MTS posts 71% growth in Q4 free cash flow and announces planned use of proceeds from the sale of Allstream which includes a $200 million share repurchase program

MTS reports 2015 fourth-quarter and full-year results

WINNIPEG, Feb. 4, 2016 /CNW/ - (TSX:MBT) Manitoba Telecom Services Inc. (MTS), today, announced its financial results for the fourth quarter and full year ended December 31, 2015 and provided an update on its strategic initiatives, including plans for the use of the Allstream sale proceeds.

"2015 was a transformational year for us. We made important strategic commitments and we delivered on them," said Jay Forbes, President & CEO. "We launched the transformation of MTS into a customer-first business. We turned Allstream around and exited the business, maximizing the value created for shareholders. As we report our year-end results today, we are also announcing our plan for the use of proceeds from the sale of Allstream, one based on the evaluation of a number of capital allocation options we committed to consider when the sale was announced."

"The planned use of proceeds will return value to shareholders, strengthen our balance sheet and improve our strategic position. It underscores the momentum we have built through 2015 and take forward into 2016. Our new team is in place. Our new strategy is in place. Our new future is taking shape, and we are excited."

Significant progress on strategic initiatives
In addition to the Allstream sale, we made progress on a number of strategic initiatives throughout 2015. We completed the pre-funding of $120 million into our pension plans, which eliminates the need for solvency payments for 2015 and 2016 even with interest rate declines in 2015. The dividend was reset to a level that represents a payout ratio of 73% of 2015 free cash flow, a level that we believe is sustainable. And the transformation of MTS into a truly customer-first company was launched in Q3 2015. We expect this transformation program will deliver annualized free cash flow improvements of approximately $100 million, with the vast majority of the improvements realized by the end of 2017.

We made changes to our executive team, adding new leaders with broad and global experience who have led in highly-competitive environments, and streamlined the executive structure to eliminate duplication and decrease costs.

With Jay Forbes, the executive team now includes:

  • Paul Beauregard, Chief Corporate & Strategy Officer and Corporate Secretary;
  • Marvin Boakye, Chief Human Resources Officer;
  • Paul Cadieux, Chief Financial Officer;
  • Kevin Jessiman, Senior Vice President of Information Services;
  • Pat Solman, Senior Vice President of Network and Field Services; and
  • Heather Tulk, Chief Customer Officer

"The significant progress on all of these strategic initiatives throughout 2015 has provided great momentum. We are beginning 2016 with the energy, drive and focus to transform the MTS customer experience and create value for our shareholders."

Allstream sale and use of proceeds
As disclosed on January 15, 2016, the sale of Allstream is complete. We realized gross proceeds of $465 million and, after closing costs, expect to realize net proceeds estimated at approximately $420 million.

Use of proceeds
Based on the expectation of net sale proceeds estimated at approximately $420 million, we are:

  • Launching a normal course issuer bid program (NCIB) which will allow for the repurchase of 7,086,000 common shares at a cost of $200 million between February 9, 2016 and February 8, 2017 at prevailing market prices; and
  • Retiring debt used to finance our pension funding prepayment and spectrum acquisitions completed in 2015.

Additional debt repayment allows for greater balance sheet flexibility for future initiatives and resets our credit metrics in order to maintain our current BBB credit ratings. Our share buybacks along with improved earnings from the transformation program are key elements to a sustainable earnings per share (EPS) dividend payout ratio in a cash taxable environment expected in 2023.

As previously disclosed, we have agreed to retain certain pension obligations as part of the closed Allstream transaction. We will retain the pension obligations and related pension plan assets in respect of retirees and other former Allstream employees under Allstream's current defined benefit pension plans. We will also retain the obligation to fund the solvency deficit related to active employees' pre-closing benefits over time. This pension solvency deficit funding is not expected to be material.

We will retain the vast majority of the tax assets (estimated net present value of approximately $242 million).

Effective November 21, 2015 Allstream is now reported as "assets held for sale" and their results are no longer reflected in the results of our continuing operations. At this same time, we recorded a non-cash, post-tax impairment charge of $95.7 million in Q4 2015.

We expect to incur approximately $10 million to $20 million of one-time transition costs over the next two years associated with the Allstream sale.

Additional information on the sale of Allstream is provided in the November 24, 2015 Material Change Report as well as the news release dated January 15, 2016, all of which can be found on our website at www.mts.ca/aboutus and is on SEDAR.

For more details regarding the accounting treatment, readers are encouraged to review the discontinued operations note disclosure in our consolidated financial statements for the year ended December 31, 2015, which can be found at www.mts.ca/aboutus.

Transformation program
A strategic review, undertaken in the first-half of 2015, identified areas of opportunity for us to be both more efficient and more customer-first. To realize this opportunity, we have developed a three-year transformation program consisting of three phases.

  • Phase I unlocks funding to invest in building a market-leading customer experience.
  • Phase II will transform operations, simplify products and processes, and improve our customer experience.
  • Phase III will increase our revenue retention and improve our growth profile.

Significant progress was made in Phase I in 2015 and early 2016. Our brand has been renewed. The management structure has been streamlined and improvements are underway to streamline back-office support functions. Further, capital investment process redesign work over the last six months should allow us to sustain the reductions made to the 2015 capital investment program. 2015 capital investments of $180.4 million represented a $32.1 million reduction from 2014, resulting in a capital intensity ratio reduction from 21.1% in 2014 to 17.4% in 2015.

Going forward in 2016, further Phase I initiatives will include rationalizing our pricing, promotions and discounts, an enhanced customer service and online strategy, and upgraded procurement and working capital management. We will provide further updates on the progress of these initiatives as the year progresses.

$200 million share repurchase program launched
The Toronto Stock Exchange (the TSX) has approved our notice of intention to make an NCIB for 7,086,000 of our outstanding common shares (Shares) representing approximately 10% of the public float as at January 31, 2016. The number of issued and outstanding shares at January 31, 2016 is 79,262,469. The average daily trading volume for our Shares for the six months ending December 31, 2015 is 284,812. The maximum amount we expect to pay for the NCIB is $200 million. The NCIB will commence on February 9, 2016 and will terminate on February 8, 2017, unless terminated earlier by MTS. The shares will be purchased through an automatic share repurchase plan with a broker. Daily purchases will be limited to 71,203 Shares, other than purchases made under block-purchase exemptions.

Purchases will be made at market prices through the facilities of the TSX or alternative Canadian trading platforms. We have not made any purchases in the 12 months preceding the date of this notice. Any tendered Shares taken up and paid for by us will be cancelled.

We have entered into an automatic share repurchase plan with a broker in order to facilitate repurchases of the Shares under our NCIB. Under our automatic share repurchase plan, our broker may repurchase shares under the NCIB at any time, including without limitation, those instances when we would ordinarily not be permitted to repurchase Shares due to regulatory restrictions or self-imposed blackout periods. Purchases will be made by our broker based upon the parameters under the NCIB and the terms of the parties' written agreement.

2015 annual financial results
"I am very pleased with the free cash flow improvement of almost $10 million, particularly given the many challenges we faced this year, not the least of which was the double cohort impact on our wireless cost of acquisition. This increase reflects the success of the strategic path we set forth in May 2015. Our plans are delivering early and encouraging results," said Forbes.

($ millions, except EPS 1)

2015


2014

% variance

MTS operating revenues

1,009.6


1,001.8

0.8

Intersegment elimination 2

(14.4)


(14.7)

2.0

Total consolidated operating revenues

995.2


987.1

0.8

MTS operating expenses

546.0


535.4

2.0

Intersegment elimination 2

(10.2)


(16.2)

37.0

Total consolidated operating expenses

535.8


519.2

3.2

MTS EBITDA 3 before restructuring and transformation costs

463.6


466.4

(0.6)

Net intersegment elimination 2

(4.2)


1.5

n.a.*

Total consolidated EBITDA before restructuring and transformation costs

459.4


467.9

(1.8)

Restructuring and transformation costs

(38.6)


n.a.

Total consolidated EBITDA

420.8


467.9

(10.1)

EPS from continuing operations

$0.77


$1.52

(49.3)

EPS

($0.31)


$1.70

n.a.

Capital investments

180.4


212.5

15.1

MTS free cash flow 4

140.7


131.5

7.0

1 EPS is based on weighted average shares outstanding of 78.9 million for the twelve months ended December 31, 2015 and 77.6 million for the twelve months ended December 31, 2014.

2 Represents revenues and expenses earned from and paid to Allstream, which, under IFRS, are not reported as part of continuing operations.

3 EBITDA is earnings before interest, taxes, depreciation and amortization and other income (expense).

4 Free cash flow includes cash flows from operating activities and net intersegment revenues and expenses less capital investments, and excludes changes in working capital, pension solvency funding and lawsuit payments, restructuring and transformation costs and non-cash taxes.

* not applicable

Free cash flow
In 2015, consolidated free cash flow increased $9.2 million from 2014, mainly due to recent efforts to improve both the intensity and effectiveness of capital investment decision-making, partially offset by increased deferred wireless costs of $25.5 million.

The following provides further insight into the operating results variances for the year:

  • MTS operating revenues: We saw an $8.1 million increase in revenues from 2014, mostly a result of higher revenues from wireless data, information solutions, Internet and IPTV, partly offset by lower wireless voice, local access and long distance revenues.

  • MTS operating expenses: Operations expense increased by $10.6 million mainly the result of increased pension expense ($7.0 million), TTC operations ($6.8 million), higher expensed labour costs due to the reduction in capital investments resulting in lower capitalized labour ($5.4 million), and higher cost of goods sold driven by higher equipment sales ($6.6 million), partially offset by lower non-salary compensation costs ($7.4 million) and discretionary spending ($4.5 million).

  • MTS EBITDA before restructuring and transformation costs: EBITDA before restructuring and transformation costs was down $2.8 million from 2014 due to increased pension expense and higher cost of goods sold and labour costs, partially offset by increased revenues. See our 2015 Supplemental for additional EBITDA information.

  • Restructuring and transformation costs: Restructuring and transformation costs ($38.6 million) are comprised of $16.1 million in cash costs and $17.1 million relating to a non-cash pension curtailment loss both of which are associated with the MTS transformation program and mostly related to the voluntary workforce reduction program. The remaining costs include severances and other costs incurred relating to other restructuring programs.

  • Income and EPS from continuing operations: Income from continuing operations was down $56.5 million in 2015, and EPS from continuing operations was down $0.75, largely the result of 2015 restructuring and transformation costs and increased depreciation and amortization expense.

  • Capital investments: Capital investments continue to be realigned due to our more rigorous capital investment process - overall capital investment intensity ratio narrowed to 17.4% in 2015, a 3.7-point improvement from 21.1% in 2014.

The following table provides further MTS free cash flow disclosure.

($ millions)


2015


2014

% variance

MTS EBITDA before restructuring and transformation costs


463.6


466.4

(0.6)

Add back (deduct):







Deferred wireless costs


(96.6)


(71.1)

(35.9)


Finance costs


(64.7)


(65.1)

0.6


Gain on revaluation of TTC


(5.6)


n.a.*


Other operating activities, net


(0.3)


(1.3)

76.9


Current cash income tax expense


(0.1)


(0.2)

50.0


Pension funding and net pension expense 1


20.1


12.2

64.8


Other income


4.0


2.1

90.5


Loss on disposal of assets


0.7


1.0

(30.0)

Total


321.1


344.0

(6.7)


Capital investments


(180.4)


(212.5)

15.1

Free cash flow for the year


140.7


131.5

7.0

1 Excludes the impact of the non-cash pension curtailment loss of $17.1 million. See page 12 of our 2015 Supplemental for further disclosure.

* not applicable

Quarterly financial results

($ millions, except EPS)

Q4 2015

Q3 2015

Q2 2015

Q1 2015

Q4 2014

MTS operating revenues

252.1

250.9

250.7

255.9

251.0

MTS EBITDA before restructuring and transformation costs

115.6

111.8

115.2

121.0

113.4

Free cash flow

33.6

29.9

29.0

48.2

19.7

Capital investments

39.0

45.8

52.5

43.1

59.2

(Loss) income from continuing operations

(3.4)

20.9

17.0

26.4

23.4

Net (loss) income for the period

(88.2)

26.7

10.4

26.7

24.2

EPS from continuing operations

($0.04)

$0.26

$0.22

$0.34

$0.30

EPS

($1.11)

$0.34

$0.13

$0.34

$0.31

More information regarding Q4 2015 results can be found in our 2015 annual Management's Discussion and Analysis (MD&A), which is available on our website at www.mts.ca/aboutus and is available on SEDAR.

2016 guidance
Our 2016 financial guidance reflects a focus on our strategic objectives. Our financial guidance for 2016 is as follows:





2016 guidance


2015 results

MTS operating revenues




0% to 2% higher


$1,009.6 million

Capital intensity




18%


17.4%

Free cash flow




10% to 15% higher


$140.7 million

For more information pertaining to our 2016 guidance, please refer to our 2015 annual MD&A, which is available on our website at www.mts.ca/aboutus and is available on SEDAR.

Dividend
Our Board of Directors declared a quarterly cash dividend of $0.325 per share for the first quarter of 2016, payable on April 15, 2016 to shareholders of record at the close of business on March 31, 2016.

The first-quarter dividend is designated an "eligible" dividend under the Income Tax Act (Canada) and any corresponding provincial legislation. Under this legislation, individuals resident in Canada may be entitled to enhanced dividend tax credits that reduce income tax otherwise payable.

Investment community conference call and webcast
We will hold our 2015 annual earnings results conference call with the investment community on Thursday, February 4, 2016 at 5:30 p.m. (Eastern time). Participants include Jay Forbes, President and Chief Executive Officer; Paul Cadieux, Chief Financial Officer and Heather Tulk, Chief Customer Officer.

To participate, please dial toll-free 1-888-231-8191 or 647-427-7450. A replay will be available until February 14, 2016 by dialing 1-855-859-2056 and entering passcode 8575285.

Investors, media and the public are invited to participate on a listen-only basis by logging into the live audio webcast of the conference call on our website at www.mts.ca/aboutus or by entering http://event.on24.com/r.htm?e=1109348&s=1&k=7B06CD0473DDB881A4B5E58C2657CF90.

A replay of the conference call will be available on our website for one year.

Forward-looking statements disclaimer
This news release includes forward-looking statements and information (collectively, "statements") including, but not limited to: statements pertaining to our corporate direction, business opportunities, operations, financial objectives, future financial results and performance, its ability to generate free cash flow in the future, the sale of Allstream, the amount and use of Allstream sale proceeds, including the amount of debt repayment and share repurchases under an NCIB, restructuring plans, strategic processes, guidance and outlook, pension plans funding including assumptions about future interest rates, the declaration of any future dividends and the amount thereof, the intention that surplus cash would be used for such things as share repurchases, the expectation of not having to pay cash income taxes until 2023; and the ability to reduce capital spending and operating expenses, future cash flows, liquidity, credit ratings and profitability, as well as other statements that are not historical facts.

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, line-of-sight,and other similar terms.

Our forward-looking information includes forecasts and projections related to the following items, among others: revenues, expenses, property, plant and equipment additions, free cash flow, dividend payments, debt repayment, share repurchases, expected growth in subscribers and the services to which they subscribe, the cost of acquiring subscribers and the deployment of new services, continued cost reductions and efficiency improvements, the growth of new products and services and all other statements that are not historical facts.

We base our conclusions, forecasts, and projections on the following factors, among others: general economic and industry growth rates, currency exchange rates and interest rates, product pricing levels and competitive intensity, subscriber growth, pricing, usage and churn rates, government regulation changes, technology deployment, device availability, the timing of new product launches, content and equipment costs, the integration of acquisitions and industry structure and stability.

All forward-looking statements are made pursuant to the safe harbour provisions of applicable Canadian securities legislation.

Forward-looking statements are subject to risks, uncertainties and assumptions. As a consequence, actual results in the future may differ materially from any forward-looking conclusion, forecast or projection, whether expressed or implied. Therefore, forward-looking statements should be considered carefully and undue reliance should not be placed on them.

Please note that forward-looking statements in this news release reflect Management's expectations as at February 4, 2016, and thus are subject to change thereafter. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. This news release and the financial information contained herein have been reviewed by our Audit Committee and approved by our Board of Directors. Factors that could cause anticipated opportunities and actual results to differ materially include, but are not limited to, matters identified in the Risks and uncertainties section and elsewhere in our 2015 annual MD&A, which is available on our website at www.mts.ca/aboutus and on SEDAR.

About MTS
MTS is Manitoba's leading communications and information technology services company. We provide consumers and businesses with a full range of wireless, high-speed Internet, TV, phone, information technology, cloud and security services.  We are focused on serving the unique needs of our customers and giving back to organizations that strengthen our communities. MTS Inc. is wholly owned by Manitoba Telecom Services Inc. (TSX:MBT). For more on MTS' products and services, visit mts.ca. For investor information, visit www.mts.ca/aboutus.

Management's Discussion and Analysis

February 4, 2016
This Management's Discussion and Analysis (MD&A) of our financial results comments on our operations, performance and financial condition for the years ended December 31, 2015 and 2014. This MD&A is based on consolidated financial statements prepared under International Financial Reporting Standards (IFRS). All financial amounts, unless otherwise indicated, are in Canadian dollars and in accordance with IFRS.

Unless otherwise indicated, this MD&A is for the year ended December 31, 2015 and is as at February 4, 2016.

In preparing this MD&A, we have taken into account information available to us up to February 4, 2016. In this MD&A, "we", "our" and "us" refer to Manitoba Telecom Services Inc. (MTS). This MD&A should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2015.

About us
For more information about our company, including our annual information form, audited consolidated financial statements and supplemental information for the year ended December 31, 2015, dated February 4, 2016, please visit our website at www.mts.ca/aboutus or visit SEDAR.

Discontinued operations
Effective November 21, 2015 we started reporting Allstream Inc. (Allstream) as assets held for sale, with their results of operations reflected as discontinued operations, and as a result Allstream's revenues and expenses are no longer reflected in the results of our continuing operations. For more details regarding the accounting treatment, readers are encouraged to review the discontinued operations note disclosure in our audited consolidated financial statements for the year ended December 31, 2015, which can be found on our website at www.mts.ca/aboutus.

Non-IFRS measures of performance
In this annual MD&A, we provide information concerning earnings before interest, taxes, depreciation and amortization (EBITDA), free cash flow and capital intensity ratio because we believe investors use them as measures of our financial performance. These measures do not have a standardized meaning as prescribed by IFRS, and are not necessarily comparable to similarly titled measures used by other companies.

Regarding forward-looking statements
This annual MD&A includes forward-looking statements and information (collectively, "statements") including, but not limited to: statements pertaining to our corporate direction, business opportunities, operations, financial objectives, future financial results and performance, its ability to generate free cash flow in the future, the sale of Allstream, the amount and use of Allstream sale proceeds, including the amount of debt repayment and share repurchases under a normal course issuer bid (NCIB), restructuring plans, strategic processes, guidance and outlook, pension plans funding including assumptions about future interest rates, the declaration of any future dividends and the amount thereof, the intention that surplus cash would be used for such things as share repurchases, the expectation of not having to pay cash income taxes until 2023; and the ability to reduce capital spending and operating expenses, future cash flows, liquidity, credit ratings and profitability, as well as other statements that are not historical facts.

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, line-of-sight and other similar terms.

Our forward-looking information includes forecasts and projections related to the following items, among others: revenues, expenses, property, plant and equipment additions, free cash flow, dividend payments, debt repayment, share repurchases, expected growth in subscribers and the services to which they subscribe, the cost of acquiring subscribers and the deployment of new services, continued cost reductions and efficiency improvements, the growth of new products and services and all other statements that are not historical facts.

We base our expectations, forecasts, and projections on the following factors, among others: general economic and industry growth rates, currency exchange rates and interest rates, product pricing levels and competitive intensity, subscriber growth, pricing, usage and churn rates, government regulation changes, technology deployment, device availability, the timing of new product launches, content and equipment costs, the integration of acquisitions and industry structure and stability.

All forward-looking statements are made pursuant to the safe harbour provisions of applicable Canadian securities legislation.

Actual events and results can be substantially different from what is expressed or implied by forward-looking information as a result of risks, uncertainties, and other factors, many of which are beyond our control, including but not limited to: the competitive environments at MTS, regulatory changes, market conditions, technological changes, security and network failures and/or cyber-risks, litigation and tax matters, and our transformation program.

Forward-looking statements are subject to risks, uncertainties and assumptions. As a consequence, actual results in the future may differ materially from any forward-looking conclusion, forecast or projection, whether expressed or implied. Therefore, forward-looking statements should be considered carefully and undue reliance should not be placed on them.

Please note that forward-looking statements in this annual MD&A reflect Management's expectations as at February 4, 2016, and thus, are subject to change thereafter.

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 annual MD&A and the financial information contained herein have been reviewed by our Audit Committee and approved by our Board of Directors.

Factors that could cause anticipated opportunities and actual results to differ materially include, but are not limited to, matters identified in the Risks and uncertainties section of this annual MD&A.

Executive summary - Corporate profile

At MTS, we're proud to be Manitoba's leading information and communications technology provider. We're dedicated to delivering a full suite of services that meet the unique needs of Manitoban consumers and businesses. We live where we work, and actively give back to organizations that strengthen our communities. You can count on MTS to make connecting your world easy. We're with you.

Headquartered in Winnipeg, Manitoba our common shares are listed on the TSX (trading symbol: MBT). Investor and corporate information can be found at www.mts.ca/aboutus.

We offer a full suite of wireless and wireline communications services including wireless, Internet, TV, phone service and security systems to residential customers in the province of Manitoba, provided by MTS and AAA Security (AAA).

We provide a wide array of business solutions including information solutions and business telecommunications services. These solutions include wireless, IP networking, phone services, security services, technology infrastructure, application development, managed services, networking services and unified cloud services provided by MTS, MTS Data Centres, AAA, EPIC Information Solutions (EPIC) and The Technology Consortium (TTC).

Leadership
In 2015 we created a new corporate structure, led by changes to our executive management team, a team that provides the competitive strength to propel us down the strategic path rolled out early that year as a result of our strategic review. Our executive team is supported by employees who are dedicated to our success and whose energy and enthusiasm have worked towards reinvigorating our brand. Together we all work to earn our customers' loyalty which in turn creates value for our shareholders.

To view more executive team information, please visit www.mts.ca/aboutus.

Corporate governance – Board of Directors
We are governed by a Board of Directors (the Board). The Board consists of ten members, all of whom are business and community leaders. Members have been carefully chosen for nomination in order to maintain independence and also to ensure that the Board has the right breadth and base of experience and expertise. The highest governing authority in our management structure, the director's responsibilities include the following items:

  • Leadership of the CEO selection and succession planning process;
  • Review and approval of our strategic direction, financial objectives and major policy decisions;
  • Oversight of executive compensation, performance evaluation and succession plans;
  • Monitoring financial and operational performance, risks, business conduct and ethics and internal auditing controls;
  • Effective Board governance and director education; and
  • Timely and accurate disclosure of shareholder information.

Key awards and recognitions

  • Shortlisted by the Canadian Society of Corporate Secretaries at the Second Annual Excellence in Governance Awards
  • Annual Globe and Mail's - Board Games ranking: Rated in 2nd place in the category of "Best performing issuers" in 2015, compared to 8th place in 2014, reflecting a constant improvement since tracking began

Our people – shaping our organization
A key factor of our success is our highly skilled and dedicated workforce of more than 2,800 Manitobans. We pride ourselves in providing an environment that focuses on our customers and engages people to think and act to earn our customers' continued loyalty at every interaction.

Executive summary - 2015 in review

First quarter

  • Completed strategic assessment of Allstream
  • Pre-funded pension plans to eliminate the need for solvency deficit payments in 2015 and 2016
  • Reset the dividend to a level that we believe is sustainable
  • Announced planned exit from Allstream

Second quarter

  • Acquired remaining 50% of TTC for $7.0 million, becoming TTC's sole shareholder
  • Launched industry-leading Total Internet plan
  • Announced new organizational structure and executive team
  • Completed strategic assessment of MTS

Third quarter

  • Acquired 15 MHz paired AWS-1 spectrum from WIND Mobile for $45 million
  • Unveiled new flagship store, design based on customers' feedback
  • Opened Manitoba's first Tier III design certified data centre
  • Launched the MTS transformation program

Fourth quarter

  • Offered a voluntary workforce reduction program that is expected to generate $28 million in annualized free cash flow improvement
  • Announced sale of Allstream to Zayo Group Holdings Inc. (Zayo) in an all-cash transaction for $465 million gross proceeds
  • Received Cisco's Canada Collaboration Partner of the Year award

January 1, 2016 to February 4, 2016

  • Announced Allstream sale completion on January 15, 2016 and plans for the use of proceeds to strengthen our financial position including a normal course issuer bid program. Program details can be found in our news release dated February 4, 2016, which is available on our website at www.mts.ca/aboutus and is available on SEDAR.
  • Launched our new brand

Strategic review progress

Allstream sale
Transaction closing details
As disclosed on January 15, 2016, the sale of Allstream is complete. We realized gross proceeds of $465 million and, after closing costs, expect to realize net proceeds estimated at approximately $420 million.

Use of proceeds
Based on the expectation of net sale proceeds estimated at approximately $420 million, we are:

  • Launching an NCIB program which will allow for the repurchase of 7,086,000 common shares for a maximum cost of $200 million between February 9, 2016 and February 8, 2017 at prevailing market prices; and
  • Retiring debt used to finance our pension funding prepayment and spectrum acquisitions completed in 2015.

Additional debt repayment allows for greater balance sheet flexibility for future initiatives and resets our credit metrics in order to maintain our current BBB credit ratings. Our share buybacks along with improved earnings from the transformation program are key elements to a sustainable earnings per share (EPS) dividend payout ratio in a cash taxable environment expected in 2023.

Other transaction details
As previously disclosed, we have agreed to retain certain pension obligations as part of the closed Allstream transaction:

  • We retain the pension obligations and related pension plan assets in respect of retirees and other former Allstream employees under Allstream's current defined benefit pension plans; and
  • We retain the obligation to fund the solvency deficit related to active employees' pre-closing benefits over time. This pension solvency deficit funding is not expected to be material.

We will retain the vast majority of the tax assets (estimated net present value of approximately $242 million).

Effective November 21, 2015 Allstream is now reported as "assets held for sale" and their results are no longer reflected in the results of our continuing operations. In Q4 2015, we recorded a non-cash post-tax impairment charge of $95.7 million. The disposal of the business was completed on January 15, 2016, and any further gain or loss on disposal will be reflected in our Q1 2016 reporting. The amount of any gain or loss on disposal will depend on final closing adjustments and final consideration received. We expect to incur approximately $10 million to $20 million in transition costs over the next two years associated with the Allstream sale.

Additional information on the sale of Allstream is provided in the November 24, 2015 Material Change Report as well as the news release dated January 15, 2016, all of which can be found on our website at www.mts.ca/aboutus and is on SEDAR.

For more details regarding the accounting treatment, readers are encouraged to review the discontinued operations note disclosure in our audited consolidated financial statements for the year ended December 31, 2015, which can be found on our website at www.mts.ca/aboutus.

Report on 2015 strategic initiatives
Recognizing that we were not meeting the expectations of our shareholders, we undertook an exhaustive strategic review of our business and concluded that:

  • A complete turnaround of Allstream's operations was required to allow it to become financially self-sustainable;
  • An exit from Allstream was the preferred course of action given the lack of strategic fit;
  • A $120 million pre-funding to the pension plans was required to eliminate the expected need for pension solvency payments in 2015 and 2016;
  • A reset of the dividend was needed to establish what we believe is a sustainable and appropriate payout level; and
  • Repositioning MTS as a customer-first organization needed to be a key priority.

In 2015, we announced and completed the following initiatives under our new strategic plan:

Allstream turnaround

Immediate actions implemented to stabilize and fix Allstream, resulting in 2015
free cash flow of $18.6 million, an increase of $20.2 million over 2014.



Allstream sale

As disclosed on January 15, 2016, the sale of Allstream was completed with
expected net proceeds estimated at approximately $420 million.



Pension plans pre-funded

On May 6, 2015 we completed the pre-funding of $120 million into our pension
plans using existing credit facilities. This one-time pre-funding eliminates the need
for solvency payments for 2015 and 2016 even with interest rate declines in 2015.



Sustainable dividend

We declared a second-quarter 2015 and subsequent quarterly dividends of
$0.325 per share ($1.30 annualized). This represents a payout ratio of 73% of the
2015 free cash flow, a level that we believe is sustainable.



MTS transformation

Our transformation journey to become a truly customer-first organization started in
Q3 2015.

We expect this program will deliver annualized free cash flow improvements of
approximately $100 million, with the vast majority of the improvements realized by
the end of 2017, and one-time cash costs associated with achieving these
improvements of roughly the same amount, incurred over the same period.

We also made changes to our executive team in 2015, adding new leaders with broad and global experience in highly-competitive environments. The executive structure was streamlined to eliminate duplication and decrease costs. With Jay Forbes, the executive team includes:

  • Paul Beauregard, Chief Corporate & Strategy Officer and Corporate Secretary;
  • Marvin Boakye, Chief Human Resources Officer;
  • Paul Cadieux, Chief Financial Officer;
  • Kevin Jessiman, Senior Vice President of Information Services;
  • Pat Solman, Senior Vice President of Network and Field Services; and
  • Heather Tulk, Chief Customer Officer

MTS transformation program
A strategic review, undertaken in the first half of 2015, identified several areas of opportunity for MTS to be both more efficient and more customer-first:

  • Organization effectiveness - MTS' organizational structure can be improved to be smaller and bring decisions closer to our customers;
  • Operating efficiency - MTS' processes and systems can evolve to capture operational efficiencies;
  • Capital deployment - Capital investment can benefit from more rigorous reviews of economic merit and strategic fit, lowering capital intensity ratios and increasing returns on investment;
  • Customer experience - MTS' customer expectations have changed dramatically, and the customer experience can be improved to meet those expectations; and
  • Marketing and sales agility - MTS' marketing and sales activities need to be more agile in the face of greater competition within the Manitoba market.

Beginning the transformation
As previously disclosed, we completed a full diagnostic of our business and determined that there is significant opportunity to improve our performance. To realize this opportunity, we developed a three-year transformation program - led by a newly established Transformation Management Office (TMO). We launched workstreams to fund the journey while planning other initiatives to remake our company into a customer-first organization.

The TMO program consists of three phases:

  • Phase l - Unlocks funding to invest in building a market-leading customer experience.

    The following initiatives have already been launched, and are expected to be completed in 2016:
    • MTS brand renewal;
    • Streamline back-office support functions and management structure;
    • Improve capital investment process;
    • Rationalize pricing, promotions and discounts;
    • Enhance customer service and online strategy; and
    • Upgrade procurement and working capital management processes.

  • Phase ll - Transforming operations, simplifying products and processes, and improving our customer experience.
  • Phase lll - Increasing revenue retention and improving growth profile.

The following is a detailed update on Phase I initiatives:

MTS brand renewal
In Q4 2015, we internally launched our customer-first brand strategy, which included training of 100% of our workforce on their role in our new brand. On February 3, 2016 we launched our new brand externally with a new messaging platform for all our customer and stakeholder communications and updated visual identities for AAA and EPIC. Our refreshed brand represents our customer-first strategy. At its foundation are four brand characteristics:

  1. Open - We are honest and transparent about what you can expect from us. You can trust us.
  2. Helpful - We are your neighbour and you have our undivided attention. We listen and respond with the solutions that are right for you. We make it easy for you.
  3. Accountable - I take ownership for the customer. I keep my promises and take responsibility to deliver a high-quality result.
  4. Dedicated - We are committed to the success of our customers, our colleagues, our communities and our province.

Our new brand demonstrates our commitment to the transformation already underway and our promise to reinvent our customer experience and become a truly customer-first organization. MTS has captured that promise in our new brand tagline - We're With You. This tagline represents our brand essence, Customer First. Every Second. MTS is focused on delivering the best experience at every interaction with our customers.

Streamline back-office support functions and management structure
Late in 2015, we initiated a voluntary workforce reduction program for certain employees in back-office support and management functions who were not customer-facing. Of the over 250 positions slated for elimination, 129 employees have exited the business as at December 31, 2015. Most of the remaining employees will exit the organization by March 31, 2016.

This voluntary workforce reduction program is expected to deliver annualized cost savings of $28 million through lower salaries and benefits. Of this amount, $7 million relates to cost savings associated with the improved capital investment initiative. In Q4 2015, we recognized one-time cash costs for this program of $13.7 million. As part of this program we also incurred one-time non-cash pension costs of $17.1 million.

Improved capital investment
The capital investment redesign work over the last six months has allowed us to sustain the reductions made to the 2015 capital investment program. 2015 capital investments of $180.4 million represented a $32.1 million reduction from 2014. This resulted in a capital intensity ratio reduction from 21.1% in 2014 to 17.4% in 2015.

As part of the capital investment redesign work, we have:

  • Implemented a new capital intake process to prioritize capital investment against our strategy and economic merits;
  • Implemented a new capital governance and evaluation process that enhances accountability for initiation, delivery and benefits realization for capital projects;
  • Completed training and new process documentation to ensure process understanding and adherence by all capital project stakeholders in the organization; and
  • Enhanced project management, project reporting and tracking of post implementation benefits.

The remaining three initiatives from Phase I are expected to be launched in Q1 2016. We will continue to provide updates on their progress as the year unfolds.

Free cash flow
The following table provides further information on free cash flow from our Manitoba operations. Free cash flow from prior periods has been restated to conform with our current definition which is cash flows from operating activities including net intersegment revenues and expenses less capital investments, and excluding changes in working capital, pension solvency funding and pension lawsuit payments, restructuring and transformation costs and non-cash taxes.

($ millions)

Q4 2015

Q3 2015

Q2 2015

Q1 2015

Q4 2014

2015

2014

%
variance

MTS EBITDA before restructuring and transformation costs

115.6

111.8

115.2

121.0

113.4

463.6

466.4

(0.6)

Capital investments

(39.0)

(45.8)

(52.5)

(43.1)

(59.2)

(180.4)

(212.5)

15.1

Deferred wireless costs

(31.6)

(26.5)

(20.6)

(17.9)

(23.8)

(96.6)

(71.1)

(35.9)

Finance costs

(16.8)

(17.7)

(15.2)

(15.0)

(15.3)

(64.7)

(65.1)

0.6

Pension funding and net pension expense 1

4.2

5.7

4.2

6.0

3.0

20.1

12.2

64.8

Other items, net

1.2

2.4

(2.1)

(2.8)

1.6

(1.3)

1.6

n.a.*

Free cash flow

33.6

29.9

29.0

48.2

19.7

140.7

131.5

7.0

1 Excludes the impact of the non-cash pension curtailment loss of $17.1 million. See page 12 of our 2015 Supplemental for further disclosure.

* not applicable

2016 strategic objectives
Following on the initiatives launched in 2015, our 2016 framework for strategic objectives is as follows:

Perspective



Strategic objectives

Financial



Grow profitably


Grow shareholder returns






Own the residential market in Manitoba by delighting our customers

Own the connected devices explosion in Manitoba by fully leveraging our network and data

Own business communications and IT by being the trusted advisor

Customer




Earn customers for life









Ramp up customer experience

Deliver new services faster

Improve cost structure

Invest to grow

Internal process




Drive efficiency






Learning and growth



Build a learning culture to delight our customers


Develop a winning culture



2016 guidance
Our 2016 financial guidance reflects a focus on our strategic objectives. Our financial guidance for 2016 is as follows:





2016 guidance


2015 results

MTS operating revenues




0% to 2% higher


$1,009.6 million

Capital intensity 1




18%


17.4%

Free cash flow




10%  to 15% higher


$140.7 million

1 Capital investments adjusted for current year Scientific Research and Experimental Development Investment Tax Credit (SR&ED ITC) impacts and excludes capital related to restructuring and transformation initiatives, divided by total operating revenues. More information about capital intensity ratio can be found in our 2015 supplemental information.

Material assumptions
We have made a number of material assumptions in preparing our 2016 financial guidance and when making certain forward-looking statements, which include, but are not limited to, the following:

Economic assumptions
Our services are expected to benefit from a Manitoba economy that is forecast to show nominal gross domestic product (GDP) growth of approximately 2.4% in 2016, according to the Government of Manitoba Finance Department.

Market assumptions
We expect competition in 2016 to be similar to 2015 across all lines of business. We expect MTS will remain the only provider in Manitoba that can bundle the full spectrum of consumer telecommunications services such as wireless, Internet, IPTV, phone service and security systems. As a result, we expect to be able to maintain market share and churn, as well as grow high-ARPU customers. We anticipate similar wireless costs of acquisition to 2015, as a similar proportion of plans in our base come up for renewal. It is also assumed that new entrants will not enter the Manitoba market in 2016. Residential local line losses and related revenues will continue to decline at the same pace as in prior years, largely due to wireless substitution. Given 2016 regulatory changes regarding pick-and-pay and entry-level basic service, television cord shaving and related revenue losses could increase, depending on the degree to which MTS TV customers switch to this entry-level service.

Financial assumptions
We assume that cash debt financing costs will be similar to those in 2015. We will continue to maintain our investment-grade credit rating. We have assumed that we will not pay cash taxes by utilizing our substantial capital cost allowance pools and available tax losses. We are not expected to pay cash taxes until 2023 at the earliest. Our company's effective tax rate is expected to be approximately 27%. There will be no material changes to today's regulatory framework.

Discussion of operations – financial results

Statement of net income and other comprehensive income (loss)

($ millions, except EPS 1 and weighted average shares outstanding)


2015


2014

% variance

MTS operating revenues


1,009.6


1,001.8

0.8

Intersegment elimination 2


(14.4)


(14.7)

(2.0)

Total consolidated operating revenues


995.2


987.1

0.8

MTS operating expenses


546.0


535.4

2.0

Intersegment elimination 2


(10.2)


(16.2)

37.0

Total consolidated operating expenses


535.8


519.2

3.2

MTS EBITDA before restructuring and transformation costs


463.6


466.4

(0.6)

Net intersegment elimination 2


(4.2)


1.5

n.a.*

Total consolidated EBITDA before restructuring and transformation costs


459.4


467.9

(1.8)

Restructuring and transformation costs


(38.6)


n.a.

Total consolidated EBITDA


420.8


467.9

(10.1)

Depreciation and amortization


278.1


244.7

13.6

Other Income


4.0


2.1

90.5

Finance costs


(64.7)


(65.1)

0.6

Income before income taxes


82.0


160.2

(48.8)

Income tax expense


21.1


42.8

(50.7)

Income from continuing operations, for the year


60.9


117.4

(48.1)

(Loss) income from discontinued operations, net of tax


(85.3)


14.3

n.a.

Net (loss) income for the year


(24.4)


131.7

n.a.

Other comprehensive income (loss) for the year, net of tax


102.0


(77.4)

n.a.

Total comprehensive income for the year


77.6


54.3

42.9

Weighted average shares outstanding (in millions)


78.9


77.6

1.7

EPS from continuing operations


$0.77


$1.52

(49.3)

EPS


($0.31)


$1.70

n.a.

1 Earnings per share

2 Represents revenues and expenses earned from and paid to Allstream, which, under IFRS, are not reported as part of income from continuing operations.

*not applicable

MTS operating revenues

($ millions)






2015


2014

% variance

Wireless






350.5


353.4

(0.8)

Broadband and converged IP






253.7


241.9

4.9

Information solutions






34.9


22.4

55.8

Security and monitoring






12.9


12.9

n.a.*

Unified communications






26.4


24.0

10.0

Local access






231.7


241.5

(4.1)

Long distance and data






59.5


65.8

(9.6)

Other






40.0


39.9

0.3

MTS operating revenues






1,009.6


1,001.8

0.8

*not applicable

Wireless
Our vast and reliable wireless networks keep our customers connected across Manitoba. The combined power of our network coverage and Wi-Fi hotspots ensures that our customers can use their smartphones and devices to their fullest. For our business wireless customers we also offer Fleetnet 800TM and paging services.

Wireless revenues

($ millions)






2015


2014

% variance

Voice






174.0


192.3

(9.5)

Data






164.2


149.2

10.1

Other






12.3


11.9

3.4

Total wireless revenues






350.5


353.4

(0.8)

Voice: Revenues decreased $18.3 million in 2015, as a result of lower pricing on feature-rich plans in the Manitoba market and lower airtime, toll and pre-paid revenues. The latter had been in steady decline, but saw improvement in Q4 due to a new strategy which is showing promising results.

Data: Driven by strong demand for smartphones and corresponding data usage, revenues increased $15.0 million in 2015. Subscribers on data plans increased in 2015 to 80% from 74% in 2014.

Post-paid subscriber churn increased from 0.96% in 2014 to 1.06% in 2015. This increased churn is mainly attributed to the impact of the wireless double cohort. As we noted in our Q2 2015 results, the Federal Court of Appeal ruling on May 19, 2015 dismissed the challenge of a consortium of wireless service providers, that the Canadian Radio-television and Telecommunications Commission (CRTC) did not have the authority to apply the provisions of the Wireless Code to contracts that were already in place before the Code took effect. As a result of this decision, as of June 3, 2015, a large cohort of our customers were eligible to exit out of their wireless contracts. On this date, our off-contract base within our post-paid wireless business doubled in size. While we have taken steps to mitigate the impact of this decision, which now includes our TMO program with its renewed customer-first strategy, our wireless churn has still been negatively impacted. Churn is traditionally higher for off-contract customers versus on-contract customers, therefore this shift in mix drives a higher weighted average churn. Despite the impact of the wireless double cohort, Q4 2015 post-paid subscriber churn remained relatively unchanged from Q4 2014, at 1.06% and 1.05%, respectively, demonstrating the effectiveness of the steps we took to mitigate the impact of this decision. See our 2015 Supplemental for additional subscriber statistics.

Broadband and converged IP
Broadband services include revenues earned from providing high-speed Internet and IPTV services to residential customers, as well as converged IP connectivity to business customers. Our high-speed Internet service provides fast, reliable speeds with the most comprehensive Internet coverage in Manitoba. IPTV service, branded as MTS Ultimate TV® is available in 16 communities in the province. Over 350,000 homes in Manitoba are eligible for both our high-speed Internet service and MTS Ultimate TV®.

Broadband and converged IP revenues

($ millions)




2015


2014

% variance

Internet




140.1


128.5

9.0

IPTV




88.8


85.2

4.2

Converged IP




24.8


28.2

(12.1)

Total broadband and converged IP revenues




253.7


241.9

4.9

Internet: 2015 saw revenue growth of $11.6 million from strong subscriber growth of 3.2% and higher ARPU (resulting from higher penetration of higher-speed plans as well as price increases).

IPTV: Revenues increased $3.6 million in 2015 from strong migrations to the higher-ARPU MTS Ultimate TV®, a lower number of customers receiving promotional pricing and price increases. Licensed broadcast distribution undertakings (BDUs) are now required to distribute emergency alert messages to all their customers as part of the National Public Safety Alerting System (NPAS). While we were able to implement a solution for our MTS Ultimate TV® service, we were unable to do so for our Classic TV service. We discontinued our Classic TV service at the beginning of 2016.

See our 2015 Supplemental for additional subscriber statistics.

Information solutions
Revenues from this line of business include revenues earned by EPIC, TTC (as of June 1, 2015) and MTS Data Centres. Information solutions revenues were up $12.5 million for 2015 compared to 2014 due primarily to the acquisition of TTC.

Security and monitoring
Provided by AAA, these services include the installation and monitoring of alarm services to residential customers.

Unified communications
Unified communications revenues are earned from the sale of IP telephony products and services. Revenues increased $2.4 million in 2015 due to greater demand, resulting in increased hardware installations and associated services.

Local access
Our local access services includes revenues earned from the sale of residential and business voice connectivity, including calling features, payphone revenue, wholesale revenues from services provided to third parties and contribution revenues. Local revenues were down, reflecting a combination of competitive losses and wireless substitution.

Long distance and data
This business line includes residential and business long distance services, business data services and wholesale data services provided to third parties.

Long distance and data revenues

($ millions)




2015


2014

% variance

Long distance




32.5


36.7

(11.4)

Data




27.0


29.1

(7.2)

Total long distance and data revenues




59.5


65.8

(9.6)

Long distance: Revenues declined, due to customer migration to lower-priced long distance plans and reduced volumes, as customers continue to replace long distance calling with alternative methods of communication.

Data: Revenues were down in 2015, reflecting reprice, migration to converged IP and competitive losses.

Other
Other services include wholesale revenues earned from wireless carriers, sales and maintenance revenues for terminal equipment such as telephone switches to business customers, other miscellaneous consumer fees and intersegment transactions.

Other revenues

($ millions)






2015


2014

% variance

Wholesale






7.6


12.3

(38.2)

Other






32.4


27.6

17.4

Total other revenues






40.0


39.9

0.3

Wholesale: Revenues were down as carriers move their customers from our CDMA network to their own networks.

MTS operating expenses
Operations expense increased by $10.6 million mainly the result of increased pension expense ($7.0 million), TTC operations ($6.8 million), higher expensed labour costs due to the reduction in capital investments resulting in lower capitalized labour ($5.4 million), and higher cost of goods sold driven by higher equipment sales ($6.6 million), partially offset by lower non-salary compensation costs ($7.4 million) and discretionary spending ($4.5 million).

MTS EBITDA before restructuring and transformation costs
EBITDA before restructuring and transformation costs was down $2.8 million mainly due to increased pension expense and higher cost of goods sold and labour costs, partially offset by increased revenues. See our 2015 Supplemental for additional EBITDA information.

Restructuring and transformation costs
Restructuring and transformation costs ($38.6 million) are comprised of $16.1 million in cash costs and $17.1 million relating to a non-cash pension curtailment loss both of which are associated with the MTS transformation program and mostly related to the voluntary workforce reduction program. The remaining costs include severances and other costs incurred relating to other restructuring programs.

Depreciation and amortization expense
Our depreciation and amortization expense increased by $33.4 million from 2014 mainly as a result of two factors. Firstly, increased amortization of deferred wireless costs, largely as a result of the cessation of three-year contracts, increased 2015 expense by $18.6 million. The remaining increase is associated with higher SR&ED ITCs recorded in 2014, which create a reduction to depreciation and amortization expense.

Other income
Our other income increased $1.9 million largely due to a combination of the non-cash gain recorded in Q2 2015 as a result of our increased ownership interest in TTC and the resulting remeasure of our previously held ownership interest in TTC, and a higher loss on disposal of assets in 2014.

Finance costs
Our finance costs decreased $0.4 million mainly a result of a lower interest rate on long-term debt financed in 2014, partially offset by the MTS Data Centres' finance lease costs.

Income tax expense
We continue to have substantial capital cost allowance pools, tax losses and investment tax credits, which we expect will fully offset our taxable income and eliminate cash income taxes until 2023 at the earliest. The present value of these available tax assets is approximately $242 million. These tax assets have a book value of $426.6 million and are comprised of tax losses, the difference between the book value of fixed assets and their undepreciated capital cost for tax purposes, and unused SR&ED ITCs. See our 2015 Supplemental for additional tax information.

Income and EPS from continuing operations
Income from continuing operations was down $56.5 million in 2015, and EPS from continuing operations was down $0.75, largely the result of 2015 restructuring and transformation costs, and increased depreciation and amortization expense.

Discontinued operations
With the sale of Allstream, 2015 assets and liabilities pertaining to Allstream have been reclassified as held for sale with the non-current assets being recorded at the lower of the carrying amount or the fair value less costs to sell. Allstream's operating results for both 2015 and 2014 have been reclassified as discontinued operations. The majority of the change year over year is related to the impairment loss ($95.7 million). For more details regarding the accounting treatment, readers are encouraged to review the Allstream sale note disclosure in our 2015 annual consolidated financial statements, which can be found on our website at www.mts.ca/aboutus.

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

The increase in other comprehensive income was due to a solid return on pension assets, partially offset by changes to the discount rate used to value the pension liabilities.

Selected annual information

($ millions, except EPS and weighted average shares outstanding)


2015

2014

2013

MTS operating revenues


1,009.6

1,001.8

995.0

Income (loss) from continuing operations


60.9

117.4

(8.9)

Net (loss) income for the year


(24.4)

131.7

(84.4)

Total assets


2,674.4

2,688.0

2,682.4

Total long-term debt, including current portion


874.0

873.1

923.1

EPS from continuing operations


$0.77

$1.52

($0.13)

EPS


($0.31)

$1.70

($1.24)

Cash dividends declared per share


$1.40

$1.70

$1.70

Over the past three years, operating revenues have reflected improvements in our strategic growth areas, which include wireless, high-speed Internet, IPTV, converged IP, and information solutions, offset by declines in legacy telecommunications services, such as local access and long distance. Revenues from strategic lines of business now represent 63% of total revenues.

Net income and EPS for 2013 decreased due to the pension plan decision costs and the write-down of Allstream assets.

Long-term debt declined between 2013 and 2014 due to the repayment of a $275 million medium-term note, offset by the issuance of a $225 million medium-term note.

In the second, third and fourth quarters of 2015, cash dividends of $0.325 per common share were declared. In the first quarter of 2015 and each quarter of 2014 and 2013, cash dividends of $0.425 per common share were declared, as approved by the Board.

Selected quarterly information

($ millions, except EPS and weighted average shares
outstanding)

Q4 2015

Q3 2015

Q2 2015

Q1 2015

Q4 2014

Q3 2014

Q2 2014

Q1 2014

MTS operating revenues

252.1

250.9

250.7

255.9

251.0

252.1

250.2

248.5

MTS EBITDA before restructuring and transformation costs

115.6

111.8

115.2

121.0

113.4

115.5

117.8

119.7

Free cash flow

33.6

29.9

29.0

48.2

19.7

29.9

37.6

44.3

Capital investments

39.0

45.8

52.5

43.1

59.2

57.4

51.3

44.6

(Loss) income from continuing operations

(3.4)

20.9

17.0

26.4

23.4

32.6

26.3

35.2

Net (loss) income for the period

(88.2)

26.7

10.4

26.7

24.2

36.8

28.8

41.9

EPS from continuing operations

($0.04)

$0.26

$0.22

$0.34

$0.30

$0.42

$0.34

$0.46

EPS

($1.11)

$0.34

$0.13

$0.34

$0.31

$0.47

$0.37

$0.54

Weighted average shares outstanding   
(in millions)

79.3

79.2

78.9

78.4

78.1

77.7

77.4

77.1

1The increase in the number of weighted average shares outstanding is due to shares issued under our dividend reinvestment program. As of Q4 2015, we no longer issue shares under the dividend reinvestment program.

Our 2015 performance is reflected in our financial results. Our interim financial results for the last eight quarters (Q4 2015 to Q1 2014) reflect the following significant transactions and trends:

  • Discontinued operations – As disclosed on January 15, 2016, the sale of Allstream is complete. We realized gross proceeds of $465 million, and after standard closing costs and adjustments, we expect to realize net proceeds estimated at approximately $420 million. Effective November 21, 2015 we started reporting Allstream as an asset held for sale, with their results of operations reflected as discontinued operations. In Q4 2015, we recorded a non-cash post-tax impairment charge of $95.7 million. The disposal of the business was completed on January 15, 2016, and any further gain or loss on disposal will be reflected in our Q1 2016 reporting. The amount of any gain or loss on disposal will depend on final closing adjustments and final consideration received. For more details regarding the accounting treatment, readers are encouraged to review the discontinued operations note disclosure in our audited consolidated financial statements for the year ended December 31, 2015, which can be found on our website at www.mts.ca/aboutus.

  • Restructuring and transformation costs – In the second, third and fourth quarters of 2015 our restructuring and transformation costs were $5.5 million, $2.9 million and $30.2 million, respectively. These costs are mainly associated with the MTS transformation program (mostly relating to the voluntary workforce reduction program) and severances and other costs incurred relating to other restructuring programs. Included in the $30.2 million is a non-cash pension curtailment loss of $17.1 million.

  • Spectrum purchases – On July 31, 2015 we acquired 15 MHz of paired AWS-1 spectrum from WIND Mobile for $45 million. We intend to use this spectrum to upgrade our wireless network, significantly increasing the network speed and customer experience. In Q2 2015, MTS acquired a block of 2500 MHz spectrum in the Innovation, Science and Economic Development Canada (ISED Canada), formerly Industry Canada 2500 MHz (BRS) auction for $2.4 million. This is in addition to the 700 MHz spectrum which was acquired in Q2 2014 for $8.9 million.

  • SR&ED ITC recovery adjustments – In Q3 2015, we realized positive SR&ED ITC recovery adjustments (relating to the 2012 taxation year) which increased EPS by $0.05 by reducing depreciation and amortization expense. In Q3 2014 and Q1 2014, we realized positive SR&ED ITC recovery adjustments which increased EPS by $0.11 in Q3 2014 and by $0.12 in Q1 2014 by reducing depreciation and amortization expense. The Q1 2014 SR&ED ITC recovery constitutes the net adjustment relating to four taxation years, ending December 31, 2011. The Q3 2014 SR&ED ITC adjustment reflects the final asset allocations to which the SR&ED ITC relate.

  • Wireless double cohort – As a result of the May 19, 2015 CRTC decision, in the second quarter of 2015 we have fully amortized any outstanding deferred wireless costs related to the now invalid three-year wireless contracts. With this accelerated amortization we recognized $9.9 million of additional expense in Q2 2015, of which $5.0 million and $3.4 million would have otherwise been expensed in Q3 and Q4 2015, respectively, with the remaining $1.5 million expensed in 2016.

  • Pension plan pre-funding – On May 6, 2015 we completed the pre-funding of $120 million into our pension plans using our existing credit facilities. This one-time pre-funding eliminates the need for solvency payments for 2015 and 2016 under any reasonable economic scenario with the expectation of enhancing the stability and predictability of cash flows.

Fourth-quarter 2015 in review

Fourth-quarter financial results

($ millions, except EPS)



Q4 2015


Q4 2014

% variance

MTS operating revenues



252.1


251.0

0.4

MTS EBITDA before restructuring and transformation costs



115.6


113.4

1.9

(Loss) income from continuing operations



(3.4)


23.4

n.a.*

EPS1 from continuing operations



($0.04)


$0.30

n.a.

Capital investments



39.0


59.2

34.1

Free cash flow



33.6


19.7

70.6

1 EPS is based on weighted average shares outstanding of 79.3 million and 78.1 million for the three months ended December 31, 2015 and December 31, 2014, respectively.

*not applicable

MTS fourth-quarter operating revenues

($ millions)




Q4 2015


Q4 2014

% variance

Wireless




87.2


89.4

(2.5)

Broadband and converged IP




64.3


62.0

3.7

Information solutions




8.3


5.1

62.7

Security and monitoring




3.4


3.2

6.3

Unified communications




7.7


6.7

14.9

Local access




56.0


59.7

(6.2)

Long distance and data




14.3


15.9

(10.1)

Other




10.9


9.0

21.1

Total operating revenues




252.1


251.0

0.4

*not applicable

Wireless services revenues
Revenues decreased $2.2 million in Q4 2015, as a result of lower voice revenues due to pricing on feature-rich plans in the Manitoba market, partly offset by increased wireless data revenues. Despite the impact of the wireless double cohort, Q4 2015 post-paid subscriber churn remained almost unchanged from Q4 2014, at 1.06% and 1.05%, respectively, demonstrating the effectiveness of the steps we took to mitigate the impact of this decision.

Broadband and converged IP services revenues
Q4 2015 saw revenue growth of $2.3 million from strong Internet and IPTV performance, partly offset by lower revenues from converged IP.

Information solutions revenues
Information solutions revenues were up $3.2 million for Q4 2015, due primarily to the acquisition of TTC.

Unified communications revenues
Revenues increased $1.0 million in Q4 2015 due to greater demand, resulting in increased hardware installations and associated services.

MTS EBITDA before restructuring and transformation costs
EBITDA before restructuring and transformation costs was up $2.2 million mainly due to a combination of increased revenues and lower operating expenses. See our 2015 Supplemental for additional EBITDA information.

(Loss) income and EPS from continuing operations
In the fourth quarter of 2015 we had a loss from continuing operations of $3.4 million and EPS of ($0.04) mainly due to restructuring and transformation costs.

Discontinued operations
With the sale of Allstream, 2015 assets and liabilities pertaining to Allstream have been reclassified as held for sale with the non-current assets being recorded at the lower of the carrying amount or the fair value less costs to sell. Allstream's operating results for  both 2015 and 2014 have been reclassified as discontinued operations. The majority of the change year over year is related to the impairment loss ($95.7 million). For more details regarding the accounting treatment, readers are encouraged to review the Allstream sale note disclosure in our 2015 annual consolidated financial statements, which can be found on our website at www.mts.ca/aboutus.

Capital investments
Our capital investments decreased $20.2 million from Q4 2014, mainly the result of our capital investment process redesign.

Fourth-quarter free cash flow
















($ millions)




Q4 2015


Q4 2014

% variance

MTS EBITDA before restructuring and transformation costs




115.6


113.4

1.9

Add back (deduct):









Deferred wireless costs




(31.6)


(23.8)

(32.8)


Finance costs




(16.8)


(15.3)

(9.8)


Other operating activities, net




1.2


(0.4)

n.a.*


Current cash income tax expense




0.3


n.a.


Pension funding and net pension expense1




4.2


3.0

40.0


Other income




(0.5)


1.6

n.a.


Loss on disposal of assets




0.2


0.4

(50.0)

Total




72.6


78.9

(8.0)


Capital investments




(39.0)


(59.2)

34.1

Free cash flow for the period




33.6


19.7

70.6

1 Excludes the impact of the non-cash pension curtailment loss of $17.1 million. See page 12 of our 2015 Supplemental for further disclosure.

* not applicable

Free cash flow increased $13.9 million over Q4 2014 mainly the result of the recent efforts to improve both the intensity and effectiveness of our capital investment decision-making and increased EBITDA, partially offset by increased deferred wireless costs.

Liquidity and capital resources

Summary of cash flow

($ millions)


2015


2014

% variance

Cash flows from (used in):







Operating activities


116.6


311.9

(62.6)


Investing activities


(239.1)


(204.7)

(16.8)


Financing activities


75.4


(146.2)

n.a.*

Cash flows used in continuing operations for the year


(47.1)


(39.0)

(20.8)

*not applicable

Operating activities
"Cash flows from (used in) operating activities" refers to cash we generate from our business activities.
Cash flows from operating activities decreased $195.3 million mainly due to a combination of the pension solvency prepayment of $116.1 million and increases in restructuring and transformation cash costs of $21.5 million, deferred wireless costs of $25.5 million and working capital changes of $31.6 million.

Investing activities
"Investing activities" refers to cash used for acquiring, and cash received from disposing of, long-term assets and other long-term investments.
Cash flows used in investing activities increased $34.4 million mainly due to higher spectrum acquisition costs and the acquisition of the remaining 50% ownership in TTC, partially offset by the planned reductions in capital investments.

Financing activities
"Financing activities" refers to actions we undertake to fund our operations through equity capital and borrowings.
Cash flows from financing activities increased $221.6 million mainly due to the net issuance of notes payable in 2015, the 2014 net re­payment of long-term debt of $50 million and the decrease in dividends paid in 2015.

In the third and fourth quarters of 2015, cash dividends of $0.325 per common share were paid out to shareholders. In the first and second quarters of 2015 and each quarter of 2014, cash dividends of $0.425 per common share were paid to shareholders, as approved by the Board. During 2015, 1,139,077 common shares were issued as a result of participation in our Dividend Reinvestment Plan. These shares were issued for net proceeds of $28.9 million. We are no longer issuing shares as a result of participation in our dividend reinvestment program. All shares are now purchased on the open market.

Share repurchase program
On February 4, 2016, the Board approved a share repurchase program which allows for the repurchase of 7,086,000 common shares at a maximum cost of $200 million between February 9, 2016 and February 8, 2017, at prevailing market prices.

Free cash flow
Our free cash flow definition includes cash flows from operating activities including net intersegment revenues and expenses less capital investments, and excluding changes in working capital, pension solvency funding and pension lawsuit payments, restructuring and transformation costs and non-cash taxes. The following table provides a reconciliation of free cash flow from EBITDA before restructuring and transformation costs. Please see our 2015 supplemental for restated prior year free cash flow, which is available on our website at www.mts.ca/aboutus and is available on SEDAR.

Free cash flow






($ millions)


2015


2014

% variance

MTS EBITDA before restructuring and transformation costs


463.6


466.4

(0.6)

Add back (deduct):







Deferred wireless costs


(96.6)


(71.1)

(35.9)


Finance costs


(64.7)


(65.1)

0.6


Gain on revaluation of TTC


(5.6)


n.a.*


Other operating activities, net


(0.3)


(1.3)

76.9


Current income tax expense


(0.1)


(0.2)

50.0


Pension funding and net pension expense 1


20.1


12.2

64.8


Other income


4.0


2.1

90.5


Loss on disposal of assets


0.7


1.0

(30.0)

Total


321.1


344.0

(6.7)


Capital investments


(180.4)


(212.5)

15.1

Free cash flow for the year


140.7


131.5

7.0

1 Excludes the impact of the non-cash pension curtailment loss of $17.1 million. See page 12 of our 2015 Supplemental for further disclosure.

* not applicable

Free cash flow increased $9.2 million from 2014 due to our recent efforts to improve both the intensity and effectiveness of our capital investment decision-making, partially offset by increased deferred wireless costs of $25.5 million.

Capital management
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 refinance maturing debt, to fund new initiatives and to manage short-term cash flow fluctuations.

Credit facilities   

($ millions)




Utilized at
December 31, 2015



Capacity

Medium-term note program






500.0

Revolving credit facility




205.2



400.0

Additional credit facilities




299.8



300.0

Accounts receivable securitization




48.1



50.0

Total




553.1



1,250.0

We renewed our medium-term note (MTN) program on October 2, 2015 for $500 million for a two-year period. We have a $400 million revolving credit facility, of which we had utilized $205.2 million at December 31, 2015 for undrawn letters of credit and to partially fund the pension prepayment and spectrum purchase. We also have two additional credit facilities totalling $300 million, which are used solely for the issuance of letters of credit. As at December 31, 2015, a total of $299.8 million was utilized for undrawn letters of credit. In addition to these programs and facilities, we have a $50-million accounts receivable securitization program, of which $48.1 million was utilized as at December 31, 2015. The accounts receivable securitization program limit was reduced from $110 million to $50 million in December 2015, with the removal of Allstream as a seller under the program. On January 15, 2016, we repaid $122.1 million in notes issued under the revolving credit facility and the $48.1 million outstanding under the accounts receivable securitization program.

Capital structure

($ millions)


December 31, 2015


December 31, 2014

Bank indebtedness (Cash and equivalents)


15.0


(33.4)

Notes payable


166.1


Finance lease obligations, including current portion


54.2


Long-term debt, including current portion


874.0


873.1

Net debt


1,109.3


839.7

Shareholders' equity


1,048.2


1,052.3

Total capitalization


2,157.5


1,892.0

Debt to capitalization


51.4%


44.4%

Our capital structure illustrates the amount of our assets that is financed by debt versus equity. Our debt to total capitalization ratio of 51.4% at December 31, 2015 continues to represent financial strength and flexibility.

Credit ratings








S&P - Senior debentures


BBB (negative)


DBRS - Senior debentures


BBB (stable)

S&P - Commercial paper


A-2


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. On May 8, 2015, S&P confirmed its credit ratings on our long-term corporate credit and senior unsecured debt at "BBB", and also confirmed our commercial paper rating of "A-2". However, S&P revised its outlook to negative from stable. DBRS confirmed its ratings on May 7, 2015, with our senior debentures at "BBB" and our commercial paper rating of "R-2 (high)". DBRS's outlook remained stable.

Outstanding share data





As at January 25, 2016


As at December 31, 2015

Common shares outstanding




79,262,469


79,262,469

Stock options outstanding




563,149


566,233

Stock options exercisable




558,235


558,235

Contractual obligations
Our commitments as of December 31, 2015 are summarized in the following table:

($ millions)

Less than one year

1-3 years

4-5 years

5+ years

Total

Long-term debt

250.0

200.0

200.0

225.0

875.0

Notes payable

166.1

166.1

Finance lease obligations

6.1

12.2

12.4

74.2

104.9

Operating leases

13.9

26.1

22.3

21.0

83.3

Purchase obligations

85.4

11.0

6.1

1.5

104.0

Total

521.5

249.3

240.8

321.7

1,333.3

Financial instruments, off-balance sheet arrangements and other financial arrangements
Foreign currency forward contracts
We use foreign currency forward contracts to manage the foreign currency exposure. Foreign exchange gains and losses on these foreign currency forward contracts are recorded in the consolidated statement of financial position as an asset or a liability, with changes in fair value recognized in the consolidated statement of net income. As at December 31, 2015, we had outstanding foreign currency forward contracts to purchase $20.5 million U.S.

Accounts receivable securitization
Under the terms of our accounts receivable securitization program, we have the ability to sell, on a revolving basis, an undivided interest in our accounts receivable to a securitization trust, to a maximum of $50 million. The program was reduced from $110 million to $50 million in December 2015, with the removal of Allstream as a seller under the program. We are required to maintain reserve accounts, in the form of additional accounts receivable over and above the cash proceeds received, to absorb any credit losses on the receivables sold. We are required to maintain certain financial ratios with respect to our accounts receivable, or the cash proceeds must be repaid. We also are subject to certain risks of default which, should they occur, could cause the agreement to be terminated early. As at December 31, 2015, we had $48.1 million outstanding under our accounts receivable securitization program.

Critical accounting estimates and assumptions

The preparation of our consolidated financial statements in accordance with IFRS requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. We make these estimates and assumptions based on reasonable methodologies, established processes and comparisons to industry standards. We continuously evaluate these estimates and assumptions, which rely on the use of professional judgment. Because professional judgment involves inherent uncertainty, actual results could differ from our estimates. Our estimates, assumptions and methods have been applied consistently.

Valuation of accounts receivable
As we expect that a certain portion of receivables from customers will not be collected, we maintain an allowance for doubtful accounts. If circumstances related to specific customers change, economic conditions change or actual results differ from expectations, our estimate of the recoverability of receivables could fluctuate from that provided for in the consolidated financial statements. A change in our estimate could impact bad debt expense and accounts receivable.

Useful lives of property, plant and equipment
Property, plant and equipment are amortized on a straight-line basis over their estimated period of future benefit. We review these estimates on an annual basis, or more frequently if events during the year indicate that a change may be required. Consideration is given to technological obsolescence, competitive pressures and other relevant business factors. A change in our estimate could impact depreciation expense and the carrying value of property, plant and equipment.

Useful lives of definite-life intangible assets
Intangible assets with a definite useful life are depreciated on a straight-line basis over their estimated period of future benefit. We review these estimates on an annual basis, or more frequently, if events during the year indicate that a change may be required. Consideration is given to customer churn, industry standards and other relevant business factors. A change in estimate could impact amortization expense and the carrying value of definite-life intangible assets.

Goodwill and indefinite-life intangible assets
Goodwill and indefinite-life intangible assets are tested for recoverability on an annual basis, or earlier when events or changes in circumstance indicate that the carrying value might not be recoverable. The recoverable amount of each cash-generating unit is determined based on value in use calculations. These calculations require the use of estimates, including our expectations of revenues and operating costs, and assumptions of growth rates. A change in our estimates could impact the carrying value of goodwill and indefinite-life intangible assets.

Non-financial assets with finite useful lives
Non-financial assets with finite useful lives include property, plant and equipment and intangible assets. We test the recoverability of non-financial assets with finite useful lives when events or changes in circumstances indicate that the carrying value might not be recoverable. The recoverable amount of each cash-generating unit to which the asset is allocated is determined based on value in use calculations. These calculations require the use of estimates, including management's expectations of revenues and operating costs, and assumptions on discount and growth rates. A change in estimates could impact the carrying value of property, plant and equipment and intangible assets.

Deferred tax assets
We have deferred tax assets resulting from net operating loss carry-forwards and deductible temporary differences, which, to the extent utilized, will reduce future taxable income. Realization of these deferred tax assets is dependent on our ability to utilize the underlying future deductions against future taxable income. In assessing the carrying value of the deferred tax assets, we make estimates and assumptions of future taxable income using internal management projections, the carry-forward period associated with the deferred tax assets, the nature of income that may be used to realize the deferred tax assets, future tax rates, and ongoing audits by the Canada Revenue Agency (CRA). A change in our assessment of any of these factors could affect the value of our deferred tax asset and related income tax expense.

Decommissioning provisions
When recognizing decommissioning provisions, we are required to make estimates of the probability of retiring assets, the timing and amount of retirement costs and the discount factor applied to determine fair value. Our estimates of probability and of the timing and amount of costs are subject to change, and are reviewed annually or more frequently if events during the year indicate that a change may be required.

Employee benefits
We provide pension, supplemental pension and other non-pension post-employment benefits to our employees. The determination of benefit expense and benefit obligation associated with post-employment benefits requires the use of certain actuarial and economic assumptions, such as the discount rate to measure defined benefit obligations, expected future salary increases and future mortality rates. A change in estimate or assumptions could affect benefit cost and the present value of the defined benefit obligation.

Discontinued operations
When determining the assets held for sale, we made a number of estimates related to the employee benefit obligations and assets attributable to active employees of Allstream considering estimates and assumptions similar to those described in employee benefits above. We will record a settlement loss or gain in discontinued operations upon the ultimate transfer of these pension assets based on the future asset and benefit obligation balances and the solvency deficit attributable to such benefit obligations. The determination of this final settlement loss or gain is subject to significant measurement uncertainty based on the nature of the underlying estimates and assumptions.

Changes in accounting policies

Our consolidated financial statements have been prepared using the same accounting policies and methods of application as those used in the previous year.

Accounting standards issued but not yet effective
We have not yet adopted certain standards, interpretations to existing standards and amendments which have been issued but are not yet effective. Many of these updates are not relevant to us and are therefore not discussed. We expect the standards and amendments described below to be applicable to its consolidated financial statements at a future date. The following standards and interpretations are currently being reviewed to determine the potential impact.

IFRS 9, Financial Instruments
The final version of IFRS 9, Financial Instruments, was issued in July 2014, and replaces earlier versions of IFRS 9 and completes the IASB's project to replace IAS 39. The new standard introduces new classification and measurement requirements for assets and liabilities, and a new expected loss impairment model that will require more timely recognition of expected credit losses for financial instruments. Entities will also be required to have additional disclosure to provide information that explains the basis for their expected credit loss calculations and how they measure expected credit losses and assess changes in credit risk. The standard also introduces a new hedge accounting model that aligns the accounting treatment with risk management activities. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, and is to be applied retrospectively, with earlier application permitted.

IFRS 15, Revenue from Contracts with Customers
IFRS 15, Revenue from Contracts with Customers, was issued in May 2014 and establishes a five-step revenue recognition model that applies to revenue arising from contracts with customers. IFRS 15 requires revenue to be recognized in a manner that depicts the transfer of promised goods or services to customers at an amount that reflects the expected consideration receivable in exchange for transferring those goods or services. This standard also provides guidance on the accounting treatment for contract acquisition and contract fulfillment costs and requires enhanced disclosures as to the nature, timing and uncertainty of revenues and cash flows arising from contracts with customers. This standard supersedes IAS 18, Revenues, IAS 11, Construction Contracts and a number of revenue-related interpretations. IFRS 15 is effective for annual periods beginning on or after January 1, 2018 and is to be applied retrospectively, with earlier adoption permitted. Entities will transition following either a full or modified retrospective approach. We expect the application of this new standard to impact the reported results in its consolidated financial statements. The expected impacts include a change in the allocation of contract revenues between services and equipment, and a shift in the timing over which those revenues are recognized. It also expects a shift in the timing of recognition for contract acquisition and fulfillment costs.

Amendments to IAS 1 Presentation of Financial Statements
Amendments to IAS 1, Presentation of Financial Statements, was issued in December 2014. These amendments provide guidance on the application of professional judgement in determining what information to disclose and how to structure it in the financial statements.  The amendments are effective for annual periods beginning on or after January 1, 2016, with earlier adoption permitted. We will adopt these presentation standards in 2016.

Risks and uncertainties

Risk evaluation processes
Risk management practices are part of our standard operations. Identifying and managing risks forms part of Management's regular business planning processes because risks, as well as associated opportunities, form the basis of many aspects of our future business models and plans.

As we set our strategic objectives, our business leaders and Enterprise Risk Management (ERM) team undertake to identify and assess the associated risks, and consider the activities being taken to mitigate them. The program is managed through our executive team, in conjunction with our ERM team.

Strategy and the annual risk assessment
With Jay Forbes joining as our new CEO in January 2015, we completed a fulsome strategic review in early 2015, which included an assessment of all of our strengths, weaknesses, opportunities and threats across all of our lines of business. We examined the competitiveness of our offerings, the effectiveness of our internal processes and tested the validity of our business models. The result was a new set of strategic plans focused on creating both immediate and long-term value and the implementation of a performance management process designed to ensure these strategies gain immediate traction.

As above, we perform and maintain a formal risk assessment that is directly linked to our strategic plans, and related business plans. Regular updates are performed throughout the year to identify potential emerging or previously unidentified risks. Our ERM team plays a key role in ensuring Management follows appropriate processes in completing these risk assessments. The risks are rated, ranked, and formalized into reports, which are reviewed by the Executive Team. The executive team provides its input, the reports are finalized and the most significant risks, or "principal risks", are presented to the Board.

The constituent elements of these principal risks, as well as other risks we face, are explained in greater detail below and are not necessarily always grouped in the same aggregating format.

Role of the Board and the Audit Committee
The Audit Committee charter requires an annual review of our risk management program for the identification and management of principal risks and respective mitigation strategies. The Audit Committee must be satisfied with two procedural matters. First, it assesses whether our risk management program is appropriate. Second, with the support of the ERM team, it ensures that each of the key risks and associated mitigations identified by Management is delegated for more detailed review, oversight and monitoring by either the full Board or one of the Board's standing committees.

In addition, the Board charter requires all directors be involved in the monitoring of all of our principal risks and their respective mitigation plans. Our directors must have a solid and substantive understanding of the principal risks facing MTS. Consequently, nearly all of the Board and committee meetings have agenda items involving risk discussions. The Board believes that risks and opportunities are related and need to be considered together. When the Board or a committee is asked to approve key strategic matters (primarily the approval of our strategic plan, but also including matters such as budgets, outlook or decisions), a discussion surrounding the associated risks and opportunities also occurs. In that sense, risks and the associated mitigations are an integral and necessary part of normal business planning.

Risks relating to MTS
General
The risks and uncertainties summarized below highlight the more important and relevant factors that could significantly affect our financial results and operations. Our executive team has reviewed these risk factors, and they believe these factors are a fair and comprehensive summary of principal risks facing MTS and the mitigation plans in place to manage them. Sometimes, however, risks manifest themselves in ways that are not expected. As such, the following is not intended to represent an exhaustive list of all potential issues that could significantly affect our financial results.

Some of the more recent significant events that affect our risk include the following:

Sale of Allstream
In November 2015, we announced the sale of Allstream to Zayo Group Canada Inc., a leading provider of communication infrastructure, in an all-cash transaction for $465 million, which closed on January 15, 2016. As a result, risk factors outlined in this MD&A are only focused on MTS.

The sale of Allstream will allow us to focus on our strategic initiatives, and will provide funding to improve our capital structure. In addition, the specific operating and performance risks associated with Allstream will be removed.

With the sale of Allstream, MTS and Allstream must separate business processes and systems that had previously been combined. Preparations to separate Allstream from MTS have been underway for some time, and substantial progress has been made to-date.

That said, as part of the separation, some of our risks will increase, such as the risks associated with our scale, as we are now a smaller company than we previously were. In addition, we have, or will have to, contract services that were previously delivered to us by Allstream. Contracted services will include our requirements for network access outside of Manitoba, although we expect that Allstream will continue to provide a number of the services that it currently provides under arms-length commercial arrangements. In addition, due to the historical combination of MTS and Allstream, for a period of time following closing, MTS will continue to have residual liability in respect of some of Allstream's obligations. While there are arrangements in place to mitigate and eventually entirely eliminate this risk, for a period of time MTS will have exposure to some of Allstream's obligations (for example, under some of Allstream's leases, MTS may be a guarantor or co-tenant). We have mitigated this risk by selecting a strong operator to acquire Allstream. Zayo is listed on the New York Stock Exchange and had revenues of $1.35 billion in its fiscal year ending June 30, 2015 and a market capitalization of $5.74 billion.

MTS transformation program
In 2015, we announced our intention to transform our business and introduce many new and exciting opportunities for our company, our customers and our shareholders. This program has identified $100 million in annual free cash flow improvement opportunities which is expected to transform our company into a customer-first organization. However, there are associated risks inherent to any transformation initiative of this size and scope. These initiatives are actively planned and managed through our TMO to ensure the greatest opportunity for success. Although the TMO initiatives are expected to rejuvenate and rebuild MTS, the benefits of the TMO initiatives may not be fully realized or may take longer to realize than anticipated. Some of the activities undertaken could be disruptive to our organization and our ability to serve customers, and to our reputation in the marketplace, which, in turn, could negatively impact different aspects of our operating results.

The TMO is carefully managing these risks to help ensure the expected benefits are realized.

Changing competitive markets
Like all of our industry peers, we operate in highly competitive environments, and in 2015 we saw the competition continue. By way of example, late in 2015, Shaw announced that it will acquire WIND Mobile, pending regulatory approvals. Shaw has not announced a plan to operate mobile wireless services in Manitoba, but may choose to do so in the future, pending the acquisition of Manitoba-based spectrum.

Competition
We have many competitors, and technology changes are making it easier for others to enter our markets. The risk is that current or future competitors will provide services comparable or superior to those we provide, at the same or at lower prices; adapt more quickly to evolving industry trends or changing market requirements; introduce competing services, or; better execute their business plans. The products and services we sell have increasingly short "lifecycles", meaning that even when we successfully introduce and compete with a particular product or service, its replacement or the next generation product or service is either in development or just about to be rolled out.

We have always been exposed to strong competition because many of our competitors are significantly larger and therefore possess a scale advantage; have greater access to financial resources, and; are better able to enter into exclusive or preferred arrangements with suppliers. All of these factors could adversely affect our market share and results.

We spend considerable time strategizing about how we can best mitigate competitive risks. All of our detailed business plans and market strategies are created with the primary objective of sustaining and growing our businesses, notwithstanding these intense competitive pressures.

Wireless competition
MTS' vast and reliable wireless networks keep our customers connected across Manitoba. The combined power of our network coverage (including CDMA, 4G HSPA+ and 4G LTE) and Wi-Fi hotspots ensures that our customers can use their smartphones and devices to their fullest, and we maintain the largest market share. We are also able to leverage other services in our bundle offers (phone, Internet and IP services, television and alarm monitoring) as part of our strategy to continue our successes in the wireless market.

Our primary competitors in the Manitoba wireless market are Rogers, TELUS and Bell, including Fido, Koodo, Virgin Mobile and PC Mobile brands. We may also see Shaw enter our market through WIND Mobile. Although we acquired all of WIND Mobile's Manitoba spectrum in the summer of 2015, in the future Shaw could enter the Manitoba wireless market and compete with our ability to offer consumer bundles (including phone, Internet and television), to be coupled with their large series of wireless "hot spots" in Manitoba using unlicensed Wi-Fi spectrum. In the past several years, we have seen significant and aggressively priced wireless plans offered by our competitors in the Manitoba market, aimed at taking market share away from MTS. In addition, TELUS expanded its wireless network footprint in Manitoba, which it shares with Bell Canada, including a new LTE network in Manitoba.

The speed and scope of the 4G LTE deployment, as well as the general rapid evolution of mobile wireless technologies, create substantial risks and opportunities for our wireless business, which is material to our consolidated results. In 2015, we expanded the reach of our 4G LTE network to more than 30 new rural communities. Deployment of new wireless networks is capital-intensive. In addition, the growing number of substitutes for wireless services, with more smartphones operating on Wi-Fi, could have a negative impact on our wireless business.

Demand for wireless data continues to increase at an exponential rate. Our ability to meet this demand in the future is not certain, and even if we can meet it, we cannot predict the cost to do so. The inability to keep up with the demand for wireless data capacity could have an adverse effect on our business, financial results and customer experience.

Spectrum is a finite and scarce resource that can be expensive to obtain, if it is available at all. The failure to acquire or maintain spectrum could affect our ability to deploy new wireless technologies or to service current customers with existing technologies. Furthermore, the Government of Canada (the Government) is able to prescribe deployment obligations for the retention of that spectrum which could be challenging to meet, and the failure to meet the same would result in the forfeiture of spectrum. All of this could materially affect our operations and consolidated profitability. In July 2015, we acquired 15 MHz of paired AWS-1 spectrum in Manitoba from WIND Mobile. This acquisition of spectrum, along with the paired block of 2500 MHz spectrum acquired in the ISED Canada auction in May 2015, will allow us to increase speed and improve customer experience on our wireless network. In the ISED Canada auction for residual 700 MHz and AWS-3 spectrum in August, we did not acquire any licenses. There is no guarantee that we will obtain future spectrum. Finally, there is also a risk that spectrum is acquired by a wireless service provider that is currently in our market, or a new market entrant (such as Shaw). The acquisition of this spectrum by such party or parties could cause overall competition in the Manitoba wireless market to intensify.

Ensuring our Manitoba wireless consumers have access to wireless devices (such as smartphones) and roaming partners can be challenging. Although we have a partnership with Rogers to procure wireless devices, some devices are harder to procure for companies with a smaller scale, such as MTS. Our roaming partners need to be technologically compatible with our network, the spectrums we use and our wireless devices. In the past, we have been successful in securing such devices and roaming partners. Under a recent regulatory ruling, the CRTC determined that Bell, TELUS and Rogers must offer wholesale wireless roaming to all other Canadian wireless carriers, at regulated rates. The CRTC also recommended that the Government repeal roaming caps introduced in June 2014, and permit market forces to determine all other wholesale roaming rates. While this provided strategic benefits to MTS, it requires that we re-negotiate roaming rates with smaller wireless providers on whose networks MTS wireless customers roam, which could materially increase our cost structure.

Finally, we have seen a growing trend of governments passing consumer protection legislation that could impact our flexibility in marketing our services or requiring longer-term contractual commitments from consumers. For instance, as of June 3, 2015, the CRTC Wireless Code allowed customers to exit their wireless contracts after two years, which, for many customers, meant a reduction in initial contract length of up to 12 months. This change created risk of higher churn, contract re-pricing, increased deferred wireless costs, and losses on device subsidies originally intended to continue for 36 months. On a sustained basis, we expect that this will increase the cost of acquisition for wireless subscribers across the entire industry.

Wireline voice competition
Our primary competitors in the consumer and small business wireline voice market are the incumbent cable providers in Manitoba, Shaw and Westman Communications Group (Westman). Cable competition and ongoing technology substitutions (including increasingly viable wireless solutions, as wireless providers are also competitors here) have contributed to the erosion of our residential network access lines. We also face increased competition at the enterprise level, including voice and related IP services from the large national providers including Bell, TELUS, Rogers and Shaw, potential new service providers such as Zayo, as well as heavier competition for voice services and equipment sales from smaller or local niche players like FlexITy, Powerland and OnX, which continues to impact our enterprise access lines and our revenues from installation and sales. This erosion is expected to continue over time. It creates significant financial pressure that needs to be offset with cost reduction strategies and revenues from other lines of business capable of producing profitable growth. There is no guarantee we will have the ability to continue to successfully implement these strategies in the future. In addition, the ongoing Basic Service Objective hearings at the CRTC (described under Regulatory developments) may put at risk the financial subsidies we receive to provide basic voice services in rural, high-cost servicing areas.

Broadband competition
Our primary competitors in urban broadband markets are the incumbent cable providers, Shaw and Westman, and wireless Internet  service providers in smaller communities and rural areas. Shaw offers some of its customers Internet speeds that are faster than those we currently offer to some of our customers. This development could adversely affect our ability to retain our market share. In addition, new wireless technologies, such as 4G LTE, could become increasingly viable substitutions for our wireline broadband offerings, putting further pressure on our business results. Our broadband business continues to perform well, despite these competitive pressures. Our broadband services form an important part of our bundle strategy. We are also reviewing the business case associated with deploying more fibre (fibre-to-the-home and fibre-to-the-node) to help maintain the competitiveness of our speeds and service offerings. These deployments, however, are very capital-intensive, and a recent CRTC ruling (described under Regulatory developments) puts into question whether competitors would be able to access MTS' fibre builds in Manitoba in the future. Finally, the ongoing Basic Service Objective hearings at the CRTC (described under Regulatory developments) are reviewing, among other matters, whether broadband is a basic service requirement for Canadians. The outcome of these hearings could materially change the competitive landscape of broadband in Canada, including the potential requirement of extensive capital investments by MTS or the subsidization of broadband services given to our competitors.

Television competition
Our primary competitors in the television market are the incumbent cable providers, Shaw and Westman, and satellite television providers, Shaw Direct and Bell TV. There is also a growing base of other new content providers, such as Netflix, CraveTV and Shomi that offer products that we believe are, to some extent, substitutes for traditional television services. Prior to 2015, Shomi and CraveTV were not available to customers of certain TV service providers, including our customers, through restricted distribution rights. In 2015, restricted distribution rights were removed from Shomi, and in 2016, restricted distribution rights were removed from CraveTV. In 2016, Shaw launched its Free Range TV service that will allow its customers to view its TV services from anywhere with a data connection, which is a service that MTS cannot replicate at this time.

Streaming of over-the-top content via the Internet has now extended to wireless TV distribution platforms over smartphones, tablets and computers. It is offered by some of our competitors, including Bell, Shaw and Rogers. MTS also has wireless TV distribution, through our own MTS TV to Go platform, as well as agreements for TSN to Go and CTV to Go, but these services are currently not as extensive as those offered through some of our competitors such as Shaw.

Our IPTV is currently available in Winnipeg and Brandon, as well as in 14 other communities. While we have an advanced television offering, there are no assurances that our past successes will continue. In addition, our acquisition costs for programming, particularly sports programming, continue to increase. We generally have a limited ability to pass these increasing costs onto our consumers, which could affect our overall profitability. Much of this content is created and/or owned by our competitors (Bell, Rogers and Shaw), who could have conflicting interests when we negotiate for their content. To date, the CRTC has offered broadcasting distributors such as MTS limited protection against attempts by our competitors who own this content (for use in both traditional television and mobile applications) to charge us unfair rates or deny us access to this content altogether.

As described under Regulatory developments, in 2015, the CRTC issued decisions on the revised framework for television programming and distribution. By March 2016, all discretionary television programming services must be distributed on a pick-and-pay basis or in small, themed packages, which may be selected by the customer or pre-assembled by the distributor. By December 2016, all licensed broadcast distribution undertakings (BDUs) must distribute all discretionary television programming services both on a pick-and-pay and in small, themed packages. We already offer small, themed television packages, therefore we are compliant with the requirement for March 2016. Because we offer a number of services on a standalone basis today, the changes to our systems to introduce pick-and-pay by December 2016 should also be relatively simple to implement. However, given our existing commitments to suppliers of TV content (many of whom are MTS competitors and subject to pre-existing contractual obligations), it is unclear how the requirement to offer services on a pick-and-pay basis could impact our cost structure or our ability to recover these costs (if any) from customers.

Also taking effect in 2016, all licensed BDUs will be required to offer a small, entry-level basic service, at a rate of no more than $25.00 per month. BDUs can continue to offer their existing basic service offering, but the entry-level service must be promoted to the same extent as the existing basic service, so that customers are aware of its availability, pricing and content. Depending on the degree to which MTS TV customers switch to this entry-level service, our ability to fully recover our fixed distribution costs could be in jeopardy.

In 2015, licensed BDUs were required to be ready to distribute emergency alert messages to all their customers as part of the National Public Safety Alerting System (NPAS). While we were able to implement a solution for our MTS Ultimate TV® service, we were unable to do so for our Classic TV service, and had to discontinue our Classic TV service.

Competitive carriers and service providers
Within Manitoba, we operate as the incumbent carrier and as a provider of wholesale services to other competitive carriers and service providers. In this market, we face competition from competitors operating within Manitoba. Some of these competitors, such as Bell and TELUS, while not incumbent network providers within Manitoba, have a national scope and larger incumbent operations in other geographic areas. These competitors have always been much larger than us, with significantly more scale and financial resources. Most, but not necessarily all, of these national competitive carriers target our business customers and, with the sale of Allstream, our scale decreases and we may have more challenges in providing some national business services. Sometimes these national competitors are better positioned to acquire business customers with national scope, such as banks and other national customers that have some locations in Manitoba but make centralized, national purchasing decisions.

In addition, there is an increasing number of smaller competitors and competitive network alternatives, ranging from larger competitors such as Westman and Manitoba Hydro Telecom to wireless Internet service providers, Voice over Internet Protocol service providers and municipal/public dark fibre and wireless networks. Several of these smaller competitors are non-profit cooperatives, crown agencies or publicly-funded agencies, or are subsidized by government broadband programs. These smaller competitors primarily compete with MTS in the small and mid-market business and public service organization markets. We also face loss of customers and business revenues when our larger customers (such as public agencies or school boards) seek to acquire dark fibre and build their own networks. As the incumbent carrier within Manitoba, we have the network infrastructure that helps us to compete against both larger national carriers and smaller regional competitors, although this competition is intensifying. As the incumbent carrier within Manitoba, we have the network infrastructure that helps us compete against larger national carriers, potential new service providers such as Zayo, and smaller regional competitors. While MTS is well-positioned, there remains intense competition for these services.

Certain dependency on key customers
We have several large government and business customers that account for a noticeable percentage of our revenues. The loss of one or more of these key customers could adversely impact our financial results.

Scale
MTS has always been significantly smaller than most other incumbent telecommunications companies in Canada (for example, Bell and TELUS). We are also smaller than some of our direct competitors within Manitoba (for example, Rogers or Shaw). In turn, these Canadian-based competitors are significantly smaller than many of their global peers.

We operate with considerably lower economies of scale and much less purchasing power than do our larger competitors, and our ability to impose custom technological standards on manufacturers and our bargaining power with larger customers are more limited. This may become more pronounced with the sale of Allstream. While MTS continues to benefit from its incumbent position in Manitoba and can leverage its position as a smaller player to be more effective and closer to customers, it does place operational and financial pressures on MTS that may not be experienced by some of our larger competitors. We mitigate this type of risk by partnering with others where appropriate and advantageous (for example, we participate in a joint mobile wireless network with Rogers Wireless), and by leveraging our ability to be more agile or offer our customers a more personalized and customer-first experience.

Major network and systems outages and security breaches
We understand the importance of network integrity. We spend a significant amount of time and resources to manage this risk, as many of these risks can be prevented through proper network and system design, maintenance and alternate sources of supply. We regularly consider the probability of cyber-incidents and the quantitative and qualitative magnitude of these risks, including the potential costs and other consequences arising from the misappropriation of assets or sensitive information, the corruption of data or operational disruption.

To-date, our pro-active and ongoing mitigation and planning efforts have allowed us to avoid significant prolonged network failures or material cyber-security incidents. However, these types of events are becoming increasingly common and are experienced by many companies, across all types of industries. No company is ever immune nor can controls be implemented to guarantee complete security from these types of incidents; and they can have significant impacts. There are no assurances that our ongoing controls will continue to be effective, though we appreciate the importance of managing this risk.

Like all others in our industry, our operations depend on how well we and our suppliers protect our networks, equipment, IT systems, software and customer information (including personal information) against damage from a number of threats, including, but not limited to, cable cuts, damage to our physical plant, natural disasters, terrorism, fire, power loss, hacking, computer viruses, vandalism, theft and abuse by our own employees and contractors. Our operations also depend on the timely maintenance, upgrade and replacement of our network and our suppliers' networks, equipment, IT systems and software, as well as pre-emptive expenses to mitigate the risks of failures (such as expenses we incur as a result of the periodic flooding in Manitoba). Any of these and other events could result in network failures, billing errors, delays in customer service and/or increases in capital expenses. The failure of networks or a component of our networks might, in some circumstances, result in a loss of service for our customers and could adversely impact our reputation, goodwill and results of operations. Any of the above events affecting third parties on which we rely may also result in an interruption in service that would last until the outage is fixed or alternative service delivery options are found, and could also harm our customer relationships. Furthermore, we periodically face situations in which manufacturers no longer support their technologies, and these technologies are often more difficult to maintain and take more resources to secure, or cannot be secured to the same extent as fully-supported technologies.

Changes in regulation
The telecommunications and broadcast industries in which we operate are federally regulated. Our business is directly affected by decisions made by various regulatory agencies of the Government, including the CRTC and ISED Canada. The outcome of regulatory reviews, proceedings, appeals and other regulatory and policy developments could have a material impact (positive or negative) on our financial position.

Changes in the regulatory environment could affect the terms and conditions under which we are able to continue to use our licensed wireless spectrum, obtain new spectrum, alter the terms under which we are required to allow others to interconnect with our networks or change how we are permitted to sell our services to consumers or at what prices. Changes to these regulations could impose new operating or capital costs, or change the competitive dynamic of this market. Our television offering is also subject to broadcasting regulations. There are material active CRTC proceedings underway that may specifically and directly affect the terms under which we provide wholesale access to our wireless network, elements of our fibre network, as well as the manner in which we are able to sell television services to our customers. We are also subject to both federal and provincial consumer protection legislation that could create new obligations and limitations to be imposed on many of our lines of business.

For a description of the principal regulatory initiatives and proceedings currently affecting us, please see the section entitled Regulatory developments which is incorporated herein by reference as these developments form a significant element of the risks we face. We monitor changes in these regulations carefully and are frequent interveners in the regulatory process to ensure our perspective is understood by the regulators prior to their making decisions that will affect us.

Litigation and legal matters
Litigation
As is the case with any large company, investigations, claims and lawsuits seeking damages and other relief are threatened or pending against us. In addition, plaintiffs within Canada are also able to launch class-action claims on behalf of a large group of persons, with increasing ease. By the nature of our consumer-facing business, we are vulnerable to class action litigation.

By way of indicative examples, we and other major telecommunications service providers are defendants in three large national class-action claims. The first involves a claim relating to a class of subscribers for wireless or cellular services who are seeking recovery of fees that the carriers have categorized as system access fees or system licensing charges, and which the plaintiffs allege have been improperly characterized as government-related charges. The second major class-action claim relates to allegations that customers for both landline and wireless services have paid extra fees in association with 9-1-1 or emergency service access fees that now ought to be repaid, which is now also subject to an industry-wide regulatory review. In the third major class-action claim, we, along with the wireless carriers operating in Canada and the manufacturers of wireless devices sold in Canada, were named in a class-action lawsuit alleging adverse health effects incurred by long-term users of cellular devices. We believe we will be successful in defending against these specific claims.

We are also seeing other class-action claims being launched against other, larger companies in our industry that, although we are not named in such proceedings, are indicative of the trend and risk of such actions. The outcome of any such actions, or of new actions that may arise, however, is uncertain. Judges or juries can, at times, deliver unpredictable decisions. Until any particular matter is resolved, there can be no assurance that our financial position will not be negatively impacted, as the costs associated with losing or defending against such claims could be material. We strive to mitigate these risks by vigorously defending ourselves when appropriate. Negative financial outcomes associated with certain operational and/or legal risks are mitigated through the purchase of appropriate insurance coverage. We also take steps to minimize the risk of being sued or being subject to such proceedings at first instance, such as by implementing appropriate compliance programs and trying, whenever possible, to negotiate favourable contractual terms that limit our liability.

Civil liability in the secondary market
Securities laws impose potential liability for misrepresentations by public companies in written disclosure and oral statements, or for the failure to make timely disclosure of a material change. We have well-documented processes in place, including a Corporate Disclosure Policy that we believe provides reasonable procedures and controls for all of our public disclosure. We believe that we have appropriate insurance coverage in respect of these risks, and rely on the integrity of our officers and directors. However, there can be no assurance that all of our processes and controls will be followed by employees, officers, third parties and directors at all times.

Legal and regulatory compliance
We necessarily rely on our employees, senior management, the Board and key third-party contractors to conduct themselves according to legal and ethical standards. Situations might occur where individuals do not adhere to our policies or where legal requirements are inadvertently breached. Such events could expose us to damages, sanctions and fines, or negatively affect our financial operating results. We are required to handle our employees' and customers' personal information in a way that is compliant with all applicable privacy laws, which is becoming increasingly onerous. We believe we have reasonable policies, processes and awareness in place for proper compliance, and that these programs reduce the risks associated with some of these complex obligations. All employees, as part of our annual review process, are required to confirm that they have read our Guide for Business Conduct, Ethics, Competition and Compliance which outlines the essential rules and guidelines for honest and ethical business conduct.

We are also subject to various codes of conduct at both the federal and provincial levels, and these obligations continue to become more onerous over time. For example, Bill 62 amends The Consumer Protection Act of Manitoba and enacts certain rules surrounding distance communication services such as TV, Internet and alarm services. The Government of Manitoba has not yet enacted regulations related to this new legislation but anticipates doing so sometime in 2016. The CRTC issued a Television Service Provider Code of Conduct (TVSP Code), to be effective September 2017, to ensure cable and satellite companies give their customers clear information about the channels they are paying for, when promotional offers will expire, and better notice of service calls and price changes.

Similarly, changes in legislation can affect our customers' ability to use the products and services we offer. As an example, in 2010, our Manitoba-based wireless customers became subject to stricter laws limiting the use of handheld wireless devices while driving. Although we supported this change and did not see any adverse effect on our results or on demand for our services, there can be no assurances that this will be the case with future changes in legislation. Changes to legislation can also require us to build new systems or provide functionality that we would not otherwise establish, which could increase our costs. As an example, we may be required to incur unexpected network capital expenses to comply with potential new legislation mandating all telecommunications carriers to provide new methods of "lawful access" to law enforcement agencies.

Additionally, from time to time, we may become subject to new statutory requirements that affect our day-to-day operations and which may impose obligations and create potential risks associated with imperfect compliance. As examples, in 2014, the Government passed anti-spam legislation which places strict restrictions on unsolicited electronic messages and a new copyright regime which imposes a duty on Internet service providers (ISPs) to send notices they receive from copyright holders regarding alleged infringement of their copyrighted material.

We will need to comply with all of these obligations, which may introduce new costs, reduce consumer demand or introduce compliance risks.

Applicable legislation and corporate articles
Despite the recent liberalization of foreign ownership requirements applicable to telecommunications companies with less than a 10% market share, we remain subject to foreign ownership requirements that apply to our television business. In addition, the articles of MTS limit the ability of individuals to own and trade our securities, although such articles could be amended in the future. In particular, there are constraints in respect of the percentage of shares that may be owned by any one person (or groups of associated persons). These restrictions could serve to deter a change of control of MTS; limit the market demand, market price or liquidity of our securities, or affect our ability to access capital.

Contractual provisions
Technology evolution brings additional legal risks and uncertainties. The intellectual property and proprietary rights of owners and developers of hardware, software, business processes and other technologies may be protected under law, and significant damages may be awarded in property infringement claims advanced by rights holders. In addition, contractual provisions to which we are bound are becoming increasingly complicated and expose us to heightened risks pertaining to our customers and vendors, and we are not always able to fully limit our liability in respect of these matters.

Radiofrequency
Many studies have been conducted on the possible impact on various health concerns of radiofrequency (RF) emissions from wireless devices; however, there have been no definitive reports or studies stating that these health issues are directly attributable to RF emissions. Although all of the wireless devices we sell fall within the RF emission guidelines set by Health Canada, there can be no assurances that public health concerns, future studies or future government regulations relating to RF emissions from wireless devices will not have an adverse effect on our business or expose us to potential litigation.

Customer experience
MTS prides itself in being an organization that is aligned around putting the customer first, continually enhancing the customer experience, and improving customer loyalty. To that end, we invest in the services that our customers ask for, adjust internal processes as appropriate and necessary, and have designed a new capital allocation program with additional scrutiny and controls over our capital investment decisions to ensure we invest in the services that our customers want, and we are working to transform our workforce to be customer-first.

That said, there are risks associated with our ability to deliver a superior experience to our customers. For instance, we would like to invest more than we currently invest in new services, but as noted below, we are constrained by availability of capital and our smaller scale. We believe that customer experience is tightly aligned with our churn rates, which in turn are directly correlated to our operational and financial results.

Defined benefit pension liability
We provide pension, supplemental pension and other non-pension post-employment benefits to our employees. The determination of benefit expense and benefit obligation associated with post-employment benefits requires the use of certain actuarial and economic assumptions, such as the discount rate to measure defined benefit obligations, expected future salary increases and future mortality rates. While we actively manage our asset portfolios and forecast economic factors that affect our liabilities, the fact remains that a change in estimate or assumption could affect the cost of benefits and the present value of the defined benefit obligation. Funding requirements remain highly vulnerable to changes in interest rates and investment returns, and this can be exacerbated because our pension plans are relatively large for the size of our business.

To reduce current risk, in 2015 we pre-funded $120 million into pension plans using existing credit facilities, eliminating the need for solvency payments for 2015 and 2016, and hopefully longer under reasonable economic scenarios.

We fulfilled our remaining obligations in 2015 with respect to the implementation of the lawsuit regarding the administration of one of MTS' pension plans, which was the subject of a decision of a Supreme Court of Canada ruling on January 30, 2014.

Further reducing risk, MTS closed the defined benefit pension plan to new entrants at the beginning of 2010, and all new employees join our defined contribution pension plan. In addition, liability for post-closing benefits in respect of the pension plans for active Allstream employees has been transferred to Zayo in connection with the Allstream sale.

Capital structure
In the last number of years, we have faced potential challenges, such as funding pension obligations, pension lawsuit settlement, spectrum purchases and network expansion, which we have worked to mitigate through 2015 and in 2016.

In 2015, we progressed in relieving some of this risk:

  • Allstream experienced substantial improvement in operating results and cash flow as a result of our strategic review and related restructuring initiatives;
  • We pre-funded $120 million into pension plans using existing credit facilities, eliminating the need for solvency payments for 2015 and 2016, and hopefully longer under reasonable economic scenarios;
  • Our obligations under the pension lawsuit settlement were completed between late 2014 and early 2015;
  • We modified our dividend to a level that we believe is more sustainable. We expect this change, together with the pension solvency prepayment, will allow us to generate stable and predictable cash flow at a level that is readily sufficient to support the new dividend, and that this new dividend will help us maintain a strong balance sheet, provide flexibility for any contingencies such as additional pension funding if required, and deliver competitive payout ratios in line with peers; and
  • We implemented a new capital allocation program with additional scrutiny and controls over our capital investment decisions.

In November 2015, we announced the sale of Allstream to Zayo, a leading provider of communication infrastructure, in an all-cash transaction for $465 million. As disclosed on January 15, 2016, the sale of Allstream is complete. MTS realized gross proceeds of $465 million, and after closing costs, MTS expects to realize net proceeds estimated at approximately $420 million. See our 2015 Supplemental for additional information pertaining to the use of Allstream sale proceeds.

That said, a level of capital risk will always remain. Our defined benefit pension plan is large and our liabilities and assets are significant, and while we do not believe that we will require cash funding in the near term, a change in estimate or assumptions could affect the cost of benefits and the present value of the defined benefit obligation and our funding requirements. We also see potential for slowdown in some of our current growth lines of business, a potential for accelerated decline in some of our legacy services, and additional requirements for maintenance and investment in our networks and systems.

Together, these risks can negatively affect cash flow and impair our ability to develop our business through ongoing investment. Furthermore, our dividend could become more challenging to support and our credit ratings could be more challenging to maintain.

Technology evolution
We operate in markets that are affected by constant and rapid technological change. Network technology continues to evolve at a pace that may enable competitors to enter our markets with increased flexibility, provide more choice for customers and speed up the obsolescence of our core technologies. Some elements of our network and technologies are aging. We periodically face situations in which manufacturers are no longer supporting their technologies. These systems become more prone to failure, which can result in more widespread network failures or operational disruption.

At the same time, technology evolution provides us with new opportunities to explore markets that were previously too difficult or costly for us to enter. These changes could result in the displacement of products and services by substitutes, and create a need for accelerated investment in our network evolution. We need to anticipate technological change and continue to invest in or develop new technologies, products and services. As such, we have deployed a joint wireless network with Rogers. The aspects of this network that are shared introduce new technological complexities as we deploy new services and standards.

The improvement in our capital structure, as noted above, combined with our new capital allocation process, have given us a greater opportunity to invest in technology evolution.

That said, like others in our industry, there can be no assurance that we will be successful in developing, implementing and marketing new technologies, products and services, or fully realize the expected sales, cost savings and efficiencies, or make these necessary investments. Nor can we be assured that we will be able to gain access to such technologies and other business inputs at reasonable terms or prices. New products or services that use new or evolving technologies could reduce demand for our existing offerings or cause prices for those services to decline.

Similarly, the deployment of new internal IT and network technologies (such as expanded networks, billing systems, back-office tools) often entails expensive and complicated projects, particularly as they need to be designed to work with both legacy and next-generation systems. These technologies are critical for us to collect our revenue, serve customers and remain competitive in the market. There are no assurances that such technologies can be deployed on time or on budget, or without causing significant business interruption.

Other
Market conditions
Our business is affected by general economic conditions, including consumer and business confidence as well as spending on, demand for and prices of products and services. During adverse economic conditions, customers and businesses may delay buying our products and services, reduce purchases, seek greater discounts or even discontinue purchases altogether. Our ability to collect receivables could also be affected and our churn rates could increase. We continuously monitor markets and proactively take steps to adjust our business plans and marketing efforts in light of general economic conditions.

Human resources
Collective agreements
A significant percentage of our employees are unionized and covered by collective bargaining agreements. Re-negotiating collective bargaining agreements carries the risk of resulting in higher labour costs and work disruptions, including work stoppages or slowdowns. We will be commencing negotiations with our largest union in February 2016. While we have not had a labour disruption since 1999, there can be no assurance that, should a labour disruption occur, it would not adversely affect the services that we provide to our customers and our operating results. We periodically develop, review and update contingency plans for labour disruption. Similarly, a labour disruption at one of our suppliers (for example, a service provider who carries portions of our traffic, a roaming partner or a content provider) could also harm our business, damage customer relationships and impact our operational results. Further information about our collective agreements is contained in our 2015 Annual Information Form, which is available on our website at www.mts.ca/aboutus or on SEDAR.

Reliance on key personnel
Our business depends on the efforts, abilities and expertise of our senior executives and employees. The loss of key individuals could impair our business and development until qualified replacements are found. There is no assurance that these individuals could quickly be replaced with persons of equal experience, skills and capabilities. We are smaller than many of our industry peers and, as a result, we sometimes face greater risks associated with employee retention. To manage this risk, the Board and its Human Resources and Compensation Committee take an active role in reviewing compensation levels to ensure we remain competitive within our peer group, and have a strong succession planning program in place. More details of these plans and mitigations are contained in our latest Management Information Circular, which is available on our website at www.mts.ca/aboutus or on SEDAR.

Regulatory developments

Background
We are subject to regulations that materially impact how we can conduct business. The telecommunications and broadcast industries in which we operate are federally regulated, pursuant to both the Telecommunications Act and the Broadcasting Act. We are also subject to other federal and provincial regulations that shape how we conduct our business.

We operate as an incumbent local exchange carrier whose telecommunications business is regulated primarily by the CRTC and by ISED Canada, in areas such as spectrum or ownership. Our television business is licensed as a BDU, which is subject to a different regulatory regime.

This regulatory section describes recent developments relating to regulatory and policy proceedings that could materially impact our business. Several years ago, the regulatory trend was towards more forbearance - meaning telecommunications services were subject to less regulation. Recently, we are seeing an accelerated pace of regulation by federal and provincial governments, as well as increasing intervention by the CRTC, ISED Canada and other regulatory bodies. We are facing a more dynamic environment, which is presenting both new risks and opportunities for our business.

We mitigate our risks and try to maximize opportunities by actively participating in regulatory and policy proceedings that are relevant to our business and directly impact us.

Wireless roaming
In May 2015, the CRTC issued its decision regarding wholesale wireless roaming. In its decision, the CRTC determined that Bell, TELUS and Rogers must offer wholesale wireless roaming to all other Canadian wireless carriers, at regulated rates. The CRTC also recommended that the Government repeal roaming caps introduced in June 2014, and permit market forces to determine all other wholesale roaming rates. On July 1, 2015, the repeal of the legislated wholesale roaming rates became effective. Market rates now govern wholesale roaming rates for parties other than Bell, Rogers and TELUS. While this could provide strategic benefits to MTS in the future, it will require that we re-negotiate formal roaming rates with smaller wireless providers on whose networks our wireless customers roam, which could have a material impact on our operating costs. Moreover, the effective date that these market rates will commence is still being considered by the CRTC as part of its process to consider the tariffed wholesale roaming rates that Bell, Rogers and TELUS have submitted to the Commission. Accordingly, we could be facing an increase or decrease of roaming rates that we have paid to Bell, Rogers and TELUS.

9-1-1 action plan
The CRTC has several proceedings in respect of the reliability and resiliency of 9-1-1 networks and next-generation 9-1-1 services.  Depending on the outcomes of each proceeding, MTS may be required to upgrade or accelerate its investment plans, and this could negatively impact our results by requiring new investments without any feasible associated economic returns.

Basic telecommunications services
Since 2010, the CRTC has mandated that all Canadians should have access to basic telephone systems no matter where they live, under the Basic Service Objective (BSO), and that incumbent telephone providers, such as MTS in Manitoba, must provide that service. To facilitate this, the CRTC established a subsidy regime in which all telecommunications providers contribute to a fund, out of which incumbent local exchange carriers withdraw to subsidize the provision of basic telephone services in high-cost serving areas. Currently, we receive more from the fund than what we pay into it.

The CRTC is currently undertaking a comprehensive review of the BSO regime "to ensure that Canadians have access to world-class telecommunications services that enable them to participate actively in the digital economy" (Source: CRTC press release, April 9, 2015). The proceeding will identify the types of services and speeds that are necessary in the digital age, for example, voice and broadband, the speeds that may be required, the geographic areas that are not adequately being served and address the funding mechanisms to support the regime. This may mean a change in the net benefits MTS receives from the fund currently, as well as an obligation on service providers to provide higher minimum Internet access speeds for all Canadians requiring further investments and contributions from carriers. A decision on the BSO proceeding is not expected until 2017. This hearing could have material impacts on MTS and change the competitive nature of the broadband market across Canada.

Wholesale wireline services
On July 22, 2015, the CRTC issued its decision regarding its recent review of wholesale wireline services and related policies. The CRTC decided to mandate incumbent local exchange carriers such as MTS to begin phasing in the implementation of disaggregated Wholesale High-Speed Access (WHSA) services (for example, access to the last mile facilities), including access to fibre-access facilities. There will be further proceedings to consider the appropriate configurations and costing/pricing of these disaggregated WHSA services in Ontario and Quebec, and in the future this could be extended to other jurisdictions, including Manitoba. We expect that competitor demand is likely to emerge more slowly and later in Manitoba than in markets such as Ontario, as evidenced by current low demand for existing WHSA services. None of these developments are expected to have a material impact on our business in the short term.

Controls and procedures

Management is responsible for establishing and maintaining disclosure controls and procedures, and internal control over financial reporting. These terms are defined in National Instrument 52-109, Certification of Disclosure in Issuers' Annual and Interim Filings, as adopted by the Canadian securities regulatory authorities.

Disclosure controls and procedures
Under the direction of our Audit Committee, our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), we evaluated the design and operation of our disclosure controls and procedures as at December 31, 2015. Based on this evaluation, our CEO and CFO have concluded that, as of the evaluation date, our disclosure controls and procedures were effective to provide reasonable assurance that information that is required to be disclosed in prescribed filings and reports that are filed with the Canadian securities regulatory authorities is recorded, processed, summarized and reported on a timely basis. It is also accumulated and communicated to Management, including the CEO and the CFO, as appropriate to allow timely decisions regarding required disclosure.

Internal control over financial reporting
Internal control over financial reporting is a process designed by, or under the supervision of, the CEO and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. Our process includes those policies and procedures that:

I.     

pertain to the maintenance of records that accurately and fairly reflect, in reasonable detail, transactions relating to our assets;

II.    

provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with IFRS, and that receipts and expenditures are made only in accordance with authorizations of Management and our directors; and

III.   

provide reasonable assurance regarding the prevention or timely detection of any unauthorized acquisition, use or disposition of our assets that could have a material effect on our annual financial statements.

Due to its inherent limitations, internal control over financial reporting can provide only a reasonable assurance and may not prevent or detect misstatements. As well, projections to future periods of an evaluation of the effectiveness of internal control over financial reporting are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.

Under the direction of our Audit Committee and our CEO and CFO, we have evaluated the design and operation of our internal control over financial reporting as at December 31, 2015, based on the criteria set forth in the Internal Control - Integrated Framework (COSO 2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our CEO and CFO have concluded that, as of the evaluation date, our internal control over financial reporting was effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. No material weaknesses in our internal control over financial reporting were identified.

There have been no changes in our internal control over financial reporting during the three-month period ended December 31, 2015 that have materiality affected, or are reasonably likely to materiality affect, our internal control over financial reporting.

Non-IFRS measures of performance

In this annual 2015 MD&A, we provide information concerning EBITDA and free cash flow because we believe investors use them as measures of our financial performance. These measures do not have a standardized meaning as prescribed by IFRS, and are not necessarily comparable to similarly titled measures used by other companies.

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

Free cash flow
We define free cash flow as "cash flows from operating activities including net intersegment revenues and expenses less capital investments, and excluding changes in working capital, pension solvency funding and pension lawsuit payments, restructuring and transformation costs and non-cash taxes." More information about free cash flow can be found in our 2015 supplemental information, which is available on our website at www.mts.ca/aboutus and is available on SEDAR.

Capital intensity ratio
We define capital intensity ratio as "capital investments adjusted for current year SR&ED ITC impacts, divided by total operating revenues and excludes capital related to restructuring and transformation initiatives." More information about capital intensity ratio can be found in our 2015 supplemental information, which is available on our website at www.mts.ca/aboutus and is available on SEDAR.

SOURCE Manitoba Telecom Services Inc.

For further information: Investors: Brenda McInnes, Investor Relations, 204-941-6205, investor.relations@mts.ca; Media: Andrew Parkinson, Corporate Communications, 204-958-3230, media.relations@mts.ca

RELATED LINKS
http://www.mts.mb.ca

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