MTS reports 71% growth in free cash flow per share as it awaits regulatory approval for a $3.9 billion transaction with BCE Inc.

  • Collaborative work continues on closing the BCE transaction
  • Transformation program has identified nearly two-thirds of our targeted $100 million in annualized free cash flow improvements
  • Free cash flow per share posts 71% growth on strong cash management

WINNIPEG, Nov. 2, 2016 /CNW/ - (TSX: MBT) Manitoba Telecom Services Inc. (MTS), today, reported results for the period ended September 30, 2016, including updates on the pending BCE Inc. (BCE) transaction and its transformation program to deliver an enhanced customer experience.

"We have made substantial progress on our transformational initiatives in Q3. Having just completed the first year of a three-year program, we have now identified nearly two-thirds of the $100 million in expected free cash flow improvements, and this, combined with our strong operational performance has generated strong year-over-year growth in free cash flow," said Jay Forbes, President & CEO. "We continue to work with BCE and regulators to secure timely approvals of the combination with MTS."

BCE transaction update
Since the May 2, 2016 announcement of BCE's intention to acquire MTS, we have reached several key milestones in obtaining necessary approvals and providing shareholder information.



June 23, 2016

Our shareholders overwhelmingly approved the special resolution authorizing the plan of arrangement pursuant to which BCE will acquire all the issued and outstanding common shares of MTS. The resolution was approved by 99.66% of the 43,098,172 votes cast by our shareholders.


June 29, 2016

The Manitoba Court of Queen's Bench granted a final order and approved our proposed transaction with BCE.


Summer 2016

Filings were made with the Canadian Radio-television and Telecommunications Commission (CRTC), the Competition Bureau and Innovation, Science and Economic Development Canada (ISED).


November 2, 2016

A letter of transmittal and election form is being mailed to our registered shareholders explaining how shareholders can deposit their MTS common shares, elect the form of consideration they wish to receive and obtain payment for their MTS common shares once the BCE transaction is completed.

   • The Election Deadline will be announced once the closing date is known.



Late 2016 or early 2017

The transaction is expected to close in late 2016 or early 2017, subject to customary closing conditions and required regulatory approvals.

We are working collaboratively with BCE to obtain the appropriate regulatory approvals in order to close the transaction within the expected time frame. Until completion of the BCE transaction, MTS' shares will continue to be listed for trading on the Toronto Stock Exchange. Additional details regarding the BCE transaction can be found in the special meeting circular which MTS has filed with the Canadian securities regulators on www.SEDAR.com and is on our website at www.mts.ca/aboutus.

Letter of transmittal and election form
The letter of transmittal and election form is being mailed to registered shareholders and explains how registered shareholders can deposit their MTS common shares, elect the form of consideration they wish to receive and obtain payment for their MTS common shares once the BCE transaction is completed. The letter of transmittal and election form also includes disclosure on the U.S. federal income tax considerations with respect to the plan of arrangement for U.S. taxpayers, which was not determinable at the time the special meeting circular was mailed. Shareholders in the United States are urged to read this disclosure. Registered shareholders must return their completed letter of transmittal and election form to Computershare Trust Company of Canada in order to receive the consideration to which they will be entitled for their MTS common shares. Non-registered shareholders should carefully follow the instructions from their broker or other financial intermediary that holds MTS common shares on their behalf.

The letter of transmittal and election form is also available on our website at www.mts.ca/aboutus and on www.SEDAR.com or by contacting Computershare Trust Company of Canada. Any questions regarding receipt of the cash or share consideration, including any request for another copy of the letter of transmittal and election form, should be directed to Computershare Trust Company of Canada by phone at 1-877-982-8757 (toll free in North America) or by email at corporateactions@computershare.com.

Transformation program update
We have made significant progress on our three-year transformation program since it was announced in 2015. As of the end of Q3 2016, our transformation efforts have resulted in a run rate of approximately two-thirds of the $100 million annualized free cash flow improvements we expect to unlock with this program. One-time cash costs associated with achieving the $100 million in improvements of roughly the same amount are expected to be incurred over the same period.

  • As of the end of Q3 2016, we have implemented initiatives that will generate $63 million in annualized free cash flow improvements.
  • To date, in order to achieve these annualized free cash flow improvements, we have made one-time investments of $25 million in our transformation program initiatives.
  • In 2016, we realized a $15.2 million increase in free cash flow as a result of our management and back-office redesign, capital investment process redesign, procurement and working capital management processes and our pricing promotions and discounts workstreams.

"We have made tremendous progress on our transformation journey with our transformation program workstreams delivering solid results," said Forbes. "Providing better customer value and services is the foundation for us realizing our full potential and truly becoming a customer-first organization."

Further transformation program details can be found in our Q3 2016 MD&A, which is available on our website at www.mts.ca/aboutus and on www.SEDAR.com.

Voluntary workforce reduction program announced
In Q3 2016, we initiated a voluntary workforce reduction program for certain employees who are not in customer-facing roles. As a result of this program, we are eliminating approximately 80 positions in specific areas of our business where changes, improvements and efficiencies are being realized. The reductions have already begun and we expect the majority will be completed by the end of Q1 2017. This program will deliver annualized cost savings of approximately $7 million through lower salaries and benefits.

We expect to incur one-time expenses of approximately $8 million to $10 million, of which an estimated $5 million relates to a non-cash pension curtailment loss. These costs will be recognized in our fourth-quarter results. By improving our cost structure, we can continue to invest in processes, systems and tools that will enhance our customer experience.

Third-quarter 2016 financial results

($ millions, except per share amounts1)

Q3 2016

Q3 2015

$ change

% variance

Operating revenues

253.3

250.9

2.4

1.0

Operations expense

131.8

139.1

(7.3)

5.2

EBITDA2 before restructuring and transformation expenses

121.5

111.8

9.7

8.7

Restructuring and transformation expenses

14.3

1.8

12.5

n.a.*

EBITDA

107.2

110.0

(2.8)

(2.5)

EPS from continuing operations

$0.24

$0.29

$(0.05)

(17.2)

EPS

$0.24

$0.34

$(0.10)

(29.4)

Capital investments (excluding restructuring and transformation)

39.2

45.8

6.6

14.4

Free cash flow3

48.0

29.9

18.1

60.5

Free cash flow per share

$0.65

$0.38

$0.27

71.1

1 Per share amounts are based on weighted average shares outstanding of 74.3 million for the three months ended September 30, 2016 and 79.2 million for the three months ended September 30, 2015.

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

3 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 amounts and non-cash taxes.

* not applicable

The following provides insight into the operating results variances for the quarter:

  • Operating revenues: We saw a $2.4 million increase in revenues from Q3 2015, with The Technology Consortium (TTC) adding to increased information solutions revenues, strong subscriber growth translating into higher internet services revenues and an increase in unified communications sales.

  • Operations expense: Operations expense in Q3 2016 was down $7.3 million from Q3 2015, mainly due to our transformation program initiative launched in late 2015 to streamline management and back-office support functions. This program delivered salaries and benefits savings of $4.4 million in Q3 2016, which is in line with forecasted savings to be realized in 2016 of $17 million.

  • EBITDA before restructuring and transformation expenses: EBITDA before restructuring and transformation expenses was higher by $9.7 million mainly due to a reduction in operating expenses resulting from our restructuring and transformation initiatives.

  • Restructuring and transformation expenses: Restructuring and transformation expenses of $14.3 million are comprised of costs related to our transformation initiatives of $1.8 million, the proposed BCE transaction of $7.4 million, Allstream unwind of $2.2 million, and other productivity initiatives to improve our effectiveness of $2.9 million.

  • EPS from continuing operations: EPS from continuing operations was down by $0.05 in Q3 2016, largely due to higher restructuring and transformation expenses, partially offset by lower operations expense.

  • Capital investments: Capital investments excluding restructuring and transformation decreased $6.6 million from Q3 2015, mainly due to our capital investment redesign initiative. As a result, we have a more disciplined capital investment program focused on our strategic priorities and economic benefits that yield savings and efficiencies. The year-to-date decrease in capital investments is also due to customer delays and the time required to implement the new process in the first half of the year. The third quarter capital investment increase over Q1 and Q2 levels is expected to continue in the final quarter of the year. Our capital intensity ratio, excluding restructuring and transformation is 14.5%, a 2.8-point improvement from 17.3% in Q3 2015. Capital investments relating to restructuring and transformation initiatives are $1.8 million year to date, resulting in a capital intensity ratio of 15.2%.

  • Free cash flow and free cash flow per share: Our Q3 2016 free cash flow of $48.0 million increased by $18.1 million, or 61%, when compared to Q3 2015 primarily due to increased EBITDA before restructuring and transformation expenses of $9.7 million and lower capital investments of $6.6 million. Free cash flow per share for Q3 2016 was $0.65 an increase of $0.27 compared to Q3 2015. The increase was due to free cash flow improvements noted above and a reduction in the weighted average shares outstanding due to share buybacks completed earlier this year.

The following table provides further free cash flow disclosure.

($ millions, except per share amounts)

Q3 2016

Q3 2015

$ change

% variance

EBITDA before restructuring and transformation expenses

121.5

111.8

9.7

8.7

Add back (deduct):





Deferred wireless costs

(29.0)

(26.5)

(2.5)

(9.4)

Other income (expense)

1.7

0.8

0.9

n.a.*

Finance costs

(11.2)

(17.7)

6.5

36.7

Current cash income tax expense

(0.3)

(0.1)

(0.2)

n.a.

Loss on disposal of assets

0.1

0.1

n.a.

Pension funding and net pension expense

2.8

5.7

(2.9)

(50.9)

Other operating activities, net

1.6

1.7

(0.1)

(5.9)

Total

87.2

75.7

11.5

15.2

Capital investments (excluding restructuring and transformation)

(39.2)

(45.8)

6.6

14.4

Free cash flow

48.0

29.9

18.1

60.5

Free cash flow per share

$0.65

$0.38

$0.27

71.1

* not applicable





Dividend
As part of the plan of arrangement pursuant to which, among other things, BCE will acquire all of the issued and outstanding common shares of MTS, we do not expect to declare or pay any more dividends to shareholders prior to closing. Our last dividend was declared on May 11, 2016 and paid out to shareholders on July 15, 2016.

Investment community conference call and webcast
We will hold our third-quarter 2016 earnings results conference call with the investment community on Wednesday, November 2, 2016 at 6 p.m. (Eastern time). Participants include Jay Forbes, President & CEO; 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 November 9, 2016 by dialing 1-855-859-2056 and entering passcode 83510121.

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=1268541&s=1&k=7A1A3B7B8D8C6365803F9C1B649B16D3.

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 the plan of arrangement (the Arrangement), the anticipated timing for the closing of the Arrangement, the consideration to be received by shareholders, which may fluctuate in value due to common shares of BCE forming part of the consideration and the consideration not being as elected by shareholders due to proration, the anticipated timing with respect to the mailing of the letter of transmittal and election form to our shareholders, our corporate direction, business opportunities, operations, financial objectives, future financial results and performance, ability to generate free cash flow in the future, restructuring and transformation plans, strategic processes, guidance and outlook and pension plans funding. Implicit in the statements referred to above, are assumptions regarding, among other things, the ability of the parties to receive, in a timely manner and on satisfactory terms, the regulatory approvals required under the arrangement agreement between MTS and BCE dated May 1, 2016, the ability of the parties to satisfy, in a timely manner, the conditions to the closing of the Arrangement, and other expectations and assumptions concerning the Arrangement, future interest rates, the expectation of not having to pay cash income taxes until 2023; and the ability to reduce operating expenses, future cash flows, liquidity, credit ratings and profitability, as well as other statements that are not historical facts. There can be no assurance that the Arrangement will occur, or that it will occur on the terms and conditions or at the time contemplated in this news release.

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 and uncertainties, including, but not limited to: failure to, in a timely manner, or at all, obtain the regulatory approvals as required under the arrangement agreement; failure of the parties to otherwise satisfy the conditions to complete the Arrangement; the effect of the announcement of the Arrangement on MTS' and BCE's respective strategic relationships, operating results and business generally; significant transaction costs or unknown liabilities; the risk of litigation that would prevent or hinder the completion of the Arrangement; failure to realize the expected benefits of the Arrangement; compliance with all applicable laws and other customary risks associated with transactions of a similar nature to the Arrangement; and general economic conditions. In addition, if the Arrangement is not completed, and MTS continues as an independent entity, there are serious risks that the announcement of the Arrangement and the dedication of substantial resources of MTS to the completion of the Arrangement could have an adverse impact on MTS' business and strategic relationships (including with future and prospective employees, customers, retailers, vendors, suppliers and partners), operating results and businesses generally. 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 November 2, 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 of our 2015 annual MD&A and our MD&A for Q1, Q2, and Q3 2016, each of which is available on our website at www.mts.ca/aboutus and on www.SEDAR.com.

About MTS
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 for Manitobans – Wireless, Internet, TV, Phone Service and Security Systems plus a full suite of Information Solutions, including Unified Cloud and Managed Services. You can count on MTS to make connecting your world easy. We're with you.

We live where we work and actively give back to organizations that strengthen our communities. Through MTS Future First, we provide sponsorships, grants and scholarships, value-in-kind support and volunteer commitment in Manitoba.

MTS Inc. is wholly owned by Manitoba Telecom Services Inc. (TSX: MBT). For more on MTS' products and services, visit www.mts.ca. For investor information, visit www.mts.ca/aboutus.

Q3 2016

Management's discussion and analysis
For the period ended September 30, 2016

Management's Discussion and Analysis

November 2, 2016

This Management's Discussion and Analysis (MD&A) of our financial results comments on our operations, performance and financial condition for the three and nine months ended September 30, 2016. 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 three and nine months ended September 30, 2016 and is as at November 2, 2016.

In preparing this MD&A, we have taken into account information available to us up to November 2, 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 interim consolidated financial statements for the three and nine months ended September 30, 2016.

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

Discontinued operations
We completed the sale of Allstream Inc. (Allstream) on January 15, 2016. Effective November 20, 2015 we started reporting Allstream as an asset 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 our financial results. For more details regarding the accounting treatment, readers are encouraged to review the discontinued operations note disclosure in our interim condensed financial statements for the period ended September 30, 2016, which can be found on our website at www.mts.ca/aboutus.

Non-IFRS measures of performance
In this MD&A, we provide information concerning earnings before interest, taxes, depreciation and amortization (EBITDA), free cash flow, free cash flow per share 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 interim MD&A includes forward-looking statements and information (collectively, "statements") including, but not limited to: statements pertaining to the plan of arrangement pursuant to which, among other things, BCE Inc. (BCE) has agreed to purchase all the issued and outstanding common shares of MTS (the Arrangement), the anticipated timing for the closing of the Arrangement, the consideration to be received by shareholders, which may fluctuate in value due to common shares of BCE forming part of the consideration and the consideration not being as elected by shareholders due to proration, our corporate direction, business opportunities, operations, financial objectives, future financial results and performance, ability to generate free cash flow in the future, restructuring and transformation plans, strategic processes, guidance and outlook and pension plans funding. Implicit in the statements referred to above, are assumptions regarding, among other things, the ability of the parties to receive, in a timely manner and on satisfactory terms, the Required Regulatory Approvals (as defined in the arrangement agreement between MTS and BCE dated May 1, 2016), the ability of the parties to satisfy, in a timely manner, the conditions to the closing of the Arrangement, and other expectations and assumptions concerning the Arrangement, future interest rates, the expectation of not having to pay cash income taxes until 2023, and the ability to reduce operating expenses, future cash flows, liquidity, credit ratings and profitability, as well as other statements that are not historical facts. There can be no assurance that the Arrangement will occur, or that it will occur on the terms and conditions or at the time contemplated in this Management's discussion and analysis.

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 and uncertainties, including, but not limited to: failure to, in a timely manner, or at all, obtain the Required Regulatory Approvals; failure of the parties to otherwise satisfy the conditions to complete the Arrangement; the effect of the announcement of the Arrangement on MTS' and BCE's respective strategic relationships, operating results and business generally; significant transaction costs or unknown liabilities; the risk of litigation that would prevent or hinder the completion of the Arrangement; failure to realize the expected benefits of the Arrangement; compliance with all applicable laws and other customary risks associated with transactions of a similar nature to the Arrangement; and general economic conditions. In addition, if the Arrangement is not completed, and MTS continues as an independent entity, there are serious risks that the announcement of the Arrangement and the dedication of substantial resources of MTS to the completion of the Arrangement could have an adverse impact on MTS' business and strategic relationships (including with future and prospective employees, customers, retailers, vendors, suppliers and partners), operating results and businesses generally. 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 interim MD&A reflect Management's expectations as at November 2, 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 interim 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 our annual MD&A which can be found on our website at www.mts.ca/aboutus and on www.SEDAR.com, and this interim MD&A. See Risks and uncertainties.

Business overview

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 range 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).

Corporate updates

BCE transaction update
Since the May 2, 2016 announcement of BCE's intention to acquire MTS, we have reached several key milestones in obtaining necessary approvals and providing shareholder information.



June 23, 2016

Our shareholders overwhelmingly approved the special resolution authorizing the plan of arrangement pursuant to which BCE will acquire all the issued and outstanding common shares of MTS. The resolution was approved by 99.66% of the 43,098,172 votes cast by our shareholders.


June 29, 2016

The Manitoba Court of Queen's Bench granted a final order and approved our proposed transaction with BCE.


Summer 2016

Filings were made with the Canadian Radio-television and Telecommunications Commission (CRTC), the Competition Bureau and Innovation, Science and Economic Development Canada (ISED).


November 2, 2016

A letter of transmittal and election form is being mailed to our registered shareholders explaining how shareholders can deposit their MTS common shares, elect the form of consideration they wish to receive and obtain payment for their MTS common shares once the BCE transaction is completed.

   • The Election Deadline will be announced once the closing date is known.



Late 2016 or early 2017

The transaction is expected to close in late 2016 or early 2017, subject to customary closing conditions and required regulatory approvals.

We are working collaboratively with BCE to obtain the appropriate regulatory approvals in order to close the transaction within the expected time frame. Until completion of the BCE transaction, MTS' shares will continue to be listed for trading on the Toronto Stock Exchange. Additional details regarding the BCE transaction can be found in the special meeting circular which MTS has filed with the Canadian securities regulators on www.SEDAR.com and is on our website at www.mts.ca/aboutus.

Letter of transmittal and election form
The letter of transmittal and election form is being mailed to registered shareholders and explains how registered shareholders can deposit their MTS common shares, elect the form of consideration they wish to receive and obtain payment for their MTS common shares once the BCE transaction is completed. The letter of transmittal and election form also includes disclosure on the U.S. federal income tax considerations with respect to the plan of arrangement for U.S. taxpayers, which was not determinable at the time the special meeting circular was mailed. Shareholders in the United States are urged to read this disclosure. Registered shareholders must return their completed letter of transmittal and election form to Computershare Trust Company of Canada in order to receive the consideration to which they will be entitled for their MTS common shares. Non-registered shareholders should carefully follow the instructions from their broker or other financial intermediary that holds MTS common shares on their behalf.

The letter of transmittal and election form is also available on our website at www.mts.ca/aboutus and on www.SEDAR.com or by contacting Computershare Trust Company of Canada. Any questions regarding receipt of the cash or share consideration, including any request for another copy of the letter of transmittal and election form, should be directed to Computershare Trust Company of Canada by phone at 1-877-982-8757 (toll free in North America) or by email at corporateactions@computershare.com.

Transformation program update
We have made significant progress on our three-year transformation program since it was announced in 2015. As of the end of Q3 2016, our transformation efforts have resulted in a run rate of approximately two-thirds of the $100 million annualized free cash flow improvements we expect to unlock with this program. One-time cash costs associated with achieving the $100 million in improvements of roughly the same amount are expected to be incurred over the same period.

  • As of the end of Q3 2016, we have implemented initiatives that will generate $63 million in annualized free cash flow improvements.
  • To date, in order to achieve these annualized free cash flow improvements, we have made one-time investments of $25 million in our transformation program initiatives.
  • In 2016, we realized a $15.2 million increase in free cash flow as a result of our management and back-office redesign, capital investment process redesign, procurement and working capital management processes and our pricing promotions and discounts workstreams.

The following workstreams have been completed to date:

  • Management and back-office redesign;
  • Capital investment process redesign;
  • Brand transformation; and
  • Customer service and online strategy roadmap.

We launched the following workstreams in 2016:

  • Pricing, promotions and discounts rationalization;
  • Information services transformation;
  • Contact centre and channels transformation;
  • Online experience improvement;
  • Network and field services transformation; and
  • Procurement and working capital management processes upgrades.

Voluntary workforce reduction program announced
In Q3 2016, we initiated a voluntary workforce reduction program for certain employees who are not in customer-facing roles. As a result of this program, we are eliminating approximately 80 positions in specific areas of our business where changes, improvements and efficiencies are being realized. The reductions have already begun and we expect the majority will be completed by the end of Q1 2017. This program will deliver annualized cost savings of approximately $7 million through lower salaries and benefits.

We expect to incur one-time expenses of approximately $8 million to $10 million, of which an estimated $5 million relates to a non-cash pension curtailment loss. These costs will be recognized in our fourth-quarter results. By improving our cost structure, we can continue to invest in processes, systems and tools that will enhance our customer experience.

Discussion of operations – financial results

Free cash flow and free cash flow per share
Our free cash flow definition 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 amounts and non-cash taxes. The following table provides a reconciliation of free cash flow from EBITDA before restructuring and transformation costs.

($ millions, unless otherwise stated)

Q3 2016

Q3 2015

$ change

% variance

YTD 2016

YTD 2015

$ change

% variance

EBITDA before restructuring and transformation









expenses

121.5

111.8

9.7

8.7

358.5

348.0

10.5

3.0

Add back (deduct):









Deferred wireless costs

(29.0)

(26.5)

(2.5)

(9.4)

(73.1)

(65.0)

(8.1)

(12.5)

Other income (expense)

1.7

0.8

0.9

n.a.*

(0.6)

4.5

(5.1)

n.a.

Finance costs

(11.2)

(17.7)

6.5

36.7

(39.0)

(47.9)

8.9

18.6

Current cash income tax expense

(0.3)

(0.1)

(0.2)

n.a.

(0.6)

(0.4)

(0.2)

(50.0)

Loss on disposal of assets

0.1

0.1

n.a.

0.9

0.5

0.4

80.0

Gain on revaluation of The Technology Consortium

n.a.

(5.6)

5.6

n.a.

Pension funding and net pension expense

2.8

5.7

(2.9)

(50.9)

7.3

15.9

(8.6)

(54.1)

Other operating activities, net

1.6

1.7

(0.1)

(5.9)

1.0

(1.5)

2.5

n.a.

Total

87.2

75.7

11.5

15.2

254.4

248.5

5.9

2.4

Capital investments (excluding restructuring and









transformation)

(39.2)

(45.8)

6.6

14.4

(106.3)

(141.4)

35.1

24.8

Free cash flow

48.0

29.9

18.1

60.5

148.1

107.1

41.0

38.3

Free cash flow per share

$0.65

$0.38

$0.27

71.1

$1.95

$1.36

$0.59

43.4

* not applicable









Our Q3 2016 free cash flow of $48.0 million increased by $18.1 million when compared to Q3 2015 primarily due to increased EBITDA before restructuring and transformation expenses of $9.7 million and lower capital investments of $6.6 million. These results reflect benefits realized from our transformation program in the amount of $10.8 million. Free cash flow per share for Q3 2016 was $0.65 an increase of $0.27 compared to Q3 2015. This increase was due to free cash flow improvements noted above, along with lower weighted average shares outstanding as a result of our 2016 normal course issuer bid.

On a year-to-date basis, free cash flow increased $41.0 million due to lower capital investments of $35.1 million and increased EBITDA before restructuring and transformation expenses of $10.5 million, partially offset by increased deferred wireless costs of $8.1 million. Year to date we have realized $15.2 million in free cash flow benefits from our transformation program.

Capital investments excluding restructuring and transformation decreased $6.6 million from Q3 2015, mainly due to our capital investment redesign initiative. As a result, we have a more disciplined capital investment program focused on our strategic priorities and economic benefits that yield savings and efficiencies. The year-to-date decrease in capital investments is also due to customer delays and the time required to implement the new process in the first half of the year. The third quarter capital investment increase over Q1 and Q2 levels is expected to continue in the final quarter of the year. Our capital intensity ratio, excluding restructuring and transformation is 14.5%, a 2.8-point improvement from 17.3% in Q3 2015. Capital investments relating to restructuring and transformation initiatives are $1.8 million year to date, resulting in a capital intensity ratio of 15.2%.

Statement of net income and other comprehensive income (loss)

($ millions, except EPS1 and weighted average shares
outstanding)

Q3 2016

Q3 20152

$ change

% variance

YTD 2016

YTD 20152

$ change

% variance

Operating revenues

253.3

250.9

2.4

1.0

756.3

757.5

(1.2)

(0.2)

Operations expense

131.8

139.1

(7.3)

5.2

397.8

409.5

(11.7)

2.9

EBITDA before restructuring and transformation









expenses

121.5

111.8

9.7

8.7

358.5

348.0

10.5

3.0

Restructuring and transformation expenses

14.3

1.8

12.5

n.a.*

38.7

6.1

32.6

n.a.

EBITDA

107.2

110.0

(2.8)

(2.5)

319.8

341.9

(22.1)

(6.5)

Depreciation and amortization

72.8

61.9

10.9

(17.6)

214.9

208.3

6.6

(3.2)

Operating income

34.4

48.1

(13.7)

(28.5)

104.9

133.6

(28.7)

(21.5)

Other (expense) income

1.7

0.8

0.9

n.a.

(0.6)

4.5

(5.1)

n.a.

Finance costs

(11.2)

(17.7)

6.5

36.7

(39.0)

(47.9)

8.9

18.6

Income before income taxes

24.9

31.2

(6.3)

(20.2)

65.3

90.2

(24.9)

(27.6)

Income tax expense

6.8

8.3

(1.5)

18.1

17.9

23.0

(5.1)

22.2

Income from continuing operations

18.1

22.9

(4.8)

(21.0)

47.4

67.2

(19.8)

(29.5)

Income (loss) from discontinued operations, net of tax

(0.2)

3.8

(4.0)

n.a.

0.5

(3.4)

3.9

n.a.

Net income

17.9

26.7

(8.8)

(33.0)

47.9

63.8

(15.9)

(24.9)

Other comprehensive (loss) income, net of tax

17.5

20.5

(3.0)

(14.6)

(174.2)

147.1

(321.3)

n.a.

Total comprehensive (loss) income

35.4

47.2

(11.8)

(25.0)

(126.3)

210.9

(337.2)

n.a.

Weighted average shares outstanding (in millions)

74.3

79.2

(4.9)

(6.2)

75.9

78.8

(2.9)

(3.7)

EPS from continuing operations

$0.24

$0.29

$(0.05)

(17.2)

$0.62

$0.85

$(0.23)

(27.1)

EPS

$0.24

$0.34

$(0.10)

(29.4)

$0.63

$0.81

$(0.18)

(22.2)

1 Earnings per share

2 Comparative information presented on the same basis as 2016 results. See our Q3 2016 Supplemental for further comparative reporting information.

*not applicable

Operating revenues

($ millions)


Q3 2016

Q3 20151

$ change

% variance

YTD 2016

YTD 20151

$ change

% variance

Wireless


88.7

88.1

0.6

0.7

262.0

263.3

(1.3)

(0.5)

Broadband and converged IP


66.7

63.2

3.5

5.5

198.5

191.5

7.0

3.7

Information solutions


10.3

8.4

1.9

22.6

34.5

26.6

7.9

29.7

Unified communications


6.7

5.3

1.4

26.4

17.3

18.7

(1.4)

(7.5)

Security and monitoring


3.4

3.3

0.1

3.0

10.0

9.5

0.5

5.3

Local access


56.4

59.1

(2.7)

(4.6)

169.1

179.1

(10.0)

(5.6)

Long distance and data


16.0

16.8

(0.8)

(4.8)

47.8

50.5

(2.7)

(5.3)

Other


5.1

6.7

(1.6)

(23.9)

17.1

18.3

(1.2)

(6.6)

Total operating revenues


253.3

250.9

2.4

1.0

756.3

757.5

(1.2)

(0.2)

1 Comparative information presented on the same basis as 2016 results.

Wireless
Our 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)


Q3 2016

Q3 2015

$ change

% variance

YTD 2016

YTD 2015

$ change

% variance

Voice


42.2

43.9

(1.7)

(3.9)

125.2

132.2

(7.0)

(5.3)

Data


43.9

41.3

2.6

6.3

128.2

122.1

6.1

5.0

Other


2.6

2.9

(0.3)

(10.3)

8.6

9.0

(0.4)

(4.4)

Total wireless revenues


88.7

88.1

0.6

0.7

262.0

263.3

(1.3)

(0.5)

Voice: Revenues decreased when compared to both the same quarter last year and year to date, as a result of lower revenues on features (as subscribers shift to feature-rich plans in the Manitoba market) along with lower airtime and toll revenues.

Data: Driven by strong demand for smartphones and corresponding data plans, revenues increased in both Q3 2016 and year to date. As of the end of Q3 2016, the percentage of subscribers on data plans is 82%, an increase from 79% in Q3 2015.

Post-paid subscriber churn decreased from 1.18% in Q3 2015 to 0.90% in Q3 2016. See our Q3 2016 Supplemental for subscriber statistics.

Broadband and converged IP
Broadband services include revenues earned from providing high-speed internet and IPTV services to residential and business 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. Over 350,000 homes in Manitoba are eligible for both our high-speed internet service and our IPTV product, MTS Ultimate TV, across 17 communities in the province.

Broadband and converged IP revenues

($ millions)

Q3 2016

Q3 2015

$ change

% variance

YTD 2016

YTD 2015

$ change

% variance

Internet

38.2

35.4

2.8

7.9

113.1

104.2

8.9

8.5

IPTV

21.8

21.8

n.a.*

65.8

66.6

(0.8)

(1.2)

Converged IP

6.7

6.0

0.7

11.7

19.6

20.7

(1.1)

(5.3)

Total broadband and converged IP revenues

66.7

63.2

3.5

5.5

198.5

191.5

7.0

3.7

*not applicable

Internet: Q3 2016 saw revenue growth of $2.8 million from Q3 2015 and year-to-date revenues grew $8.9 million. This strong growth to date is a result of increased number of subscribers and a higher average revenue per customer. The per unit revenue growth is due to the further penetration of higher tier plans and selective rate action.

IPTV: Revenues remained flat from Q3 2015 and decreased slightly year to date, as a result of a decline in subscribers and channel subscriptions, partially offset by rate action.

Converged IP: In 2015, our year-to-date results included revenues of $2.9 million related to services provided by Allstream to our customers, which we stopped recognizing in the second quarter of 2015. Excluding this impact, converged IP revenues grew by 10.1%, year to date.

See our Q3 2016 Supplemental for subscriber statistics.

Information solutions
Revenues from this line of business include revenues earned by Epic, TTC and MTS Data Centres. The increase in revenues in Q3 2016 and year to date reflects revenue contributed from TTC for the entire period, while 2015 included only four months of revenue from this acquisition. This increase is partially offset by lower hardware sales in 2016.

Unified communications
Unified communications revenues are earned from the sale of IP telephony products and services. Revenues increased $1.4 million in Q3 2016 due to increased hardware installations and associated services.

Security and monitoring
Provided by AAA, these services include the installation and monitoring of alarm services as well as smart home technology to residential and business customers. Revenues have increased 3.0% quarter over quarter and 5.3% year over year when compared to the comparative periods in 2015. This revenue growth is a result of strong commercial revenues, along with growth in smart home technology sales.

Local access
Our local access services include 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 in quarter and year to date, reflecting the declining customer demand for these services.

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)

Q3 2016

Q3 2015

$ change

% variance

YTD 2016

YTD 2015

$ change

% variance

Long distance

7.6

8.3

(0.7)

(8.4)

23.1

25.0

(1.9)

(7.6)

Data

8.4

8.5

(0.1)

(1.2)

24.7

25.5

(0.8)

(3.1)

Total long distance and data revenues

16.0

16.8

(0.8)

(4.8)

47.8

50.5

(2.7)

(5.3)

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 forms of communication.

Data: Revenues decreased in Q3 2016 and year to date as a result of declines resulting from rate pressures, 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, and other miscellaneous consumer fees.

Other revenues

($ millions)


Q3 2016

Q3 2015

$ change

% variance

YTD 2016

YTD 2015

$ change

% variance

Wholesale


1.8

1.9

(0.1)

(5.3)

5.0

5.6

(0.6)

(10.7)

Other


3.3

4.8

(1.5)

(31.3)

12.1

12.7

(0.6)

(4.7)

Total other revenues


5.1

6.7

(1.6)

(23.9)

17.1

18.3

(1.2)

(6.6)

Operations expense
Operations expense decreased by $7.3 million in Q3 2016 compared to Q3 2015, and by $11.7 million on a year-to-date basis. These results reflect salaries and benefits savings associated with our management and back-office redesign. Other operations expense reductions resulting from other productivity initiatives are partly offset by increased cost of goods sold associated with information solutions revenue growth. Operations expense also reflects a decrease in non-cash pension expense in the third quarter and year to date.

Our voluntary workforce reduction program, which was launched in late 2015 to streamline back-office support functions, delivered salaries and benefits savings of $4.4 million in Q3 2016 and $12.7 million year to date. These expense savings are in line with those expected to be realized in 2016 of $17 million. These savings were partly offset by $4.5 million in higher labour costs charged to operations expense due to efficiencies and delays in our capital program. Other productivity initiatives in the first three quarters of 2016 contributed to a reduction in other expenses.

See our Q3 2016 Supplemental for operations expense details, including further variance information.

EBITDA before restructuring and transformation expenses
EBITDA before restructuring and transformation expenses was higher by $9.7 million in Q3 2016 and $10.5 million year to date mainly due to a reduction in operating expenses resulting from our restructuring and transformation initiatives.

Restructuring and transformation expenses
Restructuring and transformation expenses in Q3 2016 of $14.3 million are comprised of costs related to our transformation initiatives of $1.8 million, the proposed BCE transaction of $7.4 million, Allstream unwind of $2.2 million, and other productivity initiatives to improve our effectiveness of $2.9 million. Year-to-date restructuring and transformation expenses of $38.7 million are related to our transformation program of $7.8 million, the proposed BCE transaction of $22.3 million, Allstream unwind costs of $2.5 million and other productivity initiatives to improve our effectiveness of $6.1 million.

Depreciation and amortization expense
Our depreciation and amortization expense increased by $10.9 million in Q3 2016 compared to Q3 2015 mostly due to higher amortization of deferred wireless acquisition costs recognized in 2016, which also contributed to the $6.6 million year-over-year increase, partially offset by amortization of a prior year SR&ED tax credit in 2015.

Other (expense) income
Q3 2016 other income remained comparable to Q3 2015. Other income decreased $5.1 million year to date, mainly due to a gain recorded in 2015 relating to the acquisition of the remaining ownership interests in TTC, and the resulting remeasure of our previously held interests as of June 1, 2015. This is not a cash-impacting item.

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. The present value of these available tax assets is approximately $239 million. These tax assets have a book value of $401.8 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 Scientific Research and Experimental Development Investment Tax Credits (SR&ED ITCs). See our Q3 2016 Supplemental for additional tax information.

Income and EPS from continuing operations
Income from continuing operations was down $4.8 million in Q3 2016 and $19.8 million year to date, and EPS from continuing operations was down $0.05 in Q3 2016 and $0.23 year to date. These declines are largely due to higher restructuring and transformation expenses, partially offset by lower operations expense.

Discontinued operations
On January 15, 2016, we completed the sale of Allstream and, after customary adjustments and transaction costs, we recognized net proceeds on the sale of $425.1 million and a loss on disposition of $2.9 million. Allstream's operating results for the first 15 days of 2016 and the 2015 comparatives have been reclassified as discontinued operations. For more details regarding the accounting treatment, readers are encouraged to review the discontinued operations note disclosure in our Q3 2016 interim condensed consolidated financial statements, which can be found on our website at www.mts.ca/aboutus. See our Q3 2016 Supplemental for a restatement of our operating results for 2015.

Other comprehensive (loss) income
Other comprehensive (loss) income represents net actuarial gains and losses arising from changes in the present value of our defined benefit pension obligations 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 other comprehensive loss year to date was due to changes in the present value of our defined benefits pension obligations as a result of lower interest rates partially offset by a higher than expected return on assets.

Selected quarterly financial information

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

Q3 2016

Q2 2016

Q1 2016

Q4 2015

Q3 2015

Q2 2015

Q1 2015

Q4 2014

Operating revenues

253.3

252.3

250.7

252.1

250.9

250.7

255.9

251.0

EBITDA before restructuring and transformation expenses

121.5

120.7

116.3

115.6

111.8

115.2

121.0

113.4

Restructuring and transformation expense

14.3

19.2

5.2

32.5

1.8

3.6

Free cash flow

48.0

54.5

45.6

33.6

29.9

29.0

48.2

19.7

Capital investments

41.0

38.0

31.0

39.0

45.8

52.5

43.1

59.2

Income (loss) from continuing operations1

18.1

12.0

17.3

(3.2)

22.9

17.7

26.6

23.4

Net income (loss)

17.9

11.3

18.7

(88.2)

26.7

10.4

26.7

24.2

EPS from continuing operations1

$0.24

$0.16

$0.22

($0.04)

$0.29

$0.22

$0.34

$0.30

EPS

$0.24

$0.15

$0.24

($1.11)

$0.34

$0.13

$0.34

$0.31

Free cash flow per share

$0.65

$0.73

$0.58

$0.42

$0.38

$0.37

$0.61

$0.25

Weighted average shares outstanding2 (in millions)

74.3

74.6

78.6

79.3

79.2

78.9

78.4

78.1

1 Comparative information presented on the same basis as 2016 results. See our Q3 2016 Supplemental for further comparative reporting information.

2 The decrease in the number of weighted average shares outstanding in 2016 is due to the shares purchased through our share repurchase program. Prior to Q4 2015, when we stopped issuing shares under the dividend reinvestment program, the increase in the number of weighted average shares outstanding was due to shares issued under this program.

Our Q3 2016 performance is reflected in our financial results. Our interim financial results for the last eight quarters (Q3 2016 to Q4 2014) reflect the following significant transactions and trends:

  • Discontinued operations – On January 15, 2016, the sale of Allstream was completed and after customary adjustments and transaction costs, we realized net proceeds on the sale of $425.1 million and a loss on disposition of $2.9 million. Final closing adjustments were recognized and remaining net proceeds of $4.9 million were received in the second quarter of 2016. In the fourth quarter of 2015, with the announcement of the sale of Allstream we recorded a non-cash post-tax impairment charge of $95.7 million. Allstream's operating results for the first 15 days of 2016 and the 2015 comparatives have been reclassified as discontinued operations. For more details regarding the accounting treatment, readers are encouraged to review the discontinued operations note disclosure in our Q3 2016 interim condensed consolidated financial statements, which can be found on our website at www.mts.ca/aboutus. See our Q3 2016 Supplemental for a restatement of our operating results for 2015.

  • Restructuring and transformation expenses – 2016 expenses are mainly related to the BCE Arrangement and our transformation program. The transformation expenses relate to initiatives launched in 2016 which are focused on rationalizing pricing, promotions and discounts, and enhancing customer service and our online strategy. The 2015 expenses are mainly associated with our transformation program (primarily the voluntary workforce reduction program), along with severances and other costs incurred relating to other restructuring programs. Included in the $32.5 million recorded in the fourth quarter of 2015 is a non-cash pension curtailment loss of $17.1 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.

  • Spectrum purchases – On July 31, 2015 we acquired 15 MHz of paired AWS-1 spectrum from WIND Mobile for $45 million. In Q2 2015, we acquired 10 MHz of paired BRS spectrum in ISED, formerly Industry Canada, 2500 MHz (BRS) auction for $2.4 million.

  • Wireless double cohort – As a result of the May 19, 2015 CRTC decision, in the second quarter of 2015 we 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 pre-funding of $120 million into our pension plans using our existing credit facilities, of which $116.1 million related to continuing operations and $3.9 million related to discontinued operations. This one-time pre-funding eliminated the need for cash solvency payments for 2016.

Liquidity and capital resources

Summary of cash flows

($ millions)


Q3 2016

Q3 2015

$ change

% variance

YTD 2016

YTD 2015

$ change

% variance

Cash flows from (used in):











Operating activities


79.6

95.6

(16.0)

(16.7)

225.9

80.0

145.9

n.a.*


Investing activities


(40.5)

(92.7)

52.2

56.3

312.0

(188.4)

500.4

n.a.


Financing activities              


(45.2)

(7.7)

(37.5)

n.a.

(518.0)

33.8

(551.8)

n.a.

Cash flows from (used in) continuing










operations


(6.1)

(4.8)

(1.3)

(27.1)

19.9

(74.6)

94.5

n.a.

*not applicable

Operating activities
"Cash flows from operating activities" refers to cash we generate from our business activities.
Cash flows from operating activities decreased $16.0 million in Q3 2016 mainly due to the negative impact of changes in non-cash working capital of $17.7 million. On a year-to-date basis, cash flows from operating activities increased $145.9 million mainly due to the pension solvency pre-funding made in 2015 in the amount of $116.1 million, and increases in non-cash working capital of $33.6 million. The improvement in non-cash working capital is mostly related to the management of handset inventory.

Investing activities
"Investing activities" refers to cash used for acquiring, and cash received from disposing of, long-term assets and other long-term investments.
Q3 2016 cash flows used in investing activities improved by $52.2 million mainly due to the use of $45.2 million to acquire spectrum in Q3 2015. Included in capital investments, and new for 2016, are $1.8 million of spend relating to our restructuring and transformation program. Our capital intensity ratio, excluding restructuring and transformation is 14.5%, a 2.8-point improvement from 17.3% in Q3 2015. Including our restructuring and transformation initiatives, our capital intensity ratio is 15.2%.

On a year-to-date basis, cash flows from investing activities increased $500.4 million due to net proceeds from the Allstream sale of $425.1 million and lower capital investments of $31.4 million and lower spectrum purchases of $47.6 million. Included in capital investments, and new for 2016, is $3.7 million of spend relating to our restructuring and transformation program. Our capital intensity ratio, excluding restructuring and transformation initiatives is 13.6%, and including our restructuring and transformation initiatives is 14.1%.

Financing activities
"Financing activities" refers to actions we undertake to fund our operations through equity capital and borrowings.
Cash flows used in financing activities increased $37.5 million in the third quarter of 2016 mainly due to the Q3 2016 repayment of notes payable of $26.9 million as opposed to the Q3 2015 issuance of notes payable of $9.5 million. On a year-to-date basis, cash flows used in financing activities increased $551.8 million due to repayment of long-term debt of $250.0 million, share repurchases of $164.4 million and repayment of notes payable of $33.9 million, all in 2016, as compared to an issuance of notes payable of $98.2 million during the same period in 2015.

In the first, second and third quarters of 2016, and third and fourth quarters of 2015, cash dividends declared at $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. In accordance with the arrangement agreement with BCE, the third-quarter 2016 quarterly cash dividend was the last dividend we paid to shareholders.

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. Starting with the October 15, 2015 dividend payment, the common shares were no longer issued from Treasury at a discount, and were instead purchased on the open market.

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
 September 30, 2016


Capacity

Medium-term note program





500.0

Revolving credit facility




174.3


400.0

Additional credit facilities




299.8


300.0

Accounts receivable securitization




43.2


50.0

Total




517.3


1,250.0

Our current medium-term note (MTN) program for $500 million will expire in November 2017. We have a $400 million revolving credit facility, of which we had utilized $85.3 million at September 30, 2016 for undrawn letters of credit and issued $89.0 million in short-term Bankers Acceptances. We also have two additional credit facilities totalling $300 million, which are used solely for the issuance of letters of credit. As at September 30, 2016, a total of $299.8 million was utilized under these additional credit facilities for undrawn letters of credit. In addition to these programs and facilities, we have a $50-million accounts receivable securitization program, of which $43.2 million was utilized as at September 30, 2016.

Capital structure

($ millions)


September 30, 2016


December 31, 2015

Bank indebtedness (cash and cash equivalents)


9.1


15.0

Notes payable


132.2


166.1

Finance lease obligations, including current portion


53.3


54.2

Long-term debt, including current portion


624.4


874.0

Net debt


819.0


1,109.3

Shareholders' equity


715.6


1,048.2

Total capitalization


1,534.6


2,157.5

Debt to capitalization


53.4%


51.4%

Our capital structure illustrates the amount of our assets that is financed by debt versus equity. Our debt to total capitalization ratio of 53.4% as at September 30, 2016 continues to represent financial strength and flexibility.

Credit ratings








S&P - Senior debentures


BBB (positive)


DBRS - Senior debentures


BBB (positive)

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 2, 2016, S&P issued a press release noting its credit ratings on our long-term corporate credit and senior unsecured debt at "BBB" and our commercial paper rating of "A-2" were placed on credit watch with positive implications. DBRS issued a press release on May 2, 2016 placing all its credit ratings on our senior debentures of "BBB" and our commercial paper rating of "R-2 (high)" under review with positive implications.

Outstanding share data





As at October 24, 2016


As at September 30, 2016

Common shares outstanding




74,398,389


74,398,389

Stock options outstanding




154,958


154,958

Stock options exercisable




152,776


152,776

During the first three quarters of 2016, 210,655 stock options were exercised to purchase common shares for cash consideration of $7.1 million.

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 September 30, 2016, we had outstanding foreign currency forward contracts to purchase $7.4 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 September 30, 2016, we had $43.2 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.

In our 2015 annual audited consolidated financial statements and notes, as well as in our 2015 annual MD&A, we have identified the accounting policies and estimates that are critical to the understanding of our business operations and our results of operations. Our critical accounting estimates and assumptions remain substantially unchanged from those disclosed in our 2015 annual audited consolidated financial statements and notes and 2015 annual MD&A.

Changes in accounting policies

Our third-quarter 2016 interim condensed consolidated financial statements have been prepared using the same accounting policies as in the previous year except for the standard described below:

Effective January 1, 2016, we adopted Amendments to IAS 1, Presentation of Financial Statements. This standard provides guidance on the application of professional judgement in determining what information to disclose and how to structure it in the financial statements. The application of this standard has not had any impact on the amounts reported for the current or prior periods.

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 our 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 International Accounting Standards Board'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 our 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. We also expect a shift in the timing of recognition for contract acquisition and fulfillment costs.

IFRS 16, Leases
IFRS 16, Leases, was issued in January 2016 and introduces a single lessee accounting model which requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognize a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. IFRS 16 is effective for annual periods beginning on or after January 1, 2019, and is to be applied retrospectively, with earlier adoption permitted if IFRS 15, Revenue from Contracts with Customers, is also adopted. Entities will transition following either a full or modified retrospective approach.

Risks and uncertainties

Risk evaluation processes
Risk management practices are part of our standard operations, across all of our businesses. Identifying and managing our principal risks form part of our management's regular business planning process because risk, as well as associated opportunities, are important considerations in our current and future business strategy.

As we set our strategic objectives, our risk management program is used to identify and assess the associated principal risks and considers the activities being taken to mitigate them. The program is managed through an executive-level strategic risk committee, together with our enterprise risk management team.

Our risks and uncertainties are described in our 2015 annual MD&A and are updated for material developments every quarter. In both our Q1 2016 MD&A and our Q2 2016 MD&A we updated our risks and uncertainties section to include the risks and uncertainties of the Arrangement.

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. See Risks and uncertainties.

We operate as an incumbent local exchange carrier whose telecommunications business is regulated primarily by the CRTC and by ISED, in areas such as spectrum or ownership. Our television business is licensed as a broadcast distribution undertaking, 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 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. Our regulatory environment is as described in our 2015 annual MD&A and is updated for material developments every quarter. There are no material changes to regulatory developments in Q3 2016.

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.

Other than changes arising from the sale of Allstream, there have been no changes in our internal control over financial reporting during our most recent interim period (ended September 30, 2016) that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting. Internal control over financial reporting is described in our 2015 annual MD&A.

Non-IFRS measures of performance

In this Q3 2016 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 amounts and non-cash taxes". More information about free cash flow can be found in our Q3 2016 Supplemental, which is available on our website at www.mts.ca/aboutus and is available on www.SEDAR.com.

Free cash flow per share
We define free cash flow per share 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 amounts and non-cash taxes divided by our weighted average shares outstanding". More information about free cash flow per share can be found in our Q3 2016 Supplemental, which is available on our website at www.mts.ca/aboutus and is available on www.SEDAR.com.

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 excluding capital related to restructuring and transformation initiatives". More information about capital intensity ratio can be found in our Q3 2016 Supplemental, which is available on our website at www.mts.ca/aboutus and is available on www.SEDAR.com.

SOURCE MTS

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

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

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Manitoba Telecom Services Inc.

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