Manitoba Telecom Services Inc. Reports 2009 Results and Announces 2010
Financial Outlook
- Growth products including Wireless, Internet, Television and Converged IP continue to deliver solid growth, increasing by 4.7% in 2009
- Strong 2009 performance from Consumer Markets division with annual EBITDA growth of 2%
- Cost reduction program achieved increased annual target with
- HSPA build and 2010 pension solvency requirements pre-funded through
-
- Divested non-telecom IT consulting business, improving focus on telecommunications products while lowering cost structure
- Declared first quarter dividend of
- Outlook for 2010 calls for stable performance
Stock Symbol: MBT
This news release contains forward-looking statements and information. For a description of the related risk factors and assumptions, please see the section entitled "Forward-looking Statements Disclaimer" later in this news release. This release discusses results from Manitoba Telecom Services Inc.'s continuing operations. The results, and the definitions of continuing operations and free cash flow, should be read in conjunction with Manitoba Telecom Services Inc.'s fourth quarter 2009 interim management's discussion and analysis dated
This outlook and the financial information contained herein have been reviewed by our Audit Committee and should be read in conjunction with the disclaimer "Regarding Forward-Looking Statements" and the "Risks and Uncertainties" sections contained in our interim MD&A for the fourth quarter of 2009, as well as similar sections of our interim MD&As for the first, second and third quarters of 2009, our 2008 annual MD&A and our 2008 Annual Information Form.
"Our results for 2009 underscore progress in areas important to our long-term success, namely the continued solid performance of growth product lines, increased focus in our revenue mix toward growth services and the careful management of operating costs," said
In line with the Company's revised outlook provided to the markets, annual revenue from continuing operations for 2009 declined 2.3%, EBITDA(2) declined 6.2%, and EPS(3) was 12.9% lower as compared to 2008. The Company's growth services portfolio, which includes wireless, digital television, high-speed Internet, converged Internet protocol ("IP"), unified communications, and security, delivered solid performance in 2009, with revenues growing by 4.7% for the year. Revenues from these services continued to increase their prominence in the overall revenue mix of the business, rising to 45.4% of total revenues.
The Company was also successful with cost reduction efforts through 2009, achieving
"We continue to maintain a strong overall financial profile and a solid balance sheet," said Wayne Demkey, Chief Financial Officer. "We have demonstrated a consistent ability to successfully access capital markets for funding requirements. This speaks to the strength of our company and of a track record of prudent management. We have also successfully pre-funded our HSPA build for Manitoba and our complete pension funding obligations for 2010."
On
"The previous structure has achieved its goals for increased productivity and cost savings for the business, enabling a fully-integrated approach from corporate support groups," said
The change impacts only the operating divisions, all corporate groups will continue to be integrated on a company-wide basis. In 2010, the Company's financial reporting will reflect the new business segmentation.
The Company's Board of Directors declared a cash dividend of
DIVISIONAL HIGHLIGHTS*
* From Continuing Operations
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Three months ended Twelve months
December 31 % ended December 31 %
(in millions $) 2009 2008 change 2009 2008 change
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Consumer Markets
division ("CMD")
CMD growth services
revenues 105.4 100.0 5.4 418.7 389.5 7.5
CMD legacy services
revenues 100.1 105.2 (4.8) 407.3 428.5 (4.9)
CMD total revenue 205.5 205.2 0.1 826.0 818.0 1.0
CMD EBITDA 100.4 102.2 (1.8) 422.7 414.9 1.9
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Enterprise Solutions
division ("ESD")
ESD growth services
revenues 100.1 100.0 0.1 409.5 401.5 2.0
ESD legacy services
revenues 147.1 158.7 (7.3) 587.9 647.6 (9.2)
ESD total revenue 247.2 258.7 (4.4) 997.4 1,049.1 (4.9)
ESD EBITDA 46.8 58.0 (19.3) 202.9 251.7 (19.4)
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MTS Allstream totals
Revenue 452.7 463.9 (2.4) 1,823.4 1,867.1 (2.3)
EBITDA(4) 146.3 158.3 (7.6) 625.1 666.4 (6.2)
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Consumer Markets division
-------------------------
Throughout 2009, the Company's Consumer Markets division delivered solid margins, revenue and EBITDA growth, and strong cash flow. The division continues to benefit from exposure to the resilient economy of Manitoba, while employing a successful strategy of leveraging unmatched product bundles offering more value to customers and delivering strong results in a competitive marketplace.
The division's three key consumer growth products delivered solid and leading revenue growth throughout 2009. Wireless revenues increased 8.0%, Internet revenues increased 6.6% and television revenues climbed 8.2%, providing a significant contribution to the strong performance of the Consumer Markets division.
The Company continued to deploy its market-leading new HDTV product, MTS Ultimate TV, throughout
"We continue to leverage our leading and innovative products, our Manitoba-leading brand and our bundling strategies to deliver a leading performance in our industry," said
Enterprise Solutions division
-----------------------------
Overall results for the Enterprise Solutions division continue to be impacted by the recession in
"We continue to be very focused with the evolution of our business mix toward our IP-based products. Efforts continue to align our cost structure and our operational processes with our marketplace so as to better meet the requirements of our customers," said
The division also improved its competitive focus through an agreement to sell its non-telecommunications IT consulting business to PricewaterhouseCoopers
MTS Allstream is retaining the telecommunications-related aspects of its consulting business such as managed security services that will continue to complement the Company's communications services portfolio.
2010 OUTLOOK
The Company's financial outlook for 2010 is again based on a strategy focused on driving growth in growth products with a renewed focus on IP-based services, prudent capital spending and aggressive cost reductions. Overall, the Company expects results in 2010 to be generally in line with 2009 results. Excluding an expected non-cash increase in pension expense of approximately
The Company announced that it will set aside
The targeted investment in the Allstream IP network, which comprises up to
With Allstream wireless, the Company expects to launch a wireless offering focused on a converged wireless/wireline product suite towards the end of 2010 in markets where Allstream is the strongest. Over the next three years, the Company expects its cumulative investment to be approximately
"This business-only wireless service will complement our existing enterprise portfolio and provide customers with unique functionality," said
The FTTH initiative in Manitoba is expected to cover 500 homes in the province through 2010. The FTTH network is the next evolution in advanced communication networks providing MTS the ability to maintain its competitive edge against the cable networks. FTTH is also more effective in servicing new home developments as compared to existing hybrid fibre/copper technologies, which helps deliver both capital and operating efficiencies.
Building on the considerable progress made improving the Company's cost structure in 2009, MTS Allstream is targeting an additional
In
The Company's business plan for the year ahead contemplates a quarterly dividend payout of
The Company forecasts that MTS Allstream will not pay cash taxes any earlier than 2017. This is based on its longer term EBITDA growth assumptions of 1% to 3% once the economy recovers.
The Company's Financial Outlook for 2010 is detailed in the following table:
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2010 Financial Outlook - Continuing Operations
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Revenues $1.780 billion to $1.880 billion
EBITDA $585 million to $635 million
EPS $2.00 to $2.50
Free cash flow $175 million to $225 million
Capital expenditures 14% to 16% of revenues
Dividend(6) $2.60
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OTHER DEVELOPMENTS
The following are various announcements made recently by the Company.
Corporate announcements
- On January 19, 2010, MTS Allstream announced that the Court of
Queen's Bench of Manitoba (the "Court") had ruled on a lawsuit
regarding the 1997 initial funding, ongoing surplus and governance of
the MTS Pension Plan. 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, resulting in no
changes to the Company's expected future ongoing funding requirements
and administration of the MTS 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 MTS Pension Plan was implemented.
The Company believes, based on legal advice received, that key
aspects of this part of the decision are flawed and present strong
grounds for appeal.
Pending the outcome of an appeal, the Company announced that
financial implications of the Court's decision could result in a one-
time future payment of approximately $100 million measured as of
December 31, 2009. This would be comprised of $43 million plus
interest calculated at a rate equal to the pension plan's rate of
return since 1997 until December 31, 2009. The Company expects that
such a payment, if any, would not be required until all appeals have
been determined.
- On January 12, 2010, MTS Allstream announced that PwC had entered
into an agreement to acquire the majority of MTS Allstream's non-
telecommunications IT consulting group, which comprises approximately
180 employees. As part of the transaction, MTS Allstream also
announced an alliance between MTS Allstream and PwC. Through this
alliance, PwC customers looking for communications solutions services
will be referred to MTS Allstream, while MTS Allstream customers who
require the support of a non-telecommunications IT consulting group
will be referred to PwC.
- On December 11, 2009, MTS Allstream stated that the Federal Cabinet
missed an important opportunity to promote competition and innovation
in Canada.
- On December 9, 2009, MTS announced it had successfully issued $200
million in medium term notes with a 10-year term maturing on December
16, 2019, and having a coupon rate of 5.625%.
- On December 2, 2009, MTS announced that Thomas E. Stefanson, Chairman
of the Board of Directors, would retire from this position effective
January 8, 2010. Mr. Stefanson was succeeded by David Leith, who
assumed the position of Chairman of the Board of Directors on the
same date.
- On December 1, 2009, MTS Allstream announced that it has been
recognized with the 2009 Frost & Sullivan Award for Competitive
Strategy Leadership for performance in the North American video
market.
- On November 24, 2009, MTS Allstream announced its donation of
$100,000 to the David Suzuki Foundation, supporting its efforts to
help transform the Canadian economy in ways that are consistent with
a sustainable future.
- On November 18, 2009, MTS Allstream announced that after taking a
year and a half off to have surgery on both of her knees, missing an
entire speed skating season and dealing with a near tragedy in her
family, MTS Allstream-sponsored speed skater Cindy Klassen, four-time
World Champion and Canada's greatest Olympian, returned to
international competition at this season's World Cup events.
- On November 6, 2009, MTS Allstream announced it had partnered with
MaRS Discovery District - a leading innovation centre that
supports Canadian innovation by connecting science, technology and
social entrepreneurs with business skills and capital.
Allstream announcements
- On January 21, 2010, MTS Allstream and Radiant Communications Corp.
announced that the two companies entered into
a Broadband Network Investment Agreement. The agreement enables both
companies to provide reliable, next generation, high-capacity
broadband services to Canadian businesses.
- On December 2, 2009, MTS Allstream announced that it had been
selected by DirectCash, the leading provider of ATMs,
debit terminals, prepaid phone cards and prepaid cash cards in
Canada, for an MPLS network and Cisco Unified Communications Manager
solution.
- On November 10, 2009, MTS Allstream announced that it had been
selected by Richardson International, one of Canada's largest
private integrated agriculture organizations, to upgrade its
communications services at its head office in Winnipeg and oilseed
processing facility in Lethbridge, Alberta.
MTS announcements
- On February 1, 2010, MTS Allstream announced that enhanced wireless
E-911 service was available in Manitoba. This network improvement,
known as Phase II enhanced wireless 911 service, allows Manitoba's
Public Safety Answering Points to see the approximate location of
callers placing a 911 emergency call using their cell phones. MTS
Allstream introduced this feature across its CDMA cellular network in
Manitoba.
- On January 28, 2010, MTS Allstream announced the deployment of an
advanced FTTH network in Waverly West, the newest neighbourhood in
Winnipeg. Customers on the new FTTH network, one of the first to be
deployed commercially in Canada, have access to the most-advanced
consumer telecommunications services that MTS offers today.
- On January 28, 2010, MTS Allstream announced an expansion of its CDMA
wireless network bringing coverage to eight new rural Manitoba
communities in 2010, including the port of Churchill in northern
Manitoba.
- On December 9, 2009, MTS Allstream was pleased to announce it was
offering customers the MTS Triple Blaze Fireplace during the holiday
season - a virtual fireplace available on MTS TV, wireless, and
Internet services until January 15, 2010.
- On November 27, 2009, MTS Allstream announced it was once again
helping Manitobans get home safely during the holiday season by
sponsoring Operation Red Nose - a unique designated driver program
that operates free of charge.
- On November 2, 2009, MTS TV, the digital television services offered
by MTS Allstream, announced new channel additions to its already
impressive and comprehensive television entertainment line-up on MTS
Classic TV and MTS Ultimate TV services.
Quarterly Conference Call
MTS Allstream's fourth quarter 2009 conference call with the investment community is scheduled for
Note
MTS Allstream's interim Management's Discussion and Analysis ("MD&A") for the three and twelve months ended
About Manitoba Telecom Services Inc.
Manitoba Telecom Services Inc., through its wholly-owned subsidiary MTS Allstream Inc., is one of Canada's leading national communication solutions companies, providing innovative communications for the way Canadians want to live and work today. The Company has more than 100 years of experience, with 6,000 employees across
Forward-looking Statements Disclaimer
This news release as well as the financial outlook contained herein includes forward-looking statements and information (collectively, the "statements") about our corporate direction, business opportunities, operating and dispute resolution activities, financial objectives and future financial results and performance that are subject to risks, uncertainties and assumptions. As a consequence, actual results in the future may differ materially from any conclusion, forecast or projection in such forward-looking statements. Examples of statements that constitute forward-looking information may be identified by words such as "believe", "expect", "project", "should", "anticipate", "could", "target", "forecast", "intend", "plan", "outlook", "see", "set", "pending", and other similar terms.
Factors that could cause anticipated opportunities and actual results to differ materially include, but are not limited to, matters identified in the "Risks and Uncertainties" section and elsewhere in our interim MD&A for the fourth quarter of 2009, as well as our interim MD&As for the first, second and third quarters of 2009, our 2008 annual MD&A, and our Annual Information Form, all of which are available on SEDAR at www.sedar.com.
Please note that forward-looking statements reflect our expectations as at the date hereof. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise except as required by law. This news release and the financial information contained herein have been reviewed by our Audit Committee and approved by our Board of Directors.
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1) Refer to MTS Allstream's fourth quarter 2009 interim MD&A for the
definition of continuing operations.
2) EBITDA is earnings before interest, taxes, amortization, and other
income. EBITDA should not be construed as an alternative to operating
income or to cash flows from operating activities (as determined in
accordance with Canadian generally accepted accounting principles) as
a measure of liquidity.
3) EPS is earnings per share.
4) Includes other EBITDA of ($0.9) million in the fourth quarter of 2009
as compared to ($1.9) million in the fourth quarter of 2008. Also,
includes other EBITDA of ($0.5) million in the full-year 2009 as
compared to ($0.2) million in the full-year 2008.
5) Refer to MTS Allstream's fourth quarter 2009 interim MD&A for the
definition of free cash flow.
6) Subject to legal requirements, and if and as declared in the
discretion of the Board of Directors.
----------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
----------------------------------------
Unless otherwise indicated, this Management's Discussion and Analysis ("MD&A") of our financial results for the interim period ended
Regarding Forward-Looking Statements
This interim MD&A as well as the financial outlook contained herein includes forward-looking statements and information (collectively, the "statements") about our corporate direction, business opportunities, operating and dispute resolution activities, financial objectives and future financial results and performance that are subject to risks, uncertainties and assumptions. As a consequence, actual results in the future may differ materially from any conclusion, forecast or projection in such forward-looking statements. Examples of statements that constitute forward-looking information may be identified by words such as "believe", "expect", "project", "should", "anticipate", "could", "target", "forecast", "intend", "plan", "outlook", "see", "set", "pending", and other similar terms.
Factors that could cause anticipated opportunities and actual results to differ materially include, but are not limited to, matters identified in the "Risks and Uncertainties" section and elsewhere in this interim MD&A, as well as our interim MD&As for the first, second and third quarters of 2009, our 2008 annual MD&A, and our Annual Information Form, all of which are available on SEDAR at www.sedar.com.
Please note that forward-looking statements reflect our expectations as at the date hereof. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise except as required by law. This interim MD&A and the financial information contained herein have been reviewed by our Audit Committee and approved by our Board of Directors.
NON-GAAP MEASURES OF PERFORMANCE
--------------------------------
In this MD&A, we provide information concerning continuing operations, EBITDA and free cash flow because we believe investors use them as measures of our financial performance. These measures do not have a standardized meaning as prescribed by Canadian generally accepted accounting principles ("GAAP"), and are not necessarily comparable to similarly titled measures used by other companies.
- Continuing Operations - We provide information that refers to our
performance from continuing operations to assist investors in
understanding the performance of our company.
Continuing operations in 2009 excludes our non-telecommunications
information technology ("IT") consulting business, which has been
classified as discontinued operations; restructuring costs; the costs
to transition certain wireless service requirements away from Bell
Mobility to new suppliers and to our wireless platform; costs related
to our high-speed packet access ("HSPA") deployment and related
billing implementation; costs related to certain regulatory
proceedings; certain costs associated with our transition from
Canadian GAAP to International Financial Reporting Standards
("IFRS"); a rebate related to Use of deferral account funds to
improve access to telecommunications services for persons with
disabilities and to expand broadband services to rural and remote
communities, Telecom Decision CRTC 2008-1 ("Decision 2008-1"); the
impact of changes in statutory income tax rates and other rate
adjustments on our tax asset; and solvency funding to our pension
plans.
Continuing operations in 2008 excludes our non-telecommunications IT
consulting business, which has been classified as discontinued
operations; restructuring costs; the costs of transitioning certain
wireless service requirements away from Bell Mobility to new
suppliers and to our wireless platform, as well as costs associated
with the advanced wireless services ("AWS") spectrum auction; the
impact of changes in statutory income tax rates and other rate
adjustments on our tax asset; the refund of a directors' and
officers' trust (the "directors' and officers' trust") that was
established in 2002 by Allstream Inc.; and solvency funding to our
pension plans.
- EBITDA - We define EBITDA as earnings before interest, taxes,
amortization and other income. EBITDA should not be construed as an
alternative to operating income or to cash flows from operating
activities (as determined in accordance with Canadian GAAP) as a
measure of liquidity.
- Free Cash Flow - We define free cash flow as cash flow from operating
activities, less capital expenditures, and excluding changes in
working capital. Free cash flow is the amount of discretionary cash
flow that we have for purchasing additional assets beyond our annual
capital expenditure program, paying dividends, buying back shares
and/or retiring debt.
OVERVIEW
--------
MTS is a leading national communications provider in
Effective
Our previous structure achieved our goals for increased productivity and cost savings for our business, enabling a fully-integrated approach from our corporate support groups. Our new structure will enable us to better leverage our different geographic markets, and should allow for improved performance going forward. It is an evolution which will further enable our company to leverage our market presence, brand and efficiencies while bringing us closer to our customers so we can serve them better.
In 2010, our financial reporting will reflect the new business segmentation. For comparative purposes, we have provided our 2009 results for revenues and EBITDA on this new basis. Please refer to our fourth quarter 2009 supplementary package for this information.
Consumer Markets division
The Consumer Markets division leads every telecommunications market segment in Manitoba, delivering a full suite of wireless, high-speed Internet and data, digital television and wireline voice services under the MTS brand, as well as security and alarm monitoring services through AAA Alarm Systems Ltd. ("AAA Alarms"), a subsidiary of MTS. This complete range of products is unmatched by any other provider in Manitoba.
In 2009, the Consumer Markets division served the national small business telecommunications market, providing customers in targeted major Canadian centres with a range of innovative business Internet, data and voice services under the Allstream brand. Effective
Enterprise Solutions division
The Enterprise Solutions division, which operates under the Allstream brand nationally and under the MTS Allstream brand in Manitoba, is a leading competitor in the national business and wholesale markets. This division's main customer base is medium and large businesses and government organizations and its key products are Internet protocol ("IP")-based communications, unified communications, voice and data connectivity, and security services. The Enterprise Solutions division operates an extensive national broadband fibre optic network that spans almost 30,000 kilometres, and provides international connections through strategic alliances and interconnection agreements with other international service providers. Effective January, 1, 2010, the enterprise account base in Manitoba, previously reported as part of the Enterprise Solutions division, will be a part of the MTS unit and included with the MTS unit's financial results.
Our common shares are listed on the
SUBSEQUENT EVENTS
-----------------
Court's Decision on Pension Lawsuit
On
In order to reach the decision regarding the
Pending the outcome of an appeal, the financial implications of the Court's decision could result in a one-time future payment of approximately
Sale of Non-Telecommunications IT Consulting Group
On
The portion of our business that is being sold has been classified as discontinued operations, as prescribed in the Canadian Institute of Chartered Accountants' Handbook, with a loss from discontinued operations net of tax in the amount of
STRATEGIC PRIORITIES UPDATE
---------------------------
In summary, in 2009, we made the following progress on five core priorities:
1. Focus on profitable growth
Our Consumer Markets division's growth services revenues increased by
7.5%, and our Enterprise Solutions division's growth services
revenues increased by 2.0%. EBITDA from our growth services, across
the company, was up 6.4%.
2. Improve the customer experience and gain market share
Our wireless services revenues climbed by 8.0% year-over-year on
customer growth of 5.5%. Our consumer high-speed Internet revenues
were up by 6.6%, with subscribers growing by 3.0%. Driven in part by
the success of our new high definition television ("HDTV") product,
MTS Ultimate TV Service, which was introduced late in the first
quarter of 2009, our digital television services revenues were up by
8.2% on subscriber growth of 2.3%. Revenues from our converged IP
enterprise data products delivered 10.6% growth. We have maintained
our market share in most of our major product lines. In 2009, we met
and exceeded our customer experience targets, as measured through
independent surveys.
3. Align cost structure to new market realities
Our revised and increased target for 2009 was to generate $50 million
to $60 million in annualized cost savings. We met this target,
achieving $58.4 million in annualized cost savings for the twelve
months ended December 31, 2009.
4. Drive the transition from legacy to growth services
Growth services accounted for 45.4% of our total revenue from
continuing operations in 2009, up from 42.4% a year earlier.
5. Determine HSPA deployment plan in Manitoba and Allstream wireless
strategy
On July 28, 2009, we made a significant announcement regarding our
wireless strategy going forward for both divisions of our company.
We entered into a strategic wireless arrangement with Rogers Wireless
Partnership ("Rogers Wireless") that will see both companies share
the cost to deploy an HSPA wireless network across Manitoba. The
agreement also allows us to leverage Rogers Wireless's purchasing
scope and scale to gain cost effective access to the new network
technology and leading-edge HSPA handsets. Our customers will have
access to the best national and international roaming capabilities
with Rogers Wireless as our roaming partner, and both companies will
share roaming revenues from the HSPA network in Manitoba. The
deployment of our regional wireless HSPA network is proceeding
according to schedule, and we expect the network to be operational by
the end of 2010.
Our strategic wireless agreement with Rogers Wireless also provides
us with the opportunity to launch a business wireless offering under
the Allstream brand through a competitive wholesale arrangement.
Towards the end of 2010, we expect to launch Allstream wireless
targeting the geographic markets where we are strongest. Our
Allstream wireless offering will focus on a converged
wireless/wireline product suite. This business-only wireless service
will complement our existing enterprise portfolio and provide
customers with unique functionality. Over the next three years, we
would expect our cumulative investment in Allstream wireless to be a
maximum of approximately $25 million, including customer acquisition
costs, as we already have significant customer relationships,
wireless application development capabilities, distribution channels
and billing systems and access to a national wireless network through
our strategic arrangement with Rogers Wireless.
RESULTS OF OPERATIONS
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2009 Results in Summary
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2009 2009 revised
(in millions $, except EPS) actual financial outlook
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Revenue (continuing operations)* 1,823.4 1,805 to 1,850
EBITDA 625.1 625 to 645
EPS 2.64 2.60 to 2.90
Free cash flow 233.5 230 to 250
Capital expenditures 14% 13% to 15% of
revenues
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* Actual results for our continuing operations and our 2009 financial
outlook have been adjusted to exclude revenues from our
non-telecommunications IT consulting business, which was subsequently
sold and classified as discontinued operations. The amount of these
revenues was approximately $50 million.
In 2009, we delivered results that were in line with our financial outlook, which was updated on
Importantly, our key growth services, such as wireless, digital television, high-speed Internet and converged IP, performed well despite the economy. In 2009, we succeeded in making our internal processes more efficient and cost effective. We reached our cost reduction target, achieving
Quarterly Metrics for the Most Recent Five Quarters
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(in millions $, 2009 2008
except EPS)* Q4 Q3 Q2 Q1 Q4
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Growth services revenues 205.5 206.4 203.8 212.5 200.0
Legacy services revenues 247.2 244.7 247.6 255.7 263.9
Revenue 452.7 451.1 451.4 468.2 463.9
EBITDA 146.3 157.1 159.0 162.7 158.3
Free cash flow 43.4 62.2 59.8 68.1 40.9
EPS 0.59 0.68 0.66 0.71 0.61
Capital expenditures/revenue 16% 15% 14% 12% 19%
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* All financial metrics in this table are from continuing operations.
Similar to the second and third quarters of 2009, we continued to experience the impacts of the recession and slow pace of economic recovery through the fourth quarter, which contributed to the year-over-year declines in the financial metrics listed in the above table.
REVENUES
Operating Revenues
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(in millions $) Q4/09 Q4/08 % change
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Revenue (continuing operations) 452.7 463.9 (2.4)
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Revenue 452.7 463.9 (2.4)
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(in millions $) YTD/09 YTD/08 % change
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Revenue (continuing operations) 1,823.4 1,867.1 (2.3)
Deferral account rebate (13.5) - n.m.
--------------------------------
Revenue 1,809.9 1,867.1 (3.1)
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Revenues from continuing operations decreased by
By Segment (continuing operations)
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(in millions $) Q4/09 Q4/08 % change
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Revenues 452.7 463.9 (2.4)
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CMD growth services revenues 105.4 100.0 5.4
ESD growth services revenues 100.1 100.0 0.1
Total growth services revenues 205.5 200.0 2.8
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CMD legacy services revenues 100.1 105.2 (4.8)
ESD legacy services revenues 147.1 158.7 (7.3)
Total legacy services revenues 247.2 263.9 (6.3)
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(in millions $) YTD/09 YTD/08 % change
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Revenues 1,823.4 1,867.1 (2.3)
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CMD growth services revenues 418.7 389.5 7.5
ESD growth services revenues 409.5 401.5 2.0
Total growth services revenues 828.2 791.0 4.7
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CMD legacy services revenues 407.3 428.5 (4.9)
ESD legacy services revenues 587.9 647.6 (9.2)
Total legacy services revenues 995.2 1,076.1 (7.5)
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Growth Services Revenues
Our growth services revenues include wireless, consumer high-speed Internet, digital television, converged IP, unified communications, and security services, as well as our alarm monitoring services business.
Collectively, our growth services revenues rose by
Legacy Services Revenues
Local, long distance and legacy data services are included in our legacy services revenues.
Legacy services revenues totaled
As expected, Rogers and AT&T continued to migrate their communications traffic from our network to their own networks, resulting in year-over-year decreases in revenues from these customers of
Operating Revenues (continuing operations)
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(in millions $) Q4/09 Q4/08 % change
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Wireless 78.5 74.6 5.2
Data 151.6 155.9 (2.8)
Local 127.3 131.2 (3.0)
Long distance 73.1 80.2 (8.9)
Other 22.2 22.0 0.9
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Total 452.7 463.9 (2.4)
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(in millions $) YTD/09 YTD/08 % change
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Wireless 312.9 289.7 8.0
Data 620.3 637.8 (2.7)
Local 514.9 527.5 (2.4)
Long distance 288.4 328.2 (12.1)
Other 86.9 83.9 3.6
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Total 1,823.4 1,867.1 (2.3)
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Wireless Services
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(in millions $) 2009 2008 % change
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Q4 78.5 74.6 5.2
YTD 312.9 289.7 8.0
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Our wireless portfolio consists of cellular, wireless data, paging and
group communications services that we offer in the Manitoba market.
Our wireless services revenues increased by
Our average revenue per user ("ARPU") of
We continue to see strong growth potential for our wireless services in Manitoba. Our MTS Mobility services provide strong brand awareness, network reach and customer service. In addition, the high-value product bundles that we offer customers cannot be matched by our competitors. These factors, along with increasing consumer adoption of wireless products, provide an environment for further growth in Manitoba. For example, at the end of the fourth quarter of 2009, wireless penetration in Manitoba was approximately 65% as compared to our estimate of the Canadian penetration rate of approximately 67%.
Data Services
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(in millions $) 2009 2008 % change
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Q4 151.6 155.9 (2.8)
YTD 620.3 637.8 (2.7)
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Our data line of business includes revenues earned from providing
converged IP, high-speed Internet, unified communications, legacy data
and security services. Data services connect data, video and voice
networks to establish private connections across office locations and to
integrate traffic over highly secure networks. We provide a wide range of
Internet connectivity services to meet the needs of residential customers
in Manitoba and business customers across the country. We also offer
hosting and security services to business customers across Canada.
Our data services revenues decreased by
We continue to experience strong demand for our converged IP services, which delivered revenue growth of 6.6% and 10.6% for the fourth quarter and full-year 2009, respectively, over the same periods in the prior year. The capabilities of the suite of data products offered by our Enterprise Solutions division continued to be demonstrated by solid growth in our IP-virtual private network ("IP-VPN") customer base. As at
Our consumer Internet services revenue grew by 1.4% to
Local Services
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(in millions $) 2009 2008 % change
-------------------------------------------------------------------------
Q4 127.3 131.2 (3.0)
YTD 514.9 527.5 (2.4)
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Local services revenues include basic voice connections for residential
customers, including enhanced calling features (such as Call Answer, Call
Display, Call Waiting and 3-Way Calling), payphone revenue, wholesale
revenues from services provided to third parties, as well as a full range
of local services to business customers. These services allow customers
to complete calls in their local calling areas and to access long
distance, cellular networks and the Internet.
Local services revenues decreased marginally by
We believe that we have positioned ourselves for long-term success in our markets by bundling our residential services in attractive offerings. Our popular residential service bundles, which can include wireless, Internet, digital television and alarm monitoring services, continue to provide a unique value proposition for our customers and cannot be matched by our competitors. Customers utilizing our bundled service offerings grew by 3.8% in the fourth quarter of 2009 as compared to the same period in 2008. Through the success of these programs we continued to deliver "best in class" performance against cable company competitors, and are minimizing the reduction in our local services revenues. At
Long Distance Services
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(in millions $) 2009 2008 % change
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Q4 73.1 80.2 (8.9)
YTD 288.4 328.2 (12.1)
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Long distance services enable residential customers in Manitoba and
business customers across Canada to communicate with destinations outside
the local exchange. Our long distance voice service portfolio includes
basic, domestic, cross-border and international outbound long distance,
basic and enhanced toll-free services, calling cards and audio
conferencing, as well as a variety of enhanced long distance services and
features.
Long distance services revenues totaled
Long distance services revenues in our Consumer Markets division were lower mainly due to customer migration to lower-priced long distance plans, reduced volumes and customer losses. Our Enterprise Solutions division's long distance services were primarily impacted by lower volumes in the cross-border and domestic markets along with lower domestic rates. Reduced business activity by our customers that are based or have operations in the U.S., as well as exiting customers, have resulted in lower domestic and cross-border volumes of long distance services. We have launched sales and marketing initiatives designed to identify new customers, retain our existing customer base and encourage higher long distance usage to counter these impacts upon our long distance business in the enterprise segment.
Other Revenues
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(in millions $) 2009 2008 % change
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Q4 22.2 22.0 0.9
YTD 86.9 83.9 3.6
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Other revenues consist of revenues earned from our digital television and
alarm monitoring services, and miscellaneous items. Our digital
television service is offered across our broadband network platform and
is targeted at residential customers in Winnipeg, Brandon and Portage la
Prairie. Miscellaneous revenues primarily consist of the sale and
maintenance of terminal equipment.
Other revenues grew by
With respect to our television service, 2009 was highlighted by the introduction of our premium television offering, branded "MTS Ultimate TV". The new service combines technology from Alcatel-Lucent
The rollout of this product occurred gradually throughout 2009 and by the end of the third quarter of the year, we had launched this service in Brandon and reached the majority of households in
EBITDA
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(in millions $) Q4/09 Q4/08 % change
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EBITDA (continuing operations) 146.3 158.3 (7.6)
Restructuring and other costs (5.8) (13.7) (57.7)
National wireless/wireless transition
costs (3.7) (9.3) (60.2)
--------------------------------
EBITDA 136.8 135.3 1.1
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(in millions $) YTD/09 YTD/08 % change
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EBITDA (continuing operations) 625.1 666.4 (6.2)
Deferral account rebate (13.5) - n.m.
Restructuring and other costs (33.6) (20.8) 61.5
National wireless/wireless transition
costs (18.1) (27.1) (33.2)
--------------------------------
EBITDA 559.9 618.5 (9.5)
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Our EBITDA from continuing operations for the fourth quarter, at
We continue to progress with our long-term strategic objectives to increase our revenues from growth services and create efficiencies in all areas of our business. For the year ended
Higher consolidated EBITDA in the fourth quarter was primarily driven by lower year-over-year restructuring costs as well as the costs associated with our transition away from Bell Mobility to new suppliers and our own wireless platform. For the twelve months ended
EPS
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(in $) Q4/09 Q4/08 % change
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EPS (continuing operations) 0.59 0.61 (3.3)
Future statutory tax rate and other
tax rate adjustments (0.36) (0.14) n.m.
Discontinued operations (0.03) (0.02) 50.0
Restructuring and other costs (0.06) (0.14) (57.1)
National wireless/wireless transition
costs (0.04) (0.10) (60.0)
--------------------------------
Basic EPS 0.10 0.21 (52.4)
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(in $) YTD/09 YTD/08 % change
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EPS (continuing operations) 2.64 3.03 (12.9)
Future statutory tax rate and other
tax rate adjustments (0.36) (0.26) (38.5)
Discontinued operations (0.03) (0.05) (40.0)
Restructuring and other costs (0.35) (0.21) 66.7
National wireless/wireless transition
costs (0.19) (0.28) (32.1)
Deferral account rebate (0.14) - n.m.
--------------------------------
Basic EPS 1.57 2.23 (29.6)
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Note: EPS for the three and twelve months ended December 31 is based on
weighted average shares outstanding of 64.7 million for 2009, and
64.6 million for 2008.
On a year-over-year basis, EPS from continuing operations decreased by
In the fourth quarter, basic EPS was
OPERATING EXPENSES
Operations Expense (continuing operations)
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(in millions $) 2009 2008 % change
-------------------------------------------------------------------------
Q4 306.4 305.6 0.3
YTD 1,198.3 1,200.7 (0.2)
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-------------------------------------------------------------------------
Operating expenses in the fourth quarter and for the full year were up by
In addition, we are seeing success with our cost reduction program focusing on areas of our business not impacted by the previous initiatives and expect to continue generating further savings in the future.
Restructuring and Transition
-------------------------------------------------------------------------
(in millions $) 2009 2008 % change
-------------------------------------------------------------------------
Q4 9.5 23.0 (58.7)
YTD 51.7 47.9 7.9
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-------------------------------------------------------------------------
We incurred restructuring costs in the amounts of
Transition costs for the fourth quarter were
Amortization Expense
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(in millions $) 2009 2008 % change
-------------------------------------------------------------------------
Q4 77.9 83.3 (6.5)
YTD 322.7 329.4 (2.0)
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Amortization expense was
Other Income
-------------------------------------------------------------------------
(in millions $) 2009 2008 % change
-------------------------------------------------------------------------
Q4 3.3 (0.5) n.m.
YTD 10.9 7.1 53.5
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-------------------------------------------------------------------------
Other income was higher in the fourth quarter of 2009 primarily due to interest income on a tax credit under the scientific research and experimental development ("SR&ED") program. In the twelve months ended
Debt Charges
-------------------------------------------------------------------------
(in millions $) 2009 2008 % change
-------------------------------------------------------------------------
Q4 15.6 12.2 27.9
YTD 59.5 48.9 21.7
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Debt charges are higher by
Income Tax Expense
-------------------------------------------------------------------------
(in millions $) 2009 2008 % change
-------------------------------------------------------------------------
Q4
Income tax on continuing operations 17.8 23.1 (22.9)
Tax impact of one-time items (3.6) (7.6) (52.6)
Statutory tax rate and other tax rate
adjustments 23.4 9.0 n.m.
--------------------------------
Total income tax 37.6 24.5 53.5
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(in millions $) 2009 2008 % change
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YTD
Income tax on continuing operations 82.8 99.4 (16.7)
Tax impact of one-time items (21.5) (16.0) 34.4
Statutory tax rate and other tax rate
adjustments 23.4 16.5 41.8
--------------------------------
Total income tax 84.7 99.9 (15.2)
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Income tax expense increased by
We continue to benefit from our substantial capital cost allowance ("CCA") pools and available tax losses which have enabled us to fully-offset our taxable income. By utilizing our deferred CCA deductions, we project that we will not pay cash taxes before 2017 with the present value of our tax asset being approximately
CONSOLIDATED QUARTERLY DATA
Unaudited quarterly financial data for our eight most recently completed quarters is presented below:
-------------------------------------------------------------------------
Q4 Q3 Q2 Q1
(in millions $, except EPS) 2009 2009 2009 2009
-------------------------------------------------------------------------
Operating revenues 452.7 437.6 451.4 468.2
Operating income 58.9 51.9 59.0 67.4
Net income before discontinued
operations 9.0 28.1 30.0 36.8
Net income and comprehensive
income 6.7 27.9 30.1 37.0
EPS before discontinued
operations 0.14 0.43 0.47 0.57
Diluted EPS before
discontinued operations 0.14 0.43 0.47 0.57
EPS 0.10 0.43 0.47 0.57
Diluted EPS 0.10 0.43 0.47 0.57
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Q4 Q3 Q2 Q1
(in millions $, except EPS) 2008 2008 2008 2008
-------------------------------------------------------------------------
Operating revenues 463.9 467.3 472.1 463.8
Operating income 52.0 68.6 79.6 88.9
Net income before discontinued
operations 14.8 39.4 38.5 54.7
Net income and comprehensive
income 13.7 38.1 38.0 54.2
EPS before discontinued
operations 0.23 0.61 0.60 0.85
Diluted EPS before
discontinued operations 0.23 0.61 0.60 0.85
EPS 0.21 0.59 0.59 0.84
Diluted EPS 0.21 0.59 0.58 0.83
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Our consolidated financial results for the eight most recently completed quarters reflect the ongoing performance of our business in the marketplace, as well as the recording of the following items:
- A loss in the amount of $2.3 million in the fourth quarter of 2009
associated with discontinued operations of our non-telecommunications
IT consulting business.
- Charges in the amount of $13.5 million for the deferral account
rebate in relation to Decision 2008-1 in the third quarter of 2009.
- Costs in relation to the transition of certain wireless service
requirements away from Bell Mobility to new suppliers and to our
wireless platform in the first, second, third and fourth quarters of
2009, in the amounts of $7.4 million, $6.3 million, $0.7 million and
$3.7 million, respectively. We recorded costs in the amounts of
$10.3 million, $7.5 million and $9.3 million in the second, third and
fourth quarters of 2008, respectively, for this transition and costs
associated with the AWS spectrum auction.
- Restructuring costs for our ongoing cost reduction initiatives in
each of the four quarters of 2009 in the amounts of $5.4 million,
$12.3 million, $8.6 million and $5.3 million, listed chronologically,
versus $7.1 million and $13.7 million in the third and fourth
quarters of 2008, respectively.
- Charges to reflect decreases in the value of our income tax asset as
a result of reductions in future income tax rates or rate
differential on temporary differences, consisting of $23.4 million in
the fourth quarter of 2009; and $7.5 million and $9.0 million in the
second and fourth quarters of 2008, respectively.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Cash Flows from Operating Activities
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(in millions $) 2009 2008 $ change
-------------------------------------------------------------------------
Q4 39.4 168.6 (129.2)
YTD 263.8 533.8 (270.0)
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Cash flows from operating activities refer to cash we generate from our
normal business activities.
In the fourth quarter of 2009, cash flows from operating activities were
Cash flows from operating activities for the full-year 2009 were
Cash Flows used in Investing Activities
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(in millions $) 2009 2008 $ change
-------------------------------------------------------------------------
Q4 93.6 94.3 (0.7)
YTD 297.9 343.2 (45.3)
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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 were
Capital Expenditures
In 2009, capital was allocated principally to fund our higher growth segments. Our capital expenditures from continuing operations in the fourth quarter of 2009 were
Free Cash Flow
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(in millions $) Q4/09 Q4/08 % change
-------------------------------------------------------------------------
Free cash flow (continuing operations) 43.4 40.9 6.1
Pension solvency funding (23.2) (8.5) n.m.
HSPA and related billing expenditures (18.6) - n.m.
Restructuring and other costs (5.8) - n.m.
Restructuring capital expenditures (1.2) (13.7) (91.2)
National wireless/wireless transition
costs (3.7) (9.3) (60.2)
Wireless transition capital expenditures - (2.2) n.m.
Directors' and officers' trust refund - 14.8 n.m.
--------------------------------
Consolidated free cash flow (9.1) 22.0 n.m.
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(in millions $) YTD/09 YTD/08 % change
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Free cash flow (continuing operations) 233.5 266.2 (12.3)
Pension solvency funding (46.7) (30.6) 52.6
HSPA and related billing expenditures (32.6) - n.m.
Restructuring and other costs (33.6) (20.8) 61.5
Restructuring capital expenditures (2.8) - n.m.
National wireless/wireless transition
costs (18.1) (27.1) (33.2)
Deferral account rebate (13.5) - n.m.
Wireless transition capital expenditures - (4.6) n.m.
Directors' and officers' trust refund - 14.8 n.m.
Spectrum license costs - (48.6) n.m.
--------------------------------
Consolidated free cash flow 86.2 149.3 (42.3)
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Free cash flow refers to cash flow from operating activities, less
capital expenditures, and excluding changes in working capital.
Free cash flow from continuing operations was
Consolidated free cash flow was negative
Cash Flows from (used in) Financing Activities
-------------------------------------------------------------------------
(in millions $) 2009 2008 $ change
-------------------------------------------------------------------------
Q4 155.2 (62.1) 217.3
YTD 137.8 (165.9) 303.7
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Financing activities refer to actions we undertake to fund our operations
through equity capital and borrowings.
Cash flows from financing activities were
Credit Facilities
-------------------------------------------------------------------------
utilized at
December 31,
(in millions $) capacity 2009
-------------------------------------------------------------------------
Medium term note program 500.0 200.0
Accounts receivable securitization 150.0 -
Revolving credit facility 350.0 137.3
--------------------------
Total 1,050.0 337.3
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We have arrangements in place that allow us to access the debt capital markets for funding when required. Borrowings under these facilities typically are used to fund new initiatives, refinance maturing debt, and manage cash flow fluctuations.
We renewed our medium term note program on
Capital Structure
-------------------------------------------------------------------------
December 31, December 31,
(in millions $) 2009 2008
-------------------------------------------------------------------------
Cash and cash equivalents (110.2) (6.5)
Proceeds from accounts receivable
securitization - 127.0
Notes payable - 95.0
Capital lease obligations, including
current portion 17.6 18.8
Long-term debt, including current portion 1,051.5 650.2
--------------------------
Total debt 958.9 884.5
Shareholders' equity 1,316.9 1,382.0
--------------------------
Total capitalization 2,275.8 2,266.5
--------------------------
--------------------------
Debt to capitalization 42.1% 39.0%
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Our capital structure illustrates the amount of our assets that are financed by debt versus equity. Our debt to total capitalization ratio of 42.1% at
Credit Ratings
-------------------------------------------------------------------------
S&P - Senior debentures BBB
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S&P - Commercial paper A-2
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DBRS - Senior debentures BBB
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DBRS - Commercial paper R-2 (high)
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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
Outstanding Share Data as at
Authorized:
- Unlimited number of Preference Shares of two classes issuable in one
or more series
- Unlimited number of Common Shares of a single class
------------------------------------------------------------------------
Issued:
-------------------------------------------------------------------------
Book Value
Shares Number (in millions $)
-------------------------------------------------------------------------
Common 64,667,817 1,266.9
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Stock options:
-------------------------------------------------------------------------
Weighted Average
Exercise Price
Options Number Per Share
-------------------------------------------------------------------------
Outstanding 2,321,835 $40.70
Exercisable 1,272,040 $41.36
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Contractual Obligations, Financial Instruments, Off-Balance Sheet Arrangements, and Other Financial Arrangements
Our contractual obligations, financial instruments, off-balance sheet arrangements, and other financial arrangements remain substantially unchanged from those that were disclosed in our interim MD&As for the first, second and third quarters of 2009, and our 2008 annual MD&A. For additional details, please consult these documents, which are available on our Web site at www.mtsallstream.com.
CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS
---------------------------------------------
Our critical accounting estimates and assumptions remain substantially unchanged from those that were disclosed in our interim MD&As for the first, second and third quarters of 2009, and our 2008 annual MD&A. For additional details, please consult these documents, which are available on our Web site at www.mtsallstream.com.
CHANGES IN ACCOUNTING POLICIES, INCLUDING INITIAL ADOPTION
----------------------------------------------------------
Our accounting policies, including initial adoption, remain substantially unchanged from those that were disclosed in our interim MD&As for the first, second and third quarters of 2009, and our 2008 annual MD&A. For additional details, please consult these documents, which are available on our Web site at www.mtsallstream.com
IFRS
In
We began our IFRS changeover project in 2008 and have developed a detailed IFRS changeover plan. A project governance structure has been established, which includes a steering committee, consisting of senior management from our finance, IT, network services, enterprise risk management and treasury departments. Our project team includes certain dedicated resources, employees who contribute as required by the project plan, as well as external consultants who have been engaged for project management and technical accounting expertise. The project team reports regularly to the Audit Committee of our Board of Directors regarding the status of the project and implications of the changeover to IFRS. Throughout the execution of our IFRS plan, there is ongoing training and communication to affected employees and other internal and external stakeholders. Our IFRS changeover plan consists of the following four phases.
Phase 1: Diagnostic Gap Assessment
Phase 1 consists of a high-level diagnostic gap and impact analysis of the differences between Canadian GAAP and IFRS applicable to us. The key activities of Phase 1 include:
- Identification of significant technical accounting and disclosure
differences;
- Identification of key IFRS accounting policy alternatives; and
- Identification of major operational and system impacts.
We completed Phase 1 of our IFRS changeover plan in
Phase 2: Design and Planning
Phase 2 entails a detailed analysis of relevant Canadian GAAP and IFRS differences, as well as an assessment of the implications of implementing new standards. The key activities of Phase 2 include:
- Detailed evaluation of accounting and disclosure options, including
review of estimated impacts on our financial position and results of
operations, key performance indicators, and business activities;
- Selection of IFRS-compliant accounting policies, including IFRS 1,
First-time Adoption of International Financial Reporting Standards
("IFRS 1"), policy choices and ongoing accounting policies;
- Assessment of implications to systems, processes and controls in
sufficient detail to support solution development in Phase 3; and
- Identification of a dual reporting solution to maintain parallel
records during 2010.
We have completed Phase 2 activities to assess and select accounting policies on a preliminary basis. This assessment is based on our expectations of accounting standards that will be in place at the time of changeover, as well as the estimated impact of these standards. Consequently, the detailed evaluation of the impacts of certain accounting policy options is ongoing, along with the final selection of these accounting policies. As IFRS continues to evolve, further evaluation may be required. We have identified a dual reporting solution.
Phase 3: Solution Development
During Phase 3, we will design and test solutions that will be implemented as we changeover to IFRS. The key activities of Phase 3 include:
- Design, development and execution of testing strategies for changes
to accounting and business processes and IT solutions;
- Design, development and execution of a testing strategy for our dual
reporting solution; and
- Revision of internal controls, as required, resulting from changes to
ongoing accounting policies and the one-time adjustments to our
opening balance sheet on changeover to IFRS.
We have substantially completed Phase 3 activities, including the assessment of implications to systems, processes and internal controls resulting from the expected financial accounting policy differences. We have designed a solution for dual reporting in 2010, and testing of the solution is underway. We also have completed design and development activities related to IT system and process changes resulting from the changes in accounting standards for property, plant and equipment. Testing of this solution is also underway.
Phase 4: Implementation
During Phase 4, we will implement IFRS-compliant accounting policies and related systems, processes and controls. The key activities of Phase 4 include:
- Implementation of changes to accounting policies;
- Preparation of IFRS-compliant opening balance sheet as at January 1,
2010;
- Preparation of IFRS-compliant financial statements and related note
disclosures; and
- Implementation of changes to systems, processes and controls.
Phase 4 of the IFRS changeover plan has commenced and is expected to continue until the end of the first quarter of 2011.
During our IFRS changeover project, we have identified differences between Canadian GAAP and IFRS that may impact our consolidated financial statements. The key differences we have identified are described below.
Employee benefits
IAS 19, Employee Benefits, provides accounting options for the treatment of actuarial gains and losses. We expect to adopt an accounting policy whereby actuarial gains and losses will be recognized immediately in equity rather than in net income. Under Canadian GAAP, we currently use the corridor approach to account for actuarial gains and losses and recognize the related expense in net income.
In addition, under IAS 19, we intend to measure the expected return on plan assets at fair value of pension fund assets. This is different from Canadian GAAP, where we measure the expected return on plan assets based on a market-related value of pension fund assets. As a result, we expect pension expense to be different under IFRS than under Canadian GAAP.
Property, plant and equipment
IAS 16, Property, Plant and Equipment, requires that each 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. We expect that this requirement will result in differences in the classification of individual components of property, plant and equipment. Additionally, we expect to adopt a separate unit straight-line methodology for depreciating items of property, plant and equipment. This is different than our current methodology where depreciation expense is calculated based on the pooling of assets.
In addition, IAS 16 requires certain expenditures, which are appropriate to capitalize as property, plant and equipment under Canadian GAAP, to be expensed under IFRS.
It is expected that the retrospective implementation of these changes in accounting policies will result in a change in the net book value of property, plant and equipment and in depreciation expense going forward.
Accounts receivable securitization
IAS 27, Consolidated and Separate Financial Statements, requires financial assets to be derecognized based on an analysis of the transfer of risks and rewards of ownership, followed by a determination regarding transfer of control of the asset. Canadian GAAP looks only to the transfer of control to determine whether a financial asset qualifies for derecognition. As such, the accounting treatment of our accounts receivable securitization program may require the recognition of a liability under IFRS rather than the derecognition of accounts receivable.
Leases
IAS 17, Leases, requires that in a sale-leaseback transaction where the leaseback is classified as an operating lease, any gain on sale is recognized immediately in income. This differs from our current policy, where, in accordance with Canadian GAAP, any gain on sale is deferred and recognized in income over the term of the operating lease.
Impairment of long-lived assets
IAS 36, Impairment of Assets, requires that a one-step approach be used to test for and to measure impairment of long-lived assets, and that the carrying value of assets be compared with the higher of fair value less costs to sell and value in use, which is measured using discounted cash flows. This is different than the two-step approach followed under Canadian GAAP. This approach first requires an entity to compare carrying values to undiscounted future cash flows to assess whether any impairment exists, and then to measure the impairment using discounted cash flows. This difference in methodologies could result in different conclusions regarding asset impairments under IFRS and Canadian GAAP.
First-time adoption of IFRS
On adoption of IFRS, entities are required to implement accounting policies that are in accordance with IFRS and to apply these policies retrospectively. IFRS 1 includes certain mandatory exceptions and certain optional exemptions to this retrospective application. The significant optional exemptions that we expect to apply are as follows:
- Employee benefits - We expect to recognize all cumulative actuarial
gains and losses on pension and other non-pension future employee
benefits in opening retained earnings at January 1, 2010.
- Business combinations - We expect to not restate any business
combinations that occurred prior to January 1, 2010.
These key differences are described to allow investors to better understand the possible impacts of our transition to IFRS. It may not be appropriate to use such information for any other purpose. These differences have been identified based on the accounting standards we expect to be in place in the year of our changeover to IFRS. The International Accounting Standards Board, however, has projects underway which could have an impact on the differences we have currently identified. Changes in accounting standards and our assessments of the estimated impacts may affect our final accounting policy selection. The financial impacts of these differences cannot be reliably quantified at this time, and while they may be material, we expect the impacts to be similar to those of our competitors. Further information regarding the quantification of the impacts will be provided as we move closer to the changeover date.
REGULATORY ENVIRONMENT
----------------------
The telecommunications and broadcast industries in which we operate in are federally regulated. We operate as both an incumbent local exchange carrier ("ILEC") in Manitoba and as a competitive local exchange carrier ("CLEC") nationally. In addition, pursuant to Broadcasting Decision CRTC 2002-235, the Canadian Radio-television and Telecommunications Commission ("CRTC") granted us a Class 1 regional broadcasting distribution license to operate as a broadcasting distribution undertaking serving
Essential Facilities
On
Proposed Unbundled Local Loop Rate Increases
On
2010 OUTLOOK
------------
This financial outlook and the information contained herein have been reviewed by our Audit Committee and should be read in conjunction with the disclaimer "Regarding Forward-Looking Statements" and the "Risks and Uncertainties" sections in this interim MD&A, as well as similar sections of our interim MD&As for the first, second and third quarters of 2009, our 2008 annual MD&A and our 2008 Annual Information Form.
Our financial outlook for 2010 is as follows:
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2010 Financial Outlook - Continuing Operations
-------------------------------------------------------------------------
Revenues $1.780 billion to $1.880 billion
EBITDA $585 million to $635 million
EPS $2.00 to $2.50
Free cash flow $175 million to $225 million
Capital expenditures 14% to 16% of revenues
Annualized dividend* $2.60 per share
-------------------------------------------------------------------------
* Subject to legal requirements, and if and as declared in the
discretion of the Board of Directors.
Our financial outlook for 2010 continues to be based on a strategy focused on driving growth in our IP-based services, aggressive cost reductions and success-based capital spending. Excluding a non-cash increase in pension expense of approximately
Our business plan for 2010 contemplates strategic and focused investments including the expansion of our Allstream IP network, the launch of Allstream wireless towards the end of the year in the geographic markets where we are strongest, and the deployment of fibre to the home ("FTTH") in certain areas of Manitoba. We have set aside approximately
We are embarking on a program to extend fibre in markets where Allstream has a proven track record of success with the goal of increasing our on-net revenues and improving profitability. We plan to spend up to
Towards the end of 2010, we expect to launch Allstream wireless targeting geographic markets where we are strongest. Our Allstream wireless offering will focus on a converged wireless/wireline product suite. This business-only wireless service will complement our existing enterprise portfolio and provide customers with unique functionality. Over the next three years, we would expect our cumulative investment in Allstream wireless to be a maximum of approximately
Our FTTH initiative in Manitoba is expected to cover 500 homes in the province through 2010. The FTTH network is the next evolution in advanced communication networks providing us the ability to maintain our competitive edge against the cable networks. FTTH is also more effective in servicing new home developments as compared to existing hybrid fibre/copper technologies, which helps deliver both capital and operating efficiencies.
Building on the considerable progress we made in 2009 improving our cost structure, we are targeting an additional
We pre-funded our HSPA build, 2010 pension solvency obligations, deferral account rebates, and past restructuring accrual with the proceeds from our very successful
Our business plan for the year ahead contemplates a quarterly dividend payout of
Longer term, we forecast that we will not pay cash taxes any earlier than 2017. This is based on our longer-term EBITDA growth assumptions of 1% to 3% once the economy recovers.
Material Assumptions
We have made a number of assumptions in preparing our financial outlook for 2010 and making certain other forward-looking statements, which include, but are not limited to, the following assumptions:
Market Assumptions
We expect our consumer market services, such as wireless, Internet and digital television, to continue to grow in 2010 at levels similar to 2009. We are assuming that there will not be any material changes to the continued growth of wireless services in 2010, notwithstanding anticipated changes to relationships and market dynamics. In addition, we continue to anticipate there will be no meaningful new entrant in wireless services in Manitoba in 2010. We expect ongoing competitive pressures in our local and long distance services. Revenues generated by the residential voice telecommunications market will continue to decrease due to competition and substitution. Although we expect competition from an incumbent cable operator to continue in the Manitoba residential market, we are confident that we have prudently prepared our operations and strategies to counter these challenges. Through our broadband network initiative, our bundling leadership, and our residential service offerings, which include wireless, Internet, digital television, local, long distance and alarm monitoring services, we believe that we are well-positioned to compete successfully. In 2010, we plan to strengthen our competitive advantage and leadership position in Manitoba by making further improvements to our broadband services, extending the coverage of our MTS Ultimate TV service throughout
We expect our national enterprise unit, which operates under the Allstream brand, to continue to face the challenges in the marketplace which emerged during the economic recession. Although we began to see long distance volumes return and some stabilization of our business in the second half of 2009, we remain cautious. Our outlook assumes that we will not see any significant impacts of a national economic recovery on our enterprise customers' purchasing decisions in 2010. The competitive pressures experienced in our legacy data connectivity and long distance services are anticipated to continue. Likewise, we anticipate that customers will continue to migrate from legacy services to IP-based services. We expect our national enterprise unit to continue to deliver strong growth in its IP-based services. We expect to launch a converged wireless/wireline product suite on a targeted geographic footprint towards the end of 2010. To face the continued competition in the enterprise markets through 2010, we have been refining our market focus, creating innovative IP solutions, reducing our cost structure, refocusing our sales efforts, and investing selectively in higher-margin opportunities.
Economic Assumptions
Consumer market services are expected to benefit from a Manitoba economy that is forecast to grow in real gross domestic product ("GDP") by 2.3% in 2010, according to the Manitoba Department of Finance. The Bank of
Cost Reduction Assumptions
For 2010, we expect to achieve
Capital Resource and Liquidity Assumptions
We continue to invest in our core operations with a focus on our growth products and services to ensure success in the markets in which we operate. We have adopted a prudent expenditure and investment strategy that is scalable and provides flexibility to adjust the pace of investment according to economic conditions. For example, during 2009, we scaled back our capital expenditures in light of the impact the economy had upon our enterprise markets. In 2010, our capital program is expected to be 14% to 16% of our revenues from continuing operations, with the majority spent on wireless and IP-based services.
In
Tax Assumptions
We have been able to reduce our taxable income by utilizing our substantial CCA pools and available tax losses. By utilizing our deferred CCA deductions, we project that we will not pay cash taxes before 2017. The present value of our tax asset is approximately
RISKS AND UNCERTAINTIES
-----------------------
Risk management practices are part of our normal business operations to help identify and manage our principal risks. Governance of principal risks forms part of the mandate and the charters of our Board of Directors and its committees, including monitoring of our risk management program by the Audit Committee of our Board of Directors.
Our risk management program is enterprise-wide with focus on identification, assessment and mitigation of risks associated with achievement of our strategic objectives. Principal risks are identified and evaluated relative to their potential impact and likelihood, including consideration of mitigating activities. We perform an annual risk assessment that is linked to our yearly business plan process, and we conduct periodic updates to identify potential emerging risks arising from major business decisions, key initiatives and external factors.
Our risk management program is managed through an executive-level strategic risk committee in conjunction with our enterprise risk management and internal audit groups. Reports on principal risks are reviewed by our executive management, the Audit Committee and the Board of Directors. In addition, the scope of our internal audit plan is risk-based, taking into account the results of risk assessments as well as other factors such as internal control risks and operational risks.
The risks and uncertainties discussed below highlight the more important and relevant factors that could significantly affect our operations. They do not represent an exhaustive list of all potential issues that could affect our financial results.
Market Conditions
Our business is affected by general economic conditions including consumer confidence and spending, enterprise confidence and spending, and the demand for, and prices of, our products and services.
Our consumer business, which is based in Manitoba, is subject to variations based on economic conditions. We have observed that demand for telecommunication consumer products is in aggregate not very sensitive to economic fluctuations and changes in market conditions. In addition, we continue to benefit from the resilience of the Manitoba economy. Our enterprise business, which services customers across
Economic conditions also affect the financial position of our customers and correspondingly, could affect our ability to collect receivables. Weak economic conditions could negatively affect our results of operations, including cash flows.
We continuously monitor market conditions and proactively take steps to adjust our business plans and marketing efforts in light of such conditions.
Debt and Equity Market Fluctuations
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 in the capital markets in general 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.
Pension Funding
We have legal funding requirements in respect of pension plans that we sponsor.
Valuations of our plans' assets and liabilities determine our funding requirements. These valuations depend on a number of factors including returns on pension plan assets, long-term interest rates, plan demographics and government pension regulations. Changes in these factors could cause actual future contributions to significantly differ from our current estimates and could require us to increase contributions to our pension plans in the future, and therefore, could have an adverse effect on our liquidity and results of operations. A material portion of our pension 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 capital markets. Accordingly, there is no assurance that our pension plans will be able to earn their projected rates of return. These same market conditions also impact the discount rate used to calculate our pension solvency obligations and thereby could significantly affect our pension solvency funding requirements.
Our pension solvency funding requirements are also affected by pension regulations. In 2009, the federal government outlined a reform proposal that is expected to affect our pension plans. Further clarification regarding the technical details of the new proposal is required before the magnitude of the impact, if any, can be determined. As a result of this proposal and other proposals that could be introduced in the future, our pension solvency funding requirements may be higher or lower than expected.
We carefully monitor our anticipated pension funding requirements as part of our business planning process and take steps, as reasonably required, to ensure that we continue to meet our obligations.
We also 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
Changes in Regulation or Legislation
The telecommunications and broadcast industries in which we operate are federally regulated. As a result, our business is affected by decisions made by various regulatory agencies of the federal government, including the CRTC and Industry
For a description of the principal regulatory initiatives and proceedings affecting us, please see the "Regulatory Environment" section in this interim MD&A.
Changes in legislation can also change the ability of our customers to use the products and services we offer. As an example, like others in the telecommunications industry, our customers may become subject to stricter laws limiting the use of hand-held wireless devices while driving or in other situations. If this legislation were to become effective within Manitoba, we do not currently expect this would have an adverse effect on our results or demand for our services, although there can be no assurances that this would not happen. We promote responsible driving and recommend that driving safety should be every wireless customer's first responsibility.
Competition
General
Like all of our industry peers, we continue to operate in a competitive environment. There can be no assurance that our current or future competitors will not provide services comparable or superior to those that we provide, or at lower prices, adapt more quickly to evolving industry trends or changing market requirements, enter the markets we operate, or introduce competing services. Any of these factors could adversely affect our market share and results of operations.
Manitoba Operations
In Manitoba, our operating environment is becoming increasingly competitive, which could potentially impact subscriber growth and put pressures on revenues and profitability.
Our primary competitors in the consumer and small business wireline market are incumbent cable providers. Cable competition and ongoing technology substitutions have contributed to the erosion of our residential network access lines. This erosion is expected to continue.
Our primary competitor in the wireless markets is Rogers, and to a lesser extent TELUS and some of Bell Canada's non-core brands such as Virgin and PC Mobile. In 2008, Shaw Communications Inc. and Globalive Communications Corp., two "new entrant companies", acquired spectrum within Manitoba. We expect these companies may launch wireless operations in Manitoba in the future. Although
Our primary competitors in the broadband market are the incumbent cable providers. We do not expect the competitive landscape to change significantly in the short-term. It is possible, however, that in the future, technologies such as wireless broadband will evolve to a level in which it affects the competitive landscape.
Our primary competitors in the television market are the incumbent cable providers and satellite television providers. Our television offering is available in
As the dominant full-service provider in Manitoba, we possess the unmatched ability to bundle up to five services: wireline, wireless, alarm monitoring, high-speed Internet, and television services. While other competitors are able to offer smaller bundles, we believe the wide scope of our offerings allows us to differentiate ourselves. We expect to continue to leverage this advantage to compete effectively in the future.
Within Manitoba, we also operate in the enterprise market as the ILEC and as a provider of wholesale services to other carriers and service providers. In this market, we face competition from certain CLECs who operate within Manitoba. As the incumbent carrier, we believe we are well-positioned to compete within this market.
National Operations
Nationally, we operate as a competitive provider of telecommunications services to businesses and as a provider of wholesale services to other carriers and service providers. All participants in the enterprise market face competition and customers' requirements are complex and continuously evolving. In areas in which we offer services using our own network, we believe we face significantly less risk in our ability to offer competitive services to our customers. In areas in which we offer our services outside of our footprint, we face greater risks because we are subject to the inferior service levels provided by the incumbent carriers. In such situations, we are also subject to the risks associated with any changes to the regulatory framework, which can alter our rights to access such networks at reasonable prices, if at all. We do take steps to attempt to manage this risk. By way of examples, we are continuously examining the benefits of expanding our network footprint in key locations to allow more focused, on-net services, and we also explore the feasibility of new alliances with third parties (such as Radiant Communications Corp. and cable companies) to deliver the same services at lower costs, all while reducing our dependency on the incumbent carriers.
In response to the pressures in the enterprise markets, we have been refining our market focus, creating innovative IP solutions, reducing our cost structure and investing selectively in higher-margin opportunities. We also actively monitor and participate in all regulatory proceedings that could affect the profitability of our national operations.
Legacy Services
The industry-wide transition from a legacy voice and data infrastructure to an IP-based infrastructure continues at a vigorous pace. We, along with our peers, are experiencing accelerated pressures in our legacy lines of business, such as long distance, local, frame relay and private line data services, as technology changes are allowing our customers to have integrated telecommunications products that offer a wider range of functionalities. This affects both our Manitoba and national operations. As a result, the revenues and margins associated with legacy services, for the most part, are declining. To date, these financial pressures have only been partly offset by increased demand and migration of customers to wireless and IP-based platforms. Our experience within the Manitoba wireline market, however, has been that our rate of losses has been lower than the Canadian average, which has helped to mitigate such financial pressures.
Our risk from this exposure has become less pronounced in recent years as we have deliberately focused on transitioning our revenue base to IP-based services across both divisions. As an example of our success, by the end of 2009, our revenues from growth services on a consolidated basis represented 45% of our total revenues, as compared to 42% at the end of 2008 and 30% four years ago. While we expect that a substantial portion of our future revenue growth will be achieved from IP-based services and we have invested significant capital resources in the development of our networks, there is a risk that this growth will not offset the decline in our legacy services.
We also continue to face the migration of certain customers' traffic from our legacy services either to new services or to their own respective networks. We expect that this type of revenue loss, however, now has been largely stabilized and we believe that the risks of any future impact has been diminished. We are also acting on strategies to facilitate the migration of our customers to IP solutions in a manner that utilizes our existing capabilities and infrastructure to mitigate the impact on our financial performance.
Continuous Rapid Changes in Technology
We operate in markets that are affected by constant and rapid technology 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 speeds up the obsolescence of our core technologies. At the same time, this provides us with new opportunities to exploit markets that were previously more 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 invest in, or develop new technologies, products and services, sometimes utilizing partnerships or alliances to reduce our costs. By way of example, in Manitoba we are currently jointly deploying a new HSPA wireless network with Rogers Wireless. These investments are critical to drive growth, achieve our financial objectives and in some cases reduce our overall cost structure.
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 from these new technologies, 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.
One of the key priorities in our business planning process is to ensure that we prudently manage technological changes in a manner that benefits our company and our shareholders.
Litigation and Legal Matters
Litigation
As is the case with any large operating company, investigations, claims and lawsuits seeking damages and other relief are often threatened or pending against us. In addition, plaintiffs within
By way of indicative examples, MTS 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 and charges in association with 911 or emergency service access fees that now ought to be repaid to those customers. We believe we will be successful in defending these specific claims. The outcome of any of such actions, or new actions that may arise, however, is always uncertain and, until the particular matter is resolved, there can be no assurance that our financial position will not be negatively impacted as the costs to us in losing such claims could be material. We work closely with expert outside counsel to vigorously defend all material litigation against us that we consider to be without merit or against which we have strong defences. In addition, we conduct our business with controls designed for compliance with legal obligations, thus reducing exposure to legal claims, or risk of loss of those claims, should they materialize.
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 also have a strong internal control certification program that we believe is a strong safeguard for our officers and Board of Directors to limit any exposure we may have in this area. We actively monitor legal developments and are prepared to make changes that we consider appropriate and prudent. While there can be no assurance that all of our processes will be followed by employees, officers, third parties and directors at all times, having processes in place is expected to provide the necessary risk mitigation one would expect for a company of our size.
Legal and Regulatory Compliance
As is the case with all companies, we necessarily rely on our senior management, Board of Directors, employees 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. This includes the risk of ensuring that our customers' personal information is handled in a way compliant with all applicable privacy laws. Such events could expose us to damages, sanctions and fines, or negatively affect financial or operating results. Although we cannot predict outcomes with certainty, we believe we have reasonable policies, processes and awareness in place for proper compliance and that these programs reduce risks.
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 theoretically 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 interests of our shareholders, this change could result in new foreign competitors or our existing competitors benefiting from new foreign investments or partnerships, which could result in increased competition.
Our Board of Directors and senior management are subject to fiduciary duties, corporate and securities laws, and stock exchange requirements, all of which provide protection to our investors.
Contractual Provisions
Technology evolution also 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 statute, such as trade-mark, patent, copyright and industrial design legislation, or under common law, such as trade secrets. Contractual provisions to which we are bound are generally becoming increasingly complicated and expose us to heightened risks, and we are not always able to fully limit our liability in respect of these matters. We also have exposure under contracts to our customers and vendors. We have reasonable processes and controls in place to ensure that contractual exposure is properly managed in consideration of the markets we operate.
Radio Frequency
It has been suggested that the radio frequency emissions from wireless devices could be associated with health concerns. We are not aware of any credible information of real health concerns. In addition, this issue is monitored and regulated by the federal government and 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.
Financing and Debt Requirements
We periodically raise capital through debt and equity offerings in the capital markets. 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.
Our ability to raise debt financing depends on our ability to continue to access the public capital markets, the bank credit market, and our accounts receivable securitization program. The cost and amount of funding depend largely on market conditions and the outlook for our business and credit ratings at the time funds are raised, which in turn, is dependent on a wide range of factors.
Although our past experience has been that our strong balance sheet has afforded us continued access to these programs at favourable terms and that we have been able to refinance our maturing debt at competitive rates, there are no assurances that this will continue.
Dividend Payments
We currently pay dividends in amounts approved on a quarterly basis by our Board of Directors. A more fulsome discussion of our current dividend policy is set forth in our most recent Annual Information Form. Payment of a dividend is subject to the discretion of our Board of Directors, as well as legal requirements, and if and as declared, which in turn, considers factors such as EPS, results of operations and financial condition, as well as our cash position and investment opportunities. Historically, our dividend has offered a stable cash flow for our shareholders and while we expect to have access to enough liquidity in 2010 to fund our dividend policy, there can be no assurances that we will continue dividend payments or dividend payments at the current level.
Operational Execution
We define and implement both short- and long-term strategies to manage our business within a competitive, regulated and fast-evolving telecommunications environment. We develop business plans for our operating units that are aligned with long-term strategies. The implementation of our strategies requires shifts in employee skills, products and services, capital spending, and targeted cost reductions. If our management, employees or processes are not able to adapt to these changes or if required capital is not available on favourable terms, we may not achieve our business objectives, which could have a negative effect on our business and financial results. There also can be no assurance that we will be successful in reducing costs. If we are unable to implement operating unit business plans that are aligned with our strategic objectives, our business and results of operations could be negatively affected.
We believe in the past we have been very effective in executing our objectives, and particularly effective on many metrics as compared to our industry peers. Additionally, our leaders are incented to achieve the business objectives set by our Board of Directors and are held accountable for their results. We feel that this fosters an environment in which our leaders are most likely to achieve our objectives.
Security and Network Failures
Like all others in our industry, our operations depend on how well we and our suppliers protect our networks, equipment, IT systems, software and the information stored in data centres against damage from a number of threats, including, but not limited to, natural disasters, fire, power loss, hacking, computer viruses, vandalism, theft and other events. Our operations also depend on the timely maintenance, upgrade and replacement of our and our suppliers' networks, equipment, IT systems and software. Any of these and other events could result in network failures, billing errors and delays in customer service. The failure of networks or a component of our networks would, in some circumstances, result in a loss of service for our customers and could adversely impact our results of operations. We rely on third parties to fulfill many of our customers' needs. Any of the above events affecting such third parties might also cause an interruption in service that would last until we could find alternative service delivery options and could also harm our customer relationships.
We have taken significant efforts to protect our networks against failure and interruption including implementing engineering designs with redundancy whenever commercially reasonable. We have also taken steps to protect us against the impact of network failures such as holding insurance policies and preparing and testing disaster recovery plans. In 2009, we were recognized for leadership in disaster recovery planning with the Award of Excellence from the Disaster Recovery Institute of
Human Resources
Collective Agreements
A majority of our employees are covered by collective bargaining agreements. Historically, we have had a very positive and constructive working relationship with our unions. Although we have no reasons to expect significant issues to arise, renegotiating collective bargaining agreements always has the risk to result in higher labour costs and work disruptions including work stoppages or work slowdowns. While we have not had a labour disruption in over a decade, there can be no assurance that should a strike or work disruption occur, it would not adversely affect the services that we provide to our customers and our results of operation. A work disruption at a service provider who carries portions of our traffic could harm our businesses, including our customer relationships and results of operations.
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. To manage these risks, our management and Board of Directors regularly review the compensation structure, succession plans and career progression of such personnel to minimize the risks of any such potential disruption.
Tax Matters
Our business activities are subject to tax legislation and regulations that frequently change. Changes in tax law or the adoption of new tax laws could result in higher tax rates or new taxes. Our tax filings are subject to government audits which could materially change the amount of current and future income tax assets and liabilities and could, in certain circumstances, result in an assessment of interest and penalties. We leverage internal and external expertise in order to manage this risk to the best of our ability. In addition, we have a substantial tax asset which is currently expected to enable us to offset the payment of cash income taxes until approximately 2017.
FIRST QUARTER DIVIDEND
On
The first quarter dividend is designated as an "eligible" dividend under the Income Tax Act (
Notes:
1. Supplementary financial information is available in the Investors
section of the MTS Web site at www.mtsallstream.com.
2. MTS's fourth quarter 2009 conference call with the investment
community is scheduled for 5:00 p.m. Eastern time on February 4,
2010. The dial-in number is 1-888-231-8191. A live audio Webcast of
the investor conference call can be accessed by visiting the
Investors section of the MTS Web site (www.mtsallstream.com). A
replay of the conference call will be available until midnight
February 15, 2010 and can be accessed by dialing 1-800-642-1687 or
1-416-849-0833 (access code 49385346). The audio Webcast will be
archived on MTS's Web site.
MANITOBA TELECOM SERVICES INC.
CONSOLIDATED STATEMENTS OF NET INCOME AND
COMPREHENSIVE INCOME
(unaudited)
For the periods ended
December 31 Three months ended Twelve months ended
-------------------------------------------------------------------------
(in millions, except
earnings per share) 2009 2008 2009 2008
-------------------------------------------------------------------------
Operating revenues $ 452.7 $ 463.9 $ 1,809.9 $ 1,867.1
-------------------------------------------------------------------------
Operating expenses
Operations 306.4 305.6 1,198.3 1,200.7
-------------------------------------------------------------------------
Restructuring and
transition (Note 2) 9.5 23.0 51.7 47.9
-------------------------------------------------------------------------
Amortization 77.9 83.3 322.7 329.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
393.8 411.9 1,572.7 1,578.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating income 58.9 52.0 237.2 289.1
-------------------------------------------------------------------------
Other income (expense) 3.3 (0.5) 10.9 7.1
-------------------------------------------------------------------------
Debt charges (15.6) (12.2) (59.5) (48.9)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income before income taxes 46.6 39.3 188.6 247.3
-------------------------------------------------------------------------
Income tax expense
(recovery) (Note 3)
Current 0.8 - (1.0) 0.3
-------------------------------------------------------------------------
Future 36.8 24.5 85.7 99.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
37.6 24.5 84.7 99.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income before discontinued
operations 9.0 14.8 103.9 147.4
-------------------------------------------------------------------------
Loss from discontinued
operations, net of tax
(Note 4) (2.3) (1.1) (2.2) (3.4)
-------------------------------------------------------------------------
Net income and comprehensive
income for the period $ 6.7 $ 13.7 $ 101.7 $ 144.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted earnings
per share (Note 9)
Income before discontinued
operations $ 0.14 $ 0.23 $ 1.61 $ 2.28
-------------------------------------------------------------------------
Net income $ 0.10 $ 0.21 $ 1.57 $ 2.23
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MANITOBA TELECOM SERVICES INC.
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
(unaudited)
For the periods ended
December 31 Three months ended Twelve months ended
-------------------------------------------------------------------------
(in millions) 2009 2008 2009 2008
-------------------------------------------------------------------------
Retained earnings,
beginning of period $ 65.7 $ 125.1 $ 96.8 $ 120.8
-------------------------------------------------------------------------
Net income for the period 6.7 13.7 101.7 144.0
-------------------------------------------------------------------------
Dividends declared (42.0) (42.0) (168.1) (168.0)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Retained earnings, end
of period $ 30.4 $ 96.8 $ 30.4 $ 96.8
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MANITOBA TELECOM SERVICES INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
December 31 2009 2008
-------------------------------------------------------------------------
(in millions)
Assets
Current assets
Cash and cash equivalents $ 110.2 $ 6.5
-------------------------------------------------------------------------
Accounts receivable (Note 5) 166.2 46.3
-------------------------------------------------------------------------
Future income taxes (Note 3) 79.0 90.5
-------------------------------------------------------------------------
Other current assets 58.0 64.0
-------------------------------------------------------------------------
Assets held for sale (Note 4) 18.6 17.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
432.0 225.0
Capital assets (Note 6) 1,643.3 1,615.4
-------------------------------------------------------------------------
Other assets 417.2 334.6
-------------------------------------------------------------------------
Future income taxes (Note 3) 362.1 436.8
-------------------------------------------------------------------------
Goodwill 41.8 41.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$ 2,896.4 $ 2,653.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities
Accounts payable and accrued liabilities $ 349.1 $ 347.7
-------------------------------------------------------------------------
Advance billings and payments 52.5 49.9
-------------------------------------------------------------------------
Current portion of long-term debt (Note 8) 11.9 220.0
-------------------------------------------------------------------------
Notes payable (Note 7) - 95.0
-------------------------------------------------------------------------
Current portion of capital lease obligations 4.2 3.8
-------------------------------------------------------------------------
Liabilities related to assets held for sale
(Note 4) 9.0 5.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
426.7 721.8
Long-term debt (Note 8) 1,039.6 430.2
-------------------------------------------------------------------------
Long-term portion of capital lease obligations 13.4 15.0
-------------------------------------------------------------------------
Deferred employee benefits 43.1 44.2
-------------------------------------------------------------------------
Other long-term liabilities 55.5 58.1
-------------------------------------------------------------------------
Future income taxes (Note 3) 1.2 1.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
1,579.5 1,271.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Shareholders' equity
Share capital (Note 9) 1,266.9 1,265.8
-------------------------------------------------------------------------
Contributed surplus 19.6 19.4
-------------------------------------------------------------------------
30.4 96.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
1,316.9 1,382.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$ 2,896.4 $ 2,653.0
-------------------------------------------------------------------------
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MANITOBA TELECOM SERVICES INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
For the periods ended
December 31 Three months ended Twelve months ended
-------------------------------------------------------------------------
(in millions) 2009 2008 2009 2008
-------------------------------------------------------------------------
Cash flows from operating
activities
Income before discontinued
operations $ 9.0 $ 14.8 $ 103.9 $ 147.4
-------------------------------------------------------------------------
Add (deduct) items not
affecting cash
Amortization 77.9 83.3 322.7 329.4
-------------------------------------------------------------------------
Future income taxes
(Note 3) 36.8 24.5 85.7 99.6
-------------------------------------------------------------------------
Gain on sale of intangible
assets - - (3.1) -
-------------------------------------------------------------------------
Deferred wireless costs (11.3) (11.4) (46.7) (40.2)
-------------------------------------------------------------------------
Pension funding and net
pension credit (31.6) (14.2) (80.3) (56.6)
-------------------------------------------------------------------------
Other, net 3.1 15.8 (0.8) 5.1
-------------------------------------------------------------------------
Changes in non-cash working
capital (44.5) 55.8 (117.6) 49.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash flows from operating
activities 39.4 168.6 263.8 533.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash flows from investing
activities
Capital expenditures, net (93.0) (90.8) (295.2) (335.4)
-------------------------------------------------------------------------
Acquisition - (0.4) (2.1) (4.4)
-------------------------------------------------------------------------
Net proceeds from sale of
intangible assets - - 1.4 -
-------------------------------------------------------------------------
Other, net (0.6) (3.1) (2.0) (3.4)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash flows used in
investing activities (93.6) (94.3) (297.9) (343.2)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash flows from financing
activities
Dividends paid (42.0) (42.0) (168.1) (168.0)
-------------------------------------------------------------------------
Issuance of long-term debt 200.0 - 625.0 -
-------------------------------------------------------------------------
Repayment of long-term debt - - (220.0) (89.7)
-------------------------------------------------------------------------
(Repayment) issuance of
notes payable, net - (20.0) (95.0) 95.0
-------------------------------------------------------------------------
Issuance of share capital
(Note 9) - - 0.9 0.2
-------------------------------------------------------------------------
Other, net (2.8) (0.1) (5.0) (3.4)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash flows from (used in)
financing activities 155.2 (62.1) 137.8 (165.9)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash flows before
discontinued operations 101.0 12.2 103.7 24.7
-------------------------------------------------------------------------
Cash flows from (used in)
discontinued operations
(Note 4) 0.2 (2.2) - (8.1)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Change in cash and cash
equivalents 101.2 10.0 103.7 16.6
-------------------------------------------------------------------------
Cash and cash equivalents
(bank indebtedness),
beginning of period 9.0 (3.5) 6.5 (10.1)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 110.2 $ 6.5 $ 110.2 $ 6.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MANITOBA TELECOM SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
For the years ended December 31, 2009 and 2008 (All financial amounts
are in $ millions, except where noted.)
-------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The interim consolidated financial statements of Manitoba Telecom
Services Inc. (the "Company") have been prepared in accordance with
Canadian generally accepted accounting principles ("GAAP"). These
interim consolidated financial statements have been prepared using
the same accounting policies and methods of their application as the
Company's audited consolidated financial statements for the year
ended December 31, 2008, except as described in Note 6.
These interim consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial
statements for the year ended December 31, 2008.
2. RESTRUCTURING AND TRANSITION
For the years ended December 31, 2009 and 2008, the Company recorded
net restructuring and transition expenses as follows:
---------------------------------------------------------------------
2009 2008
---------------------------------------------------------------------
Restructuring
---------------------------------------------------------------------
Workforce 12.8 11.2
---------------------------------------------------------------------
Other 20.8 9.6
---------------------------------------------------------------------
---------------------------------------------------------------------
33.6 20.8
---------------------------------------------------------------------
Wireless transition 18.1 27.1
---------------------------------------------------------------------
51.7 47.9
---------------------------------------------------------------------
---------------------------------------------------------------------
The liability for restructuring costs as at December 31, 2009 is as
follows:
---------------------------------------------------------------------
Balance December 31, 2008 11.3
---------------------------------------------------------------------
2009 restructuring costs, net of a $1.5 million reversal
of previously recorded costs 33.6
---------------------------------------------------------------------
Less cash payments (31.0)
---------------------------------------------------------------------
Balance December 31, 2009 13.9
---------------------------------------------------------------------
---------------------------------------------------------------------
Restructuring activities in 2009 represent a continuation of the cost
reduction initiative which commenced in the fourth quarter of 2008
aimed at achieving process improvements and further cost reductions.
The costs recorded in 2009 include severance and other employee-
related expenses that supported workforce reduction initiatives
undertaken throughout the year, costs to review and improve
efficiencies in current processes, real estate facility consolidation
charges, as well as other non-recurring amounts associated with
certain regulatory proceedings and the transition from Canadian GAAP
to International Financial Reporting Standards.
Wireless transition includes costs of transitioning certain wireless
service requirements away from Bell Mobility to new suppliers and to
the Company's wireless platform and strategic planning costs related
to a national wireless initiative. In 2008, this amount also included
costs associated with the advanced wireless services spectrum
auction.
3. INCOME TAXES
A reconciliation of the statutory income tax rate to the effective
income tax rate on income before discontinued operations is as
follows:
2009 2008
---------------------------------------------------------------------
Combined basic federal and provincial
statutory income tax rate 32.0% 32.9%
---------------------------------------------------------------------
Change in substantively enacted tax rates 9.2 3.0
---------------------------------------------------------------------
Rate differential on temporary differences 5.0 3.6
---------------------------------------------------------------------
Other items (1.3) 0.9
---------------------------------------------------------------------
Effective tax rate on income before
discontinued operations 44.9% 40.4%
---------------------------------------------------------------------
---------------------------------------------------------------------
The balances of future income taxes as at December 31, 2009 and
December 31, 2008 represent the future benefit of unused tax losses,
and temporary differences between the tax and accounting bases of
assets and liabilities. The major items giving rise to future income
tax assets and liabilities are presented below:
2009 2008
---------------------------------------------------------------------
Non-capital loss carryforwards 142.7 169.4
---------------------------------------------------------------------
Property, plant and equipment 383.9 488.8
---------------------------------------------------------------------
Employee Benefits (86.6) (69.7)
---------------------------------------------------------------------
Reserves not currently deductible (0.1) 1.1
---------------------------------------------------------------------
Total future income tax asset 439.9 589.6
---------------------------------------------------------------------
Valuation allowance - (64.0)
---------------------------------------------------------------------
Net future income tax asset 439.9 525.6
---------------------------------------------------------------------
---------------------------------------------------------------------
Future income taxes are comprised of:
2009 2008
---------------------------------------------------------------------
Current future income tax asset 79.0 90.5
---------------------------------------------------------------------
Long-term future income tax asset 362.1 436.8
---------------------------------------------------------------------
Long-term future income tax liability (1.2) (1.7)
---------------------------------------------------------------------
Net future income tax asset 439.9 525.6
---------------------------------------------------------------------
---------------------------------------------------------------------
During the year ended December 31, 2009, the Company recovered
$2.0 million in cash income taxes (2008 - $0.5 million).
As at December 31, 2009, the Company had non-capital loss
carryforwards available to reduce future years' taxable income, which
expire as follows:
---------------------------------------------------------------------
2014 23.6
---------------------------------------------------------------------
2025 and beyond 541.4
---------------------------------------------------------------------
565.0
---------------------------------------------------------------------
---------------------------------------------------------------------
4. DISCONTINUED OPERATIONS
On December 23, 2009, the Company committed to sell the majority of
its non-telecommunications IT consulting group, which is a line of
business within the Enterprise Solutions division, to
PricewaterhouseCoopers Canada for a preliminary purchase price of
$12.5 million. The purchase price is subject to adjustments which
will be finalized following the closing date of January 31, 2010. The
decision to sell this line of business resulted in a goodwill
impairment charge of $0.5 million. The financial results attributable
to this line of business have been presented as discontinued
operations.
The following table provides further information on the composition
of revenues and income (loss) related to discontinued operations:
2009 2008
---------------------------------------------------------------------
Revenue 51.2 54.4
---------------------------------------------------------------------
Income (loss) from discontinued operations
before income taxes 0.1 (5.2)
---------------------------------------------------------------------
Costs related to sale (2.8) -
---------------------------------------------------------------------
Future income tax recovery related to
discontinued operations 0.5 1.8
---------------------------------------------------------------------
Loss from discontinued operations, net of tax (2.2) (3.4)
---------------------------------------------------------------------
---------------------------------------------------------------------
The following table provides further information on the composition
of assets and liabilities held for sale:
2009 2008
---------------------------------------------------------------------
Assets
---------------------------------------------------------------------
Current Assets 17.7 15.9
---------------------------------------------------------------------
Property, plant and equipment, net 0.9 1.3
---------------------------------------------------------------------
Goodwill - 0.5
---------------------------------------------------------------------
Assets held for sale 18.6 17.7
---------------------------------------------------------------------
---------------------------------------------------------------------
Liabilities
---------------------------------------------------------------------
Current liabilities 9.0 5.4
---------------------------------------------------------------------
Liabilities related to assets held for sale 9.0 5.4
---------------------------------------------------------------------
---------------------------------------------------------------------
The following table provides further information on cash flows
relating to discontinued operations:
2009 2008
---------------------------------------------------------------------
Cash flows from (used in) operating activities 0.1 (7.8)
---------------------------------------------------------------------
Cash flows used in investing activities (0.1) (0.3)
---------------------------------------------------------------------
Cash flows from (used in) discontinued
operations - (8.1)
---------------------------------------------------------------------
---------------------------------------------------------------------
5. ACCOUNTS RECEIVABLE SECURITIZATION
Under the terms of the Company's accounts receivable securitization
program, the Company has the ability to sell, on a revolving basis,
an undivided ownership interest in its accounts receivable to a
securitization trust, up to a maximum of $150.0 million. The terms of
the Company's accounts receivable securitization program also require
the Company to maintain reserve accounts, the fair value of which
approximates carrying value. As at December 31, 2009, the Company had
no outstanding balances from its accounts receivable securitization
program.
During the year ended December 31, 2009, the Company recognized a
recovery of $0.7 million on previously recorded losses on the sale of
accounts receivable, which is recorded in other income. During the
year ended December 31, 2008, the Company recognized a pre-tax loss
of $0.2 million on the sale of accounts receivable.
During the year ended December 31, 2009, cash flows received and paid
to the trust in revolving period securitizations were
$2,221.7 million (2008 - $2,775.5 million).
6. CAPITAL ASSETS
Effective January 1, 2009, the Company adopted the recommendations of
the Canadian Institute of Chartered Accountants' ("CICA") Handbook
section 3064 Goodwill and Intangible Assets and the updates to CICA
Handbook section 1000 Financial Statement Concepts. This guidance
establishes updated standards for the recognition, measurement,
presentation and disclosure of intangible and deferred assets.
Accordingly, for the 2008 comparatives, the Company has reclassified
$51.3 million of other long-term assets and $9.5 million of other
current assets relating to deferred wireless costs and installation
costs to intangible assets. The Company also reclassified specific
software costs within capital assets of $129.9 million from property,
plant and equipment to intangible assets.
The following table provides details of the Company's capital assets:
2009 2008
---------------------------------------------------------------------
Accumu- Accumu-
lated Net lated Net
amorti- book amorti- book
Cost zation value Cost zation value
---------------------------------------------------------------------
Property, plant
and equipment
---------------------------------------------------------------------
Network
equipment
and outside
plant 2,924.6 1,913.6 1,011.0 2,750.2 1,777.4 972.8
---------------------------------------------------------------------
General
equipment
and other 435.1 319.7 115.4 414.3 271.2 143.1
---------------------------------------------------------------------
Buildings 267.7 152.9 114.8 262.2 142.7 119.5
---------------------------------------------------------------------
Equipment under
capital lease 5.4 1.0 4.4 5.4 0.6 4.8
---------------------------------------------------------------------
Plant under
construction 93.3 - 93.3 91.4 - 91.4
---------------------------------------------------------------------
Materials and
supplies 17.0 - 17.0 21.3 - 21.3
---------------------------------------------------------------------
Land 6.3 - 6.3 6.3 - 6.3
---------------------------------------------------------------------
3,749.4 2,387.2 1,362.2 3,551.1 2,191.9 1,359.2
---------------------------------------------------------------------
---------------------------------------------------------------------
Intangible
assets
---------------------------------------------------------------------
Software 302.7 158.0 144.7 239.8 110.0 129.8
---------------------------------------------------------------------
Deferred
wireless
costs 86.2 33.4 52.8 78.3 37.6 40.7
---------------------------------------------------------------------
Other deferred
installation
costs 34.0 17.9 16.1 43.7 23.6 20.1
---------------------------------------------------------------------
Customer
contracts and
relationships 29.5 14.0 15.5 27.1 13.8 13.3
---------------------------------------------------------------------
Other
contractual
relationships 1.3 0.7 0.6 1.3 0.5 0.8
---------------------------------------------------------------------
Spectrum
licenses 48.5 - 48.5 48.6 - 48.6
---------------------------------------------------------------------
Broadcasting
certificate 2.9 - 2.9 2.9 - 2.9
---------------------------------------------------------------------
505.1 224.0 281.1 441.7 185.5 256.2
---------------------------------------------------------------------
---------------------------------------------------------------------
Total 4,254.5 2,611.2 1,643.3 3,992.8 2,377.4 1,615.4
---------------------------------------------------------------------
---------------------------------------------------------------------
7. NOTES PAYABLE
As at December 31, 2009, the Company has a $350 million bank credit
facility with a syndicate of financial institutions which is used for
cash management purposes, the issuance of letters of credit and to
support the Company's $150 million commercial paper program. As at
December 31, 2009, the Company had $137.3 million in undrawn letters
of credit outstanding under this facility. The Company paid short-
term interest costs of $2.5 million (2008 - $2.5 million) for the
year ended December 31, 2009.
8. LONG-TERM DEBT
2009 2008
---------------------------------------------------------------------
Medium Term Note, 5.85%, due February 23,
2009 - 70.0
---------------------------------------------------------------------
Medium Term Note, 5.25%, due June 10, 2009 - 150.0
---------------------------------------------------------------------
Medium Term Note, 8.625%, due September 8,
2010 11.9 11.9
---------------------------------------------------------------------
Medium Term Note, 5.20%, due September 27,
2011 220.0 220.0
---------------------------------------------------------------------
Medium Term Note, 5.05%, due May 11, 2012 100.0 -
---------------------------------------------------------------------
Loan payable, 6.59%, due May 14, 2014 75.0 -
---------------------------------------------------------------------
Medium Term Note, 6.15%, due June 10, 2014 200.0 200.0
---------------------------------------------------------------------
Medium Term Note, 6.65%, due May 11, 2016 250.0 -
---------------------------------------------------------------------
Medium Term Note, 5.625%, due December 16,
2019 200.0 -
---------------------------------------------------------------------
---------------------------------------------------------------------
1,056.9 651.9
---------------------------------------------------------------------
Less: deferred costs associated with the
issuance of long-term debt (5.4) (1.7)
---------------------------------------------------------------------
---------------------------------------------------------------------
1,051.5 650.2
---------------------------------------------------------------------
Less: current portion of long-term debt (11.9) (220.0)
---------------------------------------------------------------------
---------------------------------------------------------------------
1,039.6 430.2
---------------------------------------------------------------------
---------------------------------------------------------------------
Interest expense on long-term debt, including amortization of debt
issue costs, amounts to $47.6 million in 2009 (2008 - $39.4 million).
During the year ended December 31, 2009, the Company paid interest on
long-term debt of $43.5 million (2008 - $39.8 million).
9. SHARE CAPITAL
As at December 31, 2009, share capital consists of 64,667,817 issued
and outstanding Common Shares (December 31, 2008 - 64,637,917).
During the year ended December 31, 2009, 29,900 stock options were
exercised (2008 - 6,250 stock options) for cash consideration of
$0.9 million (2008 - $0.2 million), of which $1.1 million was
credited to share capital (2008 - $0.3 million) and $0.2 million was
charged to contributed surplus (2008 - $0.1 million).
Earnings per share reconciliation
The following table provides a reconciliation of the information used
to calculate basic and diluted earnings per share:
2009 2008
---------------------------------------------------------------------
Net income - basic and diluted
---------------------------------------------------------------------
Income before discontinued operations 103.9 147.4
---------------------------------------------------------------------
Loss from discontinued operations, net of tax (2.2) (3.4)
---------------------------------------------------------------------
Net income 101.7 144.0
---------------------------------------------------------------------
---------------------------------------------------------------------
Weighted average shares outstanding
(in millions)
---------------------------------------------------------------------
Weighted average number of shares outstanding
- basic and diluted 64.7 64.6
---------------------------------------------------------------------
---------------------------------------------------------------------
Earnings per share - basic and diluted ($)
---------------------------------------------------------------------
Income before discontinued operations 1.61 2.28
---------------------------------------------------------------------
Loss from discontinued operations, net of tax (0.04) (0.05)
---------------------------------------------------------------------
Net income 1.57 2.23
---------------------------------------------------------------------
---------------------------------------------------------------------
10. STOCK-BASED COMPENSATION
The following tables provide further information on outstanding stock
options:
2009 2008
---------------------------------------------------------------------
Weighted Weighted
average average
exercise exercise
Number price Number price
of shares per share of shares per share
---------------------------------------------------------------------
Outstanding, beginning
of year 2,173,940 42.00 1,876,090 42.12
---------------------------------------------------------------------
Granted 381,695 34.24 508,000 42.24
---------------------------------------------------------------------
Exercised (29,900) 30.67 (6,250) 29.91
---------------------------------------------------------------------
Terminated (203,900) 43.41 (203,900) 44.05
---------------------------------------------------------------------
---------------------------------------------------------------------
Outstanding, end
of year 2,321,835 40.70 2,173,940 42.00
---------------------------------------------------------------------
---------------------------------------------------------------------
Exercisable, end
of year 1,246,940 41.21 1,039,460 40.54
---------------------------------------------------------------------
---------------------------------------------------------------------
Weighted
average Range of
exercise exercise
Year Options Options price price Expiry
granted outstanding exercisable per share per share date
---------------------------------------------------------------------
2009 367,195 - 34.20 32.93-35.19 2019
---------------------------------------------------------------------
2008 418,800 90,000 42.24 42.24 2018
---------------------------------------------------------------------
2007 314,000 135,200 47.30 44.00-49.37 2017
---------------------------------------------------------------------
2006 224,100 139,100 39.76 38.78-47.76 2016
---------------------------------------------------------------------
2005 579,900 464,800 42.36 40.44-49.03 2015
---------------------------------------------------------------------
2004 131,080 131,080 45.61 45.61 2014
---------------------------------------------------------------------
2003 95,160 95,160 34.84 34.75-35.81 2013
---------------------------------------------------------------------
2002 97,100 97,100 34.18 33.58-34.71 2012
---------------------------------------------------------------------
2001 56,500 56,500 37.07 36.42-38.81 2011
---------------------------------------------------------------------
2000 38,000 38,000 32.16 23.81-35.60 2010
---------------------------------------------------------------------
---------------------------------------------------------------------
11. SEGMENTED INFORMATION
As at December 31, 2009, the Company had two reportable operating
segments: the Consumer Markets division and the Enterprise Solutions
division. The Consumer Markets division provides a full range of
wireless, high-speed Internet and data, digital television, wireline
voice services, and alarm monitoring services to residential and
small business customers in Manitoba. The Consumer Markets division
also provides Internet, data and voice services to small business
customers in Canada. The Enterprise Solutions division provides
Internet protocol-based communications, unified communications,
voice, and data connectivity services to medium and large business
customers in Canada.
The Company evaluates performance based on EBITDA (earnings before
interest, taxes, amortization, and other income). EBITDA, as reported
below, includes intersegment revenues and expenses. The Company
accounts for intersegment revenues and expenses at either prices that
approximate current market prices or cost, depending on the type of
service.
The following tables provide further segmented information:
Consumer Enterprise
Markets Solutions Other Total
-------------------------------------------------------------------------
2009 2008 2009 2008 2009 2008 2009 2008
-------------------------------------------------------------------------
Operating
revenue
External 812.5 818.0 997.4 1,049.1 - - 1,809.9 1,867.1
-------------------------------------------------------------------------
Internal 0.5 0.4 0.1 0.1 36.0 39.4 36.6 39.9
-------------------------------------------------------------------------
EBITDA 395.1 389.2 172.0 231.8 (7.2) (2.5) 559.9 618.5
-------------------------------------------------------------------------
Restructuring
& trans-
ition 14.1 25.7 30.9 19.9 6.7 2.3 51.7 47.9
-------------------------------------------------------------------------
Amorti-
zation 223.1 235.8 99.1 93.3 0.5 0.3 322.7 329.4
-------------------------------------------------------------------------
Goodwill 10.4 11.8 31.4 29.4 - - 41.8 41.2
-------------------------------------------------------------------------
Assets 1,788.2 1,758.0 1,772.1 1,701.8 236.5 59.3 3,796.8 3,519.1
-------------------------------------------------------------------------
Capital
expend-
itures,
net 182.4 216.2 111.0 118.7 1.8 0.5 295.2 335.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Reconciliations of net income and assets are as follows:
2009 2008
---------------------------------------------------------------------
Consolidated net income
Total EBITDA 559.9 618.5
---------------------------------------------------------------------
Amortization (322.7) (329.4)
---------------------------------------------------------------------
Other income 10.9 7.1
---------------------------------------------------------------------
Debt charges (59.5) (48.9)
---------------------------------------------------------------------
Income tax expense (84.7) (99.9)
---------------------------------------------------------------------
---------------------------------------------------------------------
Income before discontinued operations 103.9 147.4
---------------------------------------------------------------------
Loss from discontinued operations, net of tax (2.2) (3.4)
---------------------------------------------------------------------
---------------------------------------------------------------------
101.7 144.0
---------------------------------------------------------------------
---------------------------------------------------------------------
Consolidated assets
Assets for operating segments 3,796.8 3,519.1
---------------------------------------------------------------------
Eliminations (1,360.1) (1,411.1)
---------------------------------------------------------------------
Future income taxes 441.1 527.3
---------------------------------------------------------------------
Assets held for sale 18.6 17.7
---------------------------------------------------------------------
---------------------------------------------------------------------
2,896.4 2,653.0
---------------------------------------------------------------------
---------------------------------------------------------------------
12. COMMITMENTS AND CONTINGENCIES
Commitments
On May 30, 2002, the Canadian Radio-television and Telecommunications
Commission ("CRTC") issued Regulatory framework for second price cap
period, Telecom Decision CRTC 2002-34, which provided the regulatory
framework for local rates charged to residential and business
customers and the rates that incumbent telephone companies charged
their competitors. As part of this framework, the CRTC established a
regulatory deferral account. On January 17, 2008, the CRTC issued
Disposition of funds in the deferral accounts, Telecom Decision CRTC
2008-1, which required the funds that were accumulated in the
Company's deferral account to be used for the expansion of broadband
services, for initiatives to improve accessibility to
telecommunications services for persons with disabilities, and for
certain rate reductions or credits. Aspects of Decision 2008-1,
including the requirement for rate reductions or credits, were
appealed to the Federal Court and then the Supreme Court of Canada by
Bell Canada, TELUS Communications Inc. and the Public Interest
Advocacy Centre with a decision by the Supreme Court ultimately
upholding the CRTC's decision on September 18, 2009. The estimated
balance of the Company's deferral account is approximately
$25 million as at December 31, 2009. During the year, the Company
recorded a liability in its financial statements in the amount of
$13.5 million for the estimated amount applicable to rate reductions
or credits. The Company filed its intended plan and costs for the
approved extension of broadband services with the CRTC on January 15,
2010 and its intended plan for the administration of the rate
reductions or credits on January 29, 2010.
Contingencies
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 potential financial implications of the Court's decision
could result in a one-time future payment of up to $100 million as at
December 31, 2009. The Company believes, based on legal advice
received, that the decision presents strong grounds for appeal, and
accordingly the Company will appeal the Court's decision.
13. COMPARATIVE FIGURES
The prior year figures have been reclassified when necessary to
conform to the current year's presentation.
%SEDAR: 00003357E
For further information: Investors: Paul Peters, Vice-President, Tax and Investor Relations, Manitoba Telecom Services Inc., (204) 941-6178, [email protected]; Media: Greg Burch, Director, Corporate and Employee Communications, Manitoba Telecom Services Inc., (416) 345-3576 or (204) 941-8576, [email protected]
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