Mobility of certain wireless agreements relating to the framework underpinning this wireless alliance. These agreements provide for the continuation of services following such notice during a notice period and, thereafter, during a transition period. Bell Mobility disputes that it has any remaining obligations under these agreements. We have commenced formal proceedings to resolve this disagreement. Notwithstanding this dispute, we entered into a transition agreement with Bell Mobility to ensure continuity of services to our customers, while reserving all rights to our respective entitlements under these agreements. Effective September 29, 2008, we started activating new wireless customer additions and handset upgrades on new service platforms independent of Bell Mobility. As at March 31, 2009, we migrated all existing wireless customers to our new service platform. In accordance with the transition agreement we signed with Bell Mobility, we gave Bell Mobility notice of termination of that agreement in December 2008; such termination was effective June 24, 2009. We incurred significant one-time costs of transitioning certain wireless services requirements away from Bell Mobility to new suppliers and to our wireless platform, as well as the costs associated with the AWS spectrum auction. As noted above, we are disputing certain costs being charged by Bell Mobility in relation to the transition away from Bell Mobility. We are of the opinion that such costs are recoverable from Bell Mobility; however, there is no certainty that such costs will be recovered. Changes in Telecommunications Policy and CRTC Regulation The telecommunications and broadcast industries in which we operate are federally regulated. We operate as both an incumbent local exchange carrier ("ILEC") in Manitoba and as a competitive local exchange carrier nationally. In addition, pursuant to Broadcasting Decision CRTC 2002-235, the CRTC granted us a Class 1 regional broadcasting distribution license to operate as a broadcasting distribution undertaking serving Winnipeg and the surrounding areas. Current regulatory proceedings and policy issues, which present significant risk and uncertainty on our business, are described below. Essential Facilities On March 3, 2008, the CRTC issued Revised regulatory framework for wholesale services and definition of essential service, Telecom Decision CRTC 2008-17, in which it adopted a new broadened definition of an essential service or facility as one that (i) is required by competitors to provide a retail telecommunications service; (ii) is controlled by a company that could use its market power to lessen or prevent competition; and (iii) provides a functionality that would not be practical or feasible for competitors to duplicate. In addition, the CRTC adopted six categories of mandated competitor services, with differing approaches as to when and how mandated access could or, in the case of one category of services will, be phased out. We applied to have the decision reviewed and varied with respect to the treatment of Ethernet and asymmetric digital subscriber line ("ADSL"). On December 11, 2008 and January 26, 2009 in Telecom Decision CRTC 2008-118 pertaining to Ethernet and Telecom Decision 2009-34 pertaining to ADSL, the CRTC dismissed our applications, and initiated a further proceeding concerning the appropriate unbundling of ADSL. On December 11, 2008, we expressed our intention to petition Cabinet, which is the next statutorily prescribed level of appeal. On March 11, 2009, we filed our petition with the federal government, seeking to have Ethernet and ADSL access and transport facilities controlled by the incumbents treated as essential and made available to competitors on a mandated basis, at cost-based rates. Bell Canada and TELUS Communications Inc. also filed separate petitions on that date seeking relief which would give them further flexibility to discriminate among or deny competitors access to high-speed network inputs. The government is expected to rule on the petitions by the end of 2009. On May 8, 2009, by way of Telecom Notice of Consultation CRTC 2009-261, the CRTC initiated a further proceeding merging its earlier proceeding concerning unbundled ADSL into a broader proceeding examining the appropriateness of mandating wholesale high-speed access services to be provided to competitors by incumbents and cable carriers. We will be participating in a public hearing to be held in November 2009. A decision is expected in the first quarter of 2010. Deferral Account On February 16, 2006, the CRTC issued Disposition of funds in the deferral accounts, Telecom Decision CRTC 2006-9 ("Decision 2006-9"). In this decision, the CRTC determined that the funds accumulated in our deferral account should be used for certain reductions in rates for basic local residential services and for certain optional features; for the expansion of broadband services; and for initiatives to improve accessibility to telecommunications services for persons with disabilities. After using approximately $5 million to fund the required rate reductions which came into effect on June 1, 2006, the estimate of the balance to be cleared from our deferral account for the remaining initiatives is approximately $25 million. The final calculation of the balance to be cleared is dependent upon certain other CRTC proceedings. In two subsequent decisions relating to the use of deferral account funds, Telecom Decision CRTC 2007-50 dated July 6, 2007 and Telecom Decision CRTC 2008-1 dated January 17, 2008 ("Decision 2008-1"), the CRTC approved various proposals submitted for the expansion of broadband services in certain rural and remote communities, and for improved access to telecommunications services for persons with disabilities. In Decision 2008-1, the CRTC directed that the remaining balance of the deferral accounts of the ILECs be rebated to residential customers in non-high-cost serving areas. Bell Canada and certain consumer groups have been granted leave to appeal Decision 2006-9 to the Supreme Court of Canada. We intervened in that appeal in support of Bell Canada. The appeal was argued in front of the Supreme Court in March 2009 with a decision expected before the end of the year. The final disposition of deferral account balances will be dependent upon the outcome of these appeals. In the interim, Decision 2006-9 and Decision 2008-1 have been stayed by order of the Supreme Court of Canada. Proposed Unbundled Local Loop Rate Increases On June 2, 2009, Bell Canada and Bell Aliant filed tariff notices with the CRTC that propose to increase monthly and one-time charges for unbundled local loops. We have filed an intervention requesting that the CRTC either dismiss outright the applications or establish a proceeding to validate the cost study methodology utilized in support, and assess the implications of the applications on local exchange services, local competition, price caps, the forbearance framework and the contribution regime. The CRTC has indicated it will review the interventions and reply comments that have been filed and advise as to what further process it will invoke. Pension Solvency Funding We have defined benefit pension plans which provide retirement benefits to our employees. These plans are funded as determined through periodic actuarial valuations. We have completed January 1, 2009 actuarial valuations for our defined benefit pension plans, which are in a deficit position, in accordance with federal pension legislation under the Pension Benefits Standards Act, 1985 (Canada). As one of our defined benefit pension plans is in a surplus position, an actuarial valuation is not required for this plan in 2009. We have two defined benefit pension plans with solvency deficiencies for which a total of $35 million in solvency and special funding payments are expected to be made in 2009. In 2006, we elected to extend the amortization period of our solvency funding payments from five years to 10 years based on the Solvency Funding Relief Regulations. In 2009, we have also extended our solvency funding amortization period from five years to 10 years for one of our defined benefit plans based on the new Solvency Funding Relief Regulation, 2009. In accordance with the requirements of these regulations, we obtain letters of credit, which are amended annually, to guarantee future funding of our registered pension plans. Future solvency funding requirements will depend on the results of annual actuarial funding valuations which are affected by various factors, such as return on plan assets, changes in solvency liability discount rates, and government regulations regarding the requirements associated with solvency valuations. In 2009, the federal government engaged in a public stakeholder consultation process regarding the rules that govern federally regulated pension plans and we participated in this consultation process. The outcome of the public consultation process may impact our future solvency funding payments. 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 June 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. THIRD QUARTER DIVIDEND On August 6, 2009, the Board of Directors of MTS declared a quarterly cash dividend of $0.65 per share. The third quarter dividend is payable on October 15, 2009 to shareholders of record at the close of business on September 15, 2009. The third 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 which reduce income tax otherwise payable. Notes: 1. Supplementary financial information is available in the Investors section of the MTS Web site at www.mtsallstream.com. 2. MTS's second quarter 2009 conference call with the investment community is scheduled for 9:00 a.m. Eastern time on August 7, 2009. The dial-in number is 1-800-732-0232. A live audio Webcast of the investor conference call can be accessed by visiting the Investors section of the MTS Web site (www.mtsallstream.com). A replay of the conference call will be available until midnight August 18, 2009 and can be accessed by dialing 1-877-289-8525 or 1-416-640-1917 (access code 21310275 followed by the number sign). The audio Webcast will be archived on MTS's Web site. MANITOBA TELECOM SERVICES INC. CONSOLIDATED STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME (unaudited) For the periods ended June 30 Three months ended Six months ended ------------------------------------------------------------------------- (in millions, except earnings per share) 2009 2008 2009 2008 ------------------------------------------------------------------------- Operating revenues $ 464.3 $ 486.4 $ 947.2 $ 965.2 ------------------------------------------------------------------------- Operating expenses Operations 305.0 315.1 624.7 625.2 ------------------------------------------------------------------------- Restructuring and transition (Note 2) 19.0 10.3 32.5 10.3 ------------------------------------------------------------------------- Amortization 81.1 82.2 163.1 162.7 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 405.1 407.6 820.3 798.2 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operating income 59.2 78.8 126.9 167.0 ------------------------------------------------------------------------- Other income 2.9 1.0 4.4 5.1 ------------------------------------------------------------------------- Debt charges (15.7) (12.1) (28.8) (24.6) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Income before income taxes 46.4 67.7 102.5 147.5 ------------------------------------------------------------------------- Income tax expense (recovery) Current (0.1) 0.1 0.2 0.1 ------------------------------------------------------------------------- Future 16.4 29.6 35.2 55.2 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 16.3 29.7 35.4 55.3 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net income and comprehensive income for the period $ 30.1 $ 38.0 $ 67.1 $ 92.2 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Basic earnings per share (Note 7) $ 0.47 $ 0.59 $ 1.04 $ 1.43 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Diluted earnings per share (Note 7) $ 0.47 $ 0.58 $ 1.04 $ 1.41 ------------------------------------------------------------------------- ------------------------------------------------------------------------- MANITOBA TELECOM SERVICES INC. CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (unaudited) For the periods ended June 30 Three months ended Six months ended ------------------------------------------------------------------------- (in millions) 2009 2008 2009 2008 ------------------------------------------------------------------------- Retained earnings, beginning of period $ 91.8 $ 133.0 $ 96.8 $ 120.8 ------------------------------------------------------------------------- Net income 30.1 38.0 67.1 92.2 ------------------------------------------------------------------------- Dividends declared (42.0) (42.0) (84.0) (84.0) ------------------------------------------------------------------------- Retained earnings, end of period $ 79.9 $ 129.0 $ 79.9 $ 129.0 ------------------------------------------------------------------------- ------------------------------------------------------------------------- MANITOBA TELECOM SERVICES INC. CONSOLIDATED BALANCE SHEETS (unaudited) June December (in millions) 30, 2009 31, 2008 ------------------------------------------------------------------------- Assets Current assets Cash and cash equivalents $ 7.0 $ 6.5 ------------------------------------------------------------------------- Accounts receivable (Note 3) 117.5 62.2 ------------------------------------------------------------------------- Future income taxes 91.8 90.5 ------------------------------------------------------------------------- Other current assets 78.9 64.0 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 295.2 223.2 Capital assets (Note 4) 1,612.7 1,616.7 ------------------------------------------------------------------------- Other assets 374.9 334.6 ------------------------------------------------------------------------- Future income taxes 399.7 436.8 ------------------------------------------------------------------------- Goodwill 40.3 41.7 ------------------------------------------------------------------------- ------------------------------------------------------------------------- $ 2,722.8 $ 2,653.0 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Liabilities and shareholders' equity Current liabilities Accounts payable and accrued liabilities $ 325.8 $ 351.6 ------------------------------------------------------------------------- Advance billings and payments 59.3 51.4 ------------------------------------------------------------------------- Current portion of long-term debt (Note 6) - 220.0 ------------------------------------------------------------------------- Notes payable (Note 5) - 95.0 ------------------------------------------------------------------------- Current portion of capital lease obligations 5.2 3.8 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 390.3 721.8 Long-term debt (Note 6) 852.4 430.2 ------------------------------------------------------------------------- Long-term portion of capital lease obligations 13.9 15.0 ------------------------------------------------------------------------- Deferred employee benefits 43.4 44.2 ------------------------------------------------------------------------- Other long-term liabilities 55.9 58.1 ------------------------------------------------------------------------- Future income taxes 1.1 1.7 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 1,357.0 1,271.0 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Shareholders' equity Share capital (Note 8) 1,266.8 1,265.8 ------------------------------------------------------------------------- Contributed surplus 19.1 19.4 ------------------------------------------------------------------------- Retained earnings 79.9 96.8 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 1,365.8 1,382.0 ------------------------------------------------------------------------- ------------------------------------------------------------------------- $ 2,722.8 $ 2,653.0 ------------------------------------------------------------------------- ------------------------------------------------------------------------- MANITOBA TELECOM SERVICES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) For the periods ended June 30 Three months ended Six months ended ------------------------------------------------------------------------- (in millions) 2009 2008 2009 2008 ------------------------------------------------------------------------- Cash flows from operating activities Net income $ 30.1 $ 38.0 $ 67.1 $ 92.2 ------------------------------------------------------------------------- Add items not affecting cash Amortization 81.1 82.2 163.1 162.7 ------------------------------------------------------------------------- Future income taxes 16.4 29.6 35.2 55.2 ------------------------------------------------------------------------- Deferred wireless costs (13.3) (9.6) (25.4) (19.5) ------------------------------------------------------------------------- Pension funding and net pension credit (16.8) (13.4) (33.6) (24.9) ------------------------------------------------------------------------- Gain on sale of intangible assets (3.1) - (3.1) - ------------------------------------------------------------------------- Other, net 1.0 (2.1) (5.4) (11.4) ------------------------------------------------------------------------- Changes in non-cash working capital (37.3) 16.3 (94.5) (19.5) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash flows from operating activities 58.1 141.0 103.4 234.8 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash flows from investing activities Capital expenditures, net (71.2) (70.1) (127.8) (124.9) ------------------------------------------------------------------------- Acquisition - - - (4.0) ------------------------------------------------------------------------- Sale of intangible assets, net 1.4 - 1.4 - ------------------------------------------------------------------------- Other, net (0.1) (0.2) (0.7) (0.3) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash flows used in investing activities (69.9) (70.3) (127.1) (129.2) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash flows from financing activities Dividends paid (42.0) (42.0) (84.0) (84.0) ------------------------------------------------------------------------- Issuance of long-term debt 425.0 - 425.0 - ------------------------------------------------------------------------- Repayment of long-term debt (150.0) (89.7) (220.0) (89.7) ------------------------------------------------------------------------- (Repayment) issuance of notes payable, net (207.0) 70.0 (95.0) 70.0 ------------------------------------------------------------------------- Issuance of share capital (Note 8) - 0.2 0.8 0.2 ------------------------------------------------------------------------- Other, net (2.9) (3.5) (2.6) (3.6) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash flows from (used in) financing activities 23.1 (65.0) 24.2 (107.1) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Change in cash and cash equivalents 11.3 5.7 0.5 (1.5) ------------------------------------------------------------------------- Cash and cash equivalents (bank indebtedness), beginning of period (4.3) (17.3) 6.5 (10.1) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash and cash equivalents (bank indebtedness), end of period $ 7.0 $ (11.6) $ 7.0 $ (11.6) ------------------------------------------------------------------------- ------------------------------------------------------------------------- MANITOBA TELECOM SERVICES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) For the three months ended June 30, 2009 and 2008 (All financial amounts are in $ millions, except where noted.) ------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The interim consolidated financial statements of Manitoba Telecom Services Inc. (the "Company") have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP"). These interim consolidated financial statements have been prepared using the same accounting policies and methods of their application as the Company's audited consolidated financial statements for the year ended December 31, 2008, except as described in Note 4. These interim consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 2008. 2. RESTRUCTURING AND TRANSITION During the six months ended June 30, 2009 and 2008, the Company recorded net restructuring and transition expenses as follows: --------------------------------------------------------------------- Three months ended Six months ended --------------------------------------------------------------------- 2009 2008 2009 2008 --------------------------------------------------------------------- Workforce 8.2 - 8.1 - --------------------------------------------------------------------- Wireless transition 6.3 10.3 13.7 10.3 --------------------------------------------------------------------- Other 4.5 - 10.7 - --------------------------------------------------------------------- 19.0 10.3 32.5 10.3 --------------------------------------------------------------------- --------------------------------------------------------------------- The liability for restructuring costs as at June 30, 2009 is as follows: --------------------------------------------------------------------- Balance December 31, 2008 11.3 --------------------------------------------------------------------- 2009 restructuring costs 20.3 --------------------------------------------------------------------- Less: --------------------------------------------------------------------- Cash payments (16.4) --------------------------------------------------------------------- Reversal of previously recorded restructuring costs (1.5) --------------------------------------------------------------------- Balance June 30, 2009 13.7 --------------------------------------------------------------------- --------------------------------------------------------------------- Restructuring activities in 2009 represent a continuation of the cost reduction initiative which commenced in the fourth quarter of 2008 aimed at achieving process improvements and further cost reductions. The costs recorded in 2009 include severance and other employee- related expenses, costs to review and improve efficiencies in current processes, as well as real estate facility consolidation charges. The workforce costs include severance associated with the reduction of approximately 160 positions in the Enterprise Solutions division in the second quarter of the year. These charges were offset partly by the reversal of previously recorded restructuring expenses largely as a result of successful internal redeployment efforts. The Company also recorded other non-recurring costs of $1.1 million relating to certain regulatory proceedings and certain costs associated with the transition from Canadian GAAP to International Financial Reporting Standards. Wireless transition includes costs of transitioning certain wireless service requirements away from Bell Mobility to new suppliers and to the Company's wireless platform. In 2008, this amount also included costs associated with the advanced wireless services spectrum auction. 3. ACCOUNTS RECEIVABLE SECURITIZATION Under the terms of the Company's accounts receivable securitization program, the Company has the ability to sell, on a revolving basis, an undivided ownership interest in its accounts receivable to a securitization trust, up to a maximum of $150.0 million. As a result of selling the interest in certain of the trade receivables on a fully serviced basis, a service liability of $0.2 million has been recognized by the Company as at June 30, 2009. The terms of the Company's accounts receivable securitization program also require the Company to maintain reserve accounts, the fair value of which approximates carrying value. As at June 30, 2009, the Company had received $75.0 million on the sale of its accounts receivable to the trust, which is comprised of the outstanding undivided ownership interest held by the trust of $94.3 million and the reserve accounts of $19.3 million. During the three and six months ended June 30, 2009, the Company recognized a recovery of $0.2 million and $0.4 million, respectively, on previously recorded losses on the sale of accounts receivable, which is recorded in other income. During the three and six months ended June 30, 2009, cash flows received and paid to the trust in revolving period securitizations were $674.2 million and $1,034.7 million, respectively. The key assumptions used to determine the recovery of previously recorded losses on the sale of receivables and the fair values attributed to the retained interest as at June 30, 2009 are as follows: --------------------------------------------------------------------- Annual discount rate 0.72% --------------------------------------------------------------------- Weighted average life of receivables sold (days) 40 --------------------------------------------------------------------- Credit loss ratio 0.58% --------------------------------------------------------------------- Servicing fee liability 1.0% --------------------------------------------------------------------- --------------------------------------------------------------------- 4. Capital Assets Effective January 1, 2009, the Company adopted the recommendations of the Canadian Institute of Chartered Accountants ("CICA") Handbook section 3064 Goodwill and Intangible Assets and the updates to CICA Handbook section 1000 Financial Statement Concepts. This guidance establishes updated standards for the recognition, measurement, presentation and disclosure of intangible and deferred assets. Accordingly, for the 2008 comparatives the Company has reclassified $51.3 million of other long-term assets and $9.5 million of other current assets relating to deferred wireless costs and installation costs to intangible assets. The Company also reclassified specific software costs within capital assets of $129.9 million from property, plant and equipment to intangible assets. The following table provides details of the Company's capital assets: June 30, 2009 December 31, 2008 ------------------------------------------------------------------------- Accumu- Accumu- lated Net lated Net amorti- book amorti- book Cost zation value Cost zation value ------------------------------------------------------------------------- Property, plant and equipment ------------------------------------------------------------------------- Network equipment and outside plant 2,841.4 1,844.4 997.0 2,750.2 1,777.4 972.8 ------------------------------------------------------------------------- General equipment and other 430.7 304.7 126.0 419.1 274.8 144.3 ------------------------------------------------------------------------- Buildings 265.1 148.3 116.8 262.4 142.9 119.5 ------------------------------------------------------------------------- Equipment under capital lease 5.5 0.7 4.8 5.4 0.6 4.8 ------------------------------------------------------------------------- Plant under construction 68.9 - 68.9 91.4 - 91.4 ------------------------------------------------------------------------- Materials and supplies 19.3 - 19.3 21.3 - 21.3 ------------------------------------------------------------------------- Land 6.3 - 6.3 6.3 - 6.3 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 3,637.2 2,298.1 1,339.1 3,556.1 2,195.7 1,360.4 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Intangible assets ------------------------------------------------------------------------- Software 273.4 133.0 140.4 240.0 110.1 129.9 ------------------------------------------------------------------------- Deferred wireless costs 88.9 39.2 49.7 78.3 37.6 40.7 ------------------------------------------------------------------------- Other deferred installation costs 45.2 29.7 15.5 43.7 23.6 20.1 ------------------------------------------------------------------------- Customer contracts and relationships 28.6 12.8 15.8 27.1 13.8 13.3 ------------------------------------------------------------------------- Other contractual relationships 1.3 0.6 0.7 1.3 0.5 0.8 ------------------------------------------------------------------------- Spectrum licenses 48.6 - 48.6 48.6 - 48.6 ------------------------------------------------------------------------- Broadcasting certificate 2.9 - 2.9 2.9 - 2.9 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 488.9 215.3 273.6 441.9 185.6 256.3 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Total 4,126.1 2,513.4 1,612.7 3,998.0 2,381.3 1,616.7 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 5. NOTES PAYABLE The Company has a $350 million bank credit facility with a syndicate of financial institutions which is used for cash management purposes, the issuance of letters of credit and to support the Company's $150 million commercial paper program. As at June 30, 2009, the Company had $106.9 million in undrawn letters of credit outstanding under this facility. The Company paid short-term interest costs of $0.7 million and $2.5 million for the three and six months ended June 30, 2009, respectively. 6. Long-term debt June December 30, 2009 31, 2008 --------------------------------------------------------------------- Medium Term Note, 5.85%, due February 23, 2009 - 70.0 --------------------------------------------------------------------- Medium Term Note, 5.25%, due June 10, 2009 - 150.0 --------------------------------------------------------------------- Medium Term Note, 8.625%, due September 8, 2010 11.9 11.9 --------------------------------------------------------------------- Medium Term Note, 5.20%, due September 27, 2011 220.0 220.0 --------------------------------------------------------------------- Medium Term Note, 5.05%, due May 11, 2012 100.0 - --------------------------------------------------------------------- Loan payable, 6.59%, due May 14, 2014 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 - --------------------------------------------------------------------- --------------------------------------------------------------------- 856.9 651.9 --------------------------------------------------------------------- Less: deferred costs associated with the issuance of long - term debt (4.5) (1.7) --------------------------------------------------------------------- --------------------------------------------------------------------- 852.4 650.2 --------------------------------------------------------------------- Less: current portion of long - term debt - (220.0) --------------------------------------------------------------------- --------------------------------------------------------------------- 852.4 430.2 --------------------------------------------------------------------- --------------------------------------------------------------------- During the three and six months ended June 30, 2009, the Company recorded interest expense on long-term debt, including amortization of debt issue costs of $11.4 million and $20.1 million, respectively. The Company paid interest on long-term debt for the three and six months ended June 30, 2009 of $10.1 million and $18.4 million, respectively. 7. EARNINGS PER SHARE RECONCILIATION The following table provides a reconciliation of the information used to calculate basic and diluted earnings per share: --------------------------------------------------------------------- Six months ended June 30 --------------------------------------------------------------------- 2009 2008 --------------------------------------------------------------------- Net income Basic and diluted 67.1 92.2 --------------------------------------------------------------------- --------------------------------------------------------------------- Weighted average shares outstanding (in millions) Weighted average number of shares outstanding - basic 64.7 64.6 --------------------------------------------------------------------- Dilutive effect of outstanding stock options - 1.0 --------------------------------------------------------------------- Weighted average number of shares outstanding - diluted 64.7 65.6 --------------------------------------------------------------------- --------------------------------------------------------------------- Earnings per share ($) Basic earnings per share 1.04 1.43 --------------------------------------------------------------------- Diluted earnings per share 1.04 1.41 --------------------------------------------------------------------- --------------------------------------------------------------------- 8. SHARE CAPITAL As at June 30, 2009, share capital consists of 64,659,917 issued and outstanding Common Shares (December 31, 2008 - 64,637,917). During the six months ended June 30, 2009, 22,000 stock options to purchase Common Shares were exercised for cash consideration of $0.8 million, of which $1.0 million was credited to share capital and $0.2 million was charged to contributed surplus. 9. EMPLOYEE FUTURE BENEFITS The Company's total net benefit recovery for all of its defined benefit and defined contribution pension plans, supplemental pension arrangements, and other non-pension employee future benefits for the three and six months ended June 30, 2009 is $1.6 million and $3.2 million, respectively. 10. SEGMENTED INFORMATION As at June 30, 2009, the Company had two reportable operating segments: the Consumer Markets division and the Enterprise Solutions division. The Consumer Markets division provides a full range of wireless, high-speed Internet and data, digital television, and wireline voice services to residential and small business customers in Manitoba. The Consumer Markets division also provides alarm monitoring services to small business customers in the western provinces, and Internet, data and voice services to small business customers in Canada. The Enterprise Solutions division provides Internet protocol-based communications, unified communications, voice, and data connectivity services to medium and large business customers in Canada. The Company evaluates performance based on EBITDA (earnings before interest, taxes, amortization, and other income). 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 table provides further segmented information: --------------------------------------------------------------------- Three months ended June 30 --------------------------------------------------------------------- Consumer Enterprise Markets Solutions Other Total --------------------------------------------------------------------- 2009 2008 2009 2008 2009 2008 2009 2008 --------------------------------------------------------------------- Operating revenue External 207.8 204.9 256.5 281.5 - - 464.3 486.4 --------------------------------------------------------------------- Internal 0.1 0.1 0.1 0.1 8.5 8.2 8.7 8.4 --------------------------------------------------------------------- EBITDA 101.8 96.6 38.9 65.5 (0.4) (1.1) 140.3 161.0 --------------------------------------------------------------------- Restructuring and transition 6.3 8.8 12.1 - 0.6 1.5 19.0 10.3 --------------------------------------------------------------------- --------------------------------------------------------------------- --------------------------------------------------------------------- Six months ended June 30 --------------------------------------------------------------------- Consumer Enterprise Markets Solutions Other Total --------------------------------------------------------------------- 2009 2008 2009 2008 2009 2008 2009 2008 --------------------------------------------------------------------- Operating revenue External 411.9 404.6 535.3 560.6 - - 947.2 965.2 --------------------------------------------------------------------- Internal 0.2 0.2 0.1 0.1 18.1 18.6 18.4 18.9 --------------------------------------------------------------------- EBITDA 200.7 199.0 90.2 130.6 (0.9) 0.1 290.0 329.7 --------------------------------------------------------------------- Restructuring and transition 13.7 8.8 17.5 - 1.3 1.5 32.5 10.3 --------------------------------------------------------------------- --------------------------------------------------------------------- Reconciliation to consolidated net income is as follows: --------------------------------------------------------------------- Three months ended Six months ended June 30 June 30 --------------------------------------------------------------------- 2009 2008 2009 2008 --------------------------------------------------------------------- Total EBITDA 140.3 161.0 290.0 329.7 --------------------------------------------------------------------- Amortization (81.1) (82.2) (163.1) (162.7) --------------------------------------------------------------------- Other income 2.9 1.0 4.4 5.1 --------------------------------------------------------------------- Debt charges (15.7) (12.1) (28.8) (24.6) --------------------------------------------------------------------- Income tax expense (16.3) (29.7) (35.4) (55.3) --------------------------------------------------------------------- 30.1 38.0 67.1 92.2 --------------------------------------------------------------------- --------------------------------------------------------------------- 11. CONTINGENCIES On April 21, 2004, Unique Broadband Services, Inc. (UBS) filed a statement of claim against Allstream, Inukshuk Internet Inc. (Inukshuk), Microcell Telecommunications Inc. and Microcell Solutions Inc. (Microcell) in the Ontario Superior Court of Justice. This claim, seeking damages in the amount of $160.0 million was settled during the second quarter of 2009 without any contribution to the settlement by the Company. There are no future potential liabilities outstanding against the Company. 12. SUBSEQUENT EVENT On July 28, 2009, the Company entered into an agreement with Rogers Wireless Partnership to share the costs of deploying a Universal Mobile Telecommunications Systems/High Speed Packet Access ("HSPA") wireless network across the existing regional wireless footprint of the Company. The agreement also provides the Company with cost effective access to new network technology and HSPA handsets, access to HSPA national and international roaming capabilities, and the opportunity to launch a national wireless business offering. The Company estimates its cost to build the HSPA network at approximately $70 million over the next two years. 13. COMPARATIVE FIGURES The prior period figures have been reclassified when necessary to conform to the current period's presentation. %SEDAR: 00003357E

For further information:

For further information: Investors: Paul Peters, Vice-President, Tax and
Investor Relations, Manitoba Telecom Services Inc., (204) 941-6178,
investor.relations@mtsallstream.com; Media: Greg Burch, Director, Corporate
and Employee Communications, Manitoba Telecom Services Inc., (416) 345-3576 or
(204) 941-8576, media.relations@mtsallstream.com

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