MTS Reports Solid Second Quarter Results



    
    With 15.4% Gain in Growth Services Revenues

    This news release contains forward-looking statements. For a description
of the related risk factors and assumptions, please see the section entitled
"Forward-Looking Statements Disclaimer" later in this news release.

    Second Quarter Highlights
    -  Total revenues from continuing operations up by 2.6% year-over-year
    -  Revenues from growth services up by 15.4%; now represent 44.2% of
       total revenues
    -  Enterprise Solutions division delivered revenue growth of 3.2%
    -  Strong growth of 10.6% in wireless subscribers
    -  EPS from continuing operations up by 2.5% in the second quarter or
       7.1% year to date
    -  EBITDA from continuing operations up by 0.5% in the second quarter or
       1.3% year to date
    -  Declared dividend of $0.65 per share
    

    WINNIPEG, Aug. 11 /CNW/ - Manitoba Telecom Services Inc. ("MTS" or the
"Company") (TSX: MBT) today announced its results for the second quarter ended
June 30, 2008. Total revenues from continuing operations(1) increased by 2.6%
and 2.5% for the three and six months ended June 30, 2008 to reach
$486.4 million and $965.2 million, respectively. EPS(2) from continuing
operations for the quarter increased by 2.5% to $0.81, and EBITDA(3) from
continuing operations increased by 0.5% to $171.3 million, as compared to the
previous year. On a year to date basis, EPS from continuing operations
increased by 7.1% to $1.65, and EBITDA from continuing operations increased by
1.3% to $340.0 million.
    "MTS continued to deliver profitable growth during the second quarter,"
said Pierre Blouin, Chief Executive Officer. "These results were driven
primarily by double-digit growth in growth services and the continued strong
performance of both our Consumer Markets division and the Enterprise Solutions
division, which delivered its third consecutive quarter of overall revenue
growth."
    Mr. Blouin continued, "We are well-positioned to achieve our growth
targets for 2008, while continuing to provide an attractive dividend yield to
our shareholders."
    The Company has continued to reduce its cost structure and achieved
efficiencies in its operations and reported annualized cost reductions of
$20.1 million following the second quarter already reaching its 2008 cost
reduction target of $20 million to $30 million of annualized expenses.
    Double-digit growth in revenues from the Company's growth services
portfolio, which includes wireless, converged Internet protocol ("IP"),
unified communications, digital television and high-speed Internet services,
strongly contributed to the gains posted by its continuing operations metrics
in the three and six months ended June 30, 2008. With revenues from growth
services increasing by 15.4% to $214.9 million in the second quarter, and by
16.6% to $419.8 million in the first six months of the year, MTS is continuing
to successfully increase its revenues from growth services while profitably
transitioning its customers to growth services products. For the second
quarter and year to date in 2007, respectively, growth services revenues
contributed 44.2% and 43.5%, well ahead of the 39.3% and 38.2% contributions
made to revenues from continuing operations in the comparable year-ago
periods.

    
    FINANCIAL HIGHLIGHTS

    -------------------------------------------------------------------------
    in millions of dollars,     three months              six months
     except per share amounts  ended June 30           ended June 30
                               --------------   %      --------------   %
                                2008    2007  change    2008    2007  change
    -------------------------------------------------------------------------
    Continuing Operations
    -------------------------------------------------------------------------
      EPS                       0.81    0.79     2.5    1.65    1.54     7.1
    -------------------------------------------------------------------------
      EBITDA                   171.3   170.5     0.5   340.0   335.5     1.3
    -------------------------------------------------------------------------
      Free cash flow(4)         72.4    88.6   (18.3)  151.1   183.1   (17.5)
    -------------------------------------------------------------------------
      Growth services revenues 214.9   186.2    15.4   419.8   360.1    16.6
    -------------------------------------------------------------------------
      Legacy services revenues 271.5   287.9    (5.7)  545.4   581.4    (6.2)
    -------------------------------------------------------------------------
      Revenues                 486.4   474.1     2.6   965.2   941.5     2.5
    -------------------------------------------------------------------------
    Reported
    -------------------------------------------------------------------------
      Basic EPS                 0.59    0.88   (33.0)   1.43    1.68   (14.9)
    -------------------------------------------------------------------------
      EBITDA                   161.0   172.2    (6.5)  329.7   342.4    (3.7)
    -------------------------------------------------------------------------
      Free cash flow            54.6    89.9   (39.3)  129.4   193.3   (33.1)
    -------------------------------------------------------------------------
      Revenues                 486.4   474.1     2.6   965.2   940.7     2.6
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    MTS provides financial information on continuing operations in order to
    assist investors in understanding its underlying financial performance.
    MTS's definition of continuing operations excludes certain non-recurring
    items such as restructuring costs and the retroactive impact of
    regulatory decisions.
    

    Improved EBITDA, lower debt charges, higher other income and fewer shares
outstanding all contributed to the increase in EPS from continuing operations
during the quarter. The 0.5% increase in EBITDA from continuing operations for
the second quarter reflects the increase in growth services revenues and the
positive impact of cost reduction initiatives. Free cash flow from continuing
operations was $72.4 million and $151.1 million in the three and six months
ended June 30, 2008, as compared to $88.6 million and $183.1 million in the
same periods in 2007, respectively. The change in cash flow year-over-year is
due primarily to the timing of certain capital expenditures and pension
funding payments. The Company is on track to meet its cash flow guidance for
the year.
    "Double-digit gains for growth services combined with our continued
success in achieving our cost reduction targets and stabilizing legacy
services revenues were the key performance drivers for the quarter," said
Wayne Demkey, Chief Financial Officer. "We expect that, by continuing to
execute our business plan, we will continue to grow revenues and profitability
throughout the rest of the year."
    The MTS Board of Directors declared a cash dividend of $0.65 per share
for the third quarter of 2008, which is payable on October 15, 2008 to
shareholders of record on September 15, 2008.

    DIVISIONAL HIGHLIGHTS

    Enterprise Solutions division
    -----------------------------

    The Company's Enterprise Solutions division once again delivered solid
results and margins in the second quarter of 2008, achieving sequential and
year-over-year quarterly growth in revenues and EBITDA. Next generation data
revenues, which include converged IP and unified communications services,
continued their strong performance, increasing by 20.7% and 23.7% over the
second quarter and first six months of 2007, while the Company's IP-virtual
private network customer count increased by 33.0% to 282, reflecting the
continued strong demand for innovative next generation IP-based services
offered by MTS Allstream Inc. ("MTS Allstream") to its business customers.
    The Enterprise Solutions division's national sales team continued to win
new accounts into the second quarter of 2008. The division acquired new
contracts valued at $80.6 million in the second quarter, and $156.4 million
year to date. The division signed major contracts in the quarter with The City
of Winnipeg, BMO Financial Group, DHL Express, BC Housing, Manitoba Hydro and
The Alberta Teachers' Association.

    Consumer Markets division
    -------------------------

    The Company's Consumer Markets division has been awarded the prestigious
2008 Frost and Sullivan Competitive Strategy Leadership Award in the North
American Consumer Communication and Entertainment Wallet Share Growth
category. This award is presented to a company whose competitive strategy has
yielded significant gains in market share or has executed an innovative
strategy during the research period. The Consumer Markets division has
consistently outperformed its peers operationally and financially and the
Company is proud to be recognized with this significant award.
    Successful second quarter performance by the Company's Consumer Markets
division is attributable to the continued strong performance by its growth
services and the division's ability to bundle multiple popular products and
services for customers. Delivering best in class performance, this division
holds the number one position for all telecommunications markets in Manitoba
with the full suite of next generation wireless, high-speed Internet, data,
digital television and wireline voice services that it offers customers.
Digital television and high-speed Internet services again delivered double-
digit growth in subscribers and revenues when compared to the same period last
year. Wireless customers grew at the fastest pace in Canada, growing 10.6%,
with wireless services revenues increasing by 6.0% in the quarter and 8.4%
year to date.
    Additionally, wireless penetration in Manitoba is approximately 50% as
compared to the Canadian penetration rate at the end of 2007 of approximately
62%. These penetration rates create the right conditions for continuing strong
growth in the Company's subscriber base, as consumer adoption of wireless
products continues to expand.
    Another strong performance was in high-speed Internet where customers
increased by 9.0%, while the associated Internet services revenues grew by
21.4% in both the quarter and first six months of the year as compared to the
same periods in 2007.
    Digital television customers increased by 13.2%, with revenues increasing
by 20.2% and 21.7% for the second quarter and first six months, respectively,
as compared to 2007. With over 80,300 customers, the Company's market share is
32%. MTS's strategy of bundling services continued to engender customer
loyalty, as demonstrated by the modest and decelerating rate of decline of
residential access line losses, which is in line with that of recent quarters.

    UPDATE ON WIRELESS MATTERS

    Following the conclusion of the advanced wireless services spectrum
auction on July 21, 2008, MTS strengthened its existing wireless business by
acquiring 35 MHz of wireless spectrum, covering 1.2 million people in
Manitoba, at an auction price of approximately $41 million. This provides the
Company with the flexibility and capacity to manage future demand for next
generation wireless services, including bandwidth-intensive data applications.
The Company expects to fund these future improvements, when required by
customer demand, through its existing capital expenditure program.

    The Company is also transitioning certain wireless service requirements
away from Bell Mobility to new suppliers and to its own platform.  A more
detailed description of this transition and related costs is contained in
MTS's second quarter 2008 Management's Discussion and Analysis ("MD&A") filed
on SEDAR and the Company's Web site.

    SUCCESSFUL RENEGOTIATION OF COLLECTIVE AGREEMENTS

    The Company successfully renegotiated collective agreements with its five
unions: Telecommunications Employees Association of Manitoba - International
Federation of Professional and Technical Engineers, Local 161 ("TEAM-IFPTE");
the International Brotherhood of Electrical Workers, Local 435 ("IBEW"); the
Communications, Energy and Paperworkers Union of Canada, Local 7 ("CEP"); the
Canadian Auto Workers, Local 2000 ("CAW"); and the United Steelworkers, TC
Local 1976 ("USW"). The new collective agreements have expiry dates ranging
from April 2009 to January 2011, and provide the Company with flexibility to
enhance its ability to remain competitive in its markets.

    2008 OUTLOOK

    As announced on December 7, 2007, the Company's 2008 outlook for
continuing operations is as follows:

    
    -------------------------------------------------------------------------
              2008 Financial Outlook - Continuing Operations
    -------------------------------------------------------------------------
    Revenues                                          $1.920 B to $1.980 B
    EBITDA                                            $660 M to $680 M
    EPS                                               $2.95 to $3.15
    Free cash flow                                    $250 M to $280 M
    Capital expenditures                              14% to 15% of revenues
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    For assumptions underlying the Company's 2008 outlook, refer to "Material
Assumptions" in the Company's release dated December 31, 2007 and its second
quarter 2008 MD&A, which are filed on SEDAR and the Company's Web site.

    OTHER DEVELOPMENTS

    The following are various announcements made by the Company's major
operating subsidiary, MTS Allstream during the second quarter.

    
    Enterprise Solutions division announcements

      -  On June 16, 2008, MTS Allstream announced that it had won the 2008
         Microsoft Partner of the Year award for information worker
         solutions, unified communications. From a pool of more than 2,000
         entrants worldwide, Microsoft recognized MTS Allstream's exceptional
         offering of breakthrough Microsoft Office system-based
         communications solutions.
      -  On June 2, 2008, MTS Allstream announced that it had become a
         certified qualified security assessor by the Payment Card Industry
         Security Standards Council. As a qualified security assessor, MTS
         Allstream is certified to help its customers adhere to payment card
         industry compliance standards and better address overall security
         and networking needs.
      -  On May 8, 2008, MTS Allstream announced that it had won the Cisco
         Partner Summit regional Market Mover Award (Canada). This award
         recognizes MTS Allstream's performance and success as a Cisco
         channel partner in Canada during 2007.

    Consumer Markets division announcements

      -  On July 17, 2008, MTS Allstream announced that it will continue to
         expand its wireless network coverage by investing over $1.2 million
         to add new cellular sites to rural communities in Manitoba by the
         end of 2008. This investment will expand coverage for over 14,000
         people in northern Manitoba.
      -  On July 9, 2008, MTS Allstream announced the opening of two new MTS
         Connect(TM) stores. These stores provide a one-stop-shop featuring a
         new format, digital media displays as well as a demonstration bar
         where consumers can test products and services, and their
         interconnectivity, before they make a purchase.
      -  On June 12, 2008, MTS Allstream announced that it was collaborating
         with the Winnipeg School Division and Dell Canada in the Dell
         TechKnow program. The Dell TechKnow program is a 40 hour
         after-school program, which provides underserved middle school
         students with an opportunity to acquire computer skills while
         promoting self-esteem, academic success and preparation for
         opportunities in today's digital world.
      -  On May 29, 2008, MTS Allstream announced the availability of the
         Blackberry(R) Curve(TM) 8330, a sleek and stylish high-speed
         smartphone that offers a powerful combination of communications and
         multimedia capabilities.
      -  On May 28, 2008, MTS Allstream announced the re-launch of the
         Entourage Web site, an exclusive VIP club for youth, which offers
         free tickets and access to the most popular concerts at the MTS
         Centre and sold-out events across Manitoba.

    Corporate announcements

      -  On July 4, 2008, MTS Allstream announced that it will continue to
         support community festivals across Manitoba in 2008 by providing
         more than $240,000 in support to a variety of festivals throughout
         the province.
      -  On June 25, 2008, MTS Allstream announced a 10-year sponsorship
         agreement with Exhibition Place in Toronto for the naming rights of
         its new conference centre. The state-of-the-art conference centre,
         which opens in the summer of 2009, will be named Allstream Centre -
         A Conference & Convention Centre at Exhibition Place.
      -  On May 23, 2008, MTS Allstream announced that it will be awarded
         with the 2008 Special Recognition Award from Canada's
         Telecommunications Hall of Fame in October of this year. The Special
         Recognition Award is awarded to a technology, location, event,
         organization, or group of individuals or organizations that have
         contributed significantly to Canada's telecommunications industry.
      -  On April 7, 2008, MTS Allstream announced that MTS had been
         recognized as one of Canada's top socially responsible corporate
         citizens and that it remained a constituent of the acclaimed Jantzi
         Social Index(R). The Jantzi Social Index, developed by Janzti
         Research Inc., consists of 60 Canadian companies that pass a set of
         broadly-based environmental, social and governance screens.
    

    Quarterly Conference Call

    MTS's second quarter 2008 conference call with the investment community
is scheduled for 4:00 p.m. (Eastern time) on August 11, 2008. Investors are
invited to listen to the conference call. The dial-in number is 1-800-732-
9307. A live audio Webcast of the investor conference call can be accessed by
visiting the Investors section of the MTS Web site (www.mtsallstream.com). A
replay of the conference call will be available until midnight (Eastern time)
on August 21, 2008, and can be accessed by dialing 1-877-289-8525 or 1-416
640-1917 (access code 21276282 followed by the number sign).

    Note

    MTS's interim MD&A for the six months ended June 30, 2008 and
supplementary financial information are available in the Investors section of
the MTS Web site at www.mtsallstream.com.

    About Manitoba Telecom Services Inc.

    Manitoba Telecom Services Inc., through its wholly owned subsidiary MTS
Allstream Inc., is one of Canada's leading national communication solutions
providers, delivering innovative products and services through its Enterprise
Solutions and Consumer Markets divisions. The Enterprise Solutions division,
which operates under the Allstream brand nationally and under the MTS
Allstream brand in Manitoba, is a leading competitor in the national business
and wholesale markets. This division offers customers a portfolio of solutions
tailored to the needs of medium and large businesses looking for success in a
world of rapidly evolving technology - Internet protocol connectivity, unified
communications, IT consulting and security services, and voice and data
connectivity services. The Consumer Markets division leads every
telecommunications market segment in Manitoba, delivering a full suite of next
generation wireless, high-speed Internet and data, digital television and
wireline voice services under the MTS brand, as well as small business
services in select markets across Canada under the Allstream brand, and
security and alarm monitoring services through the company's subsidiary AAA
Alarm Systems Ltd., which also operates in other western provinces. The
company's extensive national broadband fibre optic network spans more than
24,300 kilometres, and provides international connections through strategic
alliances and interconnection agreements with other international service
providers. Manitoba Telecom Services Inc.'s common shares are listed on The
Toronto Stock Exchange (trading symbol: MBT). For more information, please
visit: www.mtsallstream.com.

    Forward-Looking Statements Disclaimer

    This news release includes forward-looking statements and information
(collectively, the "statements") about our corporate direction, business
opportunities, operating and dispute resolution activities, financial
objectives, and future financial results and performance that are subject to
risks, uncertainties and assumptions. As a consequence, actual results in the
future may differ materially from any conclusion, forecast or projection in
such forward-looking statements. Forward-looking statements reflect our
expectations as at August 11, 2008. Examples of statements that constitute
forward-looking information may be identified by words such as "believe",
"expect", "project", "anticipate", "could", "target", "forecast", "intend",
"plan", "outlook", "pending", and other similar terms. Factors that could
cause anticipated opportunities and actual results to differ materially from
those expected, and the material factors or assumptions that were applied in
drawing a conclusion or making a forecast or projection set out in such
forward-looking statements, include, but are not limited to, the items
identified in our interim MD&As for the first and second quarters of 2008, and
our 2007 annual MD&A. Except as required by law, we disclaim any intention or
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
    Factors that could cause actual results to differ materially include, but
are not limited to, the intensity of competitive activity from both
traditional and new competitors (competitive conditions); the ability to
retain major customers (customer relationships); decisions by the federal
regulator that affect our ability to compete effectively or to enter into new
business opportunities (developments in federal regulation); general economic
and market conditions and the level of consumer confidence and spending, and
the demand for, and prices of, our products and services (market conditions
and economic fluctuations); the ability to manage labour relations effectively
(collective agreements); the ability to anticipate, and respond to, changes in
technology (technology); and other risk factors listed from time to time in
our comprehensive public disclosure documents, including our 2007 Annual
Report and in other filings with the Canadian securities regulatory
authorities. Unless otherwise stated, all amounts are expressed in Canadian
dollars. For further information, refer to the "Risks and Uncertainties"
sections in our 2007 annual MD&A and our interim MD&As for the first and
second quarters of 2008.
    Additional information relating to our Company, including our Annual
Information Form, is available on SEDAR at www.sedar.com. This news release
and the financial information contained herein have been reviewed by our Audit
Committee and approved by our Board of Directors.

    
    -------------------
    (1) Refer to MTS's second quarter 2008 interim MD&A for the definition of
        continuing operations.
    (2) EPS is earnings per share.
    (3) EBITDA is earnings before interest, taxes, amortization, other income
        and discontinued operations. EBITDA should not be construed as an
        alternative to operating income or to cash flows from operating
        activities (as determined in accordance with Canadian generally
        accepted accounting principles) as a measure of liquidity.
    (4) Refer to MTS's second quarter 2008 interim MD&A for the definition of
        free cash flow.


                        -----------------------------
                           MANAGEMENT'S DISCUSSION
                                 AND ANALYSIS
                        -----------------------------
    

    Unless otherwise indicated, this Management's Discussion and Analysis
("MD&A") of our financial results for the interim period ended June 30, 2008
is as at August 11, 2008. In this MD&A, "we", "our", and "us" refer to
Manitoba Telecom Services Inc. ("MTS"). This interim MD&A should be read in
conjunction with our interim consolidated financial statements and the
discussion and analysis that accompanies our audited consolidated financial
statements for the year ended December 31, 2007. This interim MD&A for the
three and six months ended June 30, 2008 updates the information contained in
our interim MD&A for the first quarter of 2008, and our 2007 annual MD&A.
    This interim MD&A includes forward-looking statements and information
(collectively, the "statements") about our corporate direction, business
opportunities, operating and dispute resolution activities, financial
objectives and future financial results and performance that are subject to
risks, uncertainties and assumptions. As a consequence, actual results in the
future may differ materially from any conclusion, forecast or projection in
such forward-looking information. Examples of statements that constitute
forward-looking information may be identified by words such as "believe",
"expect", "project", "anticipate", "could", "target", "forecast", "intend",
"plan", "outlook", and other similar terms. Factors that could cause
anticipated opportunities and actual results to differ materially from those
expected, and the material factors or assumptions that were applied in drawing
a conclusion or making a forecast or projection set out in such
forward-looking statements, include, but are not limited to, the items
identified in this interim MD&A under the "Risks and Uncertainties" and
"Material Assumptions" sections, our interim MD&A for the first quarter of
2008, and our 2007 annual MD&A. Please note that forward-looking statements
reflect our expectations as at August 11, 2008. 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. Additional information relating to our company, including our Annual
Information Form, is available on SEDAR at www.sedar.com. Unless otherwise
stated, all amounts are expressed in Canadian dollars.

    NON-GAAP MEASURES OF PERFORMANCE
    --------------------------------
    In this MD&A, we provide information concerning continuing operations,
EBITDA and free cash flow because we believe investors use them as measures of
our financial performance. These measures do not have a standardized meaning
as prescribed by Canadian generally accepted accounting principles ("GAAP"),
and are not necessarily comparable to similarly titled measures used by other
companies.

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

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

        In the first six months of 2007, continuing operations included cost
        reduction initiatives; and excluded restructuring costs and
        integration costs, certain tax recoveries, the retroactive adjustment
        related to Telecom Decision CRTC 2007-10 ("Decision 2007-10") in
        which the Canadian Radio-television and Telecommunications Commission
        ("CRTC") determined that we had been billed twice over the past
        several years for basic service extension features charges, the
        impact of changes in income tax rates on our tax asset, and a
        reduction to our tax asset valuation allowance and other adjustment.

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

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

    OVERVIEW
    --------
    MTS commenced its operations in the province of Manitoba in 1908, first
as a department of the provincial government, and then as a Crown corporation
that was incorporated in 1933. In 1997, the company was reorganized and
continued as a publicly traded company. MTS's common shares are listed on The
Toronto Stock Exchange under the trading symbol MBT.
    MTS is a leading national communications provider in Canada. The company
is organized into two reportable operating segments, the Enterprise Solutions
division and the Consumer Markets division. The company, which operates under
two principal brands, MTS and Allstream, builds upon its unique combination of
market leadership in Manitoba and agile competitive presence in business
markets across Canada to deliver innovative telecommunications solutions that
bring value to customers. MTS employs approximately 6,000 people.

    Enterprise Solutions division

    The Enterprise Solutions division, which operates under the Allstream
brand nationally and under the MTS Allstream brand in Manitoba, is a leading
competitor in the national business and wholesale markets. This division
offers customers a portfolio of solutions tailored to the needs of medium and
large businesses looking for success in a world of rapidly evolving technology
- Internet protocol ("IP")-based communications, unified communications, voice
and data connectivity services. The Enterprise Solutions division operates an
extensive national broadband fibre optic network that spans more than 24,300
kilometres, and provides international connections through strategic alliances
and interconnection agreements with other international service providers. The
division's advanced services, combined with the impressive reach of a
state-of-the-art network and continued leadership in technological innovation,
have allowed the company to forge strong relationships with top national
business customers across the country.

    Consumer Markets division

    The Consumer Markets division leads every telecommunications market
segment in Manitoba, delivering a full suite of next generation wireless,
high-speed Internet and data, digital television and wireline voice services
under the MTS brand, as well as security and alarm monitoring services through
AAA Alarm Systems Ltd., a subsidiary of MTS which also operates in other
western provinces. This complete range of products is unmatched by any other
provider in Manitoba, and the digital television service offered to customers
in Winnipeg is recognized as one of the leading North American digital
television services. With this innovative combination of products and
services, the company connects people, homes and businesses everywhere. In
addition, the Consumer Markets division is a leading player in the national
small business telecommunications market outside Manitoba, providing customers
in major Canadian centres with a range of innovative business Internet, data
and voice services under the Allstream brand.

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

    Earnings Per Share ("EPS") ($)
    -------------------------------------------------------------------------
                 (in $)                            Q2/08     Q2/07  % change
    -------------------------------------------------------------------------
    EPS (continuing operations)                     0.81      0.79       2.5
    Wireless transition and AWS spectrum auction
     costs                                         (0.10)        -      n.m.
    Future tax rate adjustment                     (0.12)    (0.09)     33.3
    Reduction in tax asset allowance and other
     adjustment                                        -      0.15      n.m.
    Decision 2007-10                                   -      0.05      n.m.
    Restructuring costs                                -     (0.02)     n.m.
                                                   --------------------------
    Basic EPS                                       0.59      0.88     (33.0)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Note: EPS for the three months ended June 30 is based on weighted average
    shares outstanding of 64.6 million for 2008, and 64.7 million for 2007.
    

    EPS from continuing operations increased by 2.5% or $0.02 to $0.81, and
by 7.1% or by $0.11 to $1.65 in the three and six months ended June 30, 2008,
as compared to the same periods last year. Contributing to these increases was
double-digit growth in the revenues of our growth services portfolio, which
includes wireless, converged IP, unified communications, digital television
and high-speed Internet services. In addition, lower shares outstanding due to
share purchases made under our normal course issuer bid (the "Issuer Bid") in
the first six months of 2007 impacted EPS from continuing operations on a year
to date basis. We continue to see success in tight competitive markets, and we
are confident in our business strategies to manage customers migrating to
IP-based technology services and to reinforce our customer relationships with
our bundle programs. In addition to these factors, the execution of our
ongoing cost reduction initiatives contributed to our improved performance
this year.
    Basic EPS decreased to $0.59 from $0.88 in the second quarter of 2008,
and in the first six months of the year, decreased to $1.43 from $1.68, as
compared to the same periods in 2007. These decreases reflect the positive
impacts of Decision 2007-10, and a reduction in our tax asset allowance as
well as the negative impacts of a future tax rate adjustment and restructuring
costs. Basic EPS in the second quarter of this year was also impacted by
activities related to our wireless transition and costs associated with the
AWS spectrum auction. As previously disclosed, during the quarter we commenced
transitioning certain wireless service requirements away from Bell Mobility.
These activities resulted in one-time costs recorded this quarter that are
further described in the Operating Expenses section on page 8.

    
    -------------------------------------------------------------------------
                 (in $)                           YTD/08    YTD/07  % change
    -------------------------------------------------------------------------
    EPS (continuing operations)                     1.65      1.54       7.1
    Wireless transition and AWS spectrum auction
     costs                                         (0.10)        -      n.m.
    Future tax rate adjustment                     (0.12)    (0.09)     33.3
    Reduction in tax asset allowance and other
     adjustment                                        -      0.15      n.m.
    Decision 2007-10                                   -      0.15      n.m.
    Restructuring costs                                -     (0.07)     n.m.
                                                   --------------------------
    Basic EPS                                         1.43     1.68   (14.9)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Note: EPS for the six months ended June 30 is based on weighted average
    shares outstanding of 64.6 million for 2008, and 65.5 million for 2007.



    EBITDA
    -------------------------------------------------------------------------
    (in millions $)                                Q2/08     Q2/07  % change
    -------------------------------------------------------------------------
    EBITDA (continuing operations)                 171.3     170.5       0.5
    Wireless transition and AWS spectrum auction
      costs                                        (10.3)        -      n.m.
    Decision 2007-10                                   -       4.4      n.m.
    Restructuring costs                                -      (2.7)     n.m.
                                                   --------------------------
    EBITDA                                         161.0     172.2      (6.5)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    -------------------------------------------------------------------------
    (in millions $)                               YTD/08    YTD/07  % change
    -------------------------------------------------------------------------
    EBITDA (continuing operations)                 340.0     335.5       1.3
    Wireless transition and AWS spectrum auction
     costs                                         (10.3)        -      n.m.
    Decision 2007-10                                   -      13.5      n.m.
    Restructuring costs                                -      (6.6)     n.m.
                                                  ---------------------------
    EBITDA                                         329.7     342.4      (3.7)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    EBITDA from continuing operations for the second quarter of 2008
increased by 0.5% or $0.8 million to $171.3 million, as compared to
$170.5 million in 2007, and for the first six months of the year, increased by
1.3% or $4.5 million to $340.0 million, as compared to $335.5 million last
year. The performance of our growth services portfolio continued to be a key
driver to our results with significant growth coming from our unified
communications, digital television, consumer Internet, converged IP
applications, wireless, and security and professional services revenues. Also
factoring into the solid year-over-year EBITDA performance are our ongoing
cost reduction initiatives
    In the second quarter of 2008, consolidated EBITDA decreased to
$161.0 million from $172.2 million in the same period a year ago. This
decrease is primarily the result of the positive impact of Decision 2007-10,
which was received in 2007, and the costs of transitioning certain wireless
service requirements away from Bell Mobility to new suppliers and our wireless
platform as well as costs associated with the AWS spectrum auction partly
offset by lower restructuring costs than were incurred in 2007. We are
disputing certain costs being charged by Bell Mobility associated with
transitioning away from Bell Mobility and are of the opinion that such costs
are recoverable from them. We have commenced formal proceedings in accordance
with the dispute resolution mechanism in our agreement.  These wireless
transition costs are a one-time charge and do not impact our continuing
operations. Year to date, Decision 2007-10, and our wireless transition and
costs associated with the AWS spectrum auction also impacted consolidated
EBITDA, which resulted in a decrease to $329.7 million from $342.4 million, as
compared to 2007.

    
    REVENUES

    Operating Revenues
    -------------------------------------------------------------------------
    (in millions $)                                Q2/08     Q2/07  % change
    -------------------------------------------------------------------------
    Revenue (continuing operations)                486.4     474.1       2.6
                                                  ---------------------------
    Revenue                                        486.4     474.1       2.6
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    -------------------------------------------------------------------------
    (in millions $)                               YTD/08    YTD/07  % change
    -------------------------------------------------------------------------
    Revenue (continuing operations)                965.2     941.5       2.5
    Decision 2007-10                                   -      (0.8)     n.m.
                                                  ---------------------------
    Revenue                                        965.2     940.7       2.6
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Consolidated revenues from continuing operations increased by 2.6% or
$12.3 million to $486.4 million in the second quarter, and by 2.5% or
$23.7 million in the first six months of 2008, as compared to the same periods
in the previous year.
    Significant increases to revenues from our growth services this quarter
and in the first six months of the year drove the year-over-year increases in
our revenues from continuing operations. Revenues from our growth services
more than offset the declines in revenues from our legacy services. The impact
of reduced network traffic from Rogers Communications Inc. ("Rogers") and
AT&T Corp. ("AT&T"), as they transition their business to their own networks,
continued with a decline of $5.5 million in the second quarter, and
contributed to a decline of $14.8 million year to date as compared to 2007. If
these impacts were excluded, our revenues would have grown by 4.0% in the
second quarter and by 4.4% in the first six months of the year, as compared to
last year.
    We are pleased with the continuing solid performance of our Consumer
Markets division and the steady improvements made by our Enterprise Solutions
division. We experienced overall growth in our revenues from continuing
operations in both divisions in the second quarter and year to date. Our
Enterprise Solutions division achieved growth of 3.2% in revenues from
continuing operations as compared to the second quarter of 2007. We are
pleased to report that this is the third consecutive quarter in which our
Enterprise Solutions division has achieved growth in overall revenue. The
strengthening performance of our Enterprise Solutions division demonstrates
the growing demand for this division's service offerings from Canadian
business customers.

    
    Segmented Revenues (Continuing Operations)
    -------------------------------------------------------------------------
    (in millions $)                                Q2/08     Q2/07  % change
    -------------------------------------------------------------------------
    Growth services                                214.9     186.2      15.4
    Legacy services                                271.5     287.9      (5.7)
                                                  ---------------------------
    Total                                          486.4     474.1       2.6
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    -------------------------------------------------------------------------
    (in millions $)                               YTD/08    YTD/07  % change
    -------------------------------------------------------------------------
    Growth services                                419.8     360.1      16.6
    Legacy services                                545.4     581.4      (6.2)
                                                  ---------------------------
    Total                                          965.2     941.5       2.5
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Growth Services Revenues

    Consistent with our strategy, the proportion of our total revenues from
growth services has continued to increase. Our growth services contributed
44.2% and 43.5% to our total revenues from continuing operations in the second
quarter and year to date, respectively, which are well ahead of the 39.3% and
38.2% contributions during the same periods last year.
    In the second quarter of 2008, revenues from growth services increased by
15.4% or $28.7 million to $214.9 million, and in the first six months of the
year, increased by 16.6% or $59.7 million to reach $419.8 million. Driving
these year-over-year increases is continued solid double-digit growth in
revenues from our unified communications, digital television, consumer
Internet, converged IP applications, and security and professional services.
On a year to date basis, revenues from our unified communications portfolio is
up by 47.1% as compared to the same period last year.

    Legacy Services Revenues

    As expected, the migration of communications traffic by Rogers and AT&T
to their own networks continued to impact the revenues from our legacy
services. For the three and six months ended June 30, 2008, legacy services
revenues decreased by 5.7% or $16.4 million to $271.5 million and by 6.2% or
$36.0 million to $545.4 million, respectively, as compared to the same periods
in 2007. The impact of reduced network traffic from Rogers and AT&T
contributed $5.5 million to the decline in the second quarter of 2008 and
$14.8 million to the decline in the first six months of the year. If this
impact was excluded, the decreases in our legacy services revenues would be
3.8% and 3.6%, respectively. Re-pricing and customer churn also influenced
year-over-year revenues. However, through our targeted marketing approaches
and successful packaging of service bundles, we are confidently managing these
impacts. With these strategies well in place, they are contributing to new and
growing revenue streams by profitably accelerating our customer transition to
growth services and products.

    
    Operating Revenues (Continuing Operations)
    -------------------------------------------------------------------------
    (in millions $)                                Q2/08     Q2/07  % change
    -------------------------------------------------------------------------
    Wireless                                        71.9      67.8       6.0
    Data                                           178.6     162.6       9.8
    Local                                          132.5     133.6      (0.8)
    Long distance                                   82.6      90.9      (9.1)
    Other                                           20.8      19.2       8.3
                                                  ---------------------------
    Total                                          486.4     474.1       2.6
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    -------------------------------------------------------------------------
    (in millions $)                               YTD/08    YTD/07  % change
    -------------------------------------------------------------------------
    Wireless                                       140.0     129.1       8.4
    Data                                           352.5     324.1       8.8
    Local                                          263.7     266.2      (0.9)
    Long distance                                  167.8     183.2      (8.4)
    Other                                           41.2      38.9       5.9
                                                  ---------------------------
    Total                                          965.2     941.5       2.5
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Our operating revenues include those earned from the provision of
    wireless, data, local voice, long distance voice, and other services,
    which include our digital television service.


    Wireless Services
    -------------------------------------------------------------------------
    (in millions $)                                 2008      2007  % change
    -------------------------------------------------------------------------
    Q2                                              71.9      67.8       6.0
    YTD                                            140.0     129.1       8.4
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Our wireless portfolio consists of cellular, wireless data, paging and
    group communications services that we offer in the Manitoba market.
    

    Revenues from our wireless services increased by 6.0% or $4.1 million to
$71.9 million in the second quarter and by 8.4% or $10.9 million in the first
six months of 2008, as compared to the same periods in 2007. Significant
growth in our wireless subscriber base primarily drove the increases in
revenues from our wireless services. As at June 30, 2008, our wireless
subscriber base had grown by 10.6% to 408,434, which is at the fastest pace in
Canada. The popularity of our wireless marketing programs continues to provide
further momentum to growing our subscriber base and revenues from this line of
business.
    We continue to see strong potential for growth in our wireless services
revenues in Manitoba. At the end of the second quarter for 2008, wireless
penetration in Manitoba was approximately 50% as compared to the Canadian
penetration rate at the end of 2007 of approximately 62%. These penetration
rates provide the right conditions for continued growth in the province as
consumer adoption of wireless products continues to expand.
    Subscribers continue to increasingly utilize next generation wireless
data services and service features, such as text messaging and Web browsing
services, which has resulted in year-over-year increases in our revenues from
wireless data services of 66.0% and 73.3% in this quarter and year to date.
Average revenue per user ("ARPU"), decreased by 2.1% to $56.46 for the six
months ended June 30, 2008. Time limited promotional offers have increased our
subscriber base substantially, however the resulting lower airtime usage and
flat network access fees related to these plans, along with lower wholesale
revenues impacted wireless ARPU this quarter and year to date.

    
    Data Services
    -------------------------------------------------------------------------
    (in millions $)                                 2008      2007  % change
    -------------------------------------------------------------------------
    Q2                                             178.6     162.6       9.8
    YTD                                            352.5     324.1       8.8
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Our data line of business includes revenues earned from providing data,
    Internet and professional services. Data services connect data, video and
    voice networks to establish private connections across office locations
    and to integrate traffic over highly secure networks. We provide a wide
    range of Internet connectivity services to meet the needs of residential
    customers in Manitoba and business customers across the country. We also
    offer numerous hosting and security services to business customers across
    Canada.
    

    Revenues from our data services increased by 9.8% or $16.0 million to
$178.6 million in the second quarter, and by 8.8% or $28.4 million to
$352.5 million in the first six months of 2008, as compared to the same
periods in 2007. This increase was driven by strong performance in our data
growth services, partly offset by customers transitioning from legacy services
to growth services, and by reduced traffic on our network from Rogers and
AT&T. If the data services revenues of Rogers and AT&T are excluded from our
performance, our data services revenues for the quarter would have shown an
increase of 11.8% and an increase of 11.4% year to date, which reflect the
growing attractiveness of our next generation products and services. We are
achieving our desired results as customers are continuing to migrate to IP
solutions that utilize our state-of-the-art IP multiprotocol label switching
("MPLS") network and customer service capabilities.
    Strong growth in our next generation data services, which include
converged IP and unified communications services, was demonstrated with
increases of 20.7% this quarter and by 23.7% year to date, as compared to the
same periods in 2007. Higher equipment sales drove strong overall revenue
growth in our unified communications services during the quarter, along with
new additional customers and volume increases from business IP domestic MPLS,
network resident IP telephony, switched Ethernet, wavelength, IP trunking and
consumer high-speed Internet services. In addition, revenues from our recent
acquisitions of Multinet Communications Services Inc. ("Multinet") and ICU
Technologies Inc. ("ICU Technologies") contributed approximately $4 million
during this quarter and $7 million year to date to our data services revenues.
If the impacts of these acquisitions are excluded, the revenues of our data
services would have grown by approximately 7% and 6%, in the second quarter
and year to date this year, respectively.
    The capabilities of the suite of products offered by our Enterprise
Solutions division continued to be demonstrated by strong growth in our
IP-virtual private network ("IP-VPN") customer base. As at June 30, 2008, we
were supporting 282 IP-VPN customers, which is 33% more than last year.
    Our consumer Internet services revenue continued to grow, climbing by
21.4% year-over-year in both the three and six months ended June 30, 2008.
Contributing to these increases is continued growth in our consumer high-speed
Internet customer base, which reached 172,795 customers as at June 30, 2008,
along with an increase in average revenue per customer.

    
    Local Services
    -------------------------------------------------------------------------
    (in millions $)                                 2008      2007  % change
    -------------------------------------------------------------------------
    Q2                                             132.5     133.6      (0.8)
    YTD                                            263.7     266.2      (0.9)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Local services revenues include basic voice connections for residential
    customers, including enhanced calling features (such as Call Answer, Call
    Display, Call Waiting and 3-Way Calling), payphone revenue, wholesale
    revenues from services provided to third parties, as well as a full range
    of local services to business customers. These services allow customers
    to complete calls in their local calling areas and to access long
    distance, cellular networks and the Internet.
    

    Local services revenues declined by 0.8% or $1.1 million to
$132.5 million in the second quarter and by 0.9% or $2.5 million to
$263.7 million in the first six months of 2008, as compared to the respective
periods in 2007.
    These decreases are primarily the result of competitive pressures in the
Winnipeg, Manitoba market. We have positioned ourselves for long-term success
against this competitive pressure by bundling our residential service
offerings such as wireless, Internet, digital television and alarm services to
create a unique value proposition for our customers. In the second quarter of
2008, customers utilizing our bundled service packages increased by 10% as
compared to last year. With these popular programs well in place, we continued
to deliver best in class performance against cable company competitors. In the
second quarter of 2008, our residential line loss was less than 4,000, after
adjusting for cottage-country seasonality and customers in transit. This level
of line loss is similar to the levels of line loss we experienced in previous
quarters, and also demonstrates the success of our service bundle plans. Our
customer connections, which include network access services, high-speed
Internet, wireless and digital television subscribers, increased by 3.6% as
compared to the second quarter of 2007.

    
    Long Distance Services
    -------------------------------------------------------------------------
    (in millions $)                                 2008      2007  % change
    -------------------------------------------------------------------------
    Q2                                              82.6      90.9      (9.1)
    YTD                                            167.8     183.2      (8.4)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Long distance services enable residential customers in Manitoba and
    business customers across Canada to communicate with destinations outside
    the local exchange. Our long distance voice service portfolio includes
    basic, domestic, cross-border and international outbound long distance,
    basic and enhanced toll-free services, calling cards and audio
    conferencing, as well as a variety of enhanced long distance services and
    features.
    

    Year-over-year, revenues from long distance services were $82.6 million
in the second quarter and $167.8 million in the first six months of this year,
reflecting decreases of 9.1% and 8.4%, respectively. Primarily impacting these
decreases were the effects of competitive pricing and customer losses in our
Consumer Markets division, which were offset partially by increased network
charges and more customers choosing our long distance services over
dial-around competitor services. Our Enterprise Solutions division was
impacted by lower rates in the cross-border and domestic markets segments and
lower volumes in international and domestic markets, which were offset
partially by higher international rates and cross-border volumes.

    
    Other Revenues
    -------------------------------------------------------------------------
    (in millions $)                                 2008      2007  % change
    -------------------------------------------------------------------------
    Q2                                              20.8      19.2       8.3
    YTD                                             41.2      38.9       5.9
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Other revenues consist of revenues earned from our digital television and
    home security services, and miscellaneous items. Our digital television
    service is offered across our broadband network platform and is targeted
    at residential customers in Winnipeg. Miscellaneous revenues primarily
    consist of the sale and maintenance of terminal equipment.
    

    During the three and six months ended June 30, 2008, other revenues
increased by 8.3% to $20.8 million and by 5.9% to $41.2 million, respectively,
as compared to the same periods in 2007. Strong revenues and subscriber growth
from our digital television services continued to drive increases in our other
revenues.
    Revenues from our digital television services increased by 20.2% or
$2.1 million to $12.5 million in the second quarter, and by 21.7% or
$4.4 million to $24.7 million year to date. In addition to strong subscriber
growth driving this year-over-year increase in revenues, we also experienced
an 8.2% increase in average revenue per subscriber ("ARPS") to $50.83. This
strong increase in ARPS was driven by increases in our revenues from core
television services, video-on-demand, pay-per-view and high-definition
services, as well as a decrease in the number of subscribers on promotional
pricing plans.
    As at June 30, 2008, our digital television subscriber base increased by
13.2% to reach 80,335, representing a 3% increase of market share over last
year. Our current share of the market is approximately 32%.

    OPERATING EXPENSES

    
    Operations Expense
    -------------------------------------------------------------------------
    (in millions $)                                 2008      2007  % change
    -------------------------------------------------------------------------
    Q2                                             325.4     299.2       8.8
    YTD                                            635.5     591.7       7.4
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Operations expense in the three and six months ended June 30, 2008
increased by 8.8% or $26.2 million and by 7.4% or $43.8 million, as compared
to the same periods last year.
    In the second quarter of 2008, we incurred $10.3 million of one-time
expenses relating to the costs of transitioning certain wireless service
requirements away from Bell Mobility to new suppliers and to our wireless
platform as well as costs associated with the AWS spectrum auction. We expect
these one-time costs to be $40 million to $50 million in aggregate over the
next two years, including the amount incurred in the second quarter of 2008.
These costs are non-recurring, will be recorded as a one-time cost and will
not impact our continuing operations.  We are disputing certain costs being
charged by Bell Mobility associated with transitioning away from Bell Mobility
and are of the opinion that such costs are recoverable from them. We have
commenced formal proceedings in accordance with the dispute resolution
mechanism in such agreements to recover the disputed costs.
    On March 5, 2008, we notified Bell Mobility that we were terminating
certain wireless alliance agreements in accordance with the terms of these
agreements. We have negotiated a transition agreement with Bell Mobility that
ensures the continuity of service for our wireless customers in Manitoba and
are finalizing terms with new suppliers to replace the services covered by
those agreements or transitioning these services to our wireless platform.
    This transition away from Bell Mobility to other suppliers and/or to our
own wireless platform is not expected to impact our wireless operating cost
structure and will give us additional flexibility to succeed in a rapidly
changing telecommunications landscape.
    We continue to focus on our cost reduction initiatives. Our 2008
efficiency program achieved $20.1 million in annualized savings as at June 30,
2008, which is in line with our 2008 objective for annualized expense savings
of $20 million to $30 million with this program. Partly offsetting these
savings were higher expenses from our growth operations. In addition, the year
to date increase was impacted by a one-time net positive adjustment in 2007 of
$14.3 million related to Decision 2007-10, which reflects the retroactive
impact of a competitor service for which we had been double-billed by
incumbent carriers. If this amount and the costs associated with the wireless
transition and our participation in the AWS spectrum auction are excluded,
expenses from continuing operations were up by 3.2%, due to increases in
revenue and timing differences between quarters.
    We have been very effective at cost-cutting over the last two years and
expect to continue to find cost savings going forward. To assist with these
ongoing cost reduction initiatives, we have engaged Proudfoot Consulting to
evaluate our many current end-to-end processes and to assess whether our
current processes are properly aligned with our existing strategies to
increase revenues from our growth services portfolio. Through this analysis, a
number of process improvement opportunities have been identified, which if we
address, could significantly enhance the way products and solutions are
delivered to customers and contribute to our cost reduction initiatives. Our
Enterprise Solutions division is on track for solid revenue growth for the
first time in several years and we recognize that continued growth by this
division is critical to our overall success. We plan to maintain and build on
this momentum throughout the remainder of 2008 and 2009 by making our internal
processes more efficient and cost effective.

    
    Restructuring and Integration Expenses
    -------------------------------------------------------------------------
    (in millions $)                                 2008      2007  % change
    -------------------------------------------------------------------------
    Q2                                                 -       2.7      n.m.
    YTD                                                -       6.6      n.m.
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    We incurred no restructuring and integration expenses in the second
quarter and first six months of this year, as compared to $2.7 million and
$6.6 million in the same periods last year, respectively.
    The costs of our 2008 efficiency program are expected to be approximately
$10 million. As at June 30, 2008, no costs were incurred under this program.
We applied payments to prior years' workforce reduction program liabilities in
the amounts of $1.2 million and $5.9 million for the three and six months
ended June 30, 2008. This is outlined in Note 2 to our interim consolidated
financial statements.

    
    Amortization Expense
    -------------------------------------------------------------------------
    (in millions $)                                 2008      2007  % change
    -------------------------------------------------------------------------
    Q2                                              82.2      80.0       2.8
    YTD                                            162.7     159.0       2.3
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Amortization expense in the second quarter increased to $82.2 million,
and in the first six months of the year, increased to $162.7 million, as
compared to $80.0 million and $159.0 million in the respective periods of
2007. These year-over-year increases are due to increases in property, plant
and equipment, as well as the intangible asset additions from our acquisitions
of Multinet and ICU Technologies.

    
    Other Income
    -------------------------------------------------------------------------
    (in millions $)                                 2008      2007  % change
    -------------------------------------------------------------------------
    Q2                                               1.0       2.7     (63.0)
    YTD                                              5.1       6.1     (16.4)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    In the three and six months ended June 30, 2008, other income was
$1.0 million and $5.1 million, respectively, as compared to $2.7 million and
$6.1 million in the same periods during 2007. Year-over-year, other income was
lower primarily due to a decrease in interest income.

    Debt Charges
    -------------------------------------------------------------------------
    (in millions $)                                 2008      2007  % change
    -------------------------------------------------------------------------
    Q2                                              12.1      13.7     (11.7)
    YTD                                             24.6      26.6      (7.5)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    In the second quarter of 2008, debt charges decreased to $12.1 million
from $13.7 million, and year to date, debt charges decreased to $24.6 million
from $26.6 million, as compared to our debt charges in 2007. These decreases
resulted from lower year-over-year long-term debt levels that were refinanced
with short-term debt at a lower interest rate and temporary cash on hand,
which were offset partially by higher costs related to our accounts receivable
program.
    Our debt to total capitalization ratio as at June 30, 2008 was 38.3%, and
continues to provide us with financial strength and flexibility going forward.

    
    Income Tax Expense
    -------------------------------------------------------------------------
    (in millions $)                                 2008      2007  % change
    -------------------------------------------------------------------------
    Q2                                              29.7      24.2      22.7
    YTD                                             55.3      53.0       4.3
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    We are able to reduce our taxable income to zero without utilizing our
substantial and growing capital cost allowance ("CCA") pools as a result of
our acquisition of Allstream Inc. in 2004 along with its income tax loss
carryforwards. Through the utilization of these loss carryforwards, followed
by the utilization of our deferred CCA deduction, we project that we will not
pay cash taxes before 2014.
    The year-over-year increases in income tax expense resulted primarily
from a favourable adjustment in our tax asset valuation allowance by
$12.8 million in the second quarter of 2007 relating to pension plan actuarial
valuations that produced higher forecasted taxable income, offset partially by
higher income before tax and higher tax rates in 2007. In addition, a
$7.5 million charge related to changes in provincial tax rates was required in
the second quarter of 2008, as compared to a similar $6.0 million adjustment
in 2007.

    CONSOLIDATED QUARTERLY DATA

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

    
    -------------------------------------------------------------------------
    (in millions $, except earnings per   Q2        Q1        Q4        Q3
     share)                              2008      2008      2007      2007
    -------------------------------------------------------------------------
    Operating revenues                   486.4     478.8     489.2     475.9
    Operating income                      78.8      88.2      72.1      82.5
    Net income before discontinued
     operations                           38.0      54.2      14.3      45.5
    Net income and comprehensive income   38.0      54.2      14.3      45.5
    Earnings per share before
     discontinued operations              0.59      0.84      0.22      0.70
    Diluted earnings per share before
     discontinued operations              0.58      0.83      0.22      0.70
    Earnings per share                    0.59      0.84      0.22      0.70
    Diluted earnings per share            0.58      0.83      0.22      0.70
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (in millions $, except earnings per   Q2        Q1        Q4        Q3
     share)                              2007      2007      2006      2006
    -------------------------------------------------------------------------
    Operating revenues                   474.1     466.6     479.1     477.9
    Operating income                      92.2      91.2      34.2      69.8
    Net income before discontinued
     operations                           57.0      52.9      26.8      35.8
    Net income and comprehensive income   57.0      52.9     216.1      40.5
    Earnings per share before
     discontinued operations              0.88      0.80      0.39      0.53
    Diluted earnings per share before
     discontinued operations              0.88      0.80      0.39      0.52
    Earnings per share                    0.88      0.80      3.18      0.60
    Diluted earnings per share            0.88      0.80      3.17      0.59
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


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

    -   In the second quarter of 2008, we incurred a one-time cost of
        $10.3 million for the transitioning of certain wireless
        service requirements away from Bell Mobility to new suppliers and to
        our wireless platform as well as costs associated with the AWS
        spectrum auction.

    -   The recognition of restructuring expenses for our 2007 efficiency
        program in each of the four quarters of 2007 in the amounts of
        $3.9 million, $2.7 million, $2.3 million and $3.0 million, listed
        chronologically, and the related workforce reduction initiative that
        we undertook in the fourth quarter of 2006 in the amount of
        $8.5 million.

    -   The recording of amounts respecting a number of regulatory decisions:
        a $5.0 million positive impact in the second quarter of 2007 and a
        $9.9 million positive impact in the first quarter of 2007, which are
        related to Decision 2007-10.

    -   Adjustments in the amounts of $12.8 million and $25.7 million for
        reductions to our tax asset valuation allowance in the second and
        fourth quarters of 2007, respectively, and $11.8 million for
        reductions to our tax asset valuation allowance in the fourth quarter
        of 2006.

    -   Effective October 2, 2006, we sold our directories business and
        recorded a net gain on the sale of discontinued operations of
        $189.3 million in the fourth quarter of 2006.

    -   The recording of charges to reflect decreases in the value of our
        income tax asset as a result of reductions in future income tax
        rates: $7.5 million in the second quarter of 2008, and $6.0 million
        and $49.6 million in the second and fourth quarters of 2007,
        respectively.

    -   The recognition of restructuring costs for our Transition Phase II
        cost reduction program in the third and fourth quarters of 2006 in
        the amounts of $9.8 million and $28.3 million, respectively. Included
        in the amount recognized in the fourth quarter of 2006 are costs
        associated with a workforce reduction initiative that was announced
        on October 2, 2006, which resulted in restructuring charges of
        $19.0 million.

    LIQUIDITY AND CAPITAL RE

SOURCES ------------------------------- Cash Flows from Operating Activities ------------------------------------------------------------------------- (in millions $) 2008 2007 $ change ------------------------------------------------------------------------- Q2 141.0 145.4 (4.4) YTD 234.8 220.9 13.9 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash flows from operating activities refer to cash we generate from our normal business activities. Cash flows from operating activities for the three and six months ended June 30, 2008 decreased by $4.4 million to $141.0 million and increased by $13.9 million to $234.8 million, respectively, as compared to the same periods in 2007. The decrease in the second quarter is mainly due to decreased consolidated EBITDA, increased pension solvency funding and decreased current tax recoveries, which were offset by increased cash from working capital primarily resulting from the utilization of our accounts receivable securitization program. The increase in the first six months of the year results mainly from a positive change in working capital due to utilization of our accounts receivable securitization program, which is partly offset by decreased consolidated EBITDA, increased pension funding, increased current tax expense and decreased cash from other operating activities. Cash Flows used in Investing Activities ------------------------------------------------------------------------- (in millions $) 2008 2007 $ change ------------------------------------------------------------------------- Q2 70.3 59.8 10.5 YTD 129.2 107.9 21.3 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Investing activities represent cash used for acquiring, and cash received from disposing of, long-term assets and other long-term investments. In the second quarter of 2008, cash flows used in investing activities increased by $10.5 million to $70.3 million, and in the first six months of the year, increased by $21.3 million to $129.2 million due to the timing of capital expenditures as compared to the same periods in 2007. Free Cash Flow ------------------------------------------------------------------------- (in millions $) Q2/08 Q2/07 % change ------------------------------------------------------------------------- Free cash flow (continuing operations) 72.4 88.6 (18.3) Pension solvency funding (7.5) (1.0) n.m. Wireless transition and AWS spectrum auction costs (10.3) - n.m. Restructuring expense - (2.7) n.m. Restructuring capital expenditures - (3.9) n.m. Tax recoveries - 3.9 n.m. Decision 2007-10 - 5.0 n.m. -------------------------- Consolidated free cash flow 54.6 89.9 (39.3) ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- (in millions $) YTD/08 YTD/07 % change ------------------------------------------------------------------------- Free cash flow (continuing operations) 151.1 183.1 (17.5) Pension solvency funding (11.4) (1.0) n.m. Wireless transition and AWS spectrum auction costs (10.3) - n.m. Restructuring expense - (6.6) n.m. Restructuring capital expenditures - (6.4) n.m. Tax recoveries - 9.3 n.m. Decision 2007-10 - 14.9 n.m. -------------------------- Consolidated free cash flow 129.4 193.3 (33.1) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Free cash flow refers to cash flow from operating activities, less capital expenditures, and excluding changes in working capital. Free cash flow from continuing operations decreased by 18.3% to $72.4 million in the second quarter of 2008, and decreased by 17.5% to $151.1 million year to date, as compared to the same periods in the previous year. The in quarter decrease year-over-year is primarily due to the timing of capital expenditures. The year to date decrease year-over-year is primarily due to the timing of capital expenditures, increased normal pension funding and decreased cash from other operating activities, which were offset by higher EBITDA from continuing operations. Consolidated free cash flow in the second quarter and year to date periods, decreased to $54.6 million and $129.4 million, respectively, as compared to 2007, and includes items not from continuing operations as detailed in the table above. The in quarter decrease year-over-year is primarily due to a decrease in cash from one-time items as listed above, timing of capital expenditures, increased pension funding and decreased cash from other operating activities. The year to date decrease year-over-year is primarily due to a decrease in cash from one-time items as listed above, timing of capital expenditures, increased pension funding and decreased cash from other operating activities. Cash Flows used in Financing Activities ------------------------------------------------------------------------- (in millions $) 2008 2007 $ change ------------------------------------------------------------------------- Q2 65.0 81.5 (16.5) YTD 107.1 207.5 (100.4) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Financing activities refer to actions we undertake to fund our operations through equity capital and borrowings. Cash flow used in financing activities were $65.0 million in the second quarter and $107.1 million in the first six months of the year as compared to $81.5 million and $207.5 million, respectively, in 2007. The in quarter decrease is primarily due to our purchase for cancellation of 562,800 common shares for $26.3 million under our Issuer Bid in the second quarter of 2007. The year to date decrease is primarily due to our purchase for cancellation of 2,377,500 common shares for $111.0 million in the first six months of 2007. In the first six months of 2008, we paid cash dividends of $84.0 million, and repaid long-term debt in the amount of $89.7 million using the proceeds of a $70 million issuance of notes payable. In the first six months of 2007, we paid cash dividends of $86.6 million, and repaid long-term debt in the amount of $14.6 million. Credit Facilities ------------------------------------------------------------------------- utilized at (in millions $) capacity June 30/08 ------------------------------------------------------------------------- Medium term note program 350.0 - Commercial paper 150.0 - Accounts receivable securitization 150.0 126.5 Letter of credit facility 150.0 150.0 Revolving credit facility 200.0 144.5 --------------------- Total 1,000.0 421.0 ------------------------------------------------------------------------- ------------------------------------------------------------------------- We have arrangements in place that allow us to access the debt and commercial paper markets for funding when required. Borrowings under these facilities typically are used to fund new initiatives, refinance maturing debt, and manage cash flow fluctuations. We established our $350 million medium term note ("MTN") program on January 18, 2008. In addition to our MTN program, we have credit facilities available in the amount of $650.0 million, which consist of a fully back-stopped commercial paper program of $150.0 million, an accounts receivable securitization program of $150.0 million, a $150.0 million non-revolving letter of credit facility, and a $200.0 million revolving credit facility. As at June 30, 2008, our commercial paper program was unutilized, while we utilized $126.5 million of our accounts receivable securitization program, $150.0 million of our non-revolving letter of credit facility for undrawn letters of credit in support of our participation in the AWS spectrum auction which we expect to be returned to us by the end of August 2008, and $144.5 million of our revolving credit facility, which includes $74.5 million in undrawn letters of credit. Of this amount, $52.5 million represents letters of credit issued under the new Solvency Funding Relief Regulations enacted under the Pension Benefits Standards Act, 1985 (Canada), which permit the extension of pension solvency payments from a five-year amortization period to a 10-year amortization period for our defined benefit pension plans. Capital Structure ------------------------------------------------------------------------- June December (in millions $) 30/08 31/07 ------------------------------------------------------------------------- Bank indebtedness 11.6 10.1 Proceeds from accounts receivable securitization 126.5 43.0 Notes payable 70.0 - Capital lease obligations, including current portion 18.8 22.5 Long-term debt, including current portion 650.0 739.5 Shareholders' equity 1,413.2 1,404.0 --------------------- Total capitalization 2,290.1 2,219.1 --------------------- --------------------- Debt to capitalization 38.3% 36.7% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Our capital structure illustrates the amount of our assets that are financed by debt versus equity. Our debt to total capitalization ratio of 38.3% as at June 30, 2008 continues to represent excellent financial strength and flexibility. Credit Ratings ------------------------------------------------------------------------- S&P - Senior debentures BBB+ ------------------------------------------------------------------------- S&P - Commercial paper A-2 ------------------------------------------------------------------------- DBRS - Senior debentures BBB ------------------------------------------------------------------------- DBRS - Commercial paper R-2 (high) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Two leading rating agencies, Standard & Poor's ("S&P") and DBRS Limited ("DBRS"), analyze us and assign ratings based on their assessments. We consistently have been assigned solid investment grade credit ratings. DBRS confirmed our credit ratings on December 20, 2007 at "BBB" on our senior debentures and "R-2 (high)" on our commercial paper, and maintained its stable outlook. On December 17, 2007, S&P confirmed our credit ratings on our long-term corporate credit and senior unsecured debt of "BBB+", and our commercial paper of "A-2". The outlook remained unchanged at negative. Outstanding Share Data as at August 5, 2008 Authorized: - Unlimited number of Preference Shares of two classes issuable in one or more series - Unlimited number of Common Shares of a single class ------------------------------------------------------------------------- Issued: ------------------------------------------------------------------------- Book Value Shares Number (in millions $) ------------------------------------------------------------------------- Common 64,635,967 1,265.7 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Stock options: ------------------------------------------------------------------------- Weighted Average Exercise Price Options Number Per Share ------------------------------------------------------------------------- Outstanding 2,290,890 $42.07 Exercisable 939,410 $40.41 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Contractual Obligations, Financial Instruments, Off-Balance Sheet Arrangements, and Other Financial Arrangements Our contractual obligations, financial instruments, off-balance sheet arrangements, and other financial arrangements remain substantially unchanged from those that were disclosed in our first quarter 2008 interim MD&A and our 2007 annual MD&A. For additional details, please consult our first quarter 2008 interim MD&A and our 2007 annual MD&A, which are available on our Web site at www.mtsallstream.com. CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS --------------------------------------------- Our critical accounting estimates and assumptions remain substantially unchanged from those that were disclosed in our first quarter 2008 interim MD&A and our 2007 annual MD&A. For additional details, please consult our first quarter 2008 interim MD&A and our 2007 annual MD&A, which are available on our Web site at www.mtsallstream.com. CHANGES IN ACCOUNTING POLICIES, INCLUDING INITIAL ADOPTION ---------------------------------------------------------- Our accounting policies, including initial adoption, remain substantially unchanged from those that were disclosed in our first quarter 2008 interim MD&A and our 2007 annual MD&A. For additional details, please consult our first quarter 2008 interim MD&A and our 2007 annual MD&A, which are available on our Web site at www.mtsallstream.com. RISKS AND UNCERTAINTIES Our risks and uncertainties remain substantially unchanged from those that were disclosed in our first quarter 2008 interim MD&A and our 2007 annual MD&A, except as noted below. For additional details, please consult our first quarter 2008 interim MD&A and our 2007 annual MD&A, which are available on our Web site at www.mtsallstream.com. Bell Mobility Agreement We and Bell Mobility have been parties to a wireless alliance that addresses competition and reciprocal services in our respective territories and provides us with access to various wireless-related platforms and products. On March 5, 2008, we provided notice of termination to Bell Mobility of certain of these wireless agreements relating to the framework underpinning this wireless alliance. These agreements provide for the continuation of services following such notice during a notice period and, thereafter, during a transition period. Bell Mobility disputes that they have any remaining obligations under such agreements. We have commenced formal proceedings to resolve this disagreement. Notwithstanding this dispute, we have entered into a transition agreement with Bell Mobility which will ensure continuity of services to our customers, while reserving all rights to our respective entitlements under such agreements. We currently are putting in place alternate services and platforms and finalizing our transition plan. We anticipate the one-time costs of transitioning certain wireless services requirements away from Bell Mobility to new suppliers and to our wireless platform as well as the costs associated with the AWS spectrum auction to be $40 million to $50 million in aggregate over the next two years, including the amount incurred in the second quarter of 2008. As noted above, we are disputing certain costs being charged by Bell Mobility associated with transitioning away from Bell Mobility and are of the opinion that such costs are recoverable from them, however, there is no certainty that such costs will be recovered. While there is always a risk associated with executing any transition, we have plans to execute this transition of wireless services in a manner that is seamless to our customers. Changes in Telecommunications Policy and CRTC Regulation The telecommunications and broadcast industries in which we operate are federally regulated. We operate as both an incumbent local exchange carrier in Manitoba and as a competitive local exchange carrier nationally. In addition, pursuant to Broadcasting Decision CRTC 2002-235, the CRTC granted us a Class 1 regional broadcasting distribution licence to operate as a broadcasting distribution undertaking serving Winnipeg and the surrounding areas. Current regulatory proceedings and policy issues, which present significant risk and uncertainty on our business, are described below. Essential Facilities On March 3, 2008, the CRTC issued Revised regulatory framework for wholesale services and definition of essential service, Telecom Decision CRTC 2008-17, in which it adopted a new broadened definition of an essential service or facility as one that (i) is required by competitors to provide a retail telecommunications service; (ii) is controlled by a company that could use its market power to lessen or prevent competition; and (iii) provides a functionality that would not be practical or feasible for competitors to duplicate. In addition, the CRTC adopted six categories of mandated competitor services, with differing approaches as to when and how mandated access could or, in the case of one category of services will, be phased out. This decision ensures that pricing for competitor services will remain, for the most part, unchanged for a period of five years. On April 2, 2008, Bell Canada and other carriers applied for leave to appeal the decision to the Federal Court of Appeal. We successfully opposed this application, which was dismissed by the Federal Court of Appeal on June 20, 2008. On May 15, 2008, Bell Canada filed four separate applications asking the CRTC to review and vary elements of its decision. We have opposed those applications, and have applied separately to have the decision reviewed and varied with respect to the treatment of Ethernet and asymmetric digital subscriber line. We expect the CRTC to rule on these review and vary applications by the end of 2008. Deferral Account On February 16, 2006, the CRTC issued Disposition of funds in the deferral accounts, Telecom Decision CRTC 2006-9 ("Decision 2006-9"). In this decision, the CRTC determined that the funds accumulated in our deferral account should be used for certain reductions in rates for basic local residential services and for certain optional features; for the expansion of broadband services; and for initiatives to improve accessibility to telecommunications services for persons with disabilities. After using approximately $5 million to fund the required rate reductions which came into effect on June 1, 2006, the estimate of the balance to be cleared from our deferral account for the remaining initiatives is approximately $24 million. The final calculation of the balance to be cleared is dependent upon certain other CRTC proceedings. In two subsequent decisions relating to the use of deferral account funds, Telecom Decision CRTC 2007-50 dated July 6, 2007 and Telecom Decision CRTC 2008-1 dated January 17, 2008 ("Decision 2008-1"), the CRTC approved various proposals submitted for the expansion of broadband services in certain rural and remote communities, and for improved access to telecommunications services for persons with disabilities. In Decision 2008-1, the CRTC directed that the remaining balance of the deferral accounts of the incumbent local exchange carriers be rebated to residential customers in non-high-cost serving areas. Bell Canada has sought leave to appeal Decision 2006-9 to the Supreme Court of Canada. Bell Canada also has sought leave from the Federal Court of Appeal to appeal Decision 2008-1. TELUS Communications Inc. has appealed Decision 2008-1 by way of a petition to Cabinet and an application filed with the CRTC to review and vary this decision. The final disposition of deferral account balances will be dependent upon the outcome of these appeals. In the interim, Decisions 2006-9 and 2008-1 have been stayed by order of the Federal Court of Appeal. AWS Spectrum Consultation and Auction In February 2007, the federal government initiated a consultation on a framework to auction spectrum in the 2 GHz range, including AWS spectrum. We submitted comments in that consultation on May 25, 2007, and on June 27, 2007, we submitted reply comments. Our submissions identified the need for the federal government to adopt rules for the AWS spectrum auction that will allow the competitive entry of new national and regional wireless providers in Canada. In particular, we asked the federal government to designate two blocks of spectrum for new entrant bidding only, and to mandate commercially reasonable roaming and tower sharing on a non-discriminatory basis. In November 2007, the federal government issued its Policy Framework for the Auction for Spectrum Licenses for Advanced Wireless Services and other Spectrum in the 2 GHz Range (the "Policy Framework") which was followed by the release of the Licensing Framework for the Auction for Spectrum Licenses for Advanced Wireless Services and other Spectrum in the 2 GHz Range (the "Licensing Framework") in late December 2007. In both the Policy Framework and the Licensing Framework, the federal government clearly expressed the importance it places on encouraging new wireless entry, and specifically decided to set aside 40 MHz of spectrum for new entrant bidding only, and to mandate both in-region and out-of-region roaming as well as tower sharing, all on commercially reasonable terms. The AWS spectrum auction commenced on May 27, 2008, and we participated as a qualified new entrant through our wholly owned subsidiary 6934242 Canada Limited. The auction concluded on July 21, 2008. We successfully bid for and are the provisional licensees with respect to licenses representing 35 MHz of spectrum in the province of Manitoba, at an auction price of approximately $41 million. Successful bidders now are required to tender payment and file documentation demonstrating compliance with the foreign investment restrictions applicable to prospective licensees. As a result of the AWS auction two new entrants became the provisional licensees for sufficient spectrum in Manitoba to enable them to offer wireless services in competition with MTS. While we believe that these new entrants will initially focus their efforts on more densely populated areas of the country where they also acquired spectrum and while we believe that we are well-positioned to face these new competitors in our market, there is no certainty that these new entrants will not create a more competitive environment in Manitoba at some point in the future. Competition Policy Review On October 30, 2007, the Competition Policy Review Panel (the "Panel") appointed by the federal government to review competition and investment policy in Canada released a consultation paper entitled Sharpening Canada's Competitive Edge. This consultation paper asks for submissions dealing with a range of issues concerning competition and investment policy, including the continued utility of foreign investment restrictions in the telecommunications industry and the state of competition policy in Canada. On January 11, 2008, we filed our submission and argued in favour of the removal of the sector-specific foreign investment restrictions applicable to the telecommunications industry, as well as for updates to competition policy to deal with an increasingly deregulated telecommunications industry. In response to our submission, the Panel requested that we appear before them to comment further, which we did on January 24, 2008. On June 26, 2008, the Panel submitted its report, entitled Compete to Win, to the Minister of Industry. In its report, the Panel recommended immediate removal of foreign investment restrictions applicable to new entrant telecommunications companies, including existing companies having less than a 10% market share in Canada, and broader liberalization for all broadcasting and telecommunications companies subsequent to further review of broadcasting and cultural policies. The Panel noted that its recommendations are consistent with those of the Telecommunications Policy Review Panel that had been established by the federal government in 2005. We are in favour with the Panel's position and qualify for the removal of foreign ownership restrictions under the recommendations. The Minister of Industry has indicated that the federal government will review the Panel's recommendations. Collective Agreements A significant portion of our employees are unionized and are covered by collective agreements. Our unionized employees are represented by the following five unions: the Telecommunications Employees Association of Manitoba - International Federation of Professional and Technical Engineers, Local 161 ("TEAM-IFPTE"); the International Brotherhood of Electrical Workers, Local 435 ("IBEW"); the Communications, Energy and Paperworkers Union of Canada, Local 7 ("CEP"); the Canadian Auto Workers, Local 2000 ("CAW"); and the United Steelworkers, TC Local 1976 ("USW"). We have successfully renegotiated collective agreements with these unions, and achieved flexibility which will enhance our ability to remain competitive in our markets. Our collective agreements with CAW and USW expire on December 31, 2009, and our collective agreement with TEAM-IFPTE expires on February 19, 2010. Our two collective agreements with CEP expire on November 20, 2010 and December 19, 2010. We have two collective agreements with IBEW, which will expire on January 31, 2011 and April 22, 2009. 2008 OUTLOOK ------------ Forward-looking statements disclaimer This outlook includes forward-looking statements and information (collectively, the "statements") about our corporate direction, business opportunities, operating and dispute resolution activities, financial objectives, and future financial results and performance that are subject to risks, uncertainties and assumptions. As a consequence, actual results in the future may differ materially from any conclusion, forecast or projection in such forward-looking information. Forward-looking statements reflect our expectations as at August 11, 2008. Examples of statements that constitute forward-looking information may be identified by words such as "believe", "expect", "project", "anticipate", "could", "target", "forecast", "intend", "plan", "outlook", "pending", and other similar terms. Factors that could cause actual results to differ materially from those expected, and the material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection set out in such forward-looking statements, include, but are not limited to, the items identified in this interim MD&A, our interim MD&A for the first quarter of 2008, and our 2007 annual MD&A. Please note that forward-looking statements reflect our expectations as at August 11, 2008. 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. Additional information relating to our company, including our Annual Information Form, is available on SEDAR at www.sedar.com. This outlook and the financial information contained herein have been reviewed by our Audit Committee. Factors that could cause anticipated opportunities and actual results to differ materially include, but are not limited to, the intensity of competitive activity from both traditional and new competitors (competitive conditions); the ability to retain major customers (customer relationships); decisions by the federal regulator that affect our ability to compete effectively or to enter into new business opportunities (developments in federal regulation); general economic and market conditions and the level of consumer confidence and spending, and the demand for, and prices of, our products and services (market conditions and economic fluctuations); the ability to manage labour relations effectively (collective agreements); the ability to anticipate, and respond to, changes in technology (technology); and other risk factors listed from time to time in our comprehensive public disclosure documents, including our 2007 Annual Report and in other filings with the Canadian securities regulatory authorities. For further information, refer to the "Risks and Uncertainties" sections in this interim MD&A, our interim MD&A for the first quarter of 2008, and our 2007 annual MD&A. ------------------------------------------------------------------------- 2008 Financial Outlook - Continuing Operations ------------------------------------------------------------------------- Revenues $1.920 billion to $1.980 billion EBITDA $660 million to $680 million EPS $2.95 to $3.15 Free cash flow $250 million to $280 million Capital expenditures 14% to 15% of revenues ------------------------------------------------------------------------- ------------------------------------------------------------------------- Looking beyond 2008, we expect consolidated revenues and EBITDA growth in the range of 1% to 3% for 2009 and into the near future. A Sharpened Strategic Focus We have a unique position in the Canadian communications services industry. We are the leading full-service communications provider in Manitoba, and have a leading presence in national enterprise markets. We are building on our unique combination of market leadership in Manitoba and agile competitive presence in business markets across Canada to deliver innovative telecommunications solutions that bring value to our customers. Following a thorough strategic business review in 2006, we have been pursuing opportunities to increase our focus on serving the national mid- market and small business segments. Our mid-market strategy is centred on the availability of our market-leading IP network in major urban centres. Together, our new initiatives are forecasted to achieve $200 million of incremental revenues by 2010. In our Consumer Markets division, where local competition has intensified, our emphasis will be on growth products and bundles in areas such as high-speed Internet, wireless and digital television services. Our goal is to maintain our position as the one-stop provider of clear choice to Manitoba households and consumers by delivering double-digit growth in our Internet, digital television and wireless services in 2008 in a more competitive and deregulated market. We have been forborne in a few markets, including the local market in Winnipeg, which has enhanced our ability to compete against new market entrants. In our Enterprise Solutions division, we will build on our established leadership in advanced IP, MPLS solutions and unified communications services. As part of this new strategy, we will strive to reduce our direct costs through the migration of customers to our network, and we will continue to improve our productivity and cost structure. From a growth perspective, revenues from our IP connectivity and unified communications product lines are forecasted to grow at double-digit rates. Material Assumptions We have made a number of assumptions in preparing our outlook and making certain other forward-looking statements, which include, but are not limited to, the following assumptions: Economic Assumptions The general economic activity in the national and regional markets in which we operate influences our performance. Consistent with the Manitoba Finance Survey of forecasts, which includes the Conference Board of Canada, as of November 2007, we assumed a growth rate of approximately 3% for gross domestic product for the Manitoba and national markets. Market Assumptions As competition in the overall marketplace escalates, the broad market segment trends that have taken shape in recent years also will persist in 2008. Growth in service areas such as wireless, Internet, digital television, converged IP and unified communications for business customers is expected to continue at similar levels in 2008. The competitive pressure experienced in traditional legacy services, which include data connectivity, and local and long distance services, will continue in similar trends as it did in 2007. Likewise, we anticipate that customer demand will continue to migrate to next generation services. To face continued strong competition in business markets, we are refining our market focus, creating innovative IP solutions, reducing our cost structure, and investing selectively in high-margin opportunities. Although competition from an incumbent cable operator is expected to continue in the Manitoba residential market, we are confident that we have prepared our operations and strategies prudently to counter these threats. Through our broadband network initiative and our residential service offerings, which include local and long distance, wireless, Internet, digital television and alarm services, we believe that we are well-positioned to compete successfully. Financial and Operational Assumptions We have made the following financial and operating assumptions with respect to the forward-looking information in this outlook: - double-digit growth for growth services, to represent approximately 45% of total revenue in 2008 as compared to 40% in 2007; and - overall revenue growth of 1% to 3%. We have future tax assets resulting from net operating loss carryforwards, which, to the extent utilized, will reduce future taxable income. As such, we do not expect to pay any cash taxes on earnings from operations in 2008. Cost Reduction Assumptions Key to our operating and financial progress will be our restructuring activities. We expect to achieve further cost reductions in 2008 of between $20 million and $30 million. To capture these additional savings, we expect to incur further restructuring costs of approximately $10 million in 2008. These costs are not included in our 2008 outlook from continuing operations. Liquidity and Capital Resources Assumptions Our operations historically have delivered strong cash flows, and we expect this positive trend to continue in 2008. We will continue to invest in our core operations with a focus on our growth products and services to ensure success in the markets in which we operate. Significant investments have been made in modernizing our network infrastructure, both in Manitoba and nationally. In 2005, we saw the completion of a five-year, $300 million broadband expansion program in Manitoba, which has positioned our network capabilities second to none in Canada. These investments, in addition to the investment choices we are making nationally, are placing us in a favourable position in terms of capital requirements going forward. In 2008, our capital program is expected to comprise 14% to 15% of our revenues. Our cash requirements for 2008 include two non-recurring obligations. These consist of approximately $10 million for restructuring programs and, based on January 1, 2007 actuarial valuations, approximately $30 million for pension solvency funding. From a 2008 cash flow perspective, we anticipate funding all of our requirements, including quarterly dividend payments, capital expenditures, restructuring costs and all pension contributions, from operations with no incremental borrowings. THIRD QUARTER DIVIDEND The Board of Directors of MTS today declared a quarterly cash dividend of $0.65 per share. The third quarter dividend is payable on October 15, 2008 to shareholders of record at the close of business on September 15, 2008. The third quarter dividend is designated as an "eligible" dividend under the Income Tax Act (Canada) and any corresponding provincial legislation. Under this legislation, individuals resident in Canada may be entitled to enhanced dividend tax credits which reduce income tax otherwise payable. Notes: 1. Supplementary financial information is available in the Investors section of the MTS Web site at www.mtsallstream.com. 2. MTS's second quarter 2008 conference call with the investment community is scheduled for 4:00 p.m. Eastern time on August 11, 2008. The dial-in number is 1-800-732-9307. A live audio Webcast of the investor conference call can be accessed by visiting the Investors section of the MTS Web site (www.mtsallstream.com). A replay of the conference call will be available until midnight August 21, 2008 and can be accessed by dialing 1-877-289-8525 or 1-416-640-1917 (access code 21276282 followed by the number sign). The audio Webcast will be archived on MTS's Web site. This interim MD&A contains forward-looking statements and there are risks that actual results may differ materially from those contemplated by these forward-looking statements. Forward-looking statements reflect our expectations as at August 11, 2008. Additional information on these risks can be found in our filings with the Canadian securities regulatory authorities. 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. In addition, investors should read the forward-looking statements disclaimer in the "2008 Outlook" section for the various factors, including economic, competitive, regulatory and company-specific, that could cause actual future financial and operating results to differ materially from the forward-looking information in this interim MD&A. About Manitoba Telecom Services Inc. Manitoba Telecom Services Inc., through its wholly owned subsidiary MTS Allstream Inc., is one of Canada's leading national communication solutions providers, delivering innovative products and services through its Enterprise Solutions and Consumer Markets divisions. The Enterprise Solutions division, which operates under the Allstream brand nationally and under the MTS Allstream brand in Manitoba, is a leading competitor in the national business and wholesale markets. This division offers customers a portfolio of solutions tailored to the needs of medium and large businesses looking for success in a world of rapidly evolving technology - Internet protocol connectivity, unified communications, IT consulting and security services, and voice and data connectivity services. The Consumer Markets division leads every telecommunications market segment in Manitoba, delivering a full suite of next generation wireless, high-speed Internet and data, digital television and wireline voice services under the MTS brand, as well as small business services in select markets across Canada under the Allstream brand, and security and alarm monitoring services through the company's subsidiary AAA Alarm Systems Ltd., which also operates in other western provinces. The company's extensive national broadband fibre optic network spans more than 24,300 kilometres, and provides international connections through strategic alliances and interconnection agreements with other international service providers. Manitoba Telecom Services Inc.'s common shares are listed on The Toronto Stock Exchange (trading symbol: MBT). For more information, please visit: www.mtsallstream.com. MANITOBA TELECOM SERVICES INC. CONSOLIDATED STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME (unaudited) For the periods ended June 30 (in millions, except Three months ended Six months ended earnings per share) 2008 2007 2008 2007 ------------------------------------------------------------------------- Operating revenues $ 486.4 $ 474.1 $ 965.2 $ 940.7 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operating expenses Operations 325.4 299.2 635.5 591.7 ------------------------------------------------------------------------- Restructuring and integration (Note 2) - 2.7 - 6.6 ------------------------------------------------------------------------- Amortization 82.2 80.0 162.7 159.0 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 407.6 381.9 798.2 757.3 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operating income 78.8 92.2 167.0 183.4 ------------------------------------------------------------------------- Other income 1.0 2.7 5.1 6.1 ------------------------------------------------------------------------- Debt charges (12.1) (13.7) (24.6) (26.6) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Income before income taxes 67.7 81.2 147.5 162.9 ------------------------------------------------------------------------- Income tax expense (recovery) (Note 4) Current 0.1 (3.8) 0.1 (9.1) ------------------------------------------------------------------------- Future 29.6 28.0 55.2 62.1 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 29.7 24.2 55.3 53.0 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net income and comprehensive income for the period $ 38.0 $ 57.0 $ 92.2 $ 109.9 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Basic earnings per share (Note 8) $ 0.59 $ 0.88 $ 1.43 $ 1.68 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Diluted earnings per share (Note 8) $ 0.58 $ 0.88 $ 1.41 $ 1.67 ------------------------------------------------------------------------- ------------------------------------------------------------------------- MANITOBA TELECOM SERVICES INC. CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (unaudited) For the periods ended June 30 Three months ended Six months ended (in millions) 2008 2007 2008 2007 ------------------------------------------------------------------------- Retained earnings, beginning of period $ 133.0 $ 145.2 $ 120.8 $ 183.9 ------------------------------------------------------------------------- Net income 38.0 57.0 92.2 109.9 ------------------------------------------------------------------------- Dividends declared (42.0) (42.0) (84.0) (84.3) ------------------------------------------------------------------------- Purchase of outstanding shares - (15.2) - (64.5) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Retained earnings, end of period $ 129.0 $ 145.0 $ 129.0 $ 145.0 ------------------------------------------------------------------------- ------------------------------------------------------------------------- MANITOBA TELECOM SERVICES INC. CONSOLIDATED BALANCE SHEETS (unaudited) June December (in millions) 30, 2008 31, 2007 ------------------------------------------------------------------------- Assets Current assets Accounts receivable (Notes 3 and 5) $ 68.5 $ 176.1 ------------------------------------------------------------------------- Future income taxes (Note 4) 104.7 109.1 ------------------------------------------------------------------------- Other current assets (Note 6) 83.7 55.8 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 256.9 341.0 Property, plant and equipment 3,834.8 3,751.5 ------------------------------------------------------------------------- Accumulated amortization 2,363.3 2,264.4 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 1,471.5 1,487.1 Other assets 365.3 334.8 ------------------------------------------------------------------------- Future income taxes (Note 4) 467.1 517.9 ------------------------------------------------------------------------- Goodwill and other intangible assets 61.0 58.5 ------------------------------------------------------------------------- ------------------------------------------------------------------------- $ 2,621.8 $ 2,739.3 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Liabilities and shareholders' equity Current liabilities Bank indebtedness $ 11.6 $ 10.1 ------------------------------------------------------------------------- Accounts payable and accrued liabilities (Note 5) 297.8 404.2 ------------------------------------------------------------------------- Advance billings and payments 51.5 49.2 ------------------------------------------------------------------------- Current portion of long-term debt (Note 5) 220.0 89.7 ------------------------------------------------------------------------- Notes payable (Notes 5 and 7) 70.0 - ------------------------------------------------------------------------- Current portion of capital lease obligations 3.3 6.1 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 654.2 559.3 Long-term debt (Note 5) 430.0 649.8 ------------------------------------------------------------------------- Long-term portion of capital lease obligations 15.5 16.4 ------------------------------------------------------------------------- Deferred employee benefits 44.7 45.0 ------------------------------------------------------------------------- Other long-term liabilities (Note 5) 60.6 62.1 ------------------------------------------------------------------------- Future income taxes (Note 4) 3.6 2.7 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 1,208.6 1,335.3 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Shareholders' equity Share capital (Note 9) 1,265.7 1,265.5 ------------------------------------------------------------------------- Contributed surplus 18.5 17.7 ------------------------------------------------------------------------- Retained earnings 129.0 120.8 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 1,413.2 1,404.0 ------------------------------------------------------------------------- ------------------------------------------------------------------------- $ 2,621.8 $ 2,739.3 ------------------------------------------------------------------------- ------------------------------------------------------------------------- MANITOBA TELECOM SERVICES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) For the periods ended June 30 Three months ended Six months ended (in millions) 2008 2007 2008 2007 ------------------------------------------------------------------------- Cash flows from operating activities Net income $ 38.0 $ 57.0 $ 92.2 $ 109.9 ------------------------------------------------------------------------- Add items not affecting cash Amortization 82.2 80.0 162.7 159.0 ------------------------------------------------------------------------- Future income taxes (Note 4) 29.6 28.0 55.2 62.1 ------------------------------------------------------------------------- Deferred wireless costs (9.6) (8.2) (19.5) (17.4) ------------------------------------------------------------------------- Pension funding and net pension credit (13.4) (7.2) (24.9) (8.8) ------------------------------------------------------------------------- Other, net (2.1) 0.1 (11.4) (3.7) ------------------------------------------------------------------------- Changes in non-cash working capital 16.3 (4.3) (19.5) (80.2) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash flows from operating activities 141.0 145.4 234.8 220.9 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash flows from investing activities Capital expenditures, net (70.1) (59.8) (124.9) (107.8) ------------------------------------------------------------------------- Acquisition (Note 13) - - (4.0) - ------------------------------------------------------------------------- Other, net (0.2) - (0.3) (0.1) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash flows used in investing activities (70.3) (59.8) (129.2) (107.9) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash flows from financing activities Dividends paid (42.0) (42.3) (84.0) (86.6) ------------------------------------------------------------------------- Repayment of long term debt (89.7) (14.6) (89.7) (14.6) ------------------------------------------------------------------------- Issuance of notes payable, net 70.0 - 70.0 - ------------------------------------------------------------------------- Issuance of share capital (Note 9) 0.2 1.5 0.2 5.4 ------------------------------------------------------------------------- Purchase of outstanding shares - (26.3) - (111.0) ------------------------------------------------------------------------- Other, net (3.5) 0.2 (3.6) (0.7) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash flows used in financing activities (65.0) (81.5) (107.1) (207.5) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Change in (bank indebtedness) cash and cash equivalents 5.7 4.1 (1.5) (94.5) ------------------------------------------------------------------------- (Bank indebtedness) cash and cash equivalents, beginning of period (17.3) 8.1 (10.1) 106.7 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (Bank indebtedness) cash and cash equivalents, end of period $ (11.6) $ 12.2 $ (11.6) $ 12.2 ------------------------------------------------------------------------- ------------------------------------------------------------------------- MANITOBA TELECOM SERVICES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) For the six months ended June 30, 2008 and 2007 (All financial amounts are in $ millions, except where noted.) ------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The interim consolidated financial statements of Manitoba Telecom Services Inc. (the "Company") have been prepared in accordance with Canadian generally accepted accounting principles. These interim consolidated financial statements have been prepared using the same accounting policies and methods of their application as the Company's audited consolidated financial statements for the year ended December 31, 2007. These interim consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 2007. Accounting policy developments Commencing with the Company's 2009 fiscal year, the recommendations of the Canadian Institute of Chartered Accountants ("CICA") for "goodwill and intangible assets" (CICA Handbook section 3064) will apply to the Company. This guidance establishes updated standards for the recognition, measurement, presentation and disclosure of intangible assets. The Company is currently evaluating the impact of the adoption of this new standard. 2. RESTRUCTURING AND INTEGRATION As at December 31, 2007, the Company had outstanding liabilities related to workforce reduction programs that were initiated in prior years. The outstanding liability as at December 31, 2007 relating to the workforce reduction element of the restructuring program which commenced in the fourth quarter of 2006 was $4.8 million. During the three and six months ended June 30, 2008, payments of $0.6 million and $4.0 million, respectively, were applied against this liability, leaving an outstanding liability of $0.8 million as at June 30, 2008. The outstanding liability as at December 31, 2007 relating to the workforce reduction element of the Company's second phase of its integration program was $3.1 million. During the three and six months ended June 30, 2008, payments of $0.6 million and $1.9 million, respectively, were applied against this liability, leaving an outstanding liability of $1.2 million as at June 30, 2008. 3. ACCOUNTS RECEIVABLE SECURITIZATION Under the terms of the Company's accounts receivable securitization program, the Company has the ability to sell, on a revolving basis, an undivided ownership interest in its accounts receivable to a securitization trust, up to a maximum of $150.0 million. As a result of selling the interest in certain of the trade receivables on a fully serviced basis, a service liability of $0.2 million has been recognized by the Company as at June 30, 2008. The terms of the Company's accounts receivable securitization program also require the Company to maintain reserve accounts, the fair value of which approximates carrying value. As at June 30, 2008, the Company had received $126.5 million on the sale of its accounts receivable to the trust, which is comprised of the outstanding undivided ownership interest held by the trust of $161.5 million and the reserve accounts of $35.0 million. During the three and six months ended June 30, 2008, the Company recognized a pre-tax loss of $0.1 million and $0.3 million, respectively, on the sale of accounts receivable, which is recorded in other income. During the three and six months ended June 30, 2008, cash flows received and paid to the trust in revolving period securitizations were $745.5 million and $1,498.5 million, respectively. The key assumptions used to determine the loss on sale of receivables and the fair values attributed to the retained interest are as follows: --------------------------------------------------------------------- Six months ended June 30 --------------------------------------------------------------------- 2008 2007 --------------------------------------------------------------------- Annual discount rate 3.70% - --------------------------------------------------------------------- Weighted average life of receivables sold (days) 40 - --------------------------------------------------------------------- Credit loss ratio 0.55% - --------------------------------------------------------------------- Servicing fee liability 1.0% - --------------------------------------------------------------------- --------------------------------------------------------------------- 4. INCOME TAXES A reconciliation of the statutory income tax rate to the effective income tax rate is as follows: --------------------------------------------------------------------- 2008 2007 --------------------------------------------------------------------- Combined basic federal and provincial statutory income tax rate 32.9% 35.7% --------------------------------------------------------------------- Change in substantively enacted tax rates 5.1 3.7 --------------------------------------------------------------------- Reduction of Valuation Allowance - (7.9) --------------------------------------------------------------------- Other items (0.5) 1.0 --------------------------------------------------------------------- Effective tax rate 37.5% 32.5% --------------------------------------------------------------------- --------------------------------------------------------------------- The balances of future income taxes as at June 30, 2008 and December 31, 2007 represent the future benefit of unused tax losses, and temporary differences between the tax and accounting bases of assets and liabilities. The major items giving rise to future income tax assets and liabilities are presented below: --------------------------------------------------------------------- 2008 2007 --------------------------------------------------------------------- Non-capital loss carryforwards 278.8 360.6 --------------------------------------------------------------------- Property, plant and equipment 413.1 374.6 --------------------------------------------------------------------- Other (59.3) (46.5) --------------------------------------------------------------------- Total future income tax asset 632.6 688.7 --------------------------------------------------------------------- Valuation allowance (64.4) (64.4) --------------------------------------------------------------------- Net future income tax asset 568.2 624.3 --------------------------------------------------------------------- --------------------------------------------------------------------- Future income taxes are comprised of: --------------------------------------------------------------------- 2008 2007 --------------------------------------------------------------------- Current future income tax asset 104.7 109.1 --------------------------------------------------------------------- Long-term future income tax asset 467.1 517.9 --------------------------------------------------------------------- Long-term future income tax liability (3.6) (2.7) --------------------------------------------------------------------- Net future income tax asset 568.2 624.3 --------------------------------------------------------------------- --------------------------------------------------------------------- During the six months ended June 30, 2008, the Company paid $0.3 million in cash income taxes (2007 - recovered $3.7 million). As at June 30, 2008, the Company had non-capital loss carryforwards available to reduce future years' taxable income, which expire as follows: --------------------------------------------------------------------- 2008 --------------------------------------------------------------------- 2009 809.3 --------------------------------------------------------------------- 2014 and beyond 60.8 --------------------------------------------------------------------- 870.1 --------------------------------------------------------------------- --------------------------------------------------------------------- 5. FINANCIAL INSTRUMENTS Effective January 1, 2008, the Company adopted CICA Handbook sections 3862 "financial instruments - disclosures" and 3863 "financial instruments - presentation". These standards outline the presentation requirements for financial instruments and require the Company to disclose information that enable users to evaluate the significance of financial instruments for the Company's financial position and performance, the nature and extent of risks arising from those financial instruments to which the Company is exposed and how the Company manages those risks. Fair value The Company's financial assets and liabilities are recorded initially at the related transaction amount, which is normally the historical cost. When the carrying value of a financial asset exceeds its fair value on a basis that is other than temporary, the carrying value is reduced to the fair value. With the exception of long-term debt, the carrying value of the Company's financial assets and liabilities, which are subject to normal trade terms, approximates the fair value. The fair value of long-term debt, including the current portion, is $655.3 million as at June 30, 2008. The fair value of long-term debt, which has fixed interest rates, is estimated by discounting the expected future cash flows using the relevant risk-free interest rate adjusted for an appropriate risk premium for the Company's credit profile. Credit Risk The Company is exposed to credit risk from its customers. This risk is minimized by the Company's large and diverse customer base. The following table provides an aging analysis of the Company's accounts receivables: --------------------------------------------------------------------- June 30, 2008 --------------------------------------------------------------------- 0-30 days 122.2 --------------------------------------------------------------------- 31-60 days 47.6 --------------------------------------------------------------------- 61-90 days 14.7 --------------------------------------------------------------------- Past 90 days 11.0 --------------------------------------------------------------------- Total 195.5 --------------------------------------------------------------------- Less: accounts receivable securitization (127.0) --------------------------------------------------------------------- Accounts receivable outstanding 68.5 --------------------------------------------------------------------- --------------------------------------------------------------------- The Company maintains an allowance for doubtful accounts for potential credit losses. This allowance is based on management's estimates and assumptions regarding current market conditions, customer analysis and historical payment trends. These factors are considered when determining whether past due accounts are allowed for or written-off. The Company's allowance for doubtful accounts for non-large business accounts receivable represents all non-large business accounts over 90 days past due. For large business accounts receivable, the allowance is calculated as a specific percentage of total large business accounts outstanding plus an additional provision for certain high risk large business accounts. The following table provides a continuity of the Company's accounts receivable allowance for doubtful accounts: --------------------------------------------------------------------- Six months ended Twelve months ended June 30, 2008 December 31, 2007 --------------------------------------------------------------------- Balance, beginning of the period 13.3 10.8 --------------------------------------------------------------------- (Decrease) increase in allowance (net of recoveries and accounts written-off) (2.9) 2.5 --------------------------------------------------------------------- Balance, end of the period 10.4 13.3 --------------------------------------------------------------------- --------------------------------------------------------------------- Liquidity Risk The Company is exposed to liquidity risk from its debt. This risk is minimized by the Company's capital structure management policies, and by maintaining bank credit facilities. The following table provides a summary of the maturity dates for various financial liabilities: --------------------------------------------------------------------- Less than 1 - 2 2 - 3 1 year years years 3+ years --------------------------------------------------------------------- Bank indebtedness 11.6 - - - --------------------------------------------------------------------- Accounts payable and accrued liabilities 297.8 - - - --------------------------------------------------------------------- Notes payable 70.0 - - - --------------------------------------------------------------------- Long-term debt, including current portion 220.0 - 10.7 419.3 --------------------------------------------------------------------- Other long-term liabilities - 10.0 8.1 42.5 --------------------------------------------------------------------- 599.4 10.0 18.8 461.8 --------------------------------------------------------------------- --------------------------------------------------------------------- Market Risk The Company is exposed to market risk from interest rates related to its debt, and from foreign exchange rates related to normal business operations in foreign currencies. Interest rate risk is minimized by the Company's capital structure management policies outlined in Note 12. The Company enters into foreign currency forward contracts to manage foreign currency exposure which arises in the normal course of business operations. As at June 30, 2008, the Company has outstanding foreign currency forward contracts to purchase $29.3 million U.S. As part of the Company's accounting policy to adjust outstanding foreign currency forward contracts from book value to fair value, the Company has recorded a gain (loss) in other income of ($0.4) million and $1.4 million for the three and six months ended June 30, 2008, respectively. These contracts mature periodically beginning in July 2008 and ending in December 2008. Reasonable fluctuations in market interest rates and foreign currency exchange rates would not have a material impact on the Company's net income and comprehensive income. 6. OTHER CURRENT ASSETS The Company's inventory balance consists of wireless handsets, parts and accessories and communications equipment held for resale. The Company performs periodic reviews of inventory for obsolescence and, during the three and six months ended June 30, 2008, expensed $0.1 million and $0.2 million, respectively, in obsolete inventory (2007 - $0.1 million and $0.2 million). During the three and six months ended June 30, 2008, the Company expensed $13.5 million and $26.3 million, respectively, of inventory relating to cost of goods sold (2007 - $9.9 million and $17.1 million). 7. NOTES PAYABLE The Company has a $350 million bank credit facility with a syndicate of financial institutions which consists of $150 million to support the Company's commercial paper program, and a $200 million revolving credit facility for cash management purposes and the issuance of letters of credit. The Company also has a $150 million non-revolving letter of credit facility for the issuance of letters of credit. The Company did not utilize its fully back-stopped commercial paper program during 2008. As at June 30, 2008, the Company had $224.5 million in undrawn letters of credit outstanding and under its revolving credit facility utilized $70.0 million in notes payable. The Company paid short term interest costs of $0.1 million for both the three and six months ended June 30, 2008. 8. EARNINGS PER SHARE RECONCILIATION The following table provides a reconciliation of the information used to calculate basic and diluted earnings per share: --------------------------------------------------------------------- Six months ended June 30 --------------------------------------------------------------------- 2008 2007 --------------------------------------------------------------------- Net income and comprehensive income Basic and diluted 92.2 109.9 --------------------------------------------------------------------- --------------------------------------------------------------------- Weighted average shares outstanding (in millions) Weighted average number of shares outstanding - basic 64.6 65.5 --------------------------------------------------------------------- Dilutive effect of outstanding stock options 1.0 0.2 --------------------------------------------------------------------- Weighted average number of shares outstanding - diluted 65.6 65.7 --------------------------------------------------------------------- --------------------------------------------------------------------- Earnings per share ($) Basic earnings per share 1.43 1.68 --------------------------------------------------------------------- Diluted earnings per share 1.41 1.67 --------------------------------------------------------------------- --------------------------------------------------------------------- 9. SHARE CAPITAL As at June 30, 2008, share capital consists of 64,635,967 issued and outstanding Common Shares (December 31, 2007 - 64,631,667). During the six months ended June 30, 2008, 4,300 stock options to purchase Common Shares were exercised for cash consideration of $0.2 million, of which $0.2 million was credited to share capital. 10. EMPLOYEE FUTURE BENEFITS The Company's total net benefit credit for all of its defined benefit and defined contribution pension plans, supplemental pension arrangements, and other non-pension employee future benefits for the three and six months ended June 30, 2008 is $0.1 million and $0.3 million, respectively. 11. SEGMENTED INFORMATION As at June 30, 2008, the Company had two reportable operating segments: the Consumer Markets division and the Enterprise Solutions division. The Consumer Markets division provides a full range of wireless, high-speed Internet and data, digital television, and wireline voice services to residential and small business customers in Manitoba. The Consumer Markets division also provides alarm monitoring services to residential and small business customers in the western provinces, and Internet, data and voice services to small business customers in Canada. The Enterprise Solutions division provides Internet protocol-based communications, unified communications, voice, and data connectivity services to medium and large business customers in Canada. In 2008, the Company changed the basis for its allocation of certain expenses across divisions. Accordingly, segmented information for 2007 has been restated to conform with these changes. The Company evaluates performance based on EBITDA (earnings before interest, taxes, amortization, other income, and discontinued operations). EBITDA, as reported below, includes intersegment revenues and expenses. The Company accounts for intersegment revenues and expenses at either prices that approximate current market prices or cost, depending on the type of service. The following table provides further segmented information: --------------------------------------------------------------------- Three months ended June 30 ------------------------------------------------------- Consumer Enterprise Markets Solutions Other Total ------------------------------------------------------- 2008 2007 2008 2007 2008 2007 2008 2007 ------------------------------------------------------- Operating revenue External 204.9 201.3 281.5 272.8 - - 486.4 474.1 --------------------------------------------------------------------- Internal 0.1 0.1 0.1 - 8.2 9.6 8.4 9.7 --------------------------------------------------------------------- EBITDA 96.6 106.7 65.5 68.0 (1.1) (2.5) 161.0 172.2 --------------------------------------------------------------------- --------------------------------------------------------------------- --------------------------------------------------------------------- Six months ended June 30 ------------------------------------------------------- Consumer Enterprise Markets Solutions Other Total ------------------------------------------------------- 2008 2007 2008 2007 2008 2007 2008 2007 ------------------------------------------------------- Operating revenue External 404.6 395.9 560.6 544.8 - - 965.2 940.7 --------------------------------------------------------------------- Internal 0.2 0.2 0.1 - 18.6 19.1 18.9 19.3 --------------------------------------------------------------------- EBITDA 199.0 202.4 130.6 140.5 0.1 (0.5) 329.7 342.4 --------------------------------------------------------------------- --------------------------------------------------------------------- Reconciliation of net income and comprehensive income is as follows: --------------------------------------------------------------------- Three months ended Six months ended June 30 June 30 --------------------------------------------------------------------- 2008 2007 2008 2007 --------------------------------------------------------------------- Total EBITDA 161.0 172.2 329.7 342.4 --------------------------------------------------------------------- Amortization (82.2) (80.0) (162.7) (159.0) --------------------------------------------------------------------- Other income 1.0 2.7 5.1 6.1 --------------------------------------------------------------------- Debt charges (12.1) (13.7) (24.6) (26.6) --------------------------------------------------------------------- Income tax expense (29.7) (24.2) (55.3) (53.0) --------------------------------------------------------------------- Consolidated net income and comprehensive income 38.0 57.0 92.2 109.9 --------------------------------------------------------------------- --------------------------------------------------------------------- 12. CAPITAL STRUCTURE FINANCIAL POLICIES Effective January 1, 2008, the Company adopted CICA Handbook section 1535 "capital disclosures". These disclosure standards require the Company to provide disclosure of how the Company manages its capital. The Company's objectives when managing capital are (i) to maintain an acceptable level of liquidity risk so that the Company can continue to cover its financial obligations and investment requirements under the current business model; and (ii) to enhance shareholder value by maintaining an efficient cost of capital. The Company manages capital through the monitoring of a number of measures, with the primary one being debt to capitalization. This metric illustrates the amount of assets that are financed by debt versus equity. It is calculated as the sum of long-term debt and notes payable divided by the sum of shareholders' equity, long-term debt and notes payable. Shareholders' equity includes share capital, contributed surplus, and retained earnings. The Company must comply with two types of covenants regarding capital structure. The first is an earnings coverage covenant on the Company's medium term notes that requires the Company to maintain a minimum ratio of earnings before interest and taxes over debt charges. The second is a level of debt covenant on the medium term notes and the Company's bank credit facility that requires the Company not to exceed a specified debt to total capitalization level. The Company continually monitors these covenants and is in full compliance. The Company manages the capital structure and makes adjustments to it based on changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain an optimal capital structure, the Company may buy back shares to reduce shareholders' equity or sell assets to reduce debt. The Company's debt to capitalization ratio is provided in the following table: --------------------------------------------------------------------- June December 30 2008 31 2007 --------------------------------------------------------------------- Bank indebtedness 11.6 10.1 --------------------------------------------------------------------- Proceeds from accounts receivable securitization 126.5 43.0 --------------------------------------------------------------------- Notes payable 70.0 - --------------------------------------------------------------------- Capital lease obligations, including current portion 18.8 22.5 --------------------------------------------------------------------- Long-term debt, including current portion 650.0 739.5 --------------------------------------------------------------------- Shareholders' equity 1,413.2 1,404.0 --------------------------------------------------------------------- Total capitalization 2,290.1 2,219.1 --------------------------------------------------------------------- Debt to capitalization 38.3% 36.7% --------------------------------------------------------------------- --------------------------------------------------------------------- 13. ACQUISITION Effective January 1, 2008, the Company acquired all of the outstanding shares of ICU Technologies Inc., a provider of video conferencing solutions in Ontario, for a preliminary purchase price of $4.0 million. The purchase price is subject to adjustments, which are expected to be resolved within one year from the date of acquisition. This acquisition was accounted for using the purchase method, and the purchase price has been allocated on a preliminary basis to assets of $4.5 million, liabilities of $1.4 million, and goodwill of $0.9 million. The acquired assets included intangible assets of $3.6 million. These intangible assets represent customer contracts and relationships of $1.9 million, brand name of $0.5 million and a non-competition agreement of $1.2 million. The intangible assets are being amortized over estimated periods of benefit of three to five years. The goodwill amount has been allocated to the Enterprise Solutions division operating segment. The operating results of this business are included in the Company's consolidated operating results from the effective date of acquisition. 14. SUBSEQUENT EVENT On July 21, 2008, upon close of the advanced wireless services spectrum auction, the Company successfully became the provisional licensee of wireless spectrum within Manitoba. The amount to be paid in 2008 for these assets will be $40.8 million. 15. COMPARATIVE FIGURES The prior period figures have been reclassified when necessary to conform to the current period's presentation. %SEDAR: 00003357E

For further information:

For further information: Investor contact: Ian Chadsey, Vice-President
Investor Relations, (204) 941-8283, investor.relations@mtsallstream.com; Media
contact: Greg Burch, Manager Corporate Communications, (416) 345-3576 or (204)
941-8576, media.relations@mtsallstream.com

Organization Profile

MTS Allstream

More on this organization


Custom Packages

Browse our custom packages or build your own to meet your unique communications needs.

Start today.

CNW Membership

Fill out a CNW membership form or contact us at 1 (877) 269-7890

Learn about CNW services

Request more information about CNW products and services or call us at 1 (877) 269-7890