Stock Symbol: MBT
WINNIPEG, Feb. 10, 2012 /CNW/ - Manitoba Telecom Services Inc. (the "Company" or "MTS Allstream"), including its two operating divisions MTS and Allstream, today reported net earnings of $167.1 million for the year ended December 31, 2011. Earnings per share ("EPS") were $2.55, compared with $2.18 for the year ended December 31, 2010.
Fourth-quarter net earnings were $36.9 million. EPS were $0.56, compared with $0.46 for the three months ended December 31, 2010.
- MTS Allstream met 2011 improved financial guidance and its 2012 financial guidance demonstrates continued progress
- Earnings per share were $2.55: an increase of 17.0% over 2010
- Free cash flow increased by $95.7 million to $129.8 million in 2011
- MTS wireless revenues up 8.6%, ARPU up $2.34, driven by 46.1% wireless data revenue growth
- MTS IPTV revenues up 19.3%; 64% of IPTV customers now subscribe to the premium service
- Allstream EBITDA up 34.0%, with IP revenue growth of 8.7%
- Allstream added 299 buildings in 2011, totaling 2,388 buildings on its IP fibre network
- Board of Directors declares $0.425 per share Q1 2012 cash dividend
"We are focused on remaining the leading telecommunications provider in Manitoba and growing Allstream's converged IP business. In 2011, we made significant progress on these strategic objectives by launching our 4G wireless network in Manitoba and by extending Allstream's national fibre network to 2,388 new buildings," said Pierre Blouin, Chief Executive Officer. "We saw a significant increase in our free cash flow for the year, which was driven by lower capital expenditures, the benefit of our cost saving programs and the growth in our strategic lines of business. Manitoba Telecom Services is well positioned to continue to perform for our customers and our shareholders in 2012."
| (in millions $, except EPS and
| 2011 outlook
(at August 4, 2011)
|Revenues||1,765.6||1,700 to 1,780||1,782.6|
|EBITDA1||594.4||580 to 610||564.8|
|EPS2||$2.55||$2.40 to $2.80||$2.18|
|Free cash flow3||129.8||110 to 150||34.1|
|Capital expenditures/revenues||16.3%||16% to 18%||20.3%|
|1||MTS Allstream defines EBITDA as earnings before interest, taxes, depreciation and amortization, and other income (expense). See the Notes section of this news release for further information.|
|2||Earnings per share ("EPS") are based on weighted average shares outstanding of 65.5 million and 64.7 million for the twelve months ended December 31, 2011 and December 31, 2010, respectively. The increase in the number of weighted shares outstanding is mainly due to participation in the Company's dividend reinvestment plan.|
|3||MTS Allstream defines free cash flow as cash flows from operating activities less capital expenditures, and excluding changes in working capital. See the Notes section of this news release for further information.|
MTS Allstream delivered solid financial performance in 2011. MTS Allstream's EBITDA was up 8.4% to $146.9 million in the fourth quarter and 5.2% to $594.4 million for the year, when compared to the same periods of 2010. Although consolidated revenue declined 1.6% in the fourth quarter and 1% for the full year due to declines in local, long distance and legacy data services, this was consistent with the Company's improved 2011 financial guidance and reflected management's plan to exit low-margin and declining lines of business. Free cash flow was up $82.4 million to $18.3 million in the fourth quarter, and up $95.7 million to $129.8 million in 2011, when compared to the same periods of 2010, due to higher EBITDA, lower capital expenditures and lower pension costs, partly offset by higher wireless costs of acquisition. Capital expenditures were lower when compared to 2010, due to higher-than-normal costs associated with the wireless 4G network build-out in 2010 and the favourable impact of an $18.5 million scientific research & experimental development ("SR&ED") investment tax credit ("ITC") adjustment to capital expenditures received in 2011. The Company achieved $28.8 million in annualized cost savings for the year, meeting its 2011 guidance range for annualized cost savings.
By leveraging its unique bundle offers, MTS increased the number of bundled customers by 5% to almost 89,000 and achieved strong customer retention and ARPU growth across all product lines in 2011. MTS delivered revenue growth of 2.7% for the fourth quarter and 2.3% for the full-year of 2011. Wireless, high-speed Internet and IPTV services generated strong revenue growth, which offset declines in local, long distance and legacy data services. MTS maintained an EBITDA margin of over 50% throughout the year and delivered EBITDA growth of 3.5% for the fourth quarter and 0.7% for the full-year of 2011.
MTS built on the successful 4G wireless network which launched March 31, 2011 through the remainder of the year, and grew wireless revenue and subscribers.
- Wireless data services are now available to 97% of Manitobans through MTS Allstream's 4G wireless network which, along with our Wi-Fi hotspots, provide the best customer experience in the province.
- Wireless revenues increased by 8.5% to $92.8 million for the fourth quarter and by 8.6% to $356.3 million for the full-year of 2011, driven by a 46.1% increase in wireless data revenues that has generated a 4.1% increase in ARPU for the year. At December 31, 2011, 41% of all postpaid wireless subscribers had data plans, up from 27% in 2010.
- Wireless subscribers totaled 496,432 as of December 31, 2011, up 2.6% over last year. MTS's extensive 4G wireless network, together with the planned deployment of Long Term Evolution ("LTE") technology in Winnipeg and Brandon in 2012, is expected to drive continued strong demand for wireless data services in the coming years.
- Blended wireless churn was 1.84% in the fourth quarter of 2011. Postpaid churn was 1.35% in the fourth quarter, up from 1.20% last year.
Broadband and converged Internet protocol ("IP") lines of business delivered strong performance in 2011, driven by demand for high-speed Internet and premium IPTV services. Broadband and converged IP revenues were up 12.8% at $52.1 million and up 10.7% at $201.1 million for the fourth quarter and full-year of 2011, respectively.
- Internet revenues grew 7.8% to $26.2 million in the fourth quarter and 6.8% to $102.6 million in 2011, with ARPU up 8.1% to $38.56 when compared to 2010, due to fewer customers on promotional plans, subscriber growth and price increases. At December 31, 2011, 188,946 customers subscribed to high-speed Internet.
- IPTV revenues grew 21.8% to $19.0 million in the fourth quarter and 19.3% to $70.6 million in 2011, driven by fewer customers on promotional plans, subscriber growth, and price increases.
- MTS has more HD channels than its competitors. With its state-of-the-art Whole Home PVR, demand continues to grow for premium IPTV service: MTS maintained 34% of Winnipeg market share and increased the proportion of customers subscribing to its premium television service to 64% of its IPTV customer base.
MTS maintained industry-leading network access line erosion rates, though local, long distance and legacy data services continued to decline in the fourth quarter of 2011.
- Local access revenues declined by 3.8% to $68.0 million in the fourth quarter and by 6.3% to $274.9 million in 2011, due to ongoing residential and business network access services ("NAS") erosion and a $5 million one-time deferral account adjustment in 2010. Residential NAS declined by 16,774 or 5.1%, while business NAS declined by 5,993 or 2.7%, compared to last year. MTS maintained 77% market share for local and access services.
- Long distance revenues declined by 9.4% to $12.5 million in the fourth quarter and 8.2% to $52.6 million in 2011, mainly due to customer migration to lower-priced long distance plans and reduced volumes, as customers continue to substitute long distance calling with alternative methods of communication, such as email, text messaging and social networking.
- Legacy data revenues were consistent year over year at $8.3 million in the fourth quarter and up 2.5% to $32.9 million in 2011, mainly due to an increase in wholesale data services.
Allstream remains focused on winning high-margin, on-net IP revenues and exiting certain low-margin legacy services, while reinvesting cash flows from declining legacy services into IP platforms. Allstream's EBITDA increased by $5.3 million, or 28.0%, to $24.2 million in the fourth quarter of 2011 and by $27.5 million, or 34.0%, to $108.5 million in 2011, mainly due to higher gross margins from increased on-net IP sales wins and lower restructuring expenses. Consistent year-over-year EBITDA growth throughout 2011 proves Allstream's strategy is working. As part of the Company's strategic plan to transition away from low-margin products and services, Allstream revenues declined 6.6% to $193.5 million in the fourth quarter and 4.6% to $801.8 million in 2011.
- Allstream increased converged IP sales by 19% in the fourth quarter and 21% in 2011, when compared to the same periods of last year.
- Converged IP revenues were up 6.6% to $60.0 million in the fourth quarter and up 8.7% to $235.4 million in 2011, representing approximately 30% of Allstream's total revenues.
- Allstream continued its pursuit of high-margin on-net IP revenues. In 2011, 47% of the IP data circuits provisioned were completely on the Allstream IP fibre network; which is more than double the proportion in Allstream's existing base.
- The Company continued to make targeted, success-based investments in Allstream's IP fibre network to extend its on-net reach and provide incremental, high-margin revenue opportunities in 2011. Allstream added a total of 75 buildings to the IP fibre network in the fourth quarter of 2011, increasing Allstream's total number of fibre-fed buildings to 2,388 at December 31, 2011. These investments are expected to drive growth in markets where Allstream has a proven track record of success.
Allstream's local access revenues were consistent with the prior year, down $0.4 million to $49.5 million in the fourth quarter and down $2.2 million to $199.3 million in 2011. The decreases in local access rates and volumes were partly offset by continued growth in the number of small and medium-sized business customers subscribing to bundled services.
Allstream continues to implement its strategy to improve profitability of legacy services by exiting low-margin long distance and legacy data services, reducing costs and transitioning customers to IP-based services.
- Long distance revenues declined by 15.0% to $23.8 million in the fourth quarter and 11.6% to $104.3 million in 2011, mainly due to lower domestic and cross-border rates, along with decreased volumes in the domestic, cross-border and international markets.
- Legacy data revenues declined by 16.6% to $24.7 million in the fourth quarter and 13.6% to $105.3 million in 2011, due to customers' continued transition to broadband and other IP-based services.
The Company's Board of Directors declared a quarterly dividend of $0.425 per share for the first quarter of 2012, which is payable on April 16, 2012 to shareholders of record on March 15, 2012.
MTS Allstream's 2012 financial guidance reflects the continued execution of its corporate strategy, including its three strategic objectives: i) to maintain MTS's industry-leading position in Manitoba, ii) to drive growth in IP-based services and improve profitability, and iii) to deliver superior customer service, while aggressively improving the Company's cost structure.
MTS Allstream's financial guidance for 2012 is as follows:
| (in millions $, except EPS and
|Revenues||1,675 to 1,775||1,765.6|
|EBITDA||590 to 630||594.4|
|EPS||$2.20 to $2.65||$2.55|
|Free cash flow1||110 to 150||129.8|
|Capital expenditures2||18% to 20% of revenues||16.3% of revenues|
|1||Free cash flow of $129.8 million in 2011 includes the impact of an $18.5 million SR&ED ITC adjustment to capital expenditures received in 2011; the free cash flow guidance range for 2012 does not contemplate a similar adjustment.|
|2||The actual increase in capital spending in 2012 over 2011 is expected to be less than $20 million after adjusting for the $18.5 million SR&ED ITC adjustment to capital expenditures received in 2011. Excluding the impact of the SR&ED ITC, capital intensity would have been 17.4% in 2011. Capital expenditures in 2012 are expected to include the continued expansion of MTS's fibre to the home network to six additional communities, the deployment of LTE technology in Winnipeg and Brandon, and the continued expansion of Allstream's fibre-fed buildings.|
"Our financial outlook demonstrates our confidence that our corporate strategy will continue to produce strong results," said Pierre Blouin. "We are making the right investments by deploying LTE technology and by increasing our national fibre network reach in 2012."
MTS Allstream expects consolidated revenue in 2012 to be $1,675 million to $1,775 million, compared with revenue of $1,766 million in 2011. Strong wireless, broadband and converged IP revenue growth in 2012 is expected to be offset by declines in revenues from legacy services, such as local access, long distance and legacy data services, while the Company strategically exits low-margin and declining lines of business.
With higher revenues from strategic services (including wireless, high-speed Internet, IPTV and converged IP) and a continued focus on cost reduction, MTS Allstream is targeting EBITDA of $590 million to $630 million in 2012, consistent with or up from 2011 EBITDA of $594.4 million.
MTS Allstream is targeting EPS of $2.20 to $2.65 in 2012 due to higher EBITDA, offset by an increase in depreciation and amortization expense, reflecting growth in the Company's asset base, higher amortization of wireless costs, and the impact of a one-time SR&ED credit received in 2011.
MTS Allstream expects to be able to generate $110 million to $150 million of free cash flow in 2012, which will provide the Company with financial flexibility to maintain strategic investments in growth lines of business. Total capital spending is expected to be 18% to 20% of revenues in 2012, including investments in fibre to the home ("FTTH") in Manitoba and LTE technology in Winnipeg and Brandon. The Company's 2012 capital program also includes funding to connect more buildings to Allstream's national IP network.
Investor day & 2012 outlook event
MTS Allstream will hold an Investor Day & 2012 Outlook Event for the investment community on February 10, 2012 at 8:00 am (Eastern Time) in Toronto, in lieu of a quarterly results conference call. Investors, media and the public are invited to participate on a listen-only basis by dialing 1-866-212-4491 or 1-416-800-1066. A replay will be available until midnight (Eastern Time) on February 24, 2012, and can be accessed by dialing 1-866-583-1035 and entering access code 9299651.
There will also be a live audio webcast of the presentation, available on MTS Allstream's website www.mtsallstream.com or at http://www.snwebcastcenter.com/custom_events/mts-20120210/site/. A replay of the audio webcast will be available following the event on www.mtsallstream.com.
|(1)||MTS Allstream defines EBITDA as earnings before interest, taxes, depreciation and amortization and other income (expense). The term "EBITDA", as it relates to 2011 and 2010 results prepared using International Financial Reporting Standards ("IFRS"), does not have any standardized meaning according to IFRS. It is therefore unlikely to be comparable to similar measures presented by other companies.|
|(in millions $)||Q4 2011||Q4 2010||2011||2010||% change|
|Deduct: Operating expenses||(371.9)||(386.1)||(1,470.1)||(1,508.5)||(2.5)|
|Add: Depreciation and amortization||79.4||74.9||298.9||290.7||2.8|
|(2)||MTS Allstream defines free cash flow as cash flows from operating activities, less capital expenditures, and excluding changes in working capital. Free cash flow is the amount of discretionary cash flow that the Company has for purchasing additional assets beyond its annual capital expenditure program, paying dividends, buying back shares and/or retiring debt. The term "free cash flow", as it relates to 2011 and 2010 results prepared using IFRS, does not have any standardized meaning according to IFRS. It is therefore unlikely to be comparable to similar measures presented by other companies.|
|(in millions $)||Q4 2011||Q4 2010||2011||2010||$ change|
|Cash flows from operating activities||126.6||132.7||386.6||451.7||(65.1)|
|Add (Deduct): Changes in non-cash working capital||(23.7)||(67.4)||31.2||(55.7)||86.9|
|Deduct: Capital expenditures||(84.6)||(129.4)||(288.0)1||(361.9)||73.9|
|Free cash flow for the period||18.3||(64.1)||129.8||34.1||95.7|
|1||Capital expenditures were favourably impacted by an $18.5 million SR&ED ITC adjustment received in 2011; this investment tax credit adjustment will be utilized when the Company becomes taxable.|
| Supplemental information for the three and twelve months ended December 31, 2011 is also available in the "Investors" section of the MTS Allstream website at www.mtsallstream.com.
Forward-looking statements disclaimer
This news release includes forward-looking statements and information (collectively, the "statements") about the Company's corporate direction, business opportunities, operations, financial objectives and future financial results and performance that are subject to risks, uncertainties and assumptions. As a consequence, actual results in the future may differ materially from any conclusion, forecast or projection in such forward-looking statements. Therefore, forward-looking statements should be considered carefully and undue reliance should not be placed on them. Examples of statements that constitute forward-looking information may be identified by words such as "believe", "expect", "project", "should", "anticipate", "could", "target", "forecast", "intend", "plan", "outlook", "see", "set", "pending", and other similar terms.
Factors that could cause anticipated opportunities and actual results to differ materially include, but are not limited to, matters identified in the "Material assumptions" section below, the "Risks and uncertainties" section, elsewhere in the Company's 2011 Annual MD&A and 2011 Annual Information Form, all of which are available on SEDAR at www.sedar.com.
Please note that forward-looking statements reflect Management's expectations at February 10, 2012. The Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. This news release and the financial information contained herein have been reviewed by th Company's Audit Committee and approved by the Company's Board of Directors.
Forward-looking statements for 2012 are based on certain economic and market assumptions, operational assumptions and financial assumptions, including, but not limited to, the following:
Economic and market assumptions
MTS consumer services are expected to benefit from the continued resiliency of the Manitoba economy, which is forecast to grow in real gross domestic product ("GDP") by 2.3% in 2012, according to the Manitoba Department of Finance. The Bank of Canada is forecasting real GDP growth for Canada in 2012 to be 2.1%. The Company anticipates the continuation of the growth seen in 2011 will positively impact MTS Allstream's enterprise markets in 2012.
The Company expects market conditions to be similar to those seen in 2011. Management expects competitive pressures in wireline and broadband markets in Manitoba will generally remain consistent in 2012, as compared to 2011, with Shaw occasionally introducing aggressive offers. It is anticipated that Wind Mobile will enter the wireless market in Manitoba in 2012, but that this new entrant will not materially affect the pricing and churn rates in the wireless market in 2012. MTS Allstream expects to experience ongoing competitive pressures in its local and long distance services. Revenues generated by the residential and business voice telecommunications market will continue to decrease, due to competition and wireless substitution, at levels similar to 2011. The Company expects Allstream to benefit from the IP sales contracts won in 2011, with growth in IP revenues in 2012. It is expected that enterprise customers will continue to migrate from legacy to IP-based services at levels similar to 2011.
For 2012, management expects to achieve $25 million to $35 million in annualized cost reductions through operational efficiency and restructuring efforts. The Company's restructuring costs for 2012 are anticipated to be nominal. The Company also expects that there will be no significant one-time expenses or costs affecting the business.
In 2012, MTS Allstream's capital program is expected to be approximately 18% to 20% of the Company's revenues. Major investments include $15 million to $20 million for the expansion of MTS's FTTH footprint in 2012, as well as $20 million to $25 million for the deployment of LTE technology in Winnipeg and Brandon over the next two years.
For the Allstream division, the Company anticipates continued customer migration to IP-based technology and expects demand for IP fibre to drive growth in the number of buildings and tenants connected to the network, as well as in the overall size of the network's footprint. The Company expects that as new and existing customers adopt high-margin IP services, revenues in legacy lines of business will decrease. Management does not anticipate the loss of any large customers which would materially affect 2012 financial guidance.
For the MTS division, the Company plans to launch IPTV service in two communities where FTTH installation began in 2011 and to launch IPTV service in four additional communities as part of its five-year FTTH initiative. The Company expects to launch LTE services in Winnipeg and Brandon later this year, but does not anticipate the launch to materially impact MTS's results in 2012. The Company expects that it will be able to leverage its Wi-Fi, CDMA-EVDO, 4G and LTE wireless networks to drive demand for smartphones (including LTE-enabled devices) and increase wireless data revenues. The Company anticipates it will maintain its share of the wireless, high-speed Internet and IPTV markets, and will see market share declines in local telephone service markets due to the continued migration of customers to wireless services, combined with competitive residential and business NAS line losses.
Management has been able to reduce taxable income by utilizing MTS Allstream's substantial capital cost allowance ("CCA") pools and available tax losses. By utilizing deferred CCA deductions, management projects that the Company will not pay cash taxes before 2019. The Company assumes the statutory tax rate in 2012 will be 27%. The present value of MTS Allstream's tax asset is approximately $330 million.
MTS Allstream's financial outlook does not include any one-time payments relating to a potential 700 MHz spectrum auction in 2012.
The Pension Benefits Standards Act, 1985 (Canada) permits the use of letters of credit in lieu of cash funding for solvency special payments, up to 15% of plan assets. Management assumes the Company's estimated $80 million pension solvency funding requirement for 2012 will not have an impact on free cash flow, as the Company expects to have both sufficient plan asset levels and credit facilities to satisfy these obligations using letters of credit.
The Company also made material assumptions in respect to discount rates, as described in note 16 of the Notes to Consolidated Financial Statements.
Management does not anticipate the need to make any payments following the outcome of pension litigation relating to one of the Company's Manitoba pension plans.
For a detailed review of material risks and uncertainties, please consult the section entitled "Risks and uncertainties" on page 22 of MTS Allstream's 2011 Annual Management's Discussion and Analysis, which is available in the "Investors" section of the MTS Allstream website at www.mtsallstream.com and on SEDAR at www.sedar.com.
Manitoba Telecom Services Inc. (MTS Allstream)
MTS Allstream is one of Canada's leading national communication solutions companies, providing innovative communications for the way Canadians live and work today. The Company has more than 100 years of experience, with 5,500 employees across Canada. MTS Allstream's business is dynamic and consists of two operating divisions. In Manitoba, MTS is the leading full-service telecommunications provider for residential and business customers. MTS's suite of services include the latest in wireless technology, broadband services, IPTV, voice services, home security, and an extensive range of business solutions. Across Canada, Allstream is a leader in IP communications and is the only national provider that focuses exclusively on the business telecommunications market. MTS Allstream has nearly two million customer connections spanning business customers across Canada and residential consumers throughout the province of Manitoba. The Company's extensive national fibre optic network spans more than 30,000 kilometres. MTS Allstream has spent 11 consecutive years on the Jantzi Social Index for leadership in social responsibility and is the recipient of the 2011 Governance Gavel Award from the Canadian Coalition of Good Governance, recognizing clear and effective public disclosure and leading governance practices. MTS Allstream's common shares are listed on the TSX (trading symbol: MBT). Customers, stakeholders and investors who want to learn more about MTS Allstream are encouraged to visit: www.mtsallstream.com. For more information about MTS's products and services, please visit www.mts.ca. For more information about Allstream's products and services, please visit www.allstream.com.
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management's Discussion and Analysis ("MD&A") of our financial results comments on our operations, performance and financial condition for the years ended December 31, 2011 and 2010. This MD&A is based on financial statements prepared under IFRS. Prior to 2010, our consolidated financial statements were presented in accordance with previous Canadian generally accepted accounting principles ("GAAP"). All financial amounts, unless otherwise indicated, are in Canadian dollars and in accordance with IFRS.
Unless otherwise indicated, this MD&A for the year ended December 31, 2011 is as at February 10, 2012. In preparing this MD&A, we have taken into account information available to us up to February 9, 2012. In this MD&A, "we", "our", and "us" refer to Manitoba Telecom Services Inc. (the "Company" or "MTS Allstream"). This MD&A should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2011. You will also find more information about us, including our Annual Information Form ("AIF") for the year ended December 31, 2011 dated February 10, 2012, on our website at www.mtsallstream.com and on SEDAR at www.sedar.com.
| Regarding forward-looking statements
This MD&A includes forward-looking statements and information (collectively, the "statements") about our corporate direction, business opportunities, operations, financial objectives, future financial results and performance, future cash flows and distributions to shareholders that are subject to risks, uncertainties and assumptions. As a consequence, actual results in the future may differ materially from any conclusion, forecast or projection in such forward-looking statements. Therefore, forward-looking statements should be considered carefully and undue reliance should not be placed on them. Examples of statements that constitute forwardlooking information may be identified by words such as "believe", "expect", "project", "should", "anticipate", "could", "target", "forecast", "intend", "plan", "outlook", "see", "set", "pending" and other similar terms.
Please note that forward-looking statements reflect our expectations as at February 10, 2012. 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 MD&A and the financial information contained herein have been reviewed by our Audit Committee and approved by our Board of Directors.
OVERVIEW OF OUR BUSINES S
MTS Allstream is a leading national communications provider in Canada and the market leader in Manitoba. Our company is organized into two principal divisions: MTS, operating in Manitoba; and Allstream, operating nationally. Our common shares are listed on the Toronto Stock Exchange (trading symbol: MBT) and our website is www.mtsallstream.com.
MTS is the leading telecommunications provider in Manitoba, delivering a full suite of wireless, high-speed Internet, Internet protocol television ("IPTV"), converged Internet protocol ("IP"), unified communications, security, home alarm monitoring, local access and long distance services. This complete range of products and services is unmatched by any other provider in the province. MTS serves both residential and business customers in Manitoba.
Allstream is a leading competitor in the national business and wholesale markets, offering small, medium and large businesses and government organizations a portfolio of telecommunications solutions tailored to meet their needs. Allstream's main products are IP-based communications, unified communications, voice and data connectivity, and security services. Allstream operates an extensive national broadband fibre optic network that spans more than 30,000 kilometres and provides international connections through strategic alliances and interconnection agreements with other international service providers.
OUR PRODUCTS AND SERVICES
We generate revenues from the following lines of business:
|(in millions $)||MTS||Allstream||Total|
|Broadband and converged IP services||201.1||235.4||436.5|
|Unified communications, security and monitoring services||33.2||87.1||120.3|
|Local access services||274.9||199.3||474.2|
|Long distance and legacy data services||85.5||209.6||295.1|
|Total operating revenues||963.8||801.8||1,765.6|
Our wireless portfolio consists of cellular, wireless data, paging and group communications services that we offer in the Manitoba market to both residential and business customers. Our wireless services set our bundle offering apart from our competitors and further cement the strength of the MTS brand. With a market share of 57%, MTS is the leading provider of wireless services in Manitoba. With our combination of 4G, CDMA-EVDO, and WiFi hotspots, MTS has the best wireless network reach in Manitoba; we also have arrangements with other international wireless service providers that allow our customers to access cellular and data services outside of Manitoba. Due to increasing demand for high-speed wireless data, we expect strong growth in wireless revenues to continue.
Broadband and converged IP services
At MTS, broadband and converged IP services include revenues earned from providing high-speed Internet and IPTV services to residential customers in Manitoba, as well as IP-based connectivity to business customers in Manitoba. A strong broadband network is essential for offering these services and delivering a valuable bundle to our customers. We are well positioned with extensive fibre facilities in our regional Manitoba network. Our broadband network reaches 85% of Manitoba homes. Over 95% of homes in Winnipeg, Brandon, Portage la Prairie and Selkirk are being served by our very-high-bit-rate digital subscriber line ("VDSL") or fibre-to-the-home ("FTTH") network. Our broadband network reach is increasing as we expand our FTTH network. We launched in two new communities in December and have another six more scheduled for launch in 2012. At the end of 2011, 14,612, homes were passed by FTTH.
At Allstream, converged IP services include revenues earned from the provision of IP-based networking and related products and services to our business customers nationally. Canadian businesses increasingly require IP connectivity solutions, resulting in growth in the converged IP market. We have the strategic advantage of long-term business relationships with many large companies in Canada. We also have a national IP fibre network that spans more than 30,000 kilometres. Over the past year, the number of Allstream fibre-fed buildings has grown by 14.3% to 2,388 buildings.
Unified communications, security and monitoring services
Unified communications, security and monitoring services consist of revenues earned from the provision of IP telephony products and services to business customers in Manitoba and nationally, along with revenues from our IP-based security offerings to national business customers. For certain customers, the ability to offer integrated security and equipment offerings is important for winning their business. At MTS, this line of business also includes revenues earned from the installation and monitoring of alarm services to residential, business and industrial customers in Manitoba.
Local access services
At MTS, local access services include revenues earned from the provision of residential and business voice connectivity including calling features (such as Call Answer, Call Display, Call Waiting and 3-Way Calling), payphone revenue, wholesale revenues from services provided to third parties, and contribution revenues. With 77% market share in Manitoba, the quality of our local wireline connection remains a competitive differentiator in the success of our voice services operations. It is the strategic entry point into customer premises for high-growth services, including high-speed Internet and IPTV. At Allstream, local access services includes revenues earned from the provision of business voice connectivity including calling features to national business and wholesale customers.
Long distance and legacy data services
Long distance and legacy data services include revenues earned from the provision of long distance calling along with the provision of networking and related products and services to our business customers. At MTS, 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, a dial-around service, and audio conferencing, as well as a variety of enhanced long distance services and features.
At MTS, other services include revenues earned from customer late payment charges, facilities rental and other miscellaneous items. At Allstream, other services include wholesale revenues earned from the routing and exchange of long distance network traffic (global hubbing), customer late payment charges, and other miscellaneous items.
2011 IN REVIEW
SUMMARY OF RESULTS
| (in millions $, except EPS and
|2011 results|| 2011 outlook
(at August 4, 2011)
|Revenues||1,765.6||1,700 to 1,780||1,782.6|
|EBITDA1||594.4||580 to 610||564.8|
|EPS2||$2.55||$2.40 to $2.80||$2.18|
|Free cash flow3||129.8||110 to 150||34.1|
|Capital expenditures/revenues||16.3%||16% to 18%||20.3%|
|1||EBITDA (earnings before interest, taxes, depreciation and amortization, and other income (expense)) is a non-IFRS measure of performance. See the section titled "Non-IFRS measures of performance" for further information.|
|2||Earnings per share ("EPS") are based on weighted average shares outstanding of 65.5 million and 64.7 million for the twelve months ended December 31, 2011 and December 31, 2010, respectively. The increase in the number of weighted shares outstanding is mainly due to participation in our dividend reinvestment plan ("DRIP").|
|3||We define free cash flow as cash flows from operating activities, less capital expenditures, and excluding changes in working capital. See the section titled "Non-IFRS measures of performance" for further information.|
On August 4, 2011, we issued our improved financial guidance to reflect MTS Allstream's better-than-expected results in the first half of 2011; our 2011 results were in line with that updated outlook in 2011. Operating revenues decreased $17.0 million, or 1.0% over 2010, mainly due to a decrease in local access, long distance, legacy data and other revenues, which more than offset increases in wireless revenues and broadband and converged IP revenues.
MTS Allstream's EBITDA increased $29.6 million in 2011, or 5.2% over last year. The year-over-year EBITDA increase in 2011 was mainly due to increased wireless revenues, increased converged IP revenues, increasing Allstream margins, and lower restructuring costs, partly offset by declining revenues from legacy lines of business. EPS increased by $0.37, or 17.0% in 2011 when compared to 2010 mainly due to increased EBITDA and other income when compared to 2010.
Capital expenditures were $288.0 million in 2011, representing a capital intensity ratio of 16.3%. Capital expenditures were favourably impacted by $18.5 million in adjustments related to a scientific research & experimental development investment tax credit ("SR&ED ITC") recognized in 2011. Excluding the impact of this ITC, the capital intensity ratio was 17.4%, down from 20.3% in 2010 related to our wireless 4G network build that was completed in the first quarter of 2011. Free cash flow for 2011 was up $95.7 million due to higher EBITDA, lower capital spending, and lower pension solvency funding, partly offset by higher wireless costs of acquisition and a one-time $4.0 million charge related to the settlement of an Ontario Sales Tax audit, when compared to 2010.
KEY DEVELOPMENTS IN 2011
Launch of 4G wireless network
On March 31, 2011, MTS launched a new 4G wireless network across Manitoba. Our 4G wireless network enabled us to strengthen MTS's already advantageous position of being the only full service provider in Manitoba. The 4G network provides high-speed data coverage that is 35% larger and delivers speeds that are up to seven times faster than was previously possible. We can now deliver cellular voice and high-speed mobile data coverage of up to 21 Mbps to 97% of Manitobans. We developed our 4G wireless network through a strategic arrangement with Rogers Wireless that saw both companies share the cost to deploy a 4G wireless network across Manitoba; our customers can now access the best national and international roaming capabilities with Rogers Wireless as our primary roaming partner.
Development of LTE wireless network
In September 2011, we announced our plans to deploy Long Term Evolution ("LTE") technology in Winnipeg and Brandon in 2012, which will allow MTS to offer cellular voice and high-speed mobile data speeds of up to 75 Mbps. Planning and infrastructure development for the initial urban LTE deployment was undertaken in 2011. We expect to invest $20 million to $25 million for LTE technology in 2012; this capital investment will be accommodated within our normal capital funding envelope.
At MTS Allstream, we are committed to remaining a leading national telecommunications provider and the market leader in Manitoba. To this end, we concentrated on three strategic objectives in 2011, and by meeting these strategic objectives, we continued to produce strong cash flows in support of our dividend policy. In 2011, we made the following progress on our three strategic objectives:
|1.|| Maintain our industry-leading position in Manitoba.
In Manitoba, we are the market leader because of our strong brand recognition, customer loyalty, exclusive distribution channels, product leadership, and unmatched bundling capabilities. To maintain our market leadership, we continue to enhance our unique bundling capability by investing in the reach and quality of our wireless and broadband networks.
|We continue to be the only provider in Manitoba that can include all major telecommunications products, including wireless, in our bundle offerings. In 2011, our wireless subscribers increased by 2.6% and our average revenue per user ("ARPU") increased by 4.1%, when compared to 2010. We launched our 4G wireless data network in Manitoba on March 31, 2011; this wireless network delivers high-speed data to 97% of Manitoba's population and, combined with our exclusive distribution channels, gives us a very strong competitive presence in Manitoba. MTS's extensive 4G wireless network, together with the planned deployment of LTE technology in Winnipeg and Brandon in 2012, is expected to meet demand for smartphones and to drive continuing growth in wireless data services for years to come.|
|In 2011, MTS's ARPU for high-speed Internet and IPTV services increased by 8.1% and 16.1%, respectively, driven by disciplined marketing that resulted in fewer customers on promotional plans, while the subscriber bases rose by 2.9% and 6.5%, respectively. As at December 31, 2011, 64% of our IPTV customer base is now subscribing to our premium IPTV service, Ultimate TV, which is available to over 95% of households in each of Winnipeg, Portage La Prairie and Brandon. In 2010, we announced plans to invest $125 million over the next five years to expand our fibre-to-the-home reach, beginning with rural Manitoban communities where MTS faces cable telephony competitors, but does not currently have a VDSL network. Our expanded fibre-to-the-home network provides residents in rural Manitoba with access to some of the fastest high-speed Internet speeds and our premium IPTV service. The first community to receive FTTH under this initiative was Selkirk, Manitoba beginning in 2010. In 2011, we expanded the number of homes passed with fibre in Selkirk to cover 96% of the city, and have connected 89% of MTS customers with nearly one third of those connected households now subscribing to Ultimate TV. In 2011, we deployed FTTH to Dauphin and Steinbach, Manitoba. We plan to deploy fibre to six more communities in 2012. Our fibre-to-the-home network is expected to improve MTS's competitive position and provide an opportunity for revenue growth by offering services that were not previously available to those communities. As part of this initiative, we expect to deploy fibre to approximately 120,000 homes in over 20 Manitoba communities, including some parts of Winnipeg.|
|2.|| Drive growth in IP-based services and improve profitability.
In 2011, we connected 299 buildings to our network with fibre, extending our on-net reach and providing us with significant incremental high margin revenue opportunities. Allstream's fibre-fed buildings now total 2,388 as at December 31, 2011. Due to our targeted sales approach, Allstream's EBITDA margin and gross margin improved 3.9 and 3.2 points to 13.5% and 57.5%, respectively, over 2010.
|Allstream continued to grow converged IP revenues, achieving 8.7% growth in 2011 when compared to 2010. Converged IP sales levels increased 21% year over year, as a result of our improved sales and marketing strategy. Through our new building programs, the transitioning of existing customers to IP services, and new customer sales into existing buildings, we have maintained high levels of sales activity and are well positioned to achieve strong IP revenue growth in 2012. Allstream's performance is expected to be positively affected by continued growth in market demand for IP services.|
|3.|| Deliver superior customer service, while aggressively improving our cost structure.
In 2011, we remained committed to delivering superior customer service and improving the customer experience. Coupled with improving its delivery metrics, MTS improved on its customer satisfaction performance relative to its 2010 results and exceeded its 2011 targets for customer service. Allstream continued to be an industry leader in customer satisfaction and, in 2011, improved on its customer service and delivery metrics when compared to the same period of 2010.
|In 2011, we reached our target range of $25 million to $35 million in annualized cost savings for the year. Through operational efficiency programs mainly associated with legacy product lines and restructuring initiatives, our total annualized cost savings at December 31, 2011 was $28.8 million.|
DISCUSSION OF OPERATIONS
CONSOLIDATED STATEMENTS OF INCOME
|(in millions $, except EPS)||2011||2010||% change|
|Depreciation and amortization||298.9||290.7||2.8%|
|Other income (expense)||2.5||(5.2)||n.m.|
|Income before income taxes||232.5||204.9||13.5%|
|Income tax expense||65.4||63.6||2.8%|
|Net income for the year||167.1||141.3||18.3%|
|Other comprehensive loss for the year, net of tax||(143.1)||(110.6)||29.4%|
|Total comprehensive income for the year||24.0||30.7||(21.8%)|
|1||Earnings per share is based on weighted average shares outstanding of 65.5 million and 64.7 million for the twelve months ended December 31, 2011 and December 31, 2010, respectively. The increase in the number of weighted shares outstanding is mainly due to participation in our DRIP.|
|(in millions $)||2011||2010||% change|
|Total operating revenues||1,765.6||1,782.6||(1.0%)|
Growth in strategic services (including wireless, broadband and converged IP) was offset by declines in traditional services. In 2011, MTS operating revenues increased by $21.8 million year over year, driven by 8.6% growth in wireless revenues and 10.7% growth in broadband and converged IP revenues, partly offset by declines in local access, long distance and legacy data, and other revenues. At Allstream, 8.7% growth in high-margin converged IP revenues partly offset the 9.2% revenue declines that were expected for our unified communications and security, local, long distance and legacy data, and other lines of business, resulting in a $38.8 million revenue decrease at Allstream when compared to last year.
Operations expense decreased by $46.6 million in 2011 when compared to 2010, mainly due to lower restructuring costs and lower operating costs from operational efficiency and restructuring initiatives completed in previous periods, along with lower direct costs as a result of higher margins and lower revenues at Allstream.
In 2011, we achieved annualized cost savings of $28.8 million, thus achieving our target range of $25 million to $35 million. These savings are a result of our operational efficiency programs mainly associated with legacy product lines and restructuring initiatives. Restructuring expenses were $6.7 million in 2011, which is lower than our total restructuring and other expenses of $35.5 million in 2010.
|(in millions $)||2011||2010||% change|
MTS Allstream's EBITDA increased $29.6 million in 2011 due to Allstream's continued focus on converged IP revenues and improving margins, growth in MTS revenues, strong management of our cost structure (from operational efficiency initiatives implemented in previous years), as well as lower restructuring expenses.
At MTS, the increase in EBITDA was due to higher revenues from wireless, IPTV and Internet lines of business, partly offset by increased operations expense associated with our growth lines of business and a decrease in revenues in legacy lines of business. MTS achieved an EBITDA margin of 50.8% in 2011.
Allstream's EBITDA in 2011 was up 34.0% or $27.5 million year over year. The increase in EBITDA was mainly due to lower restructuring costs, lower operating costs, and improved margins in 2011 compared to the prior year. We continued to focus on increasing on-net IP revenues, managing the decline of low-margin, off-net and legacy revenues, and removing costs from the business. Direct costs decreased by 11.2% in 2011 compared to 2010, while revenues decreased by 4.6% as part of Allstream's plan to exit less profitable lines of business, such as global hubbing and low margin equipment sales. Overall, Allstream's gross margin increased to 57.5% in 2011 from 54.3% in 2010.
Depreciation and amortization
Depreciation and amortization expense increased by $8.2 million in 2011 compared to 2010, reflecting growth in our asset base and higher amortization of our wireless costs of acquisition related to wireless data growth, partly offset by the impact of adjustments to SR&ED ITC in 2011.
Other income (expense)
Other income was $2.5 million in 2011 compared to other expense of $5.2 million in the previous year. This increase was mainly due to losses related to Allstream's sale of its non-telecommunications information technology consulting group in 2010, and a one-time recovery of a previous year's expenditure in the first quarter of 2011.
Finance costs were comparable to the prior year.
Income tax expense
Income tax expense increased by $1.8 million in 2011 compared to 2010, mainly due to higher income before taxes, partly offset by lower tax rates. The Company continues to have substantial capital cost allowance ("CCA") pools and tax losses. By utilizing our CCA deductions and tax losses, we expect to fully offset our taxable income and not pay cash taxes before 2019, with the present value of our tax asset being approximately $330 million.
Net income and EPS
Net income and EPS increased by $25.8 million and $0.37, respectively, in 2011 compared to 2010, mainly due to EBITDA growth and an increase in other income, partially offset by higher depreciation and amortization expense, increased income taxes, and increased finance costs.
Other comprehensive loss
Other comprehensive loss represents actuarial gains and losses arising from changes in the present value of our defined benefit plans' obligations and changes in the fair value of our defined benefit plans' assets. These items are recognized in other comprehensive income net of tax, and therefore, do not have an impact on our net income or EPS.
MTS operating revenues
|(in millions $)||2011||2010||% change|
|Broadband and converged IP||201.1||181.7||10.7%|
|Unified communications, security and monitoring||33.2||35.6||(6.7%)|
|Long distance and legacy data||85.5||89.4||(4.4%)|
|Total MTS operating revenues||963.8||942.0||2.3%|
Wireless revenues increased $28.1 million in 2011 when compared to 2010, mainly due to higher wireless ARPU and growth in our subscriber base. Wireless ARPU was $59.66 in 2011, an increase of 4.1% from $57.32 in 2010. Year-over-year wireless ARPU growth was driven by higher wireless data usage, resulting in an increase in wireless data revenues of 46.1% in 2011 when compared to the prior year. At December 31, 2011, we had 496,432 wireless subscribers, a 2.6% increase over the prior year. At December 31, 2011, 41% of post-paid subscribers had data plans, a significant increase from 27% in 2010. Nearly 70% of all upgrades and new activations in 2011 were data plans. The launch of our 4G wireless network and the release of both the iPhone 4 and later in the year the iPhone 4S have been significant contributors to the increase in data plans, higher ARPU, and the overall success of our wireless line of business. Our advanced wireless networks, coupled with increasing data usage among subscribers, are expected to contribute to strong growth in wireless revenues in the future.
Broadband and converged IP
Broadband and converged IP revenues increased $19.4 million due to IPTV and high-speed Internet revenue growth. Revenues from our IPTV services increased by $11.4 million, or 19.3% in 2011 when compared to 2010, due to year-over-year ARPU and subscriber growth. Our ARPU for IPTV services was $62.38 for 2011, an increase of 16.1% from $53.71 in 2010, mainly due to our efforts to reduce the number of subscribers on promotional plans, more subscribers on our premium television service, and price increases. At December 31, 2011, we had a total of 95,476 IPTV subscribers, representing a year-over-year increase of 6.1%. Of these customers, 64% subscribe to our premium IPTV service, Ultimate TV, which generates higher ARPU compared to our Classic TV service.
Internet services revenue grew $6.5 million, or 6.8%, in 2011, reflecting higher ARPS due to fewer subscribers on promotional plans, price increases, and subscriber growth. At December 31, 2011, our high-speed Internet subscriber base was 188,946, an increase of 2.9% from the prior year.
Revenues from MTS converged IP services increased $1.5 million, or 5.7%, in 2011 due to increased demand for MPLS services.
Unified communications, security and monitoring
Unified communications revenues decreased $2.4 million in 2011 due to the timing of equipment sales. Security and monitoring services revenues for 2011 remained consistent with the prior year.
Local access services revenues decreased $18.6 million mainly due to a 5.1% decline in residential local access lines resulting from local competition and wireless substitution, a 2.7% decrease in business local access lines, and a $5 million one-time deferral account adjustment in 2010. Because of our unrivaled bundled offers, we are experiencing one of the lowest rates of decline in Canada, a trend that is expected to continue.
Long distance and legacy data
Long distance and legacy data services revenues decreased $4.7 million, or 8.2% in 2011 as a result of customer migration to lower-priced long distance plans and reduced volumes as customers continue to substitute long distance calling with alternative methods of communication, such as email, text messaging, and social networking. Legacy data services revenues increased $0.8 million, or 2.5%, in 2011 due to an increase in wholesale data services, partly offset by migration to IP products and the decommissioning of legacy products.
The other services revenues were down $0.8 million in 2011 due to fewer construction projects being performed in 2011 than in 2010.
Allstream operating revenues
|(in millions $)||2011||2010||% change|
|Unified communications and security||87.1||90.1||(3.3%)|
|Long distance and legacy data||209.6||239.9||(12.6%)|
|Total Allstream operating revenues||801.8||840.6||(4.6%)|
Converged IP revenues increased $18.8 million in 2011, due to 21% growth in IP sales, when compared to the prior year. The revenue increase generated by strong IP sales wins was partly offset by an increase in disconnects related to a decision by a Government of Ontario department to change their policy on the procurement of telecommunications services for individual doctors' offices and clinics. While this department will continue to be a significant customer, this represents a decrease of approximately $4.7 million in 2011 when compared to 2010. Adjusting for the impact of this contract, converged IP revenues would have grown 10.9% in 2011 when compared to 2010. Allstream is extending its network and bringing more of the potential market into the network's proximity. Over the past year, the number of Allstream fibre-fed buildings has grown by 14.3% to 2,388 buildings.
Unified communications and security
Unified communications and security services revenues decreased $3.0 million in 2011; an increase in hosting revenue offset the decrease in one-time product sales due to management's actions to exit low-margin resale product lines in unified communications.
Local access revenues declined $2.2 million primarily due to decreases in local access rates and volumes, partially offset by continued growth in the number of small- and medium-sized business customers subscribing to bundled services.
Long distance and legacy data
Long distance services declined $13.7 million, or 11.6%, mainly due to lower domestic and cross-border rates along with decreased volumes in the domestic, cross-border and international markets.
Legacy data revenues decreased $16.6 million, or 13.6%, in 2011 mainly due to our customers' continued transition to broadband and other IP-based services. We continue to implement our strategy to improve profitability of our legacy services by exiting low-margin services, reducing costs, and transitioning our customers to IP-based services.
As of January 1, 2010, certain revenues previously classified as long distance and legacy data revenues have been reclassified as other services revenues. This change has been presented on a prospective basis.
Other services revenue decreased $22.1 million in 2011 due to lower international rates for global hubbing. Continued decreases are expected as part of our decision to reduce our participation in low-margin lines of businesses.
SELECTED ANNUAL AND QUARTERLY FINANCIAL INFORMATION
Selected annual information
(in millions $, except EPS and cash dividends declared per share)
|Total long-term debt, including current portion||1,020.8||1,040.6||1,051.5|
|Basic and diluted EPS||$2.55||$2.18||$1.57|
|Cash dividends declared per share||$1.70||$2.15||$2.60|
Over the past three years, operating revenues have reflected improvements in our strategic growth areas, which include MTS's wireless, high-speed Internet and IPTV services, as well as Allstream's converged IP services, offset by declines in legacy telecommunications services. Since 2009, our revenue mix has changed favourably by focusing on revenues from high margin lines of business and deliberately exiting low-margin lines of business.
The increase in net income and EPS from 2010 to 2011 was mainly due to EBITDA growth and an increase in other income, partially offset by higher depreciation and amortization expense, increased income taxes, and increased finance costs. The increase in net income and EPS from 2009 to 2010 was due to the impact of the conversion from CGAAP to IFRS. Excluding this change in accounting, net income and EPS were stable from 2009 to 2010. Further information regarding the financial impact of our conversion to IFRS is available in note 24 to the consolidated financial statements for the year ended December 31, 2011.
Total assets remained consistent from 2010 to 2011. The decrease in total assets from 2009 to 2010 was due to the impact of the conversion from CGAAP to IFRS. Excluding this change in accounting, total assets were stable from 2009 to 2010.
In 2009, and the first two quarters of 2010, the Company's quarterly dividend as approved by the Board of Directors was $0.65 per outstanding common share. On August 6, 2010, the Board of Directors approved an update to the Company's 2010 financial outlook, and set a new dividend payout ratio target of 70% to 80% of free cash flows from its Manitoba operations. As a result, the Board of Directors set the quarterly dividend to $0.425 per outstanding common share for the third and fourth quarters of 2010, which continued for all four quarters in 2011.
A comparison of our 2011 results and our 2010 results are discussed in more detail throughout this document.
Selected quarterly information
Our financial results for our eight most recently completed quarters are presented below:
|(in millions $, except EPS)||Q4 2011||Q3 2011||Q2 2011||Q1 2011|
|Basic and diluted EPS1||$0.56||$0.56||$0.76||$0.67|
| Q4 2010
|| Q3 2010
|| Q2 2010
|| Q1 2010
|Basic and diluted EPS1||$0.46||$0.76||$0.54||$0.42|
|1||EPS is based on weighted average shares outstanding of 65.9 million for the three months ended December 31, 2011, 65.7 million for the three months ended September 30, 2011, 65.4 million for the three months ended June 30, 2011, 65.2 million for the three months ended March 31, 2011, 64.9 million for the three months ended December 31, 2010, and 64.7 million for the three months ended September 30, 2010, June 30, 2010, and March 31, 2010.|
Our consolidated financial results for the eight most recently completed quarters reflected the following significant transactions and trends:
- In general, over the last eight quarters, operating revenues reflected strong growth in strategic services and declines in total legacy services revenues. We have seen an increase in demand for IP-based telecommunications services, with Allstream showing quarterly sequential IP revenue growth beginning in the third quarter of 2010. Allstream revenues, particularly those generated from our long distance and legacy data services and our unified communications portfolio, were negatively impacted by the economic downturn and slow pace of economic recovery from the second quarter of 2009 to the second quarter of 2010.
- Over the past several years, we have improved our cost structure through operational efficiency and restructuring initiatives. Expenses related to these ongoing cost reduction initiatives resulted in decreases in EBITDA. In 2011, restructuring expenses were $1.4 million in the third quarter and $5.3 million in the fourth quarter. In 2010, restructuring and transition expenses were $12.6 million in the first quarter, $8.2 million in the second quarter, $1.7 million in the third quarter, and $13.0 million in the fourth quarter.
- In the second quarter of 2011, we recognized $20.7 million of additional SR&ED ITC due to the completion of Canada Revenue Agency's ("CRA") audit for the 2005 to 2008 taxation years. The impact of the SR&ED ITC reduced depreciation expense by $10.3 million in the second quarter of 2011, partially offset by income tax expense of $2.7 million, resulting in an increase to net income of $7.6 million.
- In the third quarter of 2010, the Canadian Radio-television and Telecommunications Commission ("CRTC") reduced our requirements to rebate customers by $5.0 million related to a previous decision on the dispersal of deferral account funds, resulting in an increase in operating revenues.
- In 2010, MTS executed a comprehensive settlement agreement with Bell Mobility in respect of various historical disputes. Under this settlement, we received a $10.0 million one-time cash payment from Bell Mobility in the third quarter of 2010, which resulted in an increase in EBITDA.
- In 2010, we completed the sale of the majority of our Allstream non-telecommunications IT consulting group. We recognized losses, net of tax, associated with this line of business in the amounts of $1.0 million and $1.4 million in the first and second quarters of 2010, respectively. These losses resulted in decreases in net income and EPS.
Fourth quarter in review
| (in millions $, except EPS and
|Q4 2011||Q3 2011||Q2 2011||Q1 2011||Q4 2010|
|Free cash flow||18.3||29.3||57.8||24.4||(64.1)|
|1||EPS is based on weighted average shares outstanding of 65.9 million for the three months ended December 31, 2011, 65.7 million for the three months ended September 30, 2011, 65.4 million for the three months ended June 30, 2011, 65.2 million for the three months ended March 31, 2011, and 64.9 million for the three months ended December 31, 2010.|
Fourth quarter consolidated revenues were in-line with expectations for the year, down $7.3 million, or 1.6%, when compared to the fourth quarter 2010. In the fourth quarter of 2011, MTS revenues increased $6.4 million year over year as growth in wireless, broadband and converged IP was partly offset by declines in local, long distance, legacy data services and other revenues. This increase was offset by a decrease of $13.7 million in revenues at Allstream due to declines in long distance, legacy data services, unified communications and other revenues, partly offset by growth in converged IP services.
Our quarterly operating revenues for each division are presented below:
|MTS operating revenues|
|(in millions $)||Q4 2011||Q3 2011||Q2 2011||Q1 2011||Q4 2010|
|Broadband and converged IP||52.1||51.6||49.7||47.7||46.2|
|Unified communications, security and monitoring||8.8||8.1||8.2||8.1||9.8|
|Long distance and legacy data||20.8||21.1||21.2||22.4||22.2|
|Total MTS operating revenues||245.9||243.8||239.5||234.6||239.5|
|Allstream operating revenues|
|(in millions $)||Q4 2011||Q3 2011||Q2 2011||Q1 2011||Q4 2010|
|Unified communications and security||21.0||21.8||22.2||22.1||23.8|
|Long distance and legacy data||48.5||51.4||53.6||56.1||57.6|
|Total Allstream operating revenues||193.5||199.4||204.2||204.7||207.2|
Wireless revenues at MTS were $92.8 million in the fourth quarter, a $7.3 million increase from the same period last year, mainly due to higher wireless ARPU and growth in our subscriber base. Year-over-year wireless ARPU growth was driven by higher wireless data usage, resulting in an increase in wireless data revenues of 45.5% for the three months ended December 31, 2011. Broadband and converged IP revenues were $52.1 million in the fourth quarter, up $5.9 million over the same quarter last year. This increase was mainly due to fewer subscribers on promotional plans, an increase in subscribers, and IPTV subscribers transitioning to our premium IPTV service, Ultimate TV. In the fourth quarter of 2011, MTS's ARPU for high-speed Internet and IPTV services increased by 7.9% and 16.2%, while the subscriber bases rose by 2.9% and 6.1%, respectively, when compared to the same period of the previous year.
At Allstream, converged IP revenues increased $3.7 million, or 6.6%, in the fourth quarter of 2011. We achieved over 19% growth in IP sales during the three months ended December 31, 2011, when compared to the same period last year. The revenue increase generated by strong IP sales wins was partly offset by an increase in disconnects related to a decision by a Government of Ontario department to change their policy on the procurement of telecommunications services for individual doctors' offices and clinics. While this department will continue to be a significant customer, this represents a decrease of approximately $1.8 million in converged IP revenues for the fourth quarter 2011 when compared to the same period of 2010. Adjusting for the impact of this contract, converged IP revenues would have grown 9.8% in the fourth quarter of 2011 when compared to the same period of 2010.
The $11.4 million year-over-year increase in MTS Allstream's EBITDA in the fourth quarter was mainly attributable to improving margins at Allstream, growth in MTS revenues, improvements to our cost structure, as well as lower restructuring expenses and other costs. At MTS, the $4.2 million increase in EBITDA was primarily due to higher revenues from wireless, IPTV and Internet lines of business, partly offset by increased operations expense associated with our growth lines of business. At Allstream, the $5.3 million, or 28.0% increase in EBITDA was mostly due to a decrease in direct costs and an increase in converged IP revenues. At Allstream, we continued to direct our efforts toward increasing on-net IP revenues instead of low-margin, off-net and legacy revenues.
Net income and EPS increased by $7.1 million and $0.10 in the fourth quarter of 2011 compared to the same period of 2010. These increases were mostly attributable to EBITDA growth, partially offset by higher depreciation and amortization expense.
Capital expenditures decreased $44.8 million in the fourth quarter of 2011 over the prior year mainly due to increased spending in the fourth quarter of 2010 related to our 4G wireless network build that was completed in the first quarter of 2011. Capital spending in the fourth quarter of 2011 was focused on our strategic lines of business and, due to the cyclical nature of our capital spending program, was higher in the fourth quarter when compared to prior quarters in 2011.
The $82.4 million increase in free cash flow in the fourth quarter of 2011 was mainly due to higher EBITDA, lower capital expenditures, and lower pension funding, partly offset by higher wireless costs of acquisition, when compared to the same period last year. Pension solvency funding payments were higher in the fourth quarter of 2010 due to the timing of completing and filing of the funding valuations as a result of the slow release of the new pension regulations. The regulation delay resulted in higher than normal solvency payments for the fourth quarter of 2010.
LIQUIDITY AND CAPITAL RESOURCES
SUMMARY OF CASH FLOWS
|(in millions $)||2011||2010||$ change|
|Cash flows from (used in):|
|Change in cash and cash equivalents for the year||(33.2)||(60.2)||27.0|
Cash flows from operating activities refer to cash we generate from our normal business activities.
The $65.1 million decrease in cash flows from operating activities in 2011 was mainly due to an $86.9 million change in working capital as significant accruals for the construction of our wireless 4G network build in the fourth quarter of 2010 were paid in the first quarter of 2011. Also contributing to the decrease was an increase of $17.0 million in wireless costs of acquisition, offset by an EBITDA increase of $29.6 million, and increased other income of $7.7 million.
Investing activities represent cash used for acquiring, and cash received from disposing of, long-term assets and other long-term investments.
Cash flows used in investing activities decreased by $39.2 million in 2011 when compared to 2010.
Capital spending in 2011 was focused on our strategic lines of business. At MTS, our capital spending was focused on our 4G wireless network and billing implementation, deploying fibre to the home, and increasing the functionality of our broadband products. At Allstream, we focused our capital spending on Allstream's IP fibre network where we are making targeted investments to extend fibre to select multi-tenant buildings and to enhance our Ethernet capabilities in our co-location areas.
The $73.9 million decrease in capital expenditures in 2011 was mainly due to higher capital expenditures in 2010 related to our 4G wireless network build and an $18.5 million SR&ED ITC adjustment to capital expenditures recognized in 2011. The SR&ED ITC adjustment is offset in investing activities by an $18.5 million increase in a long-term receivable relating to the SR&ED ITC reported as "Other, net". The ITC will be utilized when the Company becomes taxable in future years.
Financing activities refer to actions we undertake to fund our operations through equity capital and borrowings.
Cash flows used in financing activities decreased by $52.9 million when compared to 2010, due to a decrease in our quarterly dividend, and strong participation in our DRIP, partly offset by a net reduction in long-term debt.
In the third quarter of 2011, we successfully issued $200.0 million of seven-year 4.59% Medium-Term Notes which mature on October 1, 2018. Proceeds were used to pay the $220.0 million debt that matured on September 27, 2011.
Dividends paid decreased $42.6 million in 2011 when compared to 2010 due to a change in the quarterly dividend rate from $0.65 to $0.425, which occurred in the third quarter of 2010.
In the second quarter of 2010, we established a DRIP with a 3% discount, which enables eligible holders of the Company's common shares to automatically reinvest their regular quarterly dividends in additional common shares of the Company without incurring brokerage fees. Participation in our DRIP remained over 25% throughout 2011, which resulted in $28.1 million additional cash available for operations.
Free cash flow
Free cash flow refers to cash flows from operating activities, less capital expenditures, and excluding changes in working capital. Free cash flow is the amount of discretionary cash flow that we have for purchasing additional assets beyond our annual capital expenditure program, paying dividends, buying back shares, and/or retiring debt.
|(in millions $)||2011||2010||$ change|
|Cash flows from operating activities||386.6||451.7||(65.1)|
|Add (Deduct): Changes in non-cash working capital||31.2||(55.7)||86.9|
|Deduct: Capital expenditures||(288.0)||(361.9)||73.9|
|Free cash flow for the year||129.8||34.1||95.7|
The $95.7 million increase in free cash flow in 2011 was primarily due to lower capital spending (including the impact of SR&ED ITC adjustments), higher EBITDA, lower pension solvency funding and lower restructuring costs, partly offset by increased wireless costs of acquisition, when compared to 2010.
We have arrangements in place that allow us to access the debt capital markets for funding when required. Borrowings under these facilities typically are used to fund new initiatives, refinance maturing debt, and manage cash flow fluctuations.
|(in millions $)||Capacity|| Utilized at
December 31, 2011
|Medium term note program||500.0||200.0|
|Revolving credit facility||400.0||37.4|
|Additional credit facility||150.0||149.3|
|Accounts receivable securitization||110.0||-|
We renewed our medium term note program on August 23, 2011 for $500.0 million and we utilized $200.0 million of this facility to issue debt in September 2011. We also have a $400.0 million revolving credit facility, of which we had utilized $37.4 million at December 31, 2011 for undrawn letters of credit. We also have a $150.0 million credit facility, which is used solely for the issuance of letters of credit. As at December 31, 2011, we utilized $149.3 million of this facility for undrawn letters of credit. In addition to these programs and facilities, we have a $110.0 million accounts receivable securitization program which was unutilized at December 31, 2011. On April 22, 2011, we renewed our accounts receivable securitization program, decreasing the amount available under this facility from $150.0 million to $110.0 million.
Of the $186.7 million in total letters of credit outstanding, $155.4 million represents letters of credit issued in accordance with the Pension Benefits Standards Act, 1985 (Canada), which permits the use of letters of credit in lieu of cash funding for solvency special payments to our defined benefit pension plans, up to fifteen percent of pension plan assets. For 2012, the Company has sufficient room within this limit and intends to utilize its revolving credit facility for approximately $80 million in undrawn letters of credit to meet its total solvency funding requirements for the year.
|(in millions $)||December 31, 2011||December 31, 2010|
|Cash and cash equivalents||(16.8)||(50.0)|
|Capital lease obligations, including current portion||15.0||16.4|
|Long-term debt, including current portion||1,020.8||1,040.6|
|Debt to capitalization||56.3%||54.3%|
Our capital structure illustrates the amount of our assets that are financed by debt versus equity. Our debt to total capitalization ratio of 56.3% as at December 31, 2011 continues to represent financial strength and flexibility.
|S&P - Senior debenture||BBB (stable)||DBRS - Senior debentures||BBB (stable)|
|S&P - Commercial paper||A-2||DBRS - Commercial paper||R-2 (high)|
Two leading rating agencies, Standard & Poor's ("S&P") and DBRS Limited ("DBRS"), analyze us and assign ratings based on their assessments. We consistently have been assigned solid investment grade credit ratings. On January 30, 2012, S&P confirmed their credit ratings on our long-term corporate credit and senior unsecured debt at "BBB" and confirmed our commercial paper rating of "A-2". S&P also confirmed its outlook as stable. DBRS confirmed its ratings on December 19, 2011, for our senior debentures as "BBB" and our commercial paper "R-2 (high)". DBRS's outlook remained stable.
Outstanding share data
| As at
January 30, 2012
| As at
December 31, 2011
|Common shares outstanding||66,217,635||65,936,973|
|Stock options outstanding||2,779,294||2,813,294|
|Stock options exercisable||1,669,661||1,703,661|
|(in millions $)||2012||2013||2014||2015||2016||Beyond||Total|
Our contractual obligations as at December 31, 2011 are provided in the table above. Our long-term debt consists of medium term notes and a loan payable. We issue medium term notes and obtain loans payable for general corporate and working capital purposes, and for financing investments and additions to property, plant and equipment. We have equipment under capital leases. We rent buildings, operating facilities, construction and other equipment under operating leases. Purchase obligations include contractual commitments for services required in the normal course of operations, as well as capital purchase commitments under supply contracts and customer contracts.
Financial instruments, off-balance sheet arrangements, and other financial arrangements
Foreign currency forward contracts
We use foreign currency forward contracts to manage the foreign currency exchange expense. These instruments hedge anticipated transactions and are not recorded on our balance sheet. As at December 31, 2011, we have no outstanding foreign currency forward contracts, as anticipated hedging was completed in January. As at January 30, 2012, we had outstanding foreign currency forward contracts to purchase $54.5 million U.S. During the year ended December 31, 2011, we recorded a $0.4 million expense in other income relating to our accounting policy of adjusting outstanding foreign currency forward contracts from book value to fair value.
Accounts receivable securitization
Under the terms of our accounts receivable securitization program, we have the ability to sell, on a revolving basis, an undivided interest in our accounts receivable to a securitization trust, up to a maximum of $110.0 million. We are required to maintain reserve accounts, in the form of additional accounts receivable over and above the cash proceeds received, to absorb any credit losses on the receivables sold. We are required to maintain certain financial ratios with respect to our accounts receivables, or the cash proceeds must be repaid. We also are subject to certain risks of default which, should they occur, could cause the agreement to be terminated early. As at December 31, 2011 and 2010, the Company had no outstanding balances from its accounts receivable securitization program.
In the normal course of business and in connection with the disposition of assets, we enter into agreements providing indemnifications that may require us to pay for costs or losses incurred by the parties to these agreements. These indemnifications relate to various matters such as intellectual property right infringement, loss or damage to property, claims arising from the provision of services, violation of laws or regulations, and breaches of representations or warranties. The nature of these indemnifications prevents us from making reasonable estimates of the maximum potential amount we could be required to pay, and no amount has been recorded in the financial statements relating to these indemnifications. Historically, we have not made significant payments related to these indemnifications.
Employee future benefits
We have two contributory defined benefit pension plans and one non-contributory defined benefit pension plan. These pension plans provide pensions based on length of service and best average earnings. These pension plans are funded as determined through periodic actuarial valuations. Contributions reflect actuarial assumptions regarding salary projections and future service benefits. We also have two defined contribution pension plans which cover certain of our employees. We also provide supplemental pension arrangements and other non-pension employee future benefits that are mainly unfunded.
2012 FINANCIAL OUTLOOK
MTS Allstream's 2012 financial guidance reflects the continued progress on the execution of its three strategic objectives and the overarching corporate strategy. MTS Allstream's financial guidance for 2012 is as follows:
| (in millions $, except EPS and
|2012 outlook||2011 results|| 2011 outlook
(at August 4, 2011)
|Revenues||1,675 to 1,775||1,765.6||1,700 to 1,780|
|EBITDA||590 to 630||594.4||580 to 610|
|EPS||$2.20 to $2.65||$2.55||$2.40 to $2.80|
|Free cash flow1||110 to 150||129.8||110 to 150|
|Capital expenditures2||18% to 20% of revenues||16.3% of revenues||16% to 18% of revenues|
|1||Free cash flow of $129.8 million in 2011 includes the impact of an $18.5 million SR&ED ITC adjustment to capital expenditures recognized in 2011; the free cash flow guidance range for 2012 does not contemplate a similar adjustment.|
|2||The actual increase in capital spending in 2012 over 2011 is expected to be less than $20 million after adjusting an $18.5 million SR&ED ITC adjustment to capital expenditures received in 2011. Excluding the impact of the SR&ED ITC, capital intensity would have been 17.4% in 2011. Capital expenditures in 2012 are expected to include the continued expansion of the FTTH network to six additional communities, the deployment of LTE technology in Winnipeg and Brandon, and the continued expansion of Allstream's fibre-fed buildings.|
MTS Allstream expects consolidated revenue in 2012 to be between $1,675 million to $1,775 million, compared with revenue of $1,765.6 million in 2011. Strong wireless, broadband and converged IP revenue growth in 2012 is expected to be offset by declines in revenues from traditional services, such as local access, long distance and legacy data services, while the Company strategically exits low-margin and declining lines of business.
With higher revenues from strategic services and a continued focus on cost reduction, MTS Allstream is targeting EBITDA to be between $590 million to $630 million in 2012, consistent or up from 2011 EBITDA of $594.4 million.
MTS Allstream is targeting EPS of $2.20 to $2.65 in 2012 due to higher EBITDA, offset by an increase in depreciation and amortization expense, reflecting growth in our asset base, higher amortization of wireless costs, and the impact of a one-time SR&ED credit received in 2011.
MTS Allstream expects to be able to generate $110 million to $150 million of free cash flow in 2012, which will provide the Company with the financial flexibility to respect its dividend policy while maintaining strategic investments in growth lines of business. Total capital spending is expected to be 18% to 20% of revenues in 2012, including investments in fibre to the home in Manitoba and LTE technology in Winnipeg and Brandon. The Company's 2012 capital program also includes funding for more strategic investments in Allstream's national IP network to connect fibre to an additional 300 buildings.
CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS
The preparation of our consolidated financial statements in accordance with IFRS requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We make these estimates and assumptions based on reasonable methodologies, established processes and comparisons to industry standards. We continuously evaluate these estimates and assumptions, which rely on the use of professional judgment. Because professional judgment involves inherent uncertainty, actual results could differ from our estimates. Each of the accounting estimates and assumptions identified below affects both of our operating segments, except for the estimates relating to our deferred tax assets, which affect our company on a consolidated basis only. Our estimates, assumptions and methods have been applied consistently.
Valuation of accounts receivable
As we expect that a certain portion of receivables from customers will not be collected, we maintain an allowance for doubtful accounts. If circumstances related to specific customers change, economic conditions change, or actual results differ from expectations, our estimate of the recoverability of receivables could fluctuate from that provided for in the consolidated financial statements. A change in our estimate could impact bad debt expense and accounts receivable.
Property, plant and equipment
Property, plant and equipment are amortized on a straight-line basis over their estimated period of future benefit. We review these estimates on an annual basis, or more frequently if events during the year indicate that a change may be required, with consideration given to technological obsolescence, competitive pressures, and other relevant business factors. A change in our estimate could impact depreciation expense and the carrying value of property, plant and equipment.
Useful lives of definite life intangible assets
Intangible assets with a definite useful life are depreciated on a straight-line basis over their estimated period of future benefit. We review these estimates on an annual basis, or more frequently, if events during the year indicate that a change may be required, with consideration given to customer churn, industry standards and other relevant business factors. A change in estimate could impact amortization expense and the carrying value of definite life intangible assets.
Goodwill and indefinite life intangible assets
Goodwill and indefinite life intangible assets are tested for recoverability on an annual basis or earlier when events or changes in circumstance indicate that the carrying value might not be recoverable. The recoverable amount of each cash-generating unit is determined based on value in use calculations. These calculations require the use of estimates, including our expectations of revenues and operating costs and assumptions of growth rates. A change in our estimates could impact the carrying value of goodwill and indefinite life intangible assets.
Deferred tax assets
We have deferred tax assets resulting from net operating loss carry forwards and deductible temporary differences, which, to the extent utilized, will reduce future taxable income. Realization of these deferred tax assets is dependent on our ability to utilize the underlying future deductions against future taxable income. In assessing the carrying value of the deferred tax assets, we make estimates and assumptions of future taxable income using internal management projections, the carry forward period associated with the deferred tax assets, the nature of income that may be used to realize the deferred tax assets, future tax rates, and ongoing audits by CRA. A change in our assessment of any of these factors could affect the value of our deferred tax asset and related income tax expense. CRA audits currently are underway for the years 2001 to 2006. These audits include a review of loss carry forwards accumulated by Allstream Inc. prior to its acquisition by the Company in 2004.
When recognizing decommissioning provisions, we are required to make estimates of the probability of retiring assets, the timing and amount of retirement costs, and the discount factor applied to determine fair value. Our estimates of probability and the timing and amount of costs are subject to change, and are reviewed annually or more frequently if events during the year indicate that a change may be required.
We provide pension, supplemental pension and other non-pension employee future benefits to our employees. The determination of benefit expense and benefit obligation associated with employee future benefits requires the use of certain actuarial and economic assumptions, such as the discount rate to measure benefit obligations, the expected rate of return on plan assets, expected future salary increases and future mortality rates. A change in estimate or assumptions could affect benefit expense and the present value of the defined benefit obligation.
CHANGES IN ACCO UNTING POLICIES
2011 adoption of IFRS
In 2008, the Canadian Accounting Standards Board confirmed January 1, 2011 as the date for IFRS to replace Canadian GAAP for publicly accountable enterprises. Our annual consolidated financial statements for the year ended December 31, 2011 represent the initial annual presentation of our results and financial position under IFRS. In May 2011, the Company filed its initial interim condensed consolidated financial statements for the three months ended March 31, 2011 under IFRS. We have applied the same accounting policies throughout 2011 in preparing our annual and interim consolidated financial statements. These accounting policies, along with further information regarding the financial impact of our conversion to IFRS, are available in notes 2 and 24, respectively, to the annual consolidated financial statements for the year ended December 31, 2011.
NON-IFRS MEASURES OF PERFORMANCE
In this MD&A, we provide information concerning EBITDA and free cash flow because we believe investors use them as measures of our financial performance. These measures do not have a standardized meaning as prescribed by IFRS and are not necessarily comparable to similarly titled measures used by other companies.
We define EBITDA as earnings before interest, taxes, depreciation and amortization, and other income (expense). EBITDA should not be construed as an alternative to operating income or to cash flows from operating activities (as determined in accordance with IFRS) as a measure of liquidity.
Free cash flow
We define free cash flow as cash flows from operating activities, less capital expenditures, and excluding changes in working capital. Free cash flow is the amount of discretionary cash flow that we have for purchasing additional assets beyond our annual capital expenditure program, paying dividends, buying back shares, and/or retiring debt.
RISKS AND UNCERTAINTIES
Risk evaluation processes
Risk management practices are part of our standard business operations. Identifying and managing our principal risks forms part of our management's regular business planning process because risks, as well as associated opportunities, form the basis of many aspects of the Company's future profitability.
We implement our risk management program across all areas of our businesses. Our program undertakes to identify and assess the principal risks associated with our strategic objectives, and considers the activities being taken to mitigate them. The program is managed through an executive-level strategic risk committee, in conjunction with our enterprise risk management (ERM) team.
Annually we conduct a formal "risk assessment" process that is directly linked to our business plan, and regular updates are performed throughout the year to identify potential emerging or previously unidentified risks. Our ERM team plays a key role in ensuring management follows appropriate processes in completing these risk assessment reviews. The outcomes are formalized into reports, which are reviewed by executive management during sessions dedicated to risk evaluation. Executive management provides its input, following which the reports are finalized and the results are presented to our Board of Directors.
The Charter of our Audit Committee requires an annual review of our risk management program for the identification and management of our principal risks and respective mitigation strategies. As a result, the Audit Committee must be satisfied with two procedural matters. First, they assess whether our risk management program is appropriate. Second, with the support of the ERM team, they ensure that each of the key risks and associated mitigations identified by management are delegated for more detailed review, oversight and monitoring by either the full Board, or one of the Board's standing Committees.
In addition, the Charter of our Board requires all Directors be involved in the monitoring of all of the Company's key risks and their respective mitigation plans. Our Directors must have a solid and substantive understanding of the principal risks facing the Company, and therefore a majority of board and committee meetings have agenda items devoted to the discussion of these risks.
Our Board believes that risks and opportunities are related, and therefore need to be considered together. Therefore, when the Board or a Committee is asked to approve key strategic matters (such as budgets, Outlook or decisions on important projects), a discussion surrounding the associated risks and opportunities also occurs. In that sense, risks and the associated mitigations are an integral and necessary part of normal business planning.
The risks and uncertainties summarized below highlight the more important and relevant factors that could significantly affect our financial results and operations. Our executive management has reviewed these risk factors and believes that they are a fair and comprehensive summary of principal risks facing the Company and the mitigation plans in place to manage them. By their nature, however, sometimes risks manifest themselves in ways that are not expected. As such, the following is not intended to represent an exhaustive list of all potential issues that could significantly affect our financial results.
Our primary risks come from our competitors. Like all of our industry peers, both MTS and Allstream operate in highly competitive environments. We have many competitors, and changes in technologies are making it easier for others to enter our markets. Although MTS and Allstream operate in different competitive markets, the primary risk for both divisions is that current or future competitors will provide services comparable or superior to those we provide, or at lower prices, adapt more quickly to evolving industry trends or changing market requirements, introduce competing services or execute better on their business plans. The products and services we sell have increasingly short "lifecycles", meaning that - even when we successfully introduce and compete with a particular product or service - its replacement or the next generation product or service is either in development or just about to be rolled out.
We have always been vulnerable to competition because many of our competitors are significantly larger than us and therefore possess a scale advantage, have greater access to financial resources and are better able to enter into exclusive or preferred arrangements with suppliers. All of these factors could adversely affect our market share and results of operations.
We spend considerable time thinking about how we can best mitigate competitive risks. All of our detailed and business plans and go-to-market strategies are created with the primary objective of sustaining and growing our businesses, notwithstanding these intense competitive pressures.
Our primary competitor in the Manitoba wireless market is Rogers Wireless, and to a lesser extent Telus and Bell Canada's Virgin Mobile and PC Mobile brands. In 2008, Shaw and Globalive, two "new entrant" companies, acquired spectrum within Manitoba. Although Shaw has since announced it does not currently intend to deploy mobile wireless services, Globalive could soon launch wireless operations in Manitoba, and Shaw will deploy a series of wireless "hot spots" in Manitoba using unlicensed WiFi spectrum. In addition, Telus is expanding its network footprint in Manitoba, which it shares with Bell Canada. Recently we successfully deployed a joint 4G network with Rogers Wireless, which remains the most comprehensive mobile wireless network in Manitoba. Many of our current or future mobile wireless competitors have announced their intention to deploy or have started the deployment of LTE networks in major Canadian urban centres which we anticipate would include Winnipeg over time, while MTS has announced plans to deploy LTE in Winnipeg and Brandon beginning in 2012. LTE will initially offer faster mobile data speeds than our existing 4G network, but is expected to further evolve to offer even higher data speeds and support for voice (VoLTE) services. The ultimate scope of deployment of LTE within Manitoba (by ourselves or our competitors) is currently unknown, and may depend on the rules set by Industry Canada in respect of the 700 MHz spectrum auction (refer to the Our regulatory environment section in our MD&A for further details). The speed and scope of the LTE deployment, as well as the general rapid evolution of mobile wireless technologies, creates substantial risks and opportunities for MTS's wireless business, which is material to our consolidated results. It is capital intensive to deploy new wireless networks, and launching wireless services based on these new networks contains risks associated with technological issues, access to cost effective wireless roaming outside Manitoba, and having access to new advanced wireless devices. In addition, the growing number of substitutes for wireless services, particularly as more smartphones can operate on WiFi, could have a negative impact on our wireless business.
Demand for wireless data is increasing at an exponential rate. Our ability to meet this demand in the future is not certain, and even if we can, we cannot predict the cost to do so. The inability to keep up with the demand for wireless data capacity could have an adverse effect on our business and financial results.
Spectrum is a finite and scarce resource that can be expensive to obtain, if it is available at all, and the failure to acquire or maintain spectrum could significantly affect our ability to deploy new mobile wireless technologies or service existing customers with existing technologies, which could materially affect our operations and consolidated profitability. Specifically, the forthcoming 700 MHz auction creates a new series of risks for our MTS division. If we are successful in obtaining this spectrum, it could require us to make a material one-time payment that was not contemplated in our financial plans. If we are unsuccessful in obtaining this spectrum, this could force us to spend considerable new capital to build more towers in order to deploy LTE using other spectrum due to inferior propagation characteristics. Finally, there is also a risk that 700 MHz spectrum is acquired by a wireless service provider that is not currently in our market, or is in our market with limited spectrum resources, and the acquisition of this spectrum by such person(s) could cause overall competition in the Manitoba wireless market to intensify materially.
Ensuring our Manitoba wireless consumers have access to wireless devices (such as smartphones) and roaming partners can be challenging, as our roaming partners need to be technologically-compatible with our network, the spectrums we use, and our wireless devices. In the past, we have been successful in securing such devices and roaming partners, however if we cannot continue this trend, our wireless business could be negatively affected, and existing or future revenue and profitability could be reduced.
Finally, we have seen a growing trend of governments passing "consumer protection" legislation that could impact our flexibility in marketing our services or requiring longer term contractual commitments from consumers.
Notwithstanding the foregoing risks, we have the most comprehensive wireless network in Manitoba (including CDMA, 4G and WiFi hotspots) and the largest market share. We are also able to leverage other services in our consumer "bundle" (home phone, Internet, television and home alarm monitoring) as part of our strategy to continue our successes in the wireless market.
Our primary competitors in the consumer and small business wireline market are the incumbent cable providers in Manitoba - Shaw and Westman Cable. Cable competition and ongoing technology substitutions (including increasingly viable wireless solutions) have contributed to the erosion of our residential network access lines, which is expected to continue over time. This erosion creates significant financial pressure that needs to be offset with cost reduction strategies and from other lines of business capable of producing profitable growth. There is no guarantee we will have the ability to continue to successfully implement these strategies in the future.
Our primary competitors in urban broadband markets are the incumbent cable providers (Shaw and Westman Cable), and wireless Internet service providers in smaller communities and rural areas. Shaw now offers some of its customers Internet speeds that are significantly faster than what we currently offer most of our customers. This development could adversely affect our ability to retain our share of this market. In addition, new wireless technologies, such as LTE, are expected to be increasingly viable substitutions for our wireline broadband offerings, which are expected to put further pressure on our business results. Our broadband business continues to perform well, despite these competitive pressures as it forms an important part of MTS's "bundle" strategy. We are also continuing to deploy more fibre (both "fibre to the home" and more "fibre to the node") to help maintain the competitiveness of our speeds and service offerings.
Our primary competitors in the television market are the incumbent cable providers (Shaw and Westman Cable) and satellite television providers (Starchoice and Bell TV), and there is a growing base of other new content providers providing substitute products such as Netflix and the streaming of "over the top" content via the Internet. Our television offering is currently available in Winnipeg and Brandon, as well as several other urban centres. Through our fibre-to-the-home deployment, we will be increasingly able to provide residents in the largest rural Manitoban communities with our digital television service. While we have an advanced television offering, there are no assurances that our past successes will continue, particularly as Shaw recently announced new features, including a whole home PVR offering that, in time, may become highly competitive with our current offering. In addition, we believe that our acquisition costs for programming, particularly sports programming, will continue to increase. We generally have a limited ability to pass these increasing costs onto our consumers, which could affect our overall profitability. Much of this content is created by and/or owned by our competitors (Bell, Rogers and Shaw), who could have conflicting interests when we negotiate for their content. The CRTC has indicated that it would act to protect broadcasting distributors such as MTS against attempts by our competitors who own this content (for use in both traditional television and mobile applications) from charging us unfair rates, or denying us access to this content altogether. At this time, it remains unclear how effective the CRTC will be in providing such protection.
Competitive carriers and service providers
Within Manitoba, we operate as the incumbent carrier and as a provider of wholesale services to other competitive carriers and service providers. In this market, we face competition from competitors operating within Manitoba. Some of these competitors such as Bell and Telus, while not incumbent network providers within Manitoba, have a national scope and larger incumbent operations in other geographies. These competitors have always been much larger than us with significantly more scale and financial resources. Most, but not necessarily all, of these national competitive carriers target our business customers. Sometimes these national/larger competitors are better positioned to acquire business customers such as banks and other "national" customers who have some locations in Manitoba, but who make "national" purchasing decisions. In addition there are an increasing number of smaller competitors and competitive network alternatives, ranged from larger competitors such as Westman Cable and Manitoba Hydro Telecom to wireless Internet service providers ("ISPs"), VoIP service providers, and municipal/public dark fiber and wireless networks. Several of these smaller competitors are non-profit cooperatives, crown agencies or publicly funded agencies, or are subsidized by government broadband programs. These smaller competitors primarily compete with MTS in the small-mid business and public service organization markets. We also face loss of customers and business revenues when our larger customers (such as public agencies or school boards) seek to acquire dark fiber and build their own networks. Nevertheless, as the incumbent carrier within Manitoba, we have the network infrastructure that allows us to be well-positioned to compete within Manitoba against both larger national carriers and smaller regional competitors.
Certain dependency on key customers
We have several large business customers (such as the Province of Manitoba and the City of Winnipeg) that form a noticeable percentage of our revenues. The loss of one or more of these key customers could adversely impact our financial results.
Highly competitive markets
Allstream serves business customers nationally. This market is highly competitive where both revenues and margins for some (but not all) of the services we offer are declining across the industry. Our largest competitors are the incumbent Canadian telecommunications companies that operate in the major urban centres, Bell and Telus. We also compete with non-incumbent telecommunications companies that are resellers and/or have a more limited network, such as various cable and hydro companies.
Few non-incumbent telecommunications companies serving business customers have been successful in generating a sustained record of profitability and taking meaningful market share from the incumbent carriers. Our current strategy aims to mitigate this by focusing on high growth products such as IP and more on the "mid-market" segment, which is subject to strong competitive pressures, but we believe is less competitive than the large business customer market.
Reliance on third parties
Business customers require services in a broad range of geographic locations, and while we have a national wireline network across Canada and in most large urban centres, there are many locations where we rely on third parties (often the incumbent phone company) for "last mile" access. In areas where we offer services using our own network, we believe we face significantly less risk in our ability to offer competitive services to our customers. As a result we adopted our "on net" strategy where we focus on selling higher margin services to customers that are served utilizing our own network, thereby reducing the need to rely on the services of other providers. In areas where we offer our services outside of our footprint, we face greater risks because we have limited control over the service levels provided to us by the incumbent carriers, who are also our direct competitors. We are also subject to the risks associated with changes to the regulatory framework, which can alter our rights to access such networks at reasonable prices, if at all. There is also a risk that, in circumstances where we operate outside of our network footprint, the incumbent carriers will increase the prices they charge us for forborne services, which could adversely affect our profitability. A recent CRTC decision allowed incumbent carriers to do this for some services commencing in 2011, which resulted in price increases. In 2013, a number of additional services will be forborne which we expect to further increase the rates we pay to other carriers. Our recent network expansion and "on-net" strategy is expected to reduce our dependency on these carriers, and make us less vulnerable to price increases. Nevertheless, a large percentage of our services are delivered to our customers using aspects of other carriers' networks, and our profitability is highly sensitive to such charges. In addition to being vulnerable to price increases by incumbents, we could be denied access to third party facilities that we may need to support our customers. Today, the CRTC does not require the incumbent carriers to provide us access to all of the services we may require to serve our customers or to provide these services to us at reasonable rates.
Significant exposure to legacy services
Allstream has financial exposure related to its "legacy services", which are operated on our older voice and data infrastructure. These legacy lines of business, such as long distance and private line data services, are in decline as our customers migrate to integrated telecommunications products such as converged IP that offer a wider range of functionalities. As a result, the revenues for legacy services are generally declining. We work to offset this by focusing on growing the sales of our IP services, which can be sold at attractive margins. Managing the transition away from legacy services can be a complicated and, at times, a capital intensive process. To manage this decline we need to reduce internal resources devoted to operating and maintaining such services. However, we continue to have customers actively using these services and therefore we need to continue to maintain these systems and platforms with fewer resources. Managing this transition is complicated, and if not managed well, could adversely affect our financial position.
Demand generation and market growth
In order to manage the decline in our legacy services, we need to create significant, off-setting growth in our IP suite of services. This is a significant challenge with material operational risk. We have had to change how we focus and motivate our sales force, and become more deliberate about what we sell, where we sell it, and to whom. We have been successful recently in driving growth, yet these growth rates may become harder to sustain as the market for IP services becomes more mature and competitive.
Dependency on key customers
We have several large customers that form a significant percentage of our revenues, and this is true for both our IP and legacy services. The loss of one or more of these key customers could adversely impact our financial results. Our recent efforts to focus on sales into the business "mid-market" will, over time, help to reduce this exposure to one or more larger customers.
Recent history of negative cash flow
Allstream has had negative free cash flow in recent years, which hinders our ability to make necessary re-investments into our business and infrastructure without using new capital. While our current business plan expects Allstream to be in a cash-flow neutral position soon, there can be no assurances that management will be able to deliver on this plan.
Changes in regulation of telecommunications and broadcast industries
The telecommunications and broadcast industries in which we operate are federally regulated. As a result, our business is directly affected by decisions made by various regulatory agencies of the Government of Canada ("the Government"), including the CRTC and Industry Canada. The outcome of regulatory reviews, proceedings, appeals and other regulatory and policy developments could have a material impact (positive or negative) on our financial position.
For MTS, changes in the regulatory environment could affect the terms and conditions under which we are able to continue to use our licensed wireless spectrum, obtain new spectrum, alter the terms under which we are required to allow others to interconnect with our network, or change how we are permitted to sell our services to consumers or at what prices. Our television offering is also subject to broadcasting regulations, and changes to these regulations could impose new operating or capital costs, or change the competitive dynamic of this market.
For Allstream, changes in the regulatory environment could affect the terms and conditions under which we are permitted to interconnect with others' networks. This has a significant impact on our profitability, as the amounts we pay to other (often incumbent) carriers are one of our most significant expenses in our business.
For a description of the principal regulatory initiatives and proceedings currently affecting our company, please see the section entitled Our regulatory environment, which are incorporated by reference as they form a significant element of the risks we face. We monitor changes in these regulations carefully and are frequent interveners in the regulatory process to ensure our perspective is understood by the regulators prior to their making decisions that will affect us.
Both MTS and Allstream are affected by general economic conditions including consumer confidence and spending, business confidence and spending, and the demand for, and prices of, products and services. During adverse economic conditions, customers and businesses may delay buying our products and services, reduce purchases, seek greater discounts or even discontinue purchases altogether. Our ability to collect receivables could also be affected, and our churn rates could increase.
It has been our past experience that Allstream's business customers are more sensitive to changes in market conditions than MTS's Manitoba-based consumers. While we cannot control general economic conditions, we continuously monitor markets and proactively take steps to adjust our business plans and marketing efforts in light of such conditions.
Financing and debt requirements
We periodically raise capital through debt and equity offerings in the capital markets, as well as through our DRIP. Our business plans and growth could be negatively affected if existing financing is not sufficient to cover funding requirements, or if we are unable to refinance maturing debt at favourable rates. We do not believe that our existing debt levels are excessive given the profitability of our operations. However, as is the case with many of our peers, our debt levels increase our vulnerability to general adverse economic and industry conditions, limit our flexibility to plan for or react to changes in our business and industry, and could place us at a disadvantage compared to our competitors with less financial leverage.
The cost and availability of any new required capital depends largely on market conditions, the outlook for our business and credit ratings at the time funds are raised, which is dependent on a wide range of factors. Specifically, our credit ratings are subject to not only our operational results, but also depend upon how third parties view us and the industry in which we operate. Changes to our credit ratings could adversely affect our ability to raise new debt or equity. In particular, if we were to cease to maintain our "investment grade" credit rating, this could have a material adverse effect on our ability to access the credit markets in the manner in which we have in the past and increase the cost of our debt.
Future cash flow requirements
Over the coming years, both the MTS and Allstream divisions (as well as their respective industry peers) could be faced with some significant one-time cash flow requirements to fund investments such as new spectrum, network expansion or enhanced back-office systems. Even though these investments may be associated with positive business cases, the up-front expenses may not be covered by our in-year free cash flow. We may also need to make significant one-time payments as a result of unexpected and unfavourable decisions arising from litigation against us, as well as make payments to fund our pension solvency deficits. Any of these payments could require additional cash not previously planned for and do not form part of our outlook or business plans.
Debt and equity markets
There are inherent risks associated with investing in the debt and equity markets. External factors over which we may not have any control could negatively impact the market price of our securities. Differences between our actual or anticipated financial results and the published expectations of financial analysts could contribute to volatility in our securities. Further, a major decline or lack of liquidity in the capital markets or an adjustment in the market price or trading volumes of our securities may adversely affect our ability to raise capital, issue debt, retain employees, make strategic acquisitions or enter into joint ventures.
Changes in interest rates could, over time, significantly increase our borrowing costs if we were forced to renew maturing debt at higher rates. In addition, some of our revenues and expenses are in US dollars and, while we can sometimes hedge some of these obligations, changes in the value of the Canadian dollar relative to the US dollar could adversely affect our cash flow.
Our pension funding requirements are a meaningful component of our costs of carrying on business, particularly the costs associated with maintaining our defined benefit pension plans in which some of our employees and retirees participate. The MTS division has a greater exposure to defined benefit pension plan costs than the Allstream division. The costs we face as a result of such plans are driven by various factors, many of which are largely outside of our control. These factors include:
Actuarial standards and applicable legislation
Changes in actuarial standards and government pension regulations can directly increase or decrease the contributions we are required to make to our pension plans. In the past, we had some success in discussions with the Government, which led to changes in federal pension funding requirements, though any future changes could be either positive or negative. We have no meaningful ability to influence any future changes to actuarial standards.
Return on plan assets
A material portion of our plans' assets are invested in equity and fixed income securities. As a result, the ability of our pension plans to earn our projected rates of return depends significantly on the performance of the financial markets. While we are thoughtful and conservative as to the types of investments made by our pension plans, and we believe we have effectively managed our pension plans' assets in the past, ultimately we cannot control the financial markets.
Other variables affecting pension valuations
Our funding obligations depend, in part, on the value of the liabilities in our pension plans. These valuations depend on actuarial standards and applicable legislation, long-term interest/discount rates and plan member demographics. We cannot control or influence these variables, yet they can significantly affect valuation. By way of example, the existing solvency deficits under our defined benefit pension plans as of early 2012 would be turned into solvency surpluses if the applicable discount rate were to increase by a few percentage points.
Existing solvency deficits
As measured on a solvency basis, our defined benefit pension plans have large deficits. These deficits have been largely caused by recent historically low discount rates. Under new federal pension legislation, we are currently allowed to utilize letters of credit to satisfy a portion of our solvency funding obligations. However, if discount rates do not increase, or if our pension plans' assets do not achieve significantly better returns than they have in the recent past, or if we maximize the amounts of letters of credit we are entitled to utilize, there will be a need for significant further cash contributions into our pension plans. Although we currently expect that we will be able to use letters of credit to fully satisfy our solvency deficit payment obligations in 2012, any such cash contributions would adversely affect our free cash flow and would also increase the possibility of "stranded capital" in our pension plans should they subsequently move into a "surplus" position.
We announced in early 2010 that we received a court decision relating to one of our Manitoba pension plans, obligating us to make a one-time payment in the amount of $43 million plus interest retroactive to 1997, that could amount to an approximate total of $100 million measured as of December 31, 2009. This amount would vary based on the underlying performance of our pension plan assets. Based on legal advice received, we believe that key aspects of this decision were flawed and presented strong grounds for appeal and for that reason, no liability has been accrued in our financial statements for this matter. Our appeal on this matter was heard in December 2010, and we are awaiting the outcome of this decision.
Operational execution/process risks
The businesses, technologies, processes and systems of both our MTS and Allstream divisions are complex. Failure to properly execute on our plans may lead to negative customer experience, network outages, failure to achieve necessary cost savings, or otherwise impede our ability to effectively carry on our business. We often rely on third parties to help us execute on objectives associated with our business plans, and cannot be assured such third parties will perform their obligations appropriately.
Continuous rapid changes in technology
Both our MTS and Allstream divisions operate in markets that are affected by constant and rapid technological change. Network technology continues to evolve at a pace that may enable competitors to enter our markets with increased flexibility, provide more choice for customers, and speed up the obsolescence of our core technologies. Some elements of our network and technologies are aging, and we periodically face situations in which manufacturers are no longer supporting their technologies and these systems become more prone to fail, which can result in more widespread network failures or operational disruption. At the same time, this provides us with new opportunities to exploit markets that were previously too difficult or costly for us to enter. These changes, however, could result in the displacement of products and services with substitutes and create a need for accelerated investment in our network evolution. Accordingly, we need to anticipate technological change and continue to invest in, or develop new technologies, products and services. We have deployed a joint 4G network with Rogers Wireless. The aspects of this network that are shared introduce new technological complexities as we deploy new services and standards.
Like others in our industry, there can be no assurance that we will be successful in developing, implementing and marketing new technologies, products and services or that we will be able to fully realize the expected sales, cost savings and efficiencies, or that we will be able to make these necessary investments. Nor can we be assured that we will be able to gain access to such technologies and other business inputs at reasonable terms or prices. New products or services that use new or evolving technologies could reduce demand for our existing offerings or cause prices for those services to decline.
Similarly, the deployment of new internal IT and network technologies (such as expanded networks, billing systems, back-office tools) are often expensive and complicated projects, particularly as they need to be designed to work with both legacy and next generation systems. These technologies are critical for us to collect our revenue, serve customers and remain competitive in the market. There are no assurances that such technologies can be deployed on time or on budget, or without causing significant business interruption.
Scale of our operations
Our MTS division has always been significantly smaller than most other incumbent telecommunications companies in Canada (e.g. Bell, Telus and Bell Aliant), and is smaller than some of its direct competitors within Manitoba (e.g. Rogers Wireless as a competitor in the wireless business). Similarly, our Allstream division is smaller than many of its direct competitors, and is much smaller than the two large incumbent telecommunications companies serving business customers (Bell and Telus). In turn, these Canadian-based competitors are significantly smaller than many of their global peers.
This means that both of our divisions operate with considerably less economies of scale, purchasing power, ability to impose custom technological standards on manufacturers, and bargaining power with our larger customers. While MTS continues to benefit from its incumbent position in Manitoba, and both MTS and Allstream can leverage their positions as smaller players to be more effective and closer to their customers, it does place operational and financial pressures on us that may not be experienced by some of our larger competitors.
We mitigate this type of risk by partnering with others where appropriate and advantageous (e.g. in our joint 4G mobile wireless network with Rogers Wireless) and by leveraging our ability to be more agile or offer our customers a more personalized and customer-focused experience.
Security and network failures/cyber-risks
Like all others in our industry, the operations of both our MTS and Allstream divisions depend on how well we and our suppliers protect our networks, equipment, IT systems, software and customer information (including personal information) against damage from a number of threats, including, but not limited to, cable cuts, damage to our physical plant, natural disasters, terrorism, fire, power loss, hacking, computer viruses, vandalism and theft. Our operations also depend on the timely maintenance, upgrade and replacement of our network and our suppliers' networks, equipment, IT systems and software, as well as pre-emptive expenses to mitigate the risks of failures (such as expenses we incur as a result of the periodic flooding in Manitoba). Any of these and other events could result in network failures, billing errors and delays in customer service and/or increase in capital expenses. The failure of networks or a component of our networks might, in some circumstances, result in a loss of service for our customers and could adversely impact our reputation, goodwill and results of operations. Any of the above events affecting third parties on which we rely may also result in an interruption in service that would last until the outage is fixed or alternative service delivery options are found and could also harm our customer relationships.
We understand the importance of network integrity. Both our MTS and Allstream divisions spend a significant amount of time and resources to manage this risk, as many of these risks can be prevented through proper network and system design, maintenance and alternate sources of supply. We regularly consider the probability of cyber incidents occurring and the quantitative and qualitative magnitude of these risks, including the potential costs and other consequences from the misappropriation of assets or sensitive information, corruption of data or operational disruption.
To date, our pre-emptive and ongoing mitigation and planning efforts have been successful, as we have not experienced any significant network failures or "cybersecurity" incidents.
Litigation and legal matters
As is the case with any large company, investigations, claims and lawsuits seeking damages and other relief are threatened or pending against us. In addition, plaintiffs within Canada are also able to launch class action claims on behalf of a large group of persons with increasing ease. By the nature of its consumer-facing businesses, our MTS division is more vulnerable to class action litigation than our Allstream division.
By way of indicative examples, we and other major telecommunication service providers are defendants in two large national class action claims. The first involves a claim relating to a class of subscribers for wireless or cellular services who are seeking recovery of fees that the carriers have categorized as system access fees or system licensing charges, and which the plaintiffs allege have been improperly characterized as government-related charges. The second major class action claim relates to allegations that customers for both land-line and wireless services have paid extra fees in association with 911 or emergency service access fees that now ought to be repaid. We believe we will be successful in defending against these specific claims. The outcome of any of such actions, or new actions that may arise, however, is uncertain and judges or juries can, at times, deliver unpredictable decisions. Until any particular matter is resolved, there can be no assurance that our financial position will not be negatively impacted as the costs in losing or defending against such claims could be material. We work hard to mitigate these risks by vigorously defending ourselves when appropriate. Negative financial outcomes associated with certain operational and/or legal risks are mitigated through the purchase of appropriate insurance coverage. We also take active steps to minimize the risk of being sued or being subject to such proceedings at first instance, such as implementing appropriate compliance programs and trying, whenever possible, to negotiate favourable contractual terms that limit our liability.
Civil liability in the secondary market
Securities laws impose potential liability for misrepresentations by public companies in written disclosure and oral statements or the failure to make timely disclosure of a material change. We have well-documented processes in place, including a corporate disclosure policy, that we believe provides reasonable procedures and controls for all of our public disclosure. We trust that our directors and officers possess significant integrity, and believe we have purchased appropriate insurance coverage in respect of these risks. However, there can be no assurance that all of our processes will be followed by employees, officers, third parties and directors at all times.
Legal and regulatory compliance
We necessarily rely on our employees, senior management, Board of Directors and key third-party contractors to conduct themselves according to legal and ethical standards. Situations might occur where individuals do not adhere to our policies or where legal requirements are inadvertently breached. Such events could expose us to damages, sanctions and fines, or negatively affect our financial operating results. We are required to handle our employees' and customers' personal information in a way that is compliant with all applicable privacy laws, which is becoming increasingly more onerous. We believe we have reasonable policies, processes and awareness in place for proper compliance and that these programs reduce the risks associated with some of these complex obligations.
Applicable legislation and corporate articles
We are subject to certain legislation and our own articles of incorporation that limit the ability of individuals to own and trade our securities. In particular, there are constraints in respect of foreign ownership and ownership by individuals owning more than a specified percentage of our common shares. These restrictions could serve to deter a change of control of our company, limit the market demand, market price or liquidity of our securities, or affect our ability to access capital. Although we support the liberalization of foreign ownership as being in the best interest of our shareholders, this change could result in new foreign competitors or existing competitors benefiting from new foreign investments or partnerships, which could result in increased competition.
Technology evolution brings additional legal risks and uncertainties. The intellectual property and proprietary rights of owners and developers of hardware, software, business processes and other technologies may be protected under law, and significant damages may be awarded in property infringement claims advanced by right holders. In addition, contractual provisions to which we are bound are becoming increasingly complicated and expose us to heightened risks to our customers and vendors, and we are not always able to fully limit our liability in respect of these matters.
Changes to legislation affecting our services
Changes in legislation can affect the ability of customers in both our MTS and Allstream divisions to use the products and services we offer. As an example, in 2010 our Manitoba-based wireless customers became subject to stricter laws limiting the use of hand-held wireless devices while driving. Although we supported this change, and did not see any adverse effect on our results or demand for services, there can be no assurances that this will be the case with future changes of legislation. Similarly, changes to legislation can require us to build new systems or provide functionality that we would not otherwise establish, which could increase our costs. As an example, we may be required to incur unexpected network capital expenses to comply with potential new legislation mandating all telecommunications carriers to provide new methods of "lawful access" to law enforcement agencies.
Periodically, it is suggested that the radio frequency emissions from wireless devices (such as the ones sold by our MTS division) could be associated with health concerns. We are not aware of any credible basis to substantiate such risks. In fact, there is significant government-backed research concluding there is no basis for such concerns. We comply with all applicable legislation and regulatory requirements. Actual or perceived issues associated with such suggestions, however, could affect our results and operations or could result in litigation.
On a quarterly basis, our Board of Directors considers whether to declare a dividend. A more comprehensive discussion of our current dividend policy is set forth in our most recent AIF, which is available on our website www.mtsallstream.com or on SEDAR at www.sedar.com. Payment of a dividend is subject to the discretion of our Board of Directors, as well as legal requirements. There are no assurances that in the future we will continue dividend payments at the current level, or at all.
A majority of our employees are covered by collective bargaining agreements. Proportionately, a higher percentage of the employees of our MTS division are unionized compared to those employees of our Allstream division.
Renegotiating collective bargaining agreements has the risk to result in higher labour costs and work disruptions including work stoppages or slowdowns. While we have not had a labour disruption in over a decade and have recent successes in concluding a series of collective agreements with several of our unions, there can be no assurance that should a labour disruption occur, it would not adversely affect the services that we provide to our customers and our operating results. Notwithstanding, we periodically develop, review and update contingency plans for labour disruption. Similarly, a labour disruption at our suppliers (e.g. a service provider who carries portions of our traffic, a roaming partner or a content provider) could also harm our businesses, damage customer relationships and impact our operational results. Further information about our collective agreements is contained in our most recent AIF, which is available on our website www.mtsallstream.com or on SEDAR at www.sedar.com.
Reliance on key personnel
Our business depends on the efforts, abilities and expertise of our senior executives and employees. The loss of key individuals could impair our business and development until qualified replacements are found. There is no assurance that these individuals could quickly be replaced with persons of equal experience, skills and capabilities. We are smaller than many of our industry peers and, as a result, we sometimes face greater risks associated with employee retention. To manage this risk, our Board and its Human Resources and Compensation Committee take an active role in reviewing compensation levels to ensure we remain competitive within our peer group, and have a strong succession planning program in place. More details of these plans and mitigations are contained in our latest Management Proxy Circular.
Our business activities are subject to tax legislation and regulations that frequently change. Changes in tax laws or the adoption of new tax laws could result in higher tax rates or new taxes. The calculation of collectable or payable taxes, in many cases, requires significant judgment in interpreting tax rules and regulations. Our tax filings are subject to government audits which could materially change the amount of current and deferred income tax assets and liabilities and could, in certain circumstances, result in an assessment of interest and penalties. At present, we have a substantial tax asset, and believe that this asset will enable us to offset the payment of cash income taxes until at least 2019.
OUR REGULATORY ENVIRONMENT
The telecommunications and broadcast industries in which we operate are federally regulated pursuant to both the Telecommunications Act and the Broadcasting Act. The primary regulatory agency we are subject to is the CRTC. The Government, through the Departments of Industry and Canadian Heritage, exercises legislative oversight of the CRTC. We are subject to policy decisions taken by the Government from time to time, as well as any amendments to applicable legislation or regulatory instruments. We operate as both an incumbent local exchange carrier ("ILEC") in Manitoba and as a competitive local exchange carrier ("CLEC") nationally. In addition, we operate as a licensed broadcasting distribution undertaking ("BDU") in parts of Manitoba, including Winnipeg and its surrounding areas. Decisions made by the CRTC may affect our operations and performance.
The following describes significant developments relating to regulatory and policy proceedings:
On July 7, 2010, the Federal Court of Appeal unanimously determined that retail ISPs do not carry on, in whole or in part, "broadcasting undertakings" subject to the Broadcasting Act when, in their role as ISPs, they provide access through the Internet to "broadcasting" requested by end-users. On September 30, 2010, opposing parties sought leave to appeal this decision to the Supreme Court of Canada, which was granted on March 24, 2011. We agree with the Federal Court of Appeal's decision that ISPs are not subject to the Broadcasting Act and that the CRTC does not have the authority to impose a levy on ISPs to support Canadian broadcasting. We participated with other ISPs at the appeal heard on January 16, 2012. The Court is expected to render a decision later in 2012.
On February 28, 2011, the Federal Court of Appeal, in a majority decision, ruled that the Broadcasting Act empowers the CRTC to establish a regime where private local television stations negotiate with BDUs a fair value in exchange for the distribution of the programming services they broadcast. On September 29, 2011 the Supreme Court of Canada agreed to hear an appeal of this decision, which has a tentative hearing date of April 19, 2012. MTS Allstream will actively monitor the proceedings.
On September 21, 2011, the CRTC issued a decision outlining the regulatory framework for the large vertically integrated broadcasting companies that have ownership and control of both programming services and distribution services. In order to prevent vertically integrated companies from imposing unreasonable terms and conditions on BDUs like MTS Allstream, the CRTC introduced a voluntary Code of Conduct to guide negotiations between large vertically integrated companies and non-integrated companies. The decision included a number of follow-up proceedings to implement the Code of Conduct and other safeguards in the decision. At this time we, along with other independent BDUs are participating in a number of proceedings to try to ensure that the Code of Conduct and other regulations will be effective in deterring uncompetitive behaviour in the marketplace. These proceedings will last throughout most of 2012.
On January 25, 2011, the CRTC issued a decision permitting incumbent carriers to apply usage-based billing ("UBB") rates on their wholesale residential high-speed Internet access services at a discount of 15% from the carrier's comparable UBB rates for its retail Internet services. Subsequent to the decision, the issues were examined by the parliamentary Standing Committee on Industry, Science and Technology.
On February 8, 2011, the CRTC put implementation of its UBB decision on hold, and initiated a review of billing practices for wholesale residential high-speed access or broadband services. MTS Allstream participated in the proceeding, including the public hearing in July 2011. On November 15, 2011, the CRTC issued a new decision rejecting UBB and adopting instead the MTS Allstream model allowing incumbent and competitor ISPs to choose between a capacity-based or flat-rate model for residential broadband accesses. The decision allows ISPs to manage network capacity and gives competitors flexibility in the market. While there is general agreement on the CRTC's proposed model there remains disagreement on approved rates and how they will be implemented. In January 2012, the Canadian Network Operators Consortium (CNOC) filed a Part I Application asking for further changes to MTS Allstream's and other incumbent carriers wholesale DSL tariffs. MTS Allstream will participate in this and other CRTC proceedings relating to the implementation of incumbent UBB tariffs ensuring the MTS Allstream wholesale service and that of others is priced and implemented in a fair and effective manner.
Unbundled local loops
Throughout 2010, the CRTC conducted a detailed review of how to set prices for competitors who use an ILEC's copper facilities, known as unbundled local loops, to provide local telephone service to customers. The review, which was triggered by an application submitted on June 2, 2009 by Bell Canada and Bell Aliant Regional Communications, Limited Partnership, considered the issue of obsolescence of copper facilities in light of greatly expanded deployment of fibre in the applicants' access networks.
On January 12, 2011, the CRTC issued Telecom Decision CRTC 2011-24 approving new rates for unbundled local loops leased from the applicants. The new prices reflect recovery of the applicants' net book values of copper facilities over the assumed remaining useful life. There is also a possibility of additional applications for other services using copper facilities or applications from other ILECs. We have identified certain issues with the CRTC's analysis and calculations and filed an application on March 7, 2011 to review and vary the decision, with the expectation of reducing or eliminating the price increase. A decision on the application is pending.
On May 13, 2011, the Bell companies filed their own application to review and vary the methodology used by the CRTC and to introduce new data, with the aim of protecting or growing the price increase. The process around the Bell application has been subject to multiple rounds of questions. The process is now scheduled to close in mid-2012. MTS Allstream is also opposing an application filed on June 2, 2011 by Bell Aliant, seeking increases to Bell Aliant's residential primary exchange service ("PES") costs in high-cost serving areas ("HCSAs") and the associated HCSA subsidy requirement. Approval of Bell Aliant's application would result in a higher revenue contribution percentage, thus increasing the amount of funds MTS Allstream is required to contribute to fund HCSAs outside of Manitoba. As well, Telus has put the CRTC on notice that it intends to file a similar application.
On August 31, 2010, the CRTC issued Telecom Decision 2010-638 approving our plan to use the funds remaining in our deferral account to roll-out broadband to 16 rural Manitoba communities by the end of August 2014, and to rebate any remaining deferral amounts to residential urban customers in Manitoba (a project which was completed in early 2011). This decision concludes the process associated with the Company's deferral account. MTS Allstream also has an obligation to invest $1.2 million of deferral account funds to improve accessibility to telecommunications services for persons with disabilities. We submitted a plan to complete this obligation by the end of 2012 to the CRTC for approval on July 29, 2011.
Review of network interconnection regulatory regimes
In March 2011, the CRTC initiated a proceeding to review the regulatory and compensation regimes for network interconnection between local, toll, and wireless service providers. The proceeding considered technological neutrality, enhancements to competition, and benefits to customers which could arise from the consolidation, modification, or simplification of these regimes. The proceeding also considered how, if at all, the network interconnection requirements based on circuit-switched technologies should be modified in light of the industry's increasing use of IP technology.
In January 2012, the Commission issued its decision, determining that it would not specifically regulate rates, terms and conditions for IP interconnection, but, determined that any service providers that have IP interconnection services for either an affiliate or another carrier must allow all other carriers to interconnect on an IP basis. The Commission also modified the rules for the existing circuit switched interconnection regime to allow independent wireless services providers to interconnect on a shared-cost, bill and keep basis a regime that had previously been reserved only for CLECs. MTS Allstream does not currently have IP interconnection with an affiliate or other carrier.
Industry Canada radio spectrum consultations
The Government has identified that making suitable spectrum available for next-generation wireless networks and services is a key component of its digital economy strategy. Accordingly, in November 2010, the Government initiated consultations on the policy and technical framework that will govern the wireless spectrum auctions for the 700 MHz spectrum band. As well, on February 10, 2011, the Government initiated a similar consultation for the 2500-2690 MHz spectrum band, which may be auctioned jointly with the 700 MHz spectrum. The timing and sequencing of the auction(s) remains to be determined. The Government has also indicated that it may link its decision on foreign investment to the policy and structure of these auctions. We participated in both consultations, which concluded in May 2011, and we will participate in subsequent consultation(s) on the licensing framework for the auctioning of the spectrum.
As in our submissions in other forums, we continue to advocate for pro-competitive auction measures and conditions of licence that will contribute to sustainable competition in the Canadian telecommunications marketplace for the benefit of all Canadians in all regions.
Foreign investment restrictions
Industry Canada, in the context of the 700 MHz spectrum auction, also sought further comments on the options to partially or completely eliminate foreign investment restrictions in Canadian telecommunications carriers. The comments were focused on the options that formed part of the Government's June 2010 consultation on the matter. It is anticipated that the Government will announce whether it intends to adopt one of the three options: i) completely eliminate restrictions on foreign investment in Canadian telecommunications carriers; ii) eliminate the investment restrictions on Canadian telecommunications carriers that have less than 10% of the national market share; or iii) make a minor change to existing restrictions that essentially retains the status quo. There is some possibility that the Government could announce its position on foreign investment early in 2012 in conjunction with the announcement of the spectrum auction rules. The interpretation of the current rules governing the foreign investment in telecommunications is also at issue as Public Mobile has made an application to the Supreme Court of Canada for leave to appeal the Federal Court of Appeal ruling agreeing that the ownership structure of wireless new entrant Globalive Wireless Management Corp. meets the existing foreign investment rules. A decision as to whether the Supreme Court will hear the Public Mobile appeal is expected early in 2012. A decision to hear the application heightens the uncertainty around interpretation of the current rules and strengthens the case for elimination of the rules under either of the Government's first two options.
Manitoba Consumer Protection Office consultation
The Government of Manitoba introduced Bill 35, The Consumer Protection Amendment Act (Cell Phone Contracts) on May 16, 2011. Bill 35, as drafted, imposes several new legal obligations on cell phone service providers, including allowing consumers to cancel contracts before the end of term; prohibiting unreasonable cancellation fees, while allowing cost recovery for equipment provided or subsidized as a contract incentive; prohibiting unilateral amendments to a material element of a contract if the change does not benefit the customer; and requiring the minimum monthly cost of services to be included in advertisements.
As a member of the Canadian Wireless Telecommunications Association ("CWTA"), we contributed to, and supported, an industry-backed submission on January 14, 2011, highlighting the range of consumer-friendly practices which CWTA members have implemented or begun implementing. Also, on June 8, 2011, MTS Allstream presented its views on Bill 35 to the Legislative Assembly of Manitoba Standing Committee on Social and Economic Development. MTS Allstream, which already operates in close alignment with the key provisions of Bill 35, supports the objectives and intended outcomes of the measures included in Bill 35.
The Bill passed third reading in the legislature on June 15, 2011, and in late December the Government of Manitoba initiated a consultation on the draft regulations. MTS Allstream will participate in the consultation and continue to work constructively to ensure that the Bill and accompanying regulations are workable and reasonable for both service providers and consumers alike. The legislation is expected to come into effect at a yet-to-be-determined date in 2012.
CONTROLS A ND PROCEDURES
Management of MTS Allstream is responsible for establishing and maintaining disclosure controls and procedures and internal control over financial reporting, as these terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings as adopted by the Canadian securities regulatory authorities.
Disclosure controls and procedures
Under the direction of our Audit Committee and our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), we evaluated the design and operation of our disclosure controls and procedures as at December 31, 2011. Based on this evaluation, our CEO and CFO have concluded that, as of the evaluation date, our disclosure controls and procedures were effective to provide reasonable assurance that information that is required to be disclosed in prescribed filings and reports that are filed with the Canadian securities regulatory authorities is recorded, processed, summarized and reported on a timely basis, and is accumulated and communicated to management, including the CEO and the CFO, as appropriate to allow timely decisions regarding required disclosure.
Internal control over financial reporting
Internal control over financial reporting is a process designed by, or designed under the supervision of, the CEO and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. Our process includes those policies and procedures that i) pertain to the maintenance of records that accurately and fairly reflect, in reasonable detail, transactions relating to our assets; ii) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with IFRS, and that receipts and expenditures are made only in accordance with authorizations of management and our directors; and iii) provide reasonable assurance regarding the prevention or timely detection of any unauthorized acquisition, use or disposition of our assets that could have a material effect on our annual financial statements.
Due to its inherent limitations, internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. As well, projections of an evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
Under the direction of our Audit Committee and our CEO and CFO, we have evaluated the design and operation of our internal control over financial reporting as at December 31, 2011 based on the criteria set forth in the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on this evaluation, our CEO and CFO have concluded that, as of the evaluation date, our internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. No material weaknesses in our internal control over financial reporting were identified.
There have been no changes in our internal control over financial reporting during the three month period ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
SOCIAL AND ENVIRONMENTAL RESPONSIBILITY
We at MTS Allstream believe that companies have a responsibility to contribute to the welfare of the communities in which they operate. Corporate citizenship is very important to us, and we strive to have a positive impact on the lives of our employees, our customers and other stakeholders. Year after year, we achieve this goal by engaging with our employees, leading by example in our communities, and making a positive impact on the environment.
Investing in our people
In today's fast-paced and ever-changing world, we believe people make the difference. Recognizing that strong employee engagement is a critical success factor for the company and employees, we are committed to an Employee Engagement Improvement Plan which: is a long-term strategy to measure employee opinions about the work environment; includes a process to work with employees to develop action plans; sets measureable goals to implement programs to improve engagement; and ensures continuous improvement.
Our Employee Engagement Improvement Plan demonstrates the company's commitment to: gain a better understanding of the views of our employees; hear what employees have to say about their experiences at MTS Allstream and understanding of our business goals and objectives; put in place actions that will address areas that employees tell us are important; compare our results against world-class standards; enable employees to help shape the type of company MTS Allstream is and can become; and influence how the company grows into an organization that is known for having a workplace that is best-in-class and where our employees are engaged and committed.
For example, we offer our employees potential for growth, development and advancement through education and career development programs. As well, we recognize and value the contributions our employees make through employee engagement and recognition programs. Our recognition program rewards employees for demonstrating our values, meeting our corporate strategies and for demonstrating leadership, customer service, community service, innovation, and environmental leadership. Further, Allstream Inc. is a leader in providing options to enhance work-life balance with its remote worker telework program. We are committed to equity and diversity in the workplace, and to the community as a whole.
Investing in our community
We recognize and appreciate our many employees who give generously to the community by donating their time and money every year. Through our "MTS Volunteers" and "My Community" programs, MTS Allstream employees, retirees and their families contributed more than 50,000 volunteer hours to community causes and events across Canada in 2011. Our company and our employees pulled together to give generously when people needed it the most in 2011. We once again participated in the United Way's national annual fundraising campaign and provided a monetary contribution to the Canadian Red Cross relief efforts when so many Manitobans were battling spring flooding. MTS volunteers also assisted with sandbagging efforts and delivered lunches to other volunteers. MTS TV also carried a new and innovative channel (Flood Watch 2011) that kept Manitobans up to date on the critical news affecting their day-to-day lives.
We take our leadership role in the community seriously, and we are making investments to strengthen our relationships with a variety of community groups and individuals. We sponsored nearly 30 community festivals across Canada. For example, MTS Allstream was the co-presenting partner of Prairie Scene 2011, a bi-annual festival held in Ottawa that celebrated Manitoba and Saskatchewan's diverse community of contemporary artists. We also partnered with the Winnipeg Blue Bombers to donate one hundred tickets per Blue Bomber home game to the United Way of Winnipeg and became the exclusive service provider for Winnipeg's newest social hub, the Winnipeg Free Press News Café.
We have historically shown our support and increased our visibility in the communities through sponsorship programs. We continue to be proud sponsors of the MTS Centre in Winnipeg and, as part of the long-awaited return of the Winnipeg Jets, we expanded our sponsorship of the community landmark. We also continued our sponsorship of the Allstream Centre in Toronto, Canada's most environmentally responsible state-of-the-art conference centre. In 2011, we sponsored elite athletes in their pursuit of excellence, including a two-year renewal with Cindy Klassen, a six-time Olympic medalist in speed skating, and the new addition of Danielle Mills, an up-and-coming professional golfer from Pointe-Claire, Quebec who just recently gained full status as an LPGA player.
We believe it is important to invest in the people who make up the communities where we live and work. In 2011, we supported a number of educational institutions in Manitoba, including the Aboriginal Business Education Program, University of Manitoba, and Red River College. In honour of Premier Gary Doer's contribution to the province of Manitoba, MTS Allstream contributed to the establishment of a scholarship in his name for the University of Winnipeg's Masters in Development for the next five years. We also donated $50,000 over five years to the Université de Saint-Boniface, which further enhances Winnipeg's educational landscape by offering French postgraduate and graduate programs. We also provided the second installment of a cash and in-kind services donation totaling $1.5 million over five years to the Canadian Museum for Human Rights.
We recognize that some of the communities we serve may have particular needs. For example, we are committed to addressing the telecommunications needs of Aboriginal communities. Working together, we explore opportunities for the potential development and implementation of initiatives that enhance the participation of Aboriginal people, communities and businesses in Manitoba. We are developing improved telecommunications services and infrastructure in rural and remote communities, which could lead to other social and economic benefits. In 2011, MTS developed processes to improve telecommunications services in rural and remote communities and continues to explore wireless opportunities using the community funded model. MTS offers Aboriginal Cultural Awareness sessions annually to its employees to better understand the people they serve and work with.
Investing in our environment
We remained committed to reducing our impact on the environment and to helping our customers and employees do the same. In 2011, we achieved an important milestone for our corporate green plan by updating our Greenhouse Gas ("GHG") inventory and setting a new target for GHG emissions. Using 2008 GHG emissions data as our new baseline, we completed a robust, quality inventory that is a credible foundation on which we can set and measure reduction targets. Our overall plan is to reduce our absolute GHG emissions (at 17,236 tonnes in 2008) by twenty percent by the end of 2020.
In addition to setting a new GHG baseline and reduction target, we remain committed to effectively managing the environmental impact of our business operations. We encourage employees to reduce paper consumption and practice recycling through a corporate standard for recycled office paper and a uniform recycling program. Our employees are also encouraged to use public transportation through incentives, such as discounted monthly bus passes. We also promote teleworking which allows employees the opportunity to choose greener commuting options and reduce their personal impact on the environment.
We leverage technology and innovation to reduce our impact on the environment. The majority of our employees work in or out of LEED (Leadership in Energy and Environmental Design) or BOMA (Builder Owners and Managers Association) certified locations, which demonstrates our commitment to sustainable workplaces. Lighting, HVAC and alternate energy sources have been implemented at office locations and network sites to improve energy efficiency and increase the use of renewable energy. We are 'greening our fleet' by installing GPS devices in order to minimize idling time and fuel consumption and by investing in electric and hybrid vehicles when replacing our fleet vehicles. By recycling all automotive materials possible, we are reducing and reusing what otherwise would be waste.
We are in compliance with all environmental laws and regulations. To stay ahead of the regulatory curve, we monitor and prepare for anticipated emerging regulatory requirements.
In addition to our efforts to minimize the impact of our operations on the environment, we continued to engage our customers in the green potential of innovative communications solutions and provide our employees with information and resources to reduce their personal impact on the environment outside of work. For our customers, we offer cell phone recycling, as well as e-billing options in order to minimize waste. We also offer virtual workplace communication solutions for our business customers in order to promote telecommuting and alternative work arrangements. At MTS Allstream, we recognize employees that demonstrate environmental leadership. We encourage employees to participate in external environmental events and we sponsor green initiatives in the community. As part of our workforce, we have an Internal Green Team which leads green activities at a grass-roots level and manages our Green Action intranet.
Additional information and quantified results on our key priorities and initiatives can be found in our Green Report, which is produced annually and is available on our website at www.mtsallstream.com.
CONSOLIDATED FINANCIAL STATEMENTS OF
MANITOBA TELECOM SERVICES INC.
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2011
|MANITOBA TELECOM SERVICES INC.|
|CONSOLIDATED STATEMENTS OF NET INCOME|
|AND OTHER COMPREHENSIVE LOSS|
|Years ended December 31|
|(in millions of Canadian dollars, except earnings per share)||Note||2011||2010|
|Depreciation and amortization||6||298.9||290.7|
|Other income (expense)||2.5||(5.2)|
|Income before income taxes||232.5||204.9|
|Income tax expense||8||65.4||63.6|
|Net income for the year||$||167.1||$||141.3|
|Other comprehensive income|
|Net losses from defined benefit plans and other employee benefits||$||(193.9)||$||(181.8)|
|Change in the effect of the minimum funding requirement||-||32.0|
|Deferred taxes on items in other comprehensive income||50.8||39.2|
|Other comprehensive loss for the year, net of tax||(143.1)||(110.6)|
|Total comprehensive income for the year||$||24.0||$||30.7|
|Basic and diluted earnings per share||9||$||2.55||$||2.18|
|MANITOBA TELECOM SERVICES INC.|
|CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY|
|(in millions of Canadian dollars)||Note|| Share
|Balance at December 31, 2010||$||1,275.0||$||20.1||$||(447.1)||$||848.0|
|Net income for the year||-||-||167.1||167.1|
|Other comprehensive loss for the year||-||-||(143.1)||(143.1)|
|Total comprehensive income for the year||-||-||24.0||24.0|
|Issuance of shares||28.7||-||-||28.7|
|Balance at December 31, 2011||$||1,303.7||$||20.6||$||(534.6)||$||789.7|
|Balance at January 1, 2010||$||1,266.9||$||19.3||$||(338.5)||$||947.7|
|Net income for the year||-||-||141.3||141.3|
|Other comprehensive loss for the year||-||-||(110.6)||(110.6)|
|Total comprehensive income for the year||-||-||30.7||30.7|
|Issuance of shares||8.1||-||-||8.1|
|Balance at December 31, 2010||$||1,275.0||$||20.1||$||(447.1)||$||848.0|
|MANITOBA TELECOM SERVICES INC.|
|CONSOLIDATED STATEMENTS OF FINANCIAL POSITION|
|(in millions of Canadian dollars)||Note|| December 31
| December 31
| January 1
|Cash and cash equivalents||15||$||16.8||$||50.0||$||110.2|
|Assets held for sale||-||-||18.6|
|Property, plant and equipment||11||1,543.3||1,497.6||1,378.6|
|Deferred tax assets||8||535.0||549.7||573.9|
|Liabilities and shareholders' equity|
|Accounts payable and accrued liabilities||15||$||311.9||$||343.4||$||312.7|
|Advance billings and payments||55.8||55.3||52.5|
|Current portion of long-term debt||15||100.0||220.0||11.9|
|Current portion of finance lease obligations||23||5.4||4.9||4.2|
|Liabilities related to assets held for sale||-||-||9.0|
|Long-term portion of finance lease obligations||23||9.6||11.5||13.4|
|Other long-term liabilities||15 & 17||49.9||34.0||31.5|
|Deferred tax liabilities||8||1.0||1.1||1.2|
|Total liabilities and shareholders' equity||$||2,681.5||$||2,630.6||$||2,626.3|
|Approved on behalf of the Board|
|David Leith||Donald H. Penny, C.M., FCA, LL.D.|
|MANITOBA TELECOM SERVICES INC.|
|CONSOLIDATED STATEMENTS OF CASH FLOWS|
| Years ended December 31
(in millions of Canadian dollars)
|Cash flows from operating activities|
|Add items not affecting cash|
|Depreciation and amortization||298.9||290.7|
|Deferred income tax expense||8||65.4||63.2|
|Loss on disposal of assets||2.4||4.3|
|Deferred wireless costs||(67.0)||(50.0)|
|Pension funding and net pension expense||(54.6)||(56.7)|
|Changes in non-cash working capital||(31.2)||55.7|
|Cash flows from operating activities||386.6||451.7|
|Cash flows from investing activities|
|Proceeds on disposal of assets held for sale||-||12.0|
|Cash flows used in investing activities||(315.0)||(354.2)|
|Cash flows from financing activities|
|Issuance of long-term debt||15||200.0||-|
|Repayment of long-term debt||15||(220.0)||(11.9)|
|Issuance of share capital||18||28.7||8.1|
|Cash flows used in financing activities||(104.8)||(157.7)|
|Change in cash and cash equivalents||(33.2)||(60.2)|
|Cash and cash equivalents, beginning of year||50.0||110.2|
|Cash and cash equivalents, end of year||$||16.8||$||50.0|
MANITOBA TELECOM SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
All amounts are in millions of Canadian dollars, unless otherwise indicated
1. CORPORATE INFORMATION
Manitoba Telecom Services Inc. (the "Company") is incorporated in Manitoba, Canada, and its Common Shares are listed on the Toronto Stock Exchange ("TSX"). The Company's head and registered office is located at 333 Main Street, P.O. Box 6666, Winnipeg, Manitoba, Canada, R3C 3V6. The principal activities of the Company are described in note 21.
2. SIGNIFICANT ACCOUNTING POLICIES
(a) Statement of compliance
These consolidated financial statements of the Company represent the initial presentation of its results and financial position under International Financial Reporting Standards ("IFRS"). The Company previously prepared its consolidated financial statements in accordance with previous Canadian generally accepted accounting principles ("GAAP"). These consolidated financial statements have been prepared in accordance with IFRS 1, First-time Adoption of International Financial Reporting Standards ("IFRS 1"), and the accounting policies described below. These policies are based on the standards as issued by the International Accounting Standards Board ("IASB"), and which have been incorporated by the Canadian Accounting Standards Board into current GAAP for publicly accountable enterprises. As these financial statements represent the Company's initial presentation of its results and financial position under IFRS, disclosure of the transition from previous GAAP to IFRS is included in note 24.
The consolidated financial statements were approved by the Board of Directors on February 9, 2012.
(b) Basis of presentation
The consolidated financial statements have been prepared on a historical cost basis, which is generally based on the fair value of the consideration at the time of the transaction. The consolidated financial statements are presented in Canadian dollars and all values are rounded to the nearest million unless otherwise indicated.
(c) Basis of consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, which includes its principal operating subsidiary MTS Allstream Inc. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. The Company has a joint arrangement, which is accounted for as a jointly-controlled asset. The Company recognizes its share of assets, liabilities, revenues and expenses related to this arrangement in its consolidated financial statements. All intercompany transactions and balances are eliminated on consolidation.
(d) Revenue recognition
Revenue is recognized when it is probable that the associated economic benefits of the transaction will flow to the Company and the amount of revenue can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable from customers for the provision of telecommunications services and sale of equipment, net of discounts and sales taxes collected. More specifically, the Company applies the following revenue recognition policies:
- Revenues from the provision of local voice, wireless, data connectivity, Internet, Internet protocol television ("IPTV"), security and alarm monitoring services are recognized in the period in which services are provided.
- Monthly network access fees, which are billed in advance, are deferred and recognized on a straight-line basis over the contracted period.
- Revenues from long distance, wireless airtime and other pay-per-use services are recognized in the period in which services are delivered.
- Revenues related to interconnection of voice and data traffic between telecommunication operators are recognized in the period in which the network usage occurs. These revenues are reported gross of any amounts charged by other telecommunications carriers for interconnection services. The costs of interconnection services received from other carriers are expensed in the period in which the services are received.
- Revenues from the provision of maintenance services are recognized on a straight-line basis over the period of the customer contract.
- Revenues from the sale of equipment are recognized when the significant risks and rewards of ownership are transferred to the buyer, which is normally at the time the equipment is delivered to and available for use by the customer, in accordance with contractual arrangements.
- Advance payments received from customers are deferred and recognized in the period in which the services are provided or the goods are delivered.
- Revenues related to contributions from customers for the construction of assets are deferred and recognized as revenue as the related service is provided.
- The Company enters into arrangements with customers in which services and products may be sold together. When the components of these multiple element arrangements have stand-alone value to the customer, the components are accounted for separately, based on the relative selling prices, using the appropriate revenue recognition criteria as described above.
- Revenues are disclosed net of discounts and rebates, as the Company does not receive an identifiable benefit in exchange for the discount given to the customer.
(e) Cash and cash equivalents
Cash and cash equivalents include cash on hand, net of bank overdrafts, and money market instruments, which are readily converted into known amounts of cash and have a maturity of three months or less.
The Company's inventory balance consists of wireless handsets, parts and accessories, and communications equipment held for resale. The Company values its inventory at the lower of cost or net realizable value, with cost being determined on an average cost basis.
(g) Property, plant and equipment
Property, plant and equipment is recorded at historical cost, net of accumulated depreciation and accumulated impairment losses, if any. For construction projects, historical cost includes materials, direct labour, other directly attributable expenditures, and borrowing costs associated with construction projects that take a substantial period of time to get ready for their intended use. Historical cost is presented net of any related investment tax credits, which are recognized when the Company has reasonable assurance that they will be realized. The present value of estimated costs for decommissioning an asset after its intended use, representing a provision, is also included in the historical cost of property, plant and equipment.
Depreciation is calculated on a straight-line basis over the estimated useful life of the asset. When significant parts of property, plant and equipment are required to be replaced in intervals, the Company recognizes such parts as individual assets and depreciates them over their estimated useful lives. The estimated useful lives are reviewed annually, with any changes in estimate accounted for prospectively. Land is not depreciated. The estimated useful lives of property, plant and equipment are as follows:
|Estimated useful life|
|Plant assets||4 to 40 years|
|Wireless site equipment||4 to 12 years|
|General equipment and other||2 to 20 years|
|Buildings and leasehold improvements||9 to 40 years|
|Assets under finance lease||10 years|
An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected from its use. Any gain or loss arising on derecognition of the asset, which is calculated as the difference between the net disposal proceeds and the carrying amount of the asset, is included in the consolidated statement of net income in the period in which the asset is derecognized.
(h) Intangible assets
Intangible assets are recognized when the Company controls the asset, it is probable that future economic benefits attributable to the asset flow to the Company, and the cost of the asset can be reliably measured. Intangible assets are initially recognized at cost and subsequently measured at cost less accumulated amortization and impairment. Intangible assets, other than goodwill and indefinite life intangible assets, are amortized on a straight-line basis over their estimated periods of future benefit. The estimated periods of future benefit and amortization methods are reviewed annually, with any changes in estimate accounted for prospectively. The Company's intangible assets include the following:
| (i) Computer software
|Computer software, which is purchased from third parties, is amortized over five years.|
| (ii) Subscriber acquisition costs
|Subscriber acquisition costs are capitalized and amortized over the average contractual life of the customer, which is normally 31 months for wireless costs and 36 months for alarm costs.|
| (iii) Spectrum licences and broadcast certificate
|The wireless spectrum licences and broadcast certificate are indefinite life intangible assets and are therefore not amortized. The wireless spectrum licences were issued by Industry Canada on December 15, 2008, for an initial 10 year term expiring December 14, 2018. The broadcast certificate was issued by the CRTC for a seven year term expiring on August 31, 2015. The Company has determined that there are no legal, regulatory, contractual, economic or other factors which would prevent the renewals or limit the useful lives of its spectrum licences or broadcast certificate.|
| (iv) Customer contracts and relationships
|Customer contracts and relationships acquired in business combinations are initially recognized at their fair value at the date of acquisition and are amortized on a straight-line basis over the estimated periods of benefit ranging from two to 10 years.|
| (v) Other
|Other intangible assets, which include non-competition agreements and other service contracts, were acquired in business combinations. These items are initially recognized at their fair value at the date of acquisition and are amortized on a straight-line basis over the estimated periods of benefit ranging from two to 10 years. Other intangible assets are subsequently measured at cost less accumulated amortization.|
| (vi) Goodwill
|Goodwill represents the excess of the aggregate purchase price over the fair value of the identifiable net tangible assets and intangible assets acquired in business combinations at the dates of acquisition. Goodwill is initially recognized as an asset at cost and is subsequently measured at cost less any accumulated impairment losses.|
(i) Impairment of property, plant and equipment and intangible assets
At each reporting date, the Company reviews the carrying amounts of its property, plant and equipment, and intangible assets to determine whether there is any indication that their carrying amount may not be recoverable. If such an indication of impairment exists, the recoverable amount of the asset is estimated and compared to its carrying amount to determine if the asset is impaired. If the recoverable amount of the individual asset cannot be determined, recoverability is tested on the basis of the cash-generating unit to which the asset is allocated.
The recoverable amount of an asset is the higher of its fair value less costs to sell or its value in use. Value in use is determined using discounted cash flow calculations. Estimated future cash flows of the asset or cash-generating unit are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and risks specific to the asset.
If the recoverable amount of an asset or cash-generating unit is estimated to be less than its carrying amount, the carrying amount of the asset is considered impaired and is reduced to its recoverable amount. An impairment loss is recognized immediately in income. Impairment losses, other than those related to goodwill, are reversed if the reasons for recognizing the original impairment loss no longer apply, and the asset is recognized at a value that would have been applied if no impairment losses had been recognized in prior periods.
Intangible assets with indefinite useful lives are tested for impairment annually and whenever there is an indication that the asset may be impaired.
Goodwill is tested for impairment annually and whenever there is an indication that the asset may be impaired. If the carrying amount of the cash-generating unit to which goodwill is allocated exceeds its recoverable amount, an impairment loss is recognized. Goodwill impairment losses cannot be reversed in future periods.
(j) Income taxes
The Company uses the liability method of accounting for income taxes. Under this method, current income taxes reflect the estimated income taxes payable for the current year. Deferred tax assets and liabilities are measured using substantively enacted tax rates, and are based on:
- the differences between the tax base of an asset or liability, and its carrying amount for accounting purposes; and
- the benefit of unused tax losses available to be carried forward to future years for tax purposes.
Deferred tax assets and liabilities are determined using the tax rates that are expected to apply when the temporary difference is reversed. Deferred tax assets are recognized only to the extent that it is probable that taxable income will be available against which the deductible temporary differences or loss carryforwards can be utilized. Deferred tax assets and liabilities are not discounted.
Current and deferred taxes are recognized in the consolidated statement of income except when the tax relates to items charged or credited to other comprehensive income or equity, in which case the tax is recognized in other comprehensive income or equity, respectively. The Company establishes provisions for uncertain tax positions for possible consequences of audits and differing interpretations by the taxation authorities. These provisions are based upon the likelihood and then best estimate of amounts expected to be paid.
The Company recognizes investment tax credits on its research and development activities using the cost reduction method, under which credits are deducted from the assets or expenses to which they relate. Credits are only recorded when it is probable that they will be realized.
The Company recognizes a provision when it has a present legal or constructive obligation that is the result of a past event, it is probable that the Company will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. Provisions are measured based on the best estimate of the amount required to settle the obligation. If the effect of the time value of money is material, the amount of the provision is determined using a pre-tax discount rate that reflects the risks specific to the obligation. The Company reviews its provisions at the end of each reporting period and, if required, an adjustment to reflect the current best estimate is made. In instances where it is no longer probable that an outflow of resources will be required to settle the obligation, the provision is reversed.
The Company recognizes restructuring provisions related to efficiency programs aimed at achieving process improvements and cost reductions. Restructuring provisions are recognized when we have announced or implemented a detailed formal plan that changes either the scope of our business or the manner in which the business is conducted. Facility exit costs are recognized as a liability and expensed when the Company exits a lease prior to the lease expiration date. The liabilities recognized are based on the remaining lease rentals reduced by the actual or estimated sublease rentals at the cease-use date. Decommissioning provisions are initially recognized at the best estimate of the amount required to settle the obligation, the resulting costs are added to the carrying amount of the related asset and the cost is amortized over the economic life of the asset. The carrying amount of the provision is adjusted for the passage of time and any changes in the market-based discount rate, amount or timing of the underlying future cash flows required to settle the obligation
(l) Financial instruments
|(i) Recognition and derecognition of financial assets and liabilities|
|Financial assets and liabilities are recognized on the Company's statement of financial position when the Company becomes a party to the contractual provisions of the instrument. The Company's financial assets and liabilities are recorded initially at fair value. Financial assets are derecognized when the Company no longer has rights to cash flows, the risks and rewards of ownership or control of the asset. Financial liabilities are derecognized when the obligation under the liability is discharged or cancelled or it expires.|
|(ii) Financial assets|
|Cash and cash equivalents|
|Cash and cash equivalents include cash on hand, net of bank overdrafts, and money market instruments, which are readily convertible into known amounts of cash. Cash and cash equivalents are classified as fair value through profit and loss ("FVTPL"), and represent a financial asset measured at fair value, with changes in fair value recognized in net income.|
|Accounts receivable are classified as loans and receivables, and are measured at amortized cost less any allowance for doubtful accounts. The Company maintains an allowance for doubtful accounts for potential credit losses. This allowance is based on management's best 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.|
|(iii) Financial liabilities|
|Long-term debt is classified as other financial liabilities and is measured at amortized cost. The Company accounts for debt issue costs associated with the issuance of long-term debt as a reduction in the carrying value of long-term debt. These costs, which are amortized over the life of long-term debt using the effective interest rate method, are included in debt charges.|
|Other financial liabilities|
|Accounts payable, notes payable, securitization borrowings and other long-term liabilities are classified as other financial liabilities and are measured at amortized cost.|
|(iv) Fair value|
|The fair value of financial assets designated as FVTPL is determined based on quoted prices in active markets for identical assets, per Level 1 of the fair value hierarchy.|
|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.|
|(v) Accounts receivable securitization|
|The Company accounts for the transfer of receivables to a securitization trust as a collateralized borrowing. When the receivables are transferred, the Company continues to recognize the receivables on its statement of financial position because the associated risks and rewards, in particular credit risk, have not been transferred. A corresponding financial liability is recognized for the cash consideration received from the trust. All trade receivables transferred have a maturity of less than 90 days. Under this arrangement, the Company continues to manage and service the receivables transferred.|
|(vi) Impairment of financial assets|
|At each reporting date, the Company assesses whether there is objective evidence that the carrying value of a financial asset is impaired. If impairment occurs, the loss is recognized in the statement of net income and the carrying value is reduced to its 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 due to the short duration to maturity.|
|(vii) Derivative financial instruments|
|The Company purchases foreign currency forward contracts in United States of America ("U.S.") dollars to manage foreign currency exchange exposure, which arises in the normal course of business operations. The Company has elected not to designate any of its foreign currency forward contracts as accounting hedges. Foreign exchange gains and losses on these foreign currency forward contracts are recorded in the consolidated statement of financial position as an asset or a liability, with changes in fair value recognized in the consolidated statement of net income.|
The determination of whether an arrangement is, or contains a lease, is based on the substance of the arrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and whether the arrangement conveys the right to use that asset.
Assets held under finance leases are recognized as assets of the Company at the lower of the present value of the minimum lease payments or the fair value of the leased assets. Assets held under finance leases are depreciated over the shorter of the lease term or their useful economic life. The corresponding liability of the Company is included in the statement of financial position as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation using the effective interest method. Finance charges are expensed in the reporting period.
Leases that do not transfer the risks and rewards of ownership are classified as operating leases. Payments are recorded in the statement of net income on a straight-line basis over the lease term.
(n) Employee benefits
The Company's cost of providing benefits under its defined benefit pension plans and other non-pension employee future benefits is determined annually by independent actuaries, using the projected unit credit method. These actuarial valuations require the use of assumptions, including the discount rate to measure obligations, the expected long-term rate of return on plan assets and expected future salary increases. The discount rate used to calculate the present values of the defined benefit obligation is determined by reference to market interest rates of high quality Canadian corporate bonds as at the measurement date. The expected return on plan assets is calculated using the fair value of pension fund assets. Past service costs arising from plan amendments are recognized immediately in income.
The defined benefit asset or liability recognized in the Company's consolidated statement of financial position comprises the present value of the defined benefit obligations less the fair value of plan assets. All actuarial gains and losses are recognized immediately in other comprehensive income. At each interim reporting period, the Company estimates actuarial gains and losses resulting from changes in the discount rate used to calculate the present value of the defined benefit pension obligations and from differences between the expected long-term rate of return on plan assets and the actual return on plan assets. At year-end, all actuarial gains and losses arising from changes in the present value of the defined benefit obligations and the fair value of plan assets are determined in an accounting valuation prepared by an independent actuary. For funded defined benefit plans, when an asset is recognized, it is limited to the present value of the economic benefit in the form of reductions in future contributions to the plan. Any minimum funding requirements are considered in the calculation of the economic benefit. For plans recognized by a defined benefit liability, minimum funding requirements can also result in an increase in the liability. An economic benefit is available to the Company if it is realizable during the life of the plan or on settlement of the plan liabilities. The Company recognizes any decrease in an asset or increase in a liability as a result of the above in other comprehensive income ("OCI"). The Company recognizes its payments to the defined contribution plans as an expense in the period in which the employee service is incurred.
(o) Share-based compensation
The Company has a number of share-based compensation plans, whereby the Company receives services from employees or its Board of Directors in exchange for equity-settled or cash-settled share-based compensation. Equity-settled plans include the Company's stock option program. Cash-settled plans include the Company's employee share ownership plan, performance share unit plan, restricted share unit plan and share appreciation plan.
The cost of equity-settled share-based transactions is measured at the fair value of the stock option at the grant date, using the Black-Scholes option pricing model. The fair value of the stock options, which have graded vesting, is expensed over the respective vesting period of each tranche based on the Company's estimate of stock options expected to vest.
The Company uses a fair value-based methodology to measure the cost of cash-settled share-based transactions. Compensation expense is based on the expected payout amounts net of estimated forfeitures and is recorded over the term of the vesting period. Cash-settled awards are classified as liabilities, which are remeasured at each reporting date. The impact of any changes in the liability as a result of subsequent changes to the estimated payout values for the units expected to vest is recognized in income in the period of change.
(p) Translation of foreign currencies
The Company's consolidated financial statements are presented in Canadian dollars, which is also its functional currency. Foreign currencies have been translated into Canadian dollars at rates of exchange on the following bases:
- monetary assets and liabilities at rates in effect on the date of the statement of financial position;
- non-monetary assets and liabilities at historical exchange rates; and
- revenues and expenses at rates prevailing at the respective transaction dates.
3. CRITICAL ACCOUNTING ESTIMATES, ASSUMPTIONS AND JUDGEMENTS
The preparation of our consolidated financial statements in accordance with IFRS requires management to make estimates, assumptions and judgements that affect the reported amounts of assets and liabilities as at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period.
(a) Critical accounting estimates and assumptions
Estimates and assumptions are based on reasonable methodologies, established processes and comparisons to industry standards. The Company continuously evaluates these estimates and assumptions, which rely on the use of professional judgement. Because professional judgement involves inherent uncertainty, actual results could differ from our estimates. Areas involving critical estimates and assumptions are described below:
|(i) Valuation of accounts receivable|
|The Company estimates that a certain portion of receivables from customers will not be collected, and maintains an allowance for doubtful accounts. If circumstances related to specific customers change, economic conditions change or actual results differ from expectations, the Company's estimate of the recoverability of receivables could fluctuate from that provided for in the consolidated financial statements. A change in estimate could impact bad debt expense and accounts receivable.|
|(ii) Property, plant and equipment|
|Property, plant and equipment are amortized on a straight-line basis over their estimated useful life. The Company reviews these estimates on an annual basis, or more frequently if events during the year indicate that a change may be required, with consideration given to technological obsolescence, competitive pressures and other relevant business factors. A change in management's estimate could impact depreciation expense and the carrying value of property, plant and equipment.|
|(iii) Useful lives of definite life intangible assets|
|Intangible assets with a definite useful life are amortized on a straight-line basis over their estimated period of future benefit. The estimated periods of future benefit and amortization methods are reviewed on an annual basis, or more frequently, if events during the year indicate that a change may be required, with consideration given to customer churn, industry standards and other relevant business factors. A change in estimate could impact amortization expense and the carrying value of intangible assets.|
|(iv) Goodwill and indefinite life intangible assets|
|The Company tests the recoverability of goodwill and indefinite life intangible assets on an annual basis or earlier when events or changes in circumstance indicate that the carrying value might not be recoverable. The recoverable amount of each cash-generating unit to which the asset is allocated, is determined based on value in use calculations. These calculations require the use of estimates, including management's expectations of revenues and operating costs, and assumptions on discount and growth rates. A change in estimates could impact the carrying value of goodwill and indefinite life intangible assets.|
|(v) Deferred tax assets|
|The Company has deferred tax assets resulting from net operating loss carryforwards and deductible temporary differences, which, to the extent utilized, will reduce future taxable income. Realization of these deferred tax assets is dependent on the Company's ability to utilize the underlying future deductions against future taxable income. In assessing the carrying value of the deferred tax assets, the Company makes estimates and assumptions of future taxable income using internal management projections, the carry forward period associated with the deferred tax assets, the nature of income that may be used to realize the deferred tax assets, future tax rates and ongoing audits by Canada Revenue Agency ("CRA"). A change in the Company's estimates or assumptions of any of these factors could affect the value of the deferred tax asset and related income tax expense. CRA audits currently are underway for the years 2001 to 2006. These audits include a review of loss carryforwards accumulated by Allstream Inc. prior to its acquisition by the Company in 2004.|
|(vi) Decommissioning provisions|
|When recognizing decommissioning provisions, the Company makes estimates of the probability of retiring assets, the timing and amount of retirement costs, and the discount factor applied to determine fair value. Management's estimates of probability, and the timing and amount of costs, are subject to change and are reviewed annually or more frequently if events during the year indicate that a change may be required.|
|(vii) Employee benefits|
|The Company provides pension, supplemental pension and other non-pension employee future benefits to its employees. The determination of benefit expense and benefit obligation associated with employee future benefits requires the use of certain actuarial and economic assumptions, such as the discount rate to measure benefit obligations, the expected rate of return on plan assets, expected future salary increases and future mortality rates. A change in estimate or assumptions could affect benefit expense and the present value of the defined benefit obligation.|
(b) Critical accounting judgement
In the normal course of operations, the Company enters into arrangements in which services and products are sold together. In the process of applying the Company's accounting policies for this type of revenue recognition, judgement is often necessary to determine when components can be accounted for separately.
4. ACCOUNTING STANDARDS ISSUED BUT NOT YET EFFECTIVE
The Company has not yet adopted certain standards, interpretations to existing standards and amendments that have been issued but have an effective date of later than periods beginning January 1, 2011. Many of these updates are not relevant to the Company and are therefore not discussed. The Company reasonably expects the following standards and amendments to be applicable to its consolidated financial statements at a future date:
IFRS 9, Financial Instruments
IFRS 9, Financial Instruments, issued by the IASB in November 2009 and amended in October 2010, introduces new requirements for the classification and measurement of financial assets and liabilities. IFRS 9 requires all financial assets within the scope of International Accounting Standard ("IAS") 39, Financial Instruments - Recognition and Measurement, to be subsequently measured at amortized cost or fair value, replacing the multiple classification options in IAS 39. IFRS 9 also requires an entity choosing to measure a financial liability at fair value to present the portion of the change in its fair value due to changes in the entity's own credit risk in the other comprehensive income section of the income statement, rather than within the statement of net income.
IFRS 9 reflects the first phase of a project to replace IAS 39. In subsequent phases, the IASB will address hedge accounting and the impairment of financial assets. IFRS 9 is effective for annual periods beginning on or after January 1, 2015, with earlier application permitted.
IFRS 10, Consolidated Financial Statements
IFRS 10, Consolidated Financial Statements, issued by the IASB in May 2011, provides a single consolidation model that identifies control as the basis for consolidation for all types of entities. IFRS 10 replaces IAS 27, Consolidated and Separate Financial Statements, and Standing Interpretations Committee ("SIC") 12, Consolidation - Special Purpose Entities. IFRS 10 is to be applied retrospectively and is effective for annual periods beginning on or after January 1, 2013, with earlier application permitted.
IFRS 11, Joint Arrangements
IFRS 11, Joint Arrangements, issued by the IASB in May 2011, describes the accounting for arrangements in which there is joint control by focusing on the rights and obligations of the arrangement, rather than its legal form. IFRS 11 also removes the ability to use proportionate consolidation for joint ventures. IFRS 11 replaces IAS 31, Interests in Joint Ventures, and SIC 13, Jointly Controlled Entities - Non-Monetary Contributions by Venturers, and is effective for annual periods beginning on or after January 1, 2013, with earlier application permitted. When adoption of IFRS 11 requires a change in accounting, the impact of the change is calculated at the beginning of the earliest period presented and the comparative periods are restated.
IFRS 12, Disclosure of Interests in Other Entities
IFRS 12, Disclosure of Interests in Other Entities, issued by the IASB in May 2011, is a new standard that addresses the disclosure requirements for all interests in other entities, including subsidiaries, joint arrangements, associates and unconsolidated structured entities. IFRS 12 is effective for annual periods beginning on or after January 1, 2013, with earlier application permitted.
IFRS 13, Fair Value Measurement
IFRS 13, Fair Value Measurement, issued by the IASB in May 2011, replaces the fair value measurement guidance currently dispersed across different IFRS standards with a single definition of fair value and a comprehensive framework for measuring fair value when such measurement is required under other IFRSs. It also establishes disclosure requirements about fair value measurements. IFRS 13 is to be applied prospectively and is effective for annual periods beginning on or after January 1, 2013, with earlier application permitted.
Amendments to IAS 1, Presentation of Financial Statements
The amendments to IAS 1, Presentation of Financial Statements, issued by the IASB in June 2011, requires companies preparing financial statements to group together items within OCI on the basis of whether they may be reclassified to the profit or loss section of the income statement. The amendments also reaffirm existing requirements that items in OCI and profit or loss should be presented as either a single statement or two consecutive statements. The amendments are effective for annual periods beginning on or after July 1, 2012, with earlier application permitted.
Amended IAS 19, Employee Benefits
The amended version of IAS 19, Employee Benefits, issued by the IASB in June 2011, amends the accounting for pensions and other post-employment benefits. It changes the method of calculating the net interest component of pension expense and also expands disclosure requirements for defined benefit plans, providing better information about the characteristics and associated risks of defined benefit plans. The accounting treatment for termination benefits has also been modified, specifically the point in time when an entity would recognize a liability for termination benefits. The amended version of IAS 19 comes into effect for annual periods beginning on or after January 1, 2013, with earlier application permitted.
The Company is currently evaluating the impact of the above standards on its financial statements.
5. OPERATING REVENUES
|Operating revenues from the provision of services||1,696.4||1,712.4|
|Operating revenues from the sale of goods||69.2||70.2|
6. OPERERATING EXPENSES
|Salaries and benefits expense||404.5||409.5|
|Bad debt expense||6.0||10.5|
|Other operations expenses||760.7||797.8|
|Depreciation and amortization:|
|Depreciation of property, plant and equipment||197.1||198.2|
|Amortization of intangible assets||101.8||92.5|
7. FINANCE COSTS
|Interest expense on long-term indebtedness||61.8||63.9|
|Interest expense on short-term indebtedness||4.5||4.0|
|Other finance expense||6.5||2.1|
|Capitalized borrowing costs||(7.2)||(5.6)|
During the year ended December 31, 2011, the Company paid short-term interest costs of $4.5 million (2010 - $4.0 million) and interest on long-term debt of $61.6 million (2010 - $62.7 million).
Borrowing costs associated with qualifying projects were capitalized at an average rate of 5.79% (2010 - 5.94%).
8. INCOME TAXES
The major components of income tax expense for the years ended December 31, 2011 and December 31, 2010 are:
|Current income tax:|
|Current income tax expense||-||0.1|
|Adjustments in respect of current income tax of previous years||-||0.3|
|Deferred income tax:|
|Relating to origination and reversal of temporary differences||65.4||63.2|
|Income tax expense||65.4||63.6|
Income tax recovery on actuarial gains and losses from defined benefit plans and other post employment benefits recognized in other comprehensive income in 2011 is $50.8 million (2010 - $39.2 million).
Reconciliations between income tax expense recognized and the accounting income multiplied by the applicable tax rate for the years ended December 31, 2011 and December 31, 2010 are as follows:
|Net income before income taxes||232.5||204.9|
|Income tax at combined federal and provincial statutory tax rate||28.3||65.8||30.3||62.1|
|Adjustments in respect of current income tax of previous years||-||-||0.1||0.3|
|Rate differential on temporary differences||(0.7)||(1.5)||(0.4)||(0.9)|
|Income tax reported in the consolidated statements of net income||28.1||65.4||31.0||63.6|
The tax rate used represents the combined federal and provincial statutory tax rate applicable to the Company's major operating entity.
The major items giving rise to deferred tax assets and liabilities are presented below:
|December 31, 2011||December 31, 2010||January 1, 2010|
|Tax loss carryforwards||229.3||214.9||142.7|
|Property, plant and equipment||196.1||261.8||384.6|
|Deferred tax assets, net||534.0||548.6||572.7|
Reflected in the consolidated statements of financial position as follows:
|December 31, 2011||December 31, 2010||January 1, 2010|
|Deferred tax assets||535.0||549.7||573.9|
|Deferred tax liabilities||(1.0)||(1.1)||(1.2)|
|Deferred tax assets, net||534.0||548.6||572.7|
Deferred tax assets of $229.3 million (December 31, 2010 - $214.9 million; January 1, 2010 - $142.7 million) on tax loss carryforwards, which arose in certain subsidiaries, were recognized in situations where their utilization is dependent on future taxable profits in excess of the reversal of existing temporary differences of the entities and where there is a history of current and prior year losses, since it is probable that the losses will be utilized through amalgamations with other taxable entities of the Company and other tax planning opportunities.
During the year ended December 31, 2011, the Company paid no cash income taxes (2010 - paid $1.2 million).
As at December 31, 2011, the Company, along with its subsidiaries, had unused non-capital tax loss carryforwards of $874.3 million (December 31, 2010 - $821.7 million; January 1, 2010 - $565.0 million) available to reduce future years' taxable income, which expire as follows:
|2025 and beyond||853.0|
9. EARNINGS PER SHARE
The following table provides a reconciliation of the information used to calculate basic and diluted earnings per share:
|Net income for the year|
|Basic and diluted||167.1||141.3|
|Weighted average shares outstanding (in millions)|
|Weighted average number of shares outstanding - basic and diluted||65.5||64.7|
|Earnings per share ($)|
|Basic and diluted earnings per share||2.55||2.18|
As at December 31, 2011 and December 31, 2010 no stock options had an anti-dilutive effect.
The Company performs periodic reviews of inventory for obsolescence and, during the year ended December 31, 2011, expensed $1.0 million in obsolete inventory (2010 - $0.9 million). During the year ended December 31, 2011, the Company expensed $38.5 million of inventory relating to cost of goods sold (2010 - $41.0 million)
11. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are comprised of the following:
| Buildings and
|January 1, 2010||2,914.6||440.0||245.6||1.7||93.3||6.3||3,701.5|
|Transfers (note 12)||(129.8)||113.6||26.2||-||-||-||10.0|
|December 31, 2010||2,924.0||586.3||279.8||1.7||154.4||6.4||3,952.6|
|December 31, 2011||3,043.2||543.8||287.3||1.7||175.8||6.6||4,058.4|
|Accumulated depreciation and impairment|
|January 1, 2010||1,919.3||298.0||104.9||0.7||-||-||2,322.9|
|Transfers (note 12)||(144.8)||135.8||15.2||-||-||-||6.2|
|December 31, 2010||1,873.2||452.3||128.6||0.9||-||-||2,455.0|
|December 31, 2011||1,978.1||400.7||135.2||1.1||-||-||2,515.1|
|Net book value|
|December 31, 2010||1,050.8||134.0||151.2||0.8||154.4||6.4||1,497.6|
|December 31, 2011||1,065.1||143.1||152.1||0.6||175.8||6.6||1,543.3|
12. INTANGIBLE ASSETS
Intangible assets are comprised of the following:
|January 1, 2010||298.9||89.6||51.4||10.8||32.1||27.7||510.5|
|Transfers (note 11)||(10.0)||-||-||-||-||-||(10.0)|
|December 31, 2010||334.9||117.7||51.4||10.7||42.7||27.7||585.1|
|December 31, 2011||375.9||140.2||51.4||10.7||44.9||27.7||650.8|
|January 1, 2010||177.2||35.2||-||2.6||17.0||-||232.0|
|Amortization recorded in operations expense||-||-||-||-||11.9||-||11.9|
|Transfers (note 11)||(6.2)||-||-||-||-||-||(6.2)|
|December 31, 2010||217.1||56.3||-||3.6||28.6||-||305.6|
|Amortization recorded in operations expense||-||-||-||-||11.1||-||11.1|
|December 31, 2011||263.2||60.9||-||4.6||14.9||-||343.6|
|Net book value|
|December 31, 2010||117.8||61.4||51.4||7.1||14.1||27.7||279.5|
|December 31, 2011||112.7||79.3||51.4||6.1||30.0||27.7||307.2|
Allocation of goodwill to cash-generating units for impairment testing
For the purposes of its annual goodwill impairment test, the Company allocates its goodwill to the cash-generating units, which are the smallest identifiable groups of assets that generate cash inflows that have goodwill and are largely independent of the cash inflows from other groups of assets. The Company's $27.7 million of goodwill has been allocated as follows: $20.6 million to the MTS Unit, excluding AAA Alarms, and $7.1 million to AAA Alarms.
The Company also has indefinite life intangible assets of $51.4 million (December 31, 2010 - $51.4 million; January 1, 2010 - $51.4 million) which have been allocated to the MTS Unit, excluding AAA Alarms, for purposes of annual impairment testing. The impairment tests performed during the year did not result in the recognition of any impairment losses.
In performing the annual impairment testing for each of the Company's cash-generating units, the Company measured the recoverable amount of the cash-generating unit based on a value in use calculation using certain key management assumptions. Cash flow projections, which were made over a five-year period based on financial budgets approved by the Board, include key assumptions about revenues, expenses and other cash flows. Revenue forecasts were based on management's estimate of growth in the markets served and are not considered to exceed the long-term average growth rates for those markets. Operating expenses were estimated based upon past experience, adjusted for the increase in activity levels supporting the cash flow projections. Discount rates applied to the cash flow forecasts are derived from the group's pre-tax weighted average cost of capital, adjusted to reflect management's estimate of the specific risk profiles of the individual cash-generating units. The cash flows related to the MTS Unit, excluding AAA Alarms, and AAA Alarms were discounted using pre-tax rates of 12.3% to 13.2% and 13.3% to 14.8%, respectively.
Based on the sensitivity analysis performed, the Company has concluded that no reasonably possible changes in the key assumptions on which the recoverable amount is based would cause the carrying amount of the cash-generating unit to exceed the recoverable amount.
13. OTHER ASSETS
|December 31, 2011||December 31, 2010||January 1, 2010|
|Investment tax credits recoverable||48.1||21.9||17.8|
|Long-term prepaid costs||15.1||16.9||18.9|
|Other long-term assets||4.6||4.2||5.5|
|Long-term disability fund, at cost||-||-||0.1|
The composition and changes in provisions are as follows:
|January 1, 2010||15.4||14.1||6.0||4.6||40.1|
|Provisions utilized Utilizations||(19.5)||(3.2)||(0.2)||(2.4)||(25.3)|
|Provisions reversed Reversals||(2.0)||(0.2)||-||(1.1)||(3.3)|
|December 31, 2010||12.9||11.2||6.3||5.2||35.6|
|December 31, 2011||11.6||15.9||6.5||4.8||38.8|
Restructuring provisions relate to the Company's efficiency programs aimed at achieving process improvements and expense reductions. Restructuring costs include costs for severance and other employee-related expenses that supported workforce reduction initiatives undertaken throughout the year, facility consolidation of select real estate, as well as costs to review and improve efficiencies in current processes. These provisions are expected to be settled over periods ranging from one month to 24 months.
The Company recognizes tax-related provisions for uncertain tax positions related to sales taxes, capital taxes and property taxes. The provisions reflect the potential obligation for the Company to remit additional taxes, penalties and/or interest as a result of decisions by taxation authorities.
Decommissioning provisions arise from legal and constructive obligations that exist for the removal of equipment or the restoration of premises upon the termination of certain agreements. These provisions, which are expected to be settled over periods ranging from seven months to 40 years, are associated with underground and above ground cable, microwave towers and related structures, building accesses and leased facilities.
The undiscounted amount of the estimated cash flows required to settle the decommissioning provisions as at December 31, 2011 is approximately $12 million (December 31, 2010 - $14 million; January 1, 2010 - $14 million).
Other provisions include amounts provided for legal or constructive obligations arising from regulatory decisions and litigation claims.
15. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Financial assets and liabilities
Financial assets and liabilities in the consolidated statements of financial position are as follows:
December 31, 2011
at fair value
| Loans and
| Other financial
|Cash and cash equivalents||16.8||-||-||16.8|
|Accounts payable and accrued liabilities||-||-||311.9||311.9|
|Current portion of long-term debt||-||-||100.0||100.0|
|Other long-term liabilities||-||-||17.0||17.0|
December 31, 2010
at fair value
| Loans and
| Other financial
|Cash and cash equivalents||50.0||-||-||50.0|
|Accounts payable and accrued liabilities||0.4||-||343.0||343.4|
|Current portion of long-term debt||-||-||220.0||220.0|
|Other long-term liabilities||-||-||0.5||0.5|
January 1, 2010
at fair value
| Loans and
| Other financial
|Cash and cash equivalents||110.2||-||-||110.2|
|Accounts payable and accrued liabilities||0.7||-||312.0||312.7|
|Current portion of long-term debt||-||-||11.9||11.9|
|Other long-term liabilities||-||-||1.1||1.1|
As at December 31, 2011, the Company had a $400 million bank credit facility with a syndicate of financial institutions, which is used for cash management purposes, the issuance of letters of credit, and to support the Company's $150 million commercial paper program. As at December 31, 2011, the Company had $37.4 million in undrawn letters of credit outstanding under this facility. The Company also had a $150 million credit facility with a financial institution, which is used solely for the issuance of letters of credit. As at December 31, 2011, the Company had $149.3 million in undrawn letters of credit outstanding under this facility.
Under the terms of the Company's accounts receivable securitization program, the Company has the ability to transfer, on a revolving basis, an undivided ownership interest in its accounts receivable to a securitization trust, up to a maximum of $110.0 million. The terms of the Company's accounts receivable securitization program require the Company to maintain reserve accounts, in the form of additional accounts receivable over and above the cash proceeds received, to absorb credit losses on the receivables sold. As at December 31, 2011, the Company had no balance outstanding on its accounts receivable securitization program.
Long-term debt is comprised of the following:
|Interest rate||Maturity||December 31, 2011||December 31, 2010||January 1, 2010|
|Medium Term Note||8.625%||September 8, 2010||-||11.9|
|Medium Term Note||5.20%||September 27, 2011||-||220.0||220.0|
|Medium Term Note||5.05%||May 11, 2012||100.0||100.0||100.0|
|Loan Payable||6.59%||May 14, 2014||75.0||75.0||75.0|
|Medium Term Note||6.15%||June 10, 2014||200.0||200.0||200.0|
|Medium Term Note||6.65%||May 11, 2016||250.0||250.0||250.0|
|Medium Term Note||4.59%||October 1, 2018||200.0||-||-|
|Medium Term Note||5.625%||December 16, 2019||200.0||200.0||200.0|
|Less: debt issue costs||(4.2)||(4.4)||(5.4)|
|Less: current portion of long-term debt||(100.0)||(220.0)||(11.9)|
The Company's notes are issued under trust indentures and are unsecured.
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, approximate fair value. The fair value of long-term debt as at December 31, 2011, including the current portion, was $1,105.2 million (December 31, 2010 - $1,111.0 million; January 1, 2010 - $1,117.0 million).
Financial risk management
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 receivable:
|December 31, 2011||December 31, 2010||January 1, 2010|
|Past 90 days||7.4||4.3||12.2|
The Company maintains an allowance for doubtful accounts for potential credit losses. This allowance is based on management's best 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 carrying amount of financial assets recorded in the financial statements, which is net of impairment losses, represents the Company's maximum exposure to credit risk.
The Company's allowance for doubtful accounts for large business accounts receivable is calculated as a specific percentage of total large business accounts outstanding plus an additional provision for certain high-risk large business accounts. For all other accounts receivable, the allowance for doubtful accounts represents all accounts over 90 days past due.
The following table provides a continuity of the Company's allowance for doubtful accounts receivable:
|Balance, beginning of the year||7.5||11.0|
|Charge for the year||6.0||10.5|
|Accounts written-off (net of recoveries)||(6.2)||(14.0)|
|Balance, end of the year||7.3|| 7.5
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, based on contractual undiscounted payments. The table includes both interest and principal cash flows.
|2011||Less than 1 year||1 - 2 years||2 - 3 years||3+ years|
|Accounts payable and accrued liabilities||311.9||-||-||-|
|Long-term debt - principal||100.0||-||275.0||650.0|
|Interest on long-term debt||56.1||54.3||45.6||112.8|
|Other long-term liabilities||2.5||2.5||2.5||16.1|
|Accounts payable and accrued liabilities||343.0||-||-||-|
|Long-term debt - principal||220.0||100.0||-||725.0|
|Interest on long-term debt||58.6||47.0||45.1||114.7|
|Other long-term liabilities||0.1||0.3||0.1||-|
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.
The Company enters into foreign currency forward contracts to manage foreign currency exposure, which arises in the normal course of business operations. The Company's accounting policy is to adjust outstanding foreign currency forward contracts from book value to fair value as at the balance sheet date. As at December 31, 2011, the Company had no outstanding foreign currency forward contracts (December 31, 2010 - $48.6 million U.S.; January 1, 2010 - $60.6 million U.S.) or a related financial liability recorded in accounts payable and accrued liabilities (December 31, 2010 - $0.4 million; January 1, 2010 - $0.7 million). During the year ended December 31, 2011, the Company recognized $0.4 million of expense in other income related to the adjustment of outstanding foreign currency forward contracts to fair value. In January 2012, the Company had outstanding foreign currency forward contracts to purchase $54.5 million U.S.
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.
Capital structure management policies
The Company's objectives when managing capital are: (i) to maintain an acceptable level of liquidity, 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. As part of managing the capital structure, the Company will make adjustments 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 following table provides information on the Company's debt to capitalization ratio:
|December 31, 2011||December 31, 2010||January 1, 2010|
|Cash and cash equivalents||(16.8)||(50.0)||(110.2)|
|Finance lease obligations, including current portion||15.0||16.4||17.6|
|Long-term debt, including current portion||1,020.8||1,040.6||1,051.5|
|Debt to capitalization||56.3%||54.3%||50.3%|
The Company must comply with two types of covenants regarding capital structure. The first is a debt to EBITDA (earnings before interest, taxes, depreciation and amortization, and other income (expense)) covenant on the Company's bank credit facility that requires the Company to maintain a ratio of debt to EBITDA below a certain threshold. The second is a level of debt covenant on the Company's medium term notes 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.
16. EMPLOYEE BENEFITS
The Company and its subsidiaries provide pension benefits through two contributory and one non-contributory defined benefit best average pension plans, which cover most of the employees of the Company and its subsidiaries. These plans provide pensions based on length of service and best average earnings. Two of the defined benefit plans have provisions for periodic cost of living adjustments to benefit payments for certain members, based on a percentage of the increase in the Consumer Price Index. The Company's policy is to fund the plans as determined through periodic actuarial valuations. Contributions reflect actuarial assumptions regarding salary projections and future service benefits.
The Company also has two defined contribution pension plans that cover certain employees of the Company. One plan requires the Company to contribute, on behalf of each member, an amount equal to 2.5% of the member's earnings. The second plan requires members to contribute a minimum of 1% to a maximum of 9% of earnings. The Company is required to match member contributions, subject to limits that vary by years of continuous service.
The Company also provides supplemental pension benefits to certain current and retired employees. One of the Company's supplemental pension benefit plans has assets set aside in trust to fund benefits.
The Company measures its defined benefit obligations and the fair value of plan assets as at December 31 each year. The most recent actuarial valuation of the pension plans for funding purposes was as at January 1, 2011. The next funding valuations are required to be completed as at January 1, 2012. Future funding requirements will depend on the results of annual actuarial funding valuations, which are affected by various factors such as actuarial experience of the plans, return on plan assets and interest rate fluctuations.
In 2006, the Government of Canada enacted Solvency Funding Relief Regulations for defined benefit pension plans regulated under the Pension Benefits Standards Act, 1985 (Canada), which enabled the extension of solvency funding payments from five years to 10 years. Effective April 1, 2011, new regulations under the Pension Benefits Standards Act, 1985 (Canada) provided that letters of credit may be used to meet solvency special payment requirements. The total face value of the letters of credit cannot exceed 15% of the market value of the assets as determined on the valuation date. MTS has elected to opt out of the 10 year funding and to treat the existing letters of credit under the Solvency Funding Relief Regulations as if they had been implemented under the new regulations under the Pension Benefits Standards Act, 1985 (Canada). To facilitate solvency special payments, the Company has arranged for $155.4 million (2010 - $110.2 million) in letters of credit to be held by RBC Dexia Investor Services Trust, the trustee for the defined benefit pension plans.
The Company provides other non-pension employee future benefits, including life, medical and dental insurance, which are unfunded. The Company's costs for medical and dental insurance available for certain retirees are fixed and not subject to changes in medical cost trend rates.
The Company also has a long-term disability plan for certain employees, for which the Company had assets set aside to fund benefits. These assets have been used to fund benefits, with a small residual amount reallocated to general corporate purposes in 2011.
Defined benefit plans
Net benefit expense
The amounts recognized in the Company's consolidated statements of net income in operations expense and the actual return on plan assets are as follows:
|Pension benefits||Other benefits|
|Current service cost||29.4||24.4||2.2||2.1|
|Expected return on plan assets||(133.5)||(127.0)||-||(0.3)|
|Net benefit expense||3.0||8.0||3.6||3.3|
The amounts recognized in the Company's consolidated statements of other comprehensive loss are as follows:\
|Pension benefits||Other benefits|
|Net actuarial losses||193.7||179.7||0.2||2.1|
|Change in the effect of the minimum funding requirement||-||(32.0)||-||-|
|Deferred tax recovery on actuarial losses||(50.8)||(38.7)||-||(0.5)|
|Total recognized in other comprehensive loss||142.9||109.0||0.2||1.6|
Net benefit liability
The components of the net benefit liability, as recognized in the Company's consolidated statements of financial position are as follows:
|Pension benefits||Other benefits|
|Present value of funded defined benefit obligation||(2,202.1)||(2,085.7)||-||(8.6)|
|Fair value of plan assets||1,853.7||1,873.7||-||3.0|
|Present value of unfunded defined benefit obligations||(16.7)||(14.0)||(29.1)||(19.8)|
|Net benefit liability - recorded in employee benefits||(365.1)||(226.0)||(29.1)||(25.4)|
Benefit obligation and plan assets
The changes in the present value of the defined benefit obligation and the fair value of plan assets are as follows:
|Pension benefits||Other benefits|
|Present value of defined benefit obligation, beginning of year||2,099.7||1,882.0||28.4||25.4|
|Employer current service cost||29.4||24.4||2.2||2.1|
|Actuarial loss on obligation||82.1||209.0||0.2||1.9|
|Benefit payments and transfers||(111.6)||(138.3)||(3.1)||(2.5)|
|Present value of defined benefit obligation, end of year||2,218.8||2,099.7||29.1||28.4|
|Fair value of plan assets, beginning of year||1,873.7||1,779.0||3.0||3.3|
|Expected return on plan assets||133.5||127.0||-||0.3|
|Actuarial gain (loss) on plan assets||(111.6)||29.3||-||(0.2)|
|Benefit payments and transfers||(111.6)||(138.3)||(3.1)||(2.5)|
|Fair value of plan assets, end of year||1,853.7||1,873.7||-||3.0|
|Actual return on plan assets||21.9||156.3||-||0.1|
The cumulative gains and losses recognized in other comprehensive income are as follows:
|Pension benefits||Other benefits|
|Actuarial losses, beginning of year||179.7||-||2.1||-|
|Net actuarial losses recognized in year||193.7||179.7||0.2||2.1|
|Actuarial losses, end of year||373.4||179.7||2.3||2.1|
The Company expects to contribute approximately $35 million in cash funding and arrange for approximately $80 million in new letters of credit to be issued to the defined benefit plans in 2012.
Other financial information about the Company's benefit plans is as follows:
|Pension benefits||Other benefits|
|Present value of defined benefit obligation||2,218.8||2,099.7||29.1||28.4|
|Fair value of plan assets||1,853.7||1,873.7||-||3.0|
|Net benefit liability||(365.1)||(226.0)||(29.1)||(25.4)|
|Experience loss on defined benefit obligation||(82.1)||(209.0)||(0.2)||(1.9)|
|Experience gain (loss) on plan assets||(111.6)||29.3||-||(0.2)|
The major categories of the defined benefit pension plans' assets as a percentage of the fair value of the total plans' assets are as follows:
The plans' assets do not include any direct investment in the Company's own financial instruments nor any property occupied or other assets used by the Company. Some of the plans' assets are invested in units of certain Canadian equity and bond pooled funds that may hold financial instruments of the Company from time to time.
Management must make assumptions about the expected long-term rate of return on plan assets. In determining the long-term rate of return assumption, management considers input from its actuaries regarding the expected long-term rates of return, assuming the Company's targeted investment portfolio mix.
The actuarial assumptions used to determine the defined benefit obligation and net benefit expense are as follows:
|Pension benefits||Other benefits|
|Defined benefit obligation|
|Future salary increases||3.25%||3.50%||3.25%||3.50%|
|Net benefit expense|
|Expected rate of return on plan assets||7.25%||7.25%||N/A||7.25%|
|Future salary increases||3.50%||3.50%||3.50%||3.50%|
Defined contribution plan
During 2011, the Company recognized an expense, representing employer contributions to the defined contribution plans, in the amount of $2.8 million (2010 - $2.7 million).
17. OTHER LONG-TERM LIABILITIES
|December 31, 2011||December 31, 2010||January 1, 2010|
|Rights-of-way and network access contracts||4.2||5.8||7.4|
18. SHARE CAPITAL
Unlimited number of Preference Shares of two classes
Unlimited number of Common Shares of a single class
The two classes of Preference Shares are issuable in one or more series, for which the Board of Directors of the Company may fix the number of shares and determine the designation, rights, privileges, restrictions and conditions. One class of Preference Shares of a single series has been designated as Class A Preference Shares. Another class of Preference Shares of a single series has been designated as Class B Preference Shares. There are no Preference Shares outstanding.
Class A Preference Shares
The rights, privileges, restrictions and conditions of the Class A Preference Shares are identical in all respects to those of the Common Shares, except for the following:
- The holders of Class A Preference Shares are not entitled to vote at meetings of shareholders on resolutions electing directors.
- The Class A Preference Shares are convertible, at any time, into Common Shares, on a one-for-one basis.
Class B Preference Shares
The rights, privileges, restrictions and conditions of the Class B Preference Shares are identical in all respects to those of the Common Shares, except for the following:
- The holders of Class B Preference Shares are not entitled to vote at meetings of shareholders, and are not entitled to share in the distribution of the assets of the Company upon a liquidation, winding-up or dissolution.
- The Class B Preference Shares are convertible into Common Shares on a one-for-one basis at the option of the holder at any time subject to foreign ownership restrictions, or upon the occurrence of certain events, or at the option of the Company at any time.
Dividends on each class of Preference Shares are payable on the same dates as dividends are paid on the Common Shares of the Company, using the same record date for determining holders of Preference Shares entitled to dividends as the record date for Common Share dividends, in an amount per Preference Share equal to the corresponding amount of dividends per Common Share.
Both classes of Preference Shares participate in the earnings of the Company on an equal basis with the Common Shares. Therefore, any shares issued are included in the weighted average number of shares outstanding for purposes of calculating basic and diluted earnings per share.
The holders of the Common Shares have the right to receive notice of, and attend and vote at, meetings of shareholders, to receive such dividends as may be declared by the Board of Directors of the Company, and to share in the distribution of the assets of the Company upon liquidation, winding-up or dissolution, subject to the rights, privileges and conditions attaching to any other class of shares ranking in priority thereto. Common shares have no par value.
During the year ended December 31, 2010, the Company established a Dividend Reinvestment Plan and Share Purchase Plan ("the Plan") which enables eligible holders of its Common Shares to automatically reinvest their regular quarterly dividends in additional Common Shares of the Company. Participants in the Plan also have the option to make cash payments to purchase additional Common Shares. The shares are issued from treasury at a discount of 3% from the average market price.
|Balance, beginning of year||64,959,635||1,275.0||64,667,817||1,266.9|
|Issued pursuant to the Plan||962,447||28.1||280,818||7.8|
|Issued pursuant to stock options||15,600||0.6||11,000||0.3|
|Balance, end of year||65,936,973||1,303.7||64,959,635||1,275.0|
During the year ended December 31, 2011, 962,447 Common Shares were issued (2010 - 280,818 Common Shares) as a result of participation in the Plan in exchange for $28.1 million (2010 - $7.8 million), which was credited to share capital.
During the year ended December 31, 2011, 709 Common Shares were cancelled. The shares were originally issued as part of the acquisition of Allstream Inc. in 2004 and after the seven year tender period expired the Company cancelled them.
During the year ended December 31, 2011, 15,600 stock options were exercised (2010 - 11,000 stock options) for cash consideration of $0.5 million (2010 - $0.3 million), of which $0.6 million was credited to share capital (2010 - $0.3 million) and $0.1 million was charged to contributed surplus (2010 - nil).
On February 9, 2012, the Company's Board of Directors declared a quarterly cash dividend of $0.425 per share. During 2011, the Company paid $1.70 per share to shareholders of record (2010 - $2.38).
19. CONTRIBUTED SURPLUS
Contributed surplus is used to recognize the value of equity-settled share-based payment transactions provided to employees, as part of their remuneration.
20. SHARE-BASED COMPENSATION
The Company has various share-based compensation arrangements, which are described below. During the year, the Company recognized expense in the amount of $12.6 million (2010 - $8.1 million) related to these plans, of which $0.5 million (2010 - $0.9 million) was for equity-settled share-based plans and $12.1 million (2010 - $7.2 million) was for cash-settled share-based plans. As at December 31, 2011, the liability arising from the cash-settled share-based compensation plans is $16.6 million (2010 - $11.8 million). The vested amount of this liability is $5.1 million (2010 - $4.4 million).
The Company has a stock option plan under which the Board of Directors may grant options to purchase Common Shares to employees at a price not less than the weighted average of the prices at which the Common Shares traded on the TSX for the five days immediately preceding the date of grant of the option. The options are exercisable during a period not to exceed 10 years. The right to exercise the options accrues over a period of five years of continuous employment at a rate of 20% per year, effective on the anniversary of the date on which the options were granted. The Company has reserved a maximum of 7.0 million (2010 - 7.0 million) Common Shares to meet rights outstanding under the stock option plan. The Company also has reserved 450,000 Common Shares to meet rights outstanding under an additional security-based compensation arrangement. This compensation arrangement has the same terms and conditions as the stock options granted under the stock option plan described above.
The following tables provide further information on outstanding stock options:
price per share
price per share
|Outstanding, beginning of year||3,027,490||38.70||2,321,835||40.70|
|Outstanding, end of year||2,813,294||38.33||3,027,490||38.70|
|Exercisable, end of year||1,703,661||40.52||1,525,919||41.30|
|Range of exercise price|| Options
| Weighted Average Remaining
|$30 - $40||2,018,514||6.21|
|$41 - $50||794,780||4.93|
The fair value of stock options is estimated at the date of grant using the Black-Scholes option pricing model, with the following weighted average assumptions:
|Risk-free interest rate||2.69% - 3.55%||2.11% - 3.01 %||2.41% - 3.42%|
|Expected dividend yield||5.47%||5.11%||7.95%|
|Expected life||6 years||6 years||6 years|
|Probability of forfeiture||35.13%||35.13%||35.13%|
Volatility is a measure of the amount by which a price is expected to fluctuate during a period. The measure of volatility used in the Company's option pricing model is the natural log of the Company's weekly historical stock prices, adjusted for unusual swings in the stock price due to events that are not expected to occur in the future.
Employee share ownership plan
The Company has an employee share ownership plan under which eligible employees can purchase Common Shares of the Company. Eligible employees may contribute between 1% and 6% of salary, with the Company contributing an amount equal to 25% of employee contributions. The Company recognizes its contributions as a component of operating expenses. During the year ended December 31, 2011, the Company recognized expenses in the amount of $3.1 million (2010 - $3.0 million) related to this plan. During the year, all Common Shares purchased on behalf of employees under this plan were purchased at fair market value.
Performance share unit plan
The Company has a performance share unit ("PSU") plan under which the Board of Directors may grant PSUs to specified employees. The performance vesting conditions applicable to PSUs are established each year, with the final payout value subject to the achievement of the predetermined performance objectives. PSUs have a maximum vesting period of three years and require continuous employment throughout the vesting period. Except under certain circumstances requiring Board approval, PSUs that have not vested at the time a participant in the PSU plan ceases to be employed are forfeited. The PSUs, like Common Shares, are entitled to dividend equivalents that are paid in the form of additional PSUs, which are issued at the time dividends are paid on the Company's Common Shares. The vesting of these additional PSUs is subject to the same performance vesting conditions and vesting date as the original grant of PSUs.
The number of PSUs granted and the accrued dividend equivalents are adjusted as at the vesting date, by a performance factor which takes into account actual performance achieved in relation to specific predetermined corporate objectives. The payout price is calculated based on the market value of the PSUs at the time of vesting and is paid out, at the option of the holder, in cash, in Common Shares of the Company that are acquired on the open market by a trustee on behalf of the Company or a combination thereof. The market value of a PSU is equal to the weighted average of the trading prices of the Company's Common Shares on the TSX on the five trading days preceding the vesting date.
The following table provides further information on outstanding performance share units:
|Outstanding, beginning of year||225,921||152,976|
|Settled in cash||(58,029)||(2,549)|
|Outstanding, end of year||206,047||225,921|
Restricted share unit plan
The Company has a restricted share unit ("RSU") plan, under which the Board of Directors may grant RSUs to specified employees. RSUs are granted based on individual performance potential and market competitiveness. The vesting of RSUs is not subject to the achievement of performance vesting conditions.
RSUs have a maximum vesting period of three years, and will vest only if there has been continuous employment throughout the vesting period. Except under certain circumstances requiring Board approval, RSUs that have not vested at the time a participant in the RSU Plan ceases to be employed are forfeited. Similar to PSUs, the RSUs attract dividend units equivalent to the dividends paid on the Company's Common Shares.
The number of RSUs granted and the accrued dividend equivalents are multiplied by the payout price at the vesting date. The payout price is calculated based on the market value of the RSUs at the time of vesting and is paid out, at the option of the holder, in cash, in Common Shares of the Company that are acquired on the open market by a trustee on behalf of the Company or a combination there of. The market value of a RSU is equal to the weighted average of the trading prices of the Company's Common Shares on the TSX on the five trading days preceding the vesting date.
The following table provides further information on outstanding restricted share units:
|Outstanding, beginning of year||286,337||166,001|
|Settled in cash||(45,438)||(16,722)|
|Outstanding, end of year||367,623||286,337|
Directors' share appreciation plan
The Company has a share appreciation plan for its non-executive Directors, requiring Directors to receive a minimum of 25% of their annual compensation in deferred compensation units ("DCU"), which are redeemable only when the Director ceases to be a Board member. Directors may elect to receive up to 100% of their compensation in the form of DCUs. DCUs attract dividends in the form of additional DCUs at the same rate as dividends on the Company's Common Shares.
The following table provides further information on outstanding deferred compensation units:
|Outstanding, beginning of year||152,388||118,127|
|Settled in cash||(32,100)||-|
|Outstanding, end of year||154,908||152,388|
21. SEGMENTED INFORMATION
As at December 31, 2011, the Company had two reportable operating segments: MTS and Allstream. MTS provides a full range of wireless, broadband, high-speed Internet, IPTV, converged IP, unified communications, security, home alarm monitoring, local access and long distance services to residential and business customers in Manitoba. Allstream provides IP-based communications, unified communications, voice and data connectivity, and security services to business customers in Canada.
The Company evaluates performance based on EBITDA. EBITDA, as reported below, includes intersegment revenues and expenses. The Company accounts for intersegment revenues and expenses at either prices that approximate current market prices or cost, depending on the type of service.
The following tables provide further segmented information:
| Operating revenue
|Depreciation and amortization||219.0||217.7||79.3||72.5||0.6||0.5||298.9||290.7|
Reconciliation to consolidated income before income taxes is as follows:
|Income before income taxes|
|Depreciation and amortization||(298.9)||(290.7)|
|Other income (expense)||2.5||(5.2)|
|Income before income taxes||232.5||204.9|
|Assets for operating segments||2,212.7||2,162.6|
|Deferred income taxes||535.0||549.7|
22. RELATED PARTY TRANSACTIONS
Related parties include the Company's wholly-owned subsidiaries, post-employment benefit plans and key management personnel. Balances and transactions during the year between the Company and its wholly-owned subsidiaries are eliminated on consolidation and, therefore, are not disclosed. Amounts paid to the group's post-employment benefit plans are set out in note 16.
Key management personnel include the members of the Company's Board of Directors and Executive Committee. Compensation expense, related to key management personnel during the year is as follows:
|Short-term employee benefits||6.5||6.5|
|Benefits paid to terminated employees||2.0||-|
|Share-based compensation (1)||5.3||5.8|
|(1)||Share-based compensation excludes the impact of fluctuations in market values of the Company's Common Shares and changes in the achieved performance vesting conditions (2011 - expense of $1.5 million; 2010 - recovery of $2.5 million).|
23. COMMITMENTS, GUARANTEES AND CONTINGENCIES
Operating lease commitments
In the normal course of operations, the Company has entered into operating lease agreements for building, operating facilities, construction equipment and other equipment. These leases have an average life of between 1 and 67 years, with renewal options contained within some contracts. The Company's future non-cancellable operating lease commitments as at December 31 are summarized in the following table:
|Not later than 1 year||57.9||56.6|
|Later than 1 year and not later than 5 years||198.5||201.3|
|Later than 5 years||233.4||269.3|
Finance lease commitments
The Company's future minimum lease payments under finance leases as at December 31 are summarized in the following table:
|Minimum lease payments|| Present value of minimum
|Not later than 1 year||5.4||4.9||4.9||4.3|
|Later than 1 year and not later than 5 years||11.1||10.7||10.1||9.3|
|Later than 5 years||-||2.9||-||2.8|
|Less: future finance charges||(1.5)||(2.1)||-||-|
Interest expense on finance leases totaled $0.6 million in 2011 (2010 - $0.7 million).
The Company has commitments for the purchase of property, plant and equipment in the amount of $18.3 million as at December 31, 2011 (December 31, 2010 - $17.3 million). These commitments are for the acquisition of property, plant and equipment used in the normal course of operations.
In the normal course of business and in connection with the disposition or sale of assets, the Company enters into agreements providing indemnifications that may require the Company to pay for costs or losses incurred by the parties to these agreements. These indemnifications relate to various matters such as intellectual property right infringement, loss or damage to property, claims arising from the provision of services, violation of laws or regulations, and breaches of representations or warranties. The nature of these indemnifications prevents the Company from making reasonable estimates of the maximum potential amount it could be required to pay, and no amount has been recorded in the financial statements relating to these indemnifications. Historically, the Company has not made significant payments related to these indemnifications.
The Company also indemnifies its directors, officers and certain other employees against claims and damages that are incurred in the performance of their service to the Company to the extent permitted by law. The Company has acquired and maintains liability insurance in respect of its directors and officers.
The Company obtains letters of credit with financial institutions for the benefit of third parties. In general, the terms of these letters of credit permit third parties to draw on the letters of credit to recover any loss incurred, as defined in the particular letter of credit. Certain of these letters of credit guarantee future funding of the Company's registered pension plans. As at December 31, 2011, the Company had undrawn letters of credit outstanding in the amount of $186.7 million (2010 - $139.8 million).
In September 1999, three of the Company's unions and a retiree suing on behalf of other retirees and their surviving spouses filed a claim in the Court of Queen's Bench of Manitoba against the Company in respect of the Manitoba Telecom Services Inc. and Participating Subsidiaries Employee Pension Plan (the "Pension Plan"). This claim sought various declarations to the effect that the Company was not entitled to use any portion of the surplus in the Pension Plan to reduce contributions, and that such utilization by the Company was a breach of the Company's obligations to its employees and former employees. The claim also sought, among other things, a mandatory order directing the Company to reimburse the Pension Plan for all amounts of the surplus that the Company has used to reduce its contributions, as well as an injunction prohibiting the Company from utilizing any future surplus in the Pension Plan.
The Company filed a statement of defence in this action in December 1999. This matter proceeded to trial in the fall of 2008, and the Company received a decision from the Court on January 19, 2010. In its decision, the Court upheld the governance of the pension plan and affirmed the position of the Company with respect to the issue of ongoing surplus. As a result, there will be no changes to the Company's expected future ongoing funding requirements and administration of the Pension Plan. The Court also ruled that the Company was obligated to make a $43 million one-time payment, retroactive to 1997, the year the Company was privatized and the Pension Plan was implemented, plus interest from that date at the effective rate of return earned by the Pension Plan during this period. The appeal of this decision was heard on December, 2010, and the decision has not yet been received. Pending the outcome of this appeal, the financial implications of the Court's decision could result in a one-time future payment of approximately $100 million. This would be comprised of $43 million plus interest calculated at a rate equal to the Pension Plan's rate of return since 1997. The Company expects that such a payment, if any, would not be required until all appeals have been determined. There will be no increase to the Company's ongoing pension funding requirements as a result of this decision.
The Company's legal department performs an assessment of the legal proceedings and claims which have occurred as a result of regular business activities during the period. Based on the information and estimates available, the outcomes of these contingent liabilities are uncertain and they do not satisfy the requirements to be recognized in the consolidated statement of financial position as liabilities. The Company believes that there will be no material adverse effect on its results of operations and financial position as a result of any pending legal proceedings including those described above.
24. TRANSITION TO IFRS
These consolidated financial statements for the year ended December 31, 2011 are the Company's first annual consolidated financial statements prepared in accordance with IFRS. As such, these financial statements have been prepared in accordance with IFRS 1, as well as the accounting policies as described in note 2.
Prior to 2011, the Company's consolidated financial statements were prepared in accordance with previous GAAP, which differs in certain areas from IFRS. Therefore, in preparing the consolidated opening statement of financial position at January 1, 2010, the Company's date of transition to IFRS (the "Transition Date"), certain adjustments have been made to amounts previously reported in the consolidated financial statements under previous GAAP. An explanation of how the transition from previous GAAP to IFRS has affected the Company's financial position, net income and other comprehensive income, equity and cash flows is set out in this note.
(a) Exemptions upon IFRS adoption
On adoption of IFRS, entities are required to implement accounting policies that are in accordance with IFRS and apply these policies retrospectively. IFRS 1 allows first-time adopters of IFRS to apply certain optional exemptions to this retrospective application. The relevant exemptions applied by the Company are as follows:
|(i) Business combinations|
|The Company elected not to apply IFRS 3, Business Combinations, retrospectively to business combinations that occurred prior to the Transition Date.|
|(ii) Employee benefits|
|The Company elected to recognize all cumulative actuarial gains or losses and transitional assets on pension and other non-pension future employee benefits in opening retained earnings at the Transition Date. The Company also elected to disclose amounts required by paragraph 120A(p) of IAS 19, Employee Benefits, as the amounts are determined for each accounting period prospectively from the Transition Date.|
|(iii) Share-based payments|
|The Company elected to apply IFRS 2, Share-based Payment, retrospectively to all stock options granted after November 7, 2002, and which were not fully vested at the Transition Date.|
|(iv) Borrowing costs|
|The Company elected to apply IAS 23 Borrowing Costs, as it relates to the determination of the capitalization rate prospectively from the Transition Date.|
(b) Notes to explain the effects of IFRS in the financial statements
In adopting IFRS, the Company has applied accounting policies that are in accordance with IFRS. These policies that differ from the previous application of GAAP and the related impact on the Company's financial statements are as follows:
|A. Employee benefits|
| Actuarial gains and losses
At the Transition Date, the Company applied the exemption in IFRS 1 and recognized all cumulative actuarial gains and losses and transitional assets and obligations on pension and other non-pension future employee benefits in opening retained earnings. Under IFRS, the Company recognizes all actuarial gains and losses arising from changes in the present value of the defined benefit obligation and the fair value of plan assets immediately in other comprehensive income. This is different than previous GAAP where the corridor approach was used, and the excess of the net actuarial gain or loss over 10% of the greater of the benefit obligation and the market-related value of plan assets was amortized over the expected average remaining service life of active employees. The amount of this amortization comprised one of the components of pension expense under previous GAAP. As a result, pension expense recognized in the consolidated statement of net income under IFRS excludes the amortization of actuarial gains and losses. Under IFRS, these actuarial gains and losses are recognized immediately in other comprehensive income.
| Minimum funding requirements
At the Transition Date, the Company determined that the minimum funding requirements of its defined benefit pension plans resulted in the recognition of a defined benefit obligation in its opening IFRS statement of financial position. Under IFRS, any changes in this defined benefit obligation is recognized in other comprehensive income.
| Measurement of plan assets
Under IFRS, the expected return on plan assets is measured based on the fair value of pension fund assets. Under previous GAAP, the Company measured the expected return on plan assets based on a market-related value of pension fund assets. This difference in the measurement of plan assets results in a change in pension expense recognized in the consolidated statement of net income.
|B. Property, plant and equipment|
| Components and depreciation methodology
Under IFRS, each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item must be depreciated separately. This may result in differences in the individual components of property, plant and equipment between IFRS and previous GAAP. Upon transition to IFRS, the Company reclassified certain items of property, plant and equipment into IFRS-compliant components. The Company also changed its depreciation methodology from a straight-line basis where depreciation expense was calculated based on the pooling of assets, to a separate unit straight-line methodology. As a result of the retrospective application of these changes, the Company adjusted accumulated depreciation in its opening IFRS statement of financial position, resulting in an increase in the net book value of its property, plant and equipment. This adjustment in depreciation methodologies also results in a change in depreciation expense recognized in the consolidated statement of net income.
Certain expenditures that are appropriate to capitalize as property, plant and equipment under previous GAAP do not qualify for capitalization under IFRS. As a result of retrospectively implementing this change in accounting policy, the Company adjusted the cost and accumulated depreciation of its property, plant and equipment in its opening IFRS statement of financial position, resulting in a decrease in the net book value of its property, plant and equipment. This adjustment also results in a change in operations expense and depreciation expense recognized in the consolidated statement of net income.
| Contributions from customers
Under IFRS, contributions from customers related to the construction of assets should be recognized initially as a liability and recognized as revenue in the period the related service is provided. Under previous GAAP, the Company credited amounts received from customers against the cost of construction of property, plant and equipment. This change in accounting policy results in a change in property, plant and equipment and liabilities on the consolidated statement of financial position and a change in revenues and depreciation expense recognized in the statement of net income.
|Under IFRS, a one-step approach is used to test for, and to measure impairment of long-lived assets, with the carrying value of assets compared to its recoverable amount, which is defined as the higher of value in use and fair value less costs to sell. Value in use is measured using discounted cash flows. This is different from the two-step approach followed under previous GAAP, where an entity is required to compare carrying values to undiscounted cash flows to assess whether any impairment exists, and then to measure the impairment using discounted cash flows.|
|Under IFRS, a first-time adopter is required to test goodwill for impairment at the Transition Date. The Company's impairment testing as at the Transition date under IFRS resulted in the recognition of an impairment loss in Allstream which was reflected as decreases in goodwill ($14.1 million), other intangible assets ($18.4 million) and property, plant and equipment ($101.2 million). This adjustment also results in a decrease in depreciation and amortization expense recognized in the consolidated statement of net income.|
|In performing the impairment testing of the Allstream cash-generating unit at the Transition Date, the Company measured the recoverable amount of the cash-generating unit based on a value in use calculation using certain key management assumptions. Cash flow projections, which were made over a five-year period based on financial budgets approved by the Board, include key assumptions about revenues, expenses and other cash flows. Revenue forecasts were based on management's estimate of growth in the markets served and are not considered to exceed the long-term average growth rates for those markets. Operating expenses were estimated based upon past experience, adjusted for the increase in activity levels supporting the cash flow projections. Discount rates applied to the cash flow forecasts are derived from the group's pre-tax weighted average cost of capital, adjusted to reflect management's estimate of the specific risk profiles of the individual cash-generating units. The cash flows related to Allstream were discounted using pre-tax rates of 15.0% to 16.2%.|
| Sale-leaseback transactions
Under IFRS, in a sale-leaseback transaction where the leaseback is classified as an operating lease, any gain on sale is recognized immediately in income. This accounting treatment differs from previous GAAP, where any gain on sale is deferred and recognized in income over the term of the operating lease. The Company had one such sale-leaseback transaction, and upon transition to IFRS this deferred gain has been derecognized. This adjustment results in an increase in operations expense as recognized in the consolidated statement of net income.
| Revenue recognition
Under IFRS, the Company has recorded an adjustment to recognize a liability for customer prepayments related to wireless activation fees. These fees are deferred and recognized as revenue over the period of the customer contract.
|F. Decommissioning provisions|
Under IFRS, the discount rate to be used for measuring decommissioning provisions should be based on current market rates at time of initial recognition and updated each reporting period. This measurement basis is slightly different than that required under previous GAAP, so a minor adjustment to the decommissioning provision and corresponding item of property, plant and equipment is recognized at the Transition Date.
|G. Share-based compensation|
In determining share-based compensation expense related to stock options, IFRS requires that the number of awards expected to vest be estimated at the time the award is granted. This estimate may be revised based on subsequent information regarding the number of awards expected to vest. Under previous GAAP, the Company recognizes forfeitures of awards as they occur. As a result of retrospectively applying this change in accounting, a minor adjustment to retained earnings at the Transition Date has been recognized.
|H. Income taxes|
| Income tax effect of other adjustments at the Transition Date
As a result of the differences between previous GAAP and IFRS for each of the financial statement items identified above, deferred taxes under IFRS have been adjusted, where applicable.
|I. Presentation reclassifications|
| Prepaid expenses, inventory, intangible assets and provisions
Under IFRS, separate disclosure of prepaid expenses, inventory, intangible assets and provisions is required on the face of the consolidated statement of financial position.
| Deferred taxes
Under IFRS, all deferred tax assets and liabilities are classified as non-current. As a result, the current portion of the deferred tax asset has been reclassified to long-term.
| Other income and finance costs
Under IFRS, certain items previously classified as other income have been reclassified to finance costs on the consolidated statements of net income.
| Discontinued operations
Under IFRS, the definition of discontinued operations differs from that under previous GAAP. As a result, the sale of the Company's non-telecommunications IT consulting group in 2010, which was classified as a discontinued operation under previous GAAP, is not considered a discontinued operation under IFRS and was reclassified to continuing operations on the consolidated statement of net income.
(c) Reconciliations of GAAP to IFRS
As a first-time adopter of IFRS, the Company is required to reconcile previously reported GAAP to IFRS for equity, comprehensive income and cash flows.
A reconciliation of shareholders' equity from previous GAAP to IFRS is as follows:
|Reference|| December 31,
| January 1,
|Shareholders' equity under previous GAAP||1,286.5||1,316.9|
|Adjustments to shareholders' equity to conform with IFRS:|
|Employee future benefits||A||(645.9)||(494.4)|
|Property, plant and equipment||B||146.5||105.7|
|Total reduction in shareholders' equity||(438.5)||(369.2)|
|Shareholders' equity under IFRS||848.0||947.7|
A reconciliation of earnings and comprehensive income from previous GAAP to IFRS is as follows:
|For the period ended||Reference|| December 31,
|Net income and comprehensive income under previous GAAP||99.7|
|Adjustments to net income to conform with IFRS:|
|Employee future benefits||A||(1.7)|
|Property, plant and equipment||B||40.8|
|Total increase in net income||41.6|
|Net income under IFRS||141.3|
| Adjustments to other comprehensive income to conform
|Employee future benefits||A||(149.8)|
|Total comprehensive income under IFRS||30.7|
(d) IFRS financial statements
In addition to the required disclosure presented above, the following reconciliations of the Company's consolidated financial statements as previously presented under previous GAAP to financial statements prepared under IFRS provide further perspective on the financial impact of the transition to IFRS:
Consolidated statement of financial position as at January 1, 2010
|IFRS presentation||Reference|| Previous
|Cash and cash equivalents||$||110.2||$||-||$||-||$||110.2|
|Deferred income tax assets||I||79.0||(79.0)||-||-|
|Other current assets||I||58.0||(58.0)||-||-|
|Assets held for sale||18.6||-||-||18.6|
|Property, plant and equipment||B,C||1,362.2||-||16.4||1,378.6|
|Deferred tax assets||H, I||362.1||79.0||132.8||573.9|
|Liabilities and shareholders' equity|
|Accounts payable and accrued liabilities||D,I||$||349.1||$||(34.7)||$||(1.7)||$||312.7|
|Advance billings and payments||52.5||-||-||52.5|
|Current portion of long-term debt||11.9||-||-||11.9|
|Current portion of finance lease obligations||4.2||-||-||4.2|
|Liabilities related to assets held for sale||9.0||-||-||9.0|
|Long-term portion of finance lease obligations||13.4||-||-||13.4|
|Employee future benefits||A, I||43.1||(0.1)||119.5||162.5|
|Other long-term liabilities||D, E, I||55.5||(6.2)||(17.8)||31.5|
|Deferred tax liabilities||1.2||-||-||1.2|
|Retained earnings (deficit)||A to H||30.4||-||(368.9)||(338.5)|
|Total liabilities and shareholders' equity||$||2,896.4||$||-||$||(270.1)||$||2,626.3|
Consolidated statement of net income and other comprehensive income for the year ended December 31, 2010
|IFRS presentation||Reference|| Previous
|Restructuring and transition||25.5||(25.5)||-||-|
|Depreciation and amortization||B||336.1||-||(45.4)||290.7|
|Other income (expense)||I||5.7||(9.2)||(1.7)||(5.2)|
|Income before income taxes||157.4||(3.3)||50.8||204.9|
|Income tax expense||H||55.3||(0.9)||9.2||63.6|
|Income before discontinued operations||102.1||(2.4)||41.6||141.3|
|Loss from discontinued operations||I||(2.4)||2.4||-||-|
|Net income for the year||$||99.7||$||-||$||41.6||$||141.3|
|Other comprehensive income|
|Net actuarial losses from defined benefit plans and other employee benefits||$||-||$||-||$||(181.8)||$||(181.8)|
|Change in effect of the minimum funding requirement||-||-||32.0||32.0|
|Deferred taxes on items in other comprehensive income||-||-||39.2||39.2|
|Other comprehensive loss for the year, net of tax||-||-||(110.6)||(110.6)|
|Total comprehensive income for the year||$||99.7||$||-||$||(69.0)||$||30.7|
|Basic and diluted earnings per share||$||1.54||$||-||$||0.64||$||2.18|
Consolidated statement of cash flows for the year ended December 31, 2010
|IFRS presentation||Reference|| Previous
|Cash flows from operating activities|
|Add (deduct) items not affecting cash:|
|Depreciation and amortization||B,C,G||336.1||-||(45.4)||290.7|
|Deferred income taxes||H,I||54.9||(0.9)||9.2||63.2|
|Loss on disposal of assets||I||-||2.2||2.1||4.3|
|Deferred wireless costs||(50.0)||-||-||(50.0)|
|Pension funding and net pension expense||A||(58.4)||-||1.7||(56.7)|
|Changes in non-cash working capital||55.7||-||-||55.7|
|Cash flows from operating activities||455.5||(1.1)||(2.7)||451.7|
|Cash flows from investing activities|
|Capital acquisitions, net||B||(364.6)||-||2.7||(361.9)|
|Proceeds on disposal of assets held for sale||I||-||12.0||-||12.0|
|Cash flows used in investing activities||(368.9)||12.0||2.7||(354.2)|
|Cash flows from financing activities|
|Repayment of long-term debt||(11.9)||-||-||(11.9)|
|Issuance of share capital||8.1||-||-||8.1|
|Cash flows used in financing activities||(157.7)||-||-||(157.7)|
|Cash flows before discontinued operations||(71.1)||10.9||-||(60.2)|
|Cash flows from discontinued operations||10.9||(10.9)||-||-|
|Change in cash and cash equivalents||(60.2)||-||-||(60.2)|
|Cash and cash equivalents, beginning of year||110.2||-||-||110.2|
|Cash and cash equivalents, end of year||$||50.0||$||-||$||-||$||50.0|
MANITOBA TELECOM SERVICES INC.
FOR THE PERIOD ENDED December 31, 2011
|(in millions $, in accordance with IFRS)|
| Three months ended
|Free cash flow|
|Add back (deduct):|
|Current tax expense||-||0.3||0.3||1.0|
|Loss on disposal of assets||0.3||0.6||0.9||0.5|
|Deferred wireless costs||(22.7)||-||(22.7)||(16.9)|
|Pension funding and net pension expense||(3.9)||(2.3)||(6.2)||(38.7)|
|Other non-cash items||0.8||1.0||1.8||1.5|
|Consolidated free cash flow||19.7||(1.4)||18.3||(64.1)|
| Twelve months ended
|Free cash flow|
|Add back (deduct):|
|Other income (expense)||3.0||(0.5)||2.5||(5.2)|
|Current tax expense||-||-||-||(0.4)|
|Loss on disposal of assets||1.2||1.2||2.4||4.3|
|Deferred wireless costs||(67.0)||-||(67.0)||(50.0)|
|Pension funding and net pension expense||(38.1)||(16.5)||(54.6)||(56.7)|
|Other non-cash items||3.4||2.2||5.6||3.2|
|Consolidated free cash flow||139.9||(10.1)||129.8||34.1|
|Consolidated capital expenditures||288.0||361.9|
|(1) MTS includes MTS and Other.|
|(in millions $, in accordance with IFRS)|| Three months ended
UC & security
& legacy data
|Cost of goods sold||(15.4)||(15.0)||(20.3)||(17.8)||(10.2)||(78.7)||(94.6)|
|Gross margin %||74.3%||28.6%||59.0%||63.3%||29.7%||59.3%||54.3%|
|Other operating expenses (1)||(90.6)||(93.7)|
|EBITDA margin %||12.5%||9.1%|
| Twelve months ended
UC & security
| Long distance &
|Cost of goods sold||(62.8)||(63.4)||(85.9)||(78.7)||(50.3)||(341.1)||(384.3)|
|Gross margin %||73.3%||27.2%||56.9%||62.5%||28.6%||57.5%||54.3%|
|Other operating expenses (1)||(352.2)||(375.3)|
|EBITDA margin %||13.5%||9.6%|
|Business network access serivces||594,380||619,704|
|Connected fibre-fed buildings||2,388||2,089|
|(1) Includes intersegment amounts.|
|MTS OPERATING STATISTICS|
|High-speed Internet *||188,946||183,571|
|Dial-up Internet *||12,000||17,096|
|Residential network access services||311,046||327,820|
|Business network access services||219,850||225,843|
|Total customer connections||1,323,750||1,328,051|
|Average monthly revenue per customer||$ 59.66||$ 57.32|
|Churn rate (pre & post-paid)||1.59%||1.41%|
|Churn rate (post-paid)||1.06%||0.95%|
|Revenues (millions $)||70.6||59.2|
|Average monthly revenue per customer||$ 62.38||$ 53.71|
| * The prior year figures have been updated to conform to the current year's presentation.
For further details see MTS Allstream's Annual 2011 Management's Discussion and Analysis.
For further information: