Manitoba Telecom Services Inc. reports results from the strategic review and the first-quarter 2015

WINNIPEG, May 7, 2015 /CNW/ - (TSX:MBT) Manitoba Telecom Services Inc. ("the Company"), including its two primary operating subsidiaries, MTS Inc. ("MTS") and Allstream Inc. ("Allstream"), today reported the results of its strategic review process and earnings for the first quarter of 2015.

STRATEGIC REVIEW
The Company recently completed its strategic review, a disciplined process which was both wide-ranging and thorough. Drilling down into individual lines of business, the Company examined the competitiveness of its offerings, the effectiveness of its internal processes and tested the validity of its business models. The result is a new set of strategies focused on creating both immediate and long-term value and the implementation of a performance management process designed to ensure these strategies gain immediate traction.

"I am pleased with the insights and findings we have been able to identify over the past few months, all of which have confirmed my belief in the untapped potential of this company," said Jay Forbes, MTS Allstream,
Chief Executive Officer.

"We have completed a situational assessment that openly challenged our understandings and beliefs of the business. In doing so, we created a congruent view of the business across our senior management team, which has in turn, given rise to strategic plans that squarely address the challenges and opportunities unearthed by our situational assessment. We also have built balanced scorecards for MTS and Allstream that inform, align and engage our employees in the pursuit of a more focused set of strategic objectives."

Details on the new strategies and performance management process can be found on the Company's website at www.mtsallstream.com/about/strategy.

IMMEDIATE ACTIONS
MTS Allstream has taken immediate actions to address the near-term concerns of its investors:

• Pre-funded $120 million into the pension plans with a view to eliminating the need for pension solvency deficit payments in 2015 and 2016 (and likely beyond);
• Realigned Allstream's cost structure with a 25% reduction in the workforce and a planned 20% to 30% decrease in capital expenditures - allowing Allstream the ability to generate free cash flow in 2015 and beyond and
• Reset the dividend rate to a level that the Company can expect to readily sustain and grow

Pension plans pre-funding
The Company has pre-funded $120 million into its pension plans using its existing credit facilities.
This one-time pre-funding will eliminate the need for solvency payments for 2015 and 2016 under any reasonable economic scenario (and for 2017 and beyond based on consensus bank forecasts for long-term interest rates) with the expectation of enhancing the stability and predictability of free cash flows. Further details on the pension plans and projected funding requirements under various economic circumstances can be found in the Q1 2015 supplemental at www.mtsallstream.com/investors/financials.

Allstream - competitive carrier cost structure
Narrowing Allstream's strategic focus has created the opportunity to quickly address its cost structure;
100 employees have left the business a further 400 have received working notice and will exit the business throughout the current year and into 2016. These reductions - representing about 25% of Allstream's workforce - will generate approximately $50 million in annualized free cash flow improvement. The benefits of these changes will be realized over the next 18 months as these employees exit the business. Details of the cost of employees on working notice can be found in the Company's Q1 2015 financial statements and Q1 2015 Management's Discussion and Analysis ("MD&A"). In addition, the Company has made changes to the capital investment review process within Allstream to reflect the new strategic priorities and economic expectations. The Company expects that this will generate a 20% to 30% reduction in annual capital investment in 2015 and beyond.

Sustainable dividend with long-term growth potential
The Board of Directors has declared a second-quarter 2015 dividend of $0.325 per share ($1.30 annualized). This represents a payout ratio of 70% to 80% of the expected free cash flows from the MTS operations; the free cash flows of Allstream have been excluded given its non-strategic status. The Company expects that the MTS business (together with the pension solvency pre-payment) is fully capable of generating stable and predictable free cash flow at a level that is readily sufficient to support the new dividend

The new dividend rate has been set with the expectation of:

• Maintaining a strong balance sheet;
• Providing flexibility for any contingencies such as additional pension funding if required and
• Delivering competitive payout ratios in line with peers

It is also intended that surplus cash would be used to enhance shareholder value, re-investing in the core business or near-adjacent growth opportunities (such as the MTS Data Centre) and/or repurchasing shares.

Beginning in Q3 2015, a 3% discount will no longer be offered as part of the dividend re-investment program ("DRIP"). The DRIP program will continue, but shares issued under the program will be sourced on the open market to reduce further dilution.

MTS STRATEGY - A STRONG FOUNDATION TO BUILD UPON

For the Company's Manitoba operations, the results of the strategic review have demonstrated that MTS is a great company with even greater potential. With a large customer base, an extensive network and a well-admired brand, MTS is well-positioned to capture its fair share of market growth while improving the profitability of its operations. There are still great opportunities to grow in Manitoba, a market that has generated stable nominal gross domestic product ("GDP") growth of 4.5% on average, over the last four years.

The new strategic focus for MTS will center on the following areas:

Create a customer-first organization
Develop an organization that is fully aligned around putting the customer first, continually enhancing the customer experience, growing revenue and increasing customer loyalty.

Grow revenue faster
Capitalize on our brand, existing customer base and unparalleled bundling offers in order to grow core revenues and under-penetrated Consumer and Business Solutions segments.

Invest in the future
Increase the productivity of past and future investments in our mature telecom market and allocate more of our capital to investments creating the potential for greater future growth.

Make it simple
Simplify our systems and processes for both customers and employees, improving the end-to-end customer experience.

Drive efficiencies
Imbed the knowledge and expertise of our retiring workforce into our processes and systems, creating operational cost savings. Create a performance-based culture where accountabilities are set, met and celebrated.

Reinvent the MTS brand
Invest in a substantial renewal of the brand in the Consumer segment while crafting a parallel brand strategy for Business Solutions.

ALLSTREAM STRATEGY - CHANGING HOW WE DO BUSINESS
While Allstream's strategic review identified a clear path to profitable growth, it has also re-affirmed that Allstream is not integral or strategic to MTS's future. With the expectation of being free cash flow positive hereafter, the Company will evaluate its options from a position of strength, executing a new strategy to create value for its shareholders.

The situational assessment for Allstream revealed a company that:

• Lacked strategic focus - Allstream essentially went to market in every product, in every segment and in every geography;
• Had an unsustainable cost structure - fixed costs hadn't fallen in tandem with revenue declines, badly eroding operating margins;
• Struggled with revenue retention and growth - Allstream had a low-level of new customer acquisition and inadequate churn management and
• Lacked the necessary rigor around capital expenditures - investment decisions that have not yielded sufficient economic benefit

The new strategy will see Allstream create immediate and expected lasting value through a:

• Laser focus on converged IP products, in key customer segments and in five-major markets;
• Competitive carrier cost structure
• Reduce headcount by 25% for an approximate $50 million in annualized free cash flow improvement;
• Revitalized marketing and sales function - focused on being the disruptor in the incumbent local exchange carrier legacy market
• Improved sales force productivity through changes to compensation, training and sales management
• Dedicated churn management and
• Rigorous discipline with capital investments
• Reduce capital investments by 20% to 30% to reflect the shift in focus to more profitable customer segments

These new strategies are already creating benefits for Allstream and we have the right management team in place to carry out this transformation.

As the Company works through implementing its new strategies in 2015 updates will be provided on how it is achieving these goals.

The new strategy maintains the Company's current strong credit metrics and supports its BBB credit ratings.

FIRST-QUARTER 2015 RESULTS

Consolidated financial results

($ millions, except EPS)						Q1 2015		Q1 2014		% variance
Revenues						408.0		401.5		1.6
Operations expense						267.6		253.9		(5.4)
EBITDA^1						140.4		147.6		(4.9)
EPS^2						$0.34		$0.54		(37.0)
Capital expenditures						60.5		43.6		38.8

^1	EBITDA is earnings before interest, taxes, depreciation and amortization and other income (expense)
^2	Earnings per share ("EPS") is based on weighted average shares outstanding of 78.4 million for the three months ended March 31, 2015, 77.1 million for the three months ended March 31, 2014

• Revenues: MTS saw a $7.3 million increase in revenues from Q1 2014, mainly the result of consumer wireless and broadband growth as well as higher revenue from information solutions. Allstream's converged IP services revenue growth of 9.4% partly offset declines in local, long distance and other data revenues, resulting in a decline of $1.9 million when compared to Q1 2014.
• Operations expense: The $13.7 million increase in Q1 2015, is attributable to a combination of favourable one-time impacts in Q1 2014 mostly relating to tax provisions ($3.4 million), increased pension expense ($1.8 million), an increase in cost of goods sold relating to higher Q1 2015 equipment sales at both MTS and Allstream ($9.0 million) and $1.7 million of Allstream 2015 restructuring costs in connection with the workforce reduction plan.
• EBITDA: During the first quarter 2015, MTS EDITDA was down by $1.7 million, or 1.4% as compared to Q1 2014. Revenue growth from information solutions was mostly offset by the related cost of goods sold, while increased operating expenses resulting from increased pension expense and the one-time favourable tax provision impacts in Q1 2014 offset net growth in other lines of business. Allstream's Q1 EBITDA was down by $7.8 million or 28.0% from Q1 2014 due to net revenue declines, and higher restructuring costs associated with the workforce reduction plan.
• Net income and EPS: Net income and EPS were down $15.2 million or $0.20, respectively, in Q1 2015 due largely to the increase in depreciation and amortization expense resulting from one-time Scientific Research and Experimental Development Investment Tax Credits ("SR&ED ITCs") recorded in Q1 2014 and the Allstream EBITDA decline, partly offset by lower income tax expense.
• Capital expenditures: Q1 2014 results include a $21.7 million SR&ED ITCs recovery. After adjusting for this impact, capital expenditures are down $4.8 million year over year due to planned reductions in capital spending.

Consolidated free cash flow¹

($ millions)										Q1 2015				Q1 2014			% variance
EBITDA										140.4				147.6			(4.9)
Add back (deduct):
	Deferred wireless costs									(17.9)				(15.0)			(19.3)
	Finance costs									(15.4)				(17.6)			12.5
	Current income tax expense									(2.4)				(0.1)			n.a.*
	Other operating activities, net									(4.2)				(4.4)			4.5
	Pension funding and net pension expense									6.3				4.4			43.2
	Other income									0.7				1.8			(61.1)
	Loss on disposal of assets									0.2				(0.3)			n.a.
	Total									107.7				116.4			(7.5)
	Investing activities									(61.0)				(67.4)			9.5
Free cash flow for the period										46.7				49.0			(4.7)

1	The free cash flow definition differs from prior years and includes cash flows from operating activities less investing activities and excluding changes in working capital, pension solvency funding and pension lawsuit payments
* not applicable

Consolidated free cash flow was down $2.3 million from Q1 2014 mainly due to decreased EBITDA of $7.2 million and increased deferred wireless costs of $2.9 million, partially offset by planned reductions in capital spending.

2015 Guidance

($ millions, except for EPS)

2015 guidance

2014 results

MTS^1 EBITDA

Higher

466.4

MTS^1 free cash flow

Higher

139.2

Allstream EBITDA

Lower - primarily due to restructuring costs

99.5

Allstream free cash flow

Positive

(1.6)

Earnings per share

$0.90 to $1.20

$1.70

^1	MTS includes MTS and Other

Please refer to the Q1 2015 MD&A and 2014 annual MD&A "Risks and uncertainties" sections for information as it pertains to the Company's 2015 Guidance.

Dividend
The Company's Board of Directors declared a quarterly cash dividend of $0.325 per share for the second quarter of 2015, payable on July 15, 2015 to shareholders of record at the close of business on June 15, 2015.

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

Investment community conference call and webcast
MTS will hold its strategic review and first-quarter 2015 earnings results conference call with the investment community on Thursday, May 7 at 8 a.m. (Eastern Time). Participants include Jay Forbes, Chief Executive Officer and Wayne Demkey, Chief Financial Officer.

To participate, please dial toll-free 1-888-231-8191 or 647-427-7450. A replay will be available until May 14, 2015 by dialing 1-855-859-2056 and entering passcode 90185537.

Investors, media and the public are invited to participate on a listen-only basis by logging into the live audio webcast of the conference call on the Company's website www.mtsallstream.com/investors or by entering www.mtsallstream.com/investors/Q12015results.

A replay of the conference call will be available on the Company's website for one year.

Forward-looking statements disclaimer
This news release includes forward-looking statements and information (collectively, "statements") including, but not limited to, statements pertaining to the Company's corporate direction, business opportunities, operations, financial objectives, future financial results and performance, strategic review, guidance and outlook, pension plans funding including assumptions about future interest rates, the declaration of any future dividends and the amount thereof, the intention that surplus cash would be used for such things as share repurchases, the expectation of not having to pay cash income taxes until 2023, ability to reduce capital spending and operating expenses, future cash flows, liquidity, credit ratings and profitability, as well as other statements that are not historical facts.

Examples of statements that constitute forward-looking information may be identified by words such as "believe", "expect", "project", "should", "anticipate", "could", "target", "forecast", "intend", "plan", "outlook", "see", "set", "pending", "eliminate" and other similar terms.

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

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

Please note that forward-looking statements in this news release reflect Management's expectations as at May 7, 2015, and thus are subject to change thereafter. The Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. This news release and the financial information contained herein have been reviewed by the Company's Audit Committee and approved by the Company's Board of Directors.

Factors that could cause anticipated opportunities and actual results to differ materially include, but are not limited to, matters identified in the "Risks and uncertainties" section and elsewhere in the Company's 2014 annual MD&A, which is available on the Company's website atwww.mtsallstream.com/investors and at www.sedar.com.

About Manitoba Telecom Services Inc. (MTS Allstream)
MTS Allstream (trading symbol: MBT) is one of Canada's leading national communications solutions companies, with more than 100 years of experience and approximately 5,000 employees across Canada. Providing full-service telecommunications support for residential and business customers in Manitoba, MTS offers the latest in wireless technology, broadband services, IPTV, voice services, home security, information solutions, and an extensive range of business solutions. Across Canada, Allstream is a leader in IP communications and the only national provider focused exclusively on the business telecommunications market. MTS Allstream has nearly two million customer connections spanning business customers across Canada and residential consumers throughout Manitoba. The Company's extensive national fibre optic network spans more than 30,000 kilometres. MTS Allstream has been recognized for leadership in social responsibility and governance practices.

MTS Allstream's common shares are listed on the TSX (trading symbol: MBT). For more information about the MTS Allstream group of companies, please visit: www.mtsallstream.com.

Q1 2015 MANAGEMENT'S DISCUSSION AND ANALYSIS

For the three-month period ended March 31, 2015

May 7, 2015
This interim Management's Discussion and Analysis ("MD&A") of our financial results comments on our operations, performance and financial condition for the three months ended March 31, 2015. This MD&A is based on financial statements prepared under International Financial Reporting Standards ("IFRS"). All financial amounts, unless otherwise indicated, are in Canadian dollars and in accordance with IFRS.

Unless otherwise indicated, this interim MD&A for the three months ended March 31, 2015 is as at May 7, 2015.

In preparing this MD&A, we have taken into account information available to us up to May 7, 2015. In this MD&A, "we", "our" and "us" refer to Manitoba Telecom Services Inc. ("the Company"). This MD&A should be read in conjunction with our interim condensed consolidated financial statements for the three months ended March 31, 2015.

About us
For more information about our company, including our Annual Information Form, audited consolidated financial statements and annual MD&A for the year ended December 31, 2014, dated February 4, 2015, please visit our website at www.mtsallstream.com or visit SEDAR at www.sedar.com.

Risks and uncertainties
In conjunction with our first quarter 2015 interim condensed consolidated financial statements, supplemental, and this interim MD&A, we urge you to read the important risks and uncertainties that are detailed on page 17 of this MD&A.

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

Regarding forward-looking statements
This interim MD&A and, in particular, but not limited to, the "Risks and uncertainties" section of this interim MD&A, includes forward-looking statements and information (collectively, "statements") including, but not limited to, statements pertaining to the Company's corporate direction, business opportunities, operations, financial objectives, future financial results and performance, strategic review, guidance and outlook, pension plans funding including assumptions about future interest rates, the declaration of any future dividends and the amount thereof, the intention that surplus cash would be used for such things as share repurchases, the expectation of not having to pay cash income taxes until 2023, ability to reduce capital spending and operating expenses, future cash flows, liquidity, credit ratings and profitability, as well as other statements that are not historical facts.

Examples of statements that constitute forward-looking information may be identified by words such as "believe", "expect", "project", "should", "anticipate", "could", "target", "forecast", "intend", "plan", "outlook", "see", "set", "pending", "eliminate" and other similar terms.

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

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

Please note that forward-looking statements in this interim MD&A reflect Management's expectations as at May 7, 2015, and thus, are subject to change thereafter.

The Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. This interim MD&A and the financial information contained herein have been reviewed by the Company's Audit Committee and approved by the Company's Board of Directors ("the Board").

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

Business overview

The COMPANY
Manitoba Telecom Services Inc. provides innovative communications solutions throughout Canada. Headquartered in Winnipeg, we serve all communication market segments in Manitoba through our MTS Inc. subsidiary ("MTS") as well as business customers across Canada through our Allstream Inc. subsidiary ("Allstream"). Our common shares are listed on the TSX (trading symbol: MBT) and our website is www.mtsallstream.com.

Executive leadership appointment
On March 23, 2015, Heather Tulk was appointed Chief Marketing Officer for MTS Allstream. Heather is an accomplished marketing executive with 20 years of progressive experience in enterprise and consumer environments, most recently serving as Senior Vice-President Marketing, Business Markets with Bell Canada.

To view more leadership team information, please visit www.mtsallstream.com/leadershipteam.

MTS
MTS offers a full suite of wireless, high-speed Internet, IPTV, wireline voice, and home security services (through its AAA Alarms Systems LTD subsidiary ("AAA Security") to its consumer market. MTS also has a full array of business solutions including information solutions and business telecommunications services. Information solutions currently includes IT infrastructure, application development, managed services, networking services and unified cloud services provided by EPIC Information Solutions ("EPIC") and will include our new MTS Data Centre when it opens in July 2015. The MTS Data Centre will be the first and only commercial Tier 3 design-certified data centre in the province.

ALLSTREAM
Allstream is Canada's only national telecommunications provider focused exclusively on business customers. Allstream leverages its nationwide IP network to help businesses unify the many ways they connect - to better serve customers, and to improve efficiency and productivity. All our services run on a secure national network, which is built and managed using advanced IP and fiber technologies.  

Strategic review
We recently completed our strategic review, a disciplined process which was both wide-ranging and thorough. Drilling down into individual lines of business, we examined the competitiveness of our offerings, the effectiveness of our internal processes and tested the validity of our business models. The result is a new set of strategies focused on creating both immediate and long-term value and the implementation of a performance management process designed to ensure these strategies gain immediate traction.

Details on the new strategies and performance management process can be found on our website at www.mtsallstream.com/about/strategy.

IMMEDIATE ACTIONS
We have taken immediate actions to address the near-term concerns of our investors:

• Pre-funded $120 million into the pension plans with a view to eliminating the need for pension solvency deficit payments in 2015 and 2016 (and likely beyond);
• Realigned Allstream's cost structure with a 25% reduction in the workforce and a planned 20% to 30% decrease in capital expenditures - allowing Allstream the ability to generate free cash flow in 2015 and beyond, and
• Reset our dividend rate to a level that we can expect to readily sustain and grow

Pension plans pre-funding
We have pre-funded $120 million into the pension plans using our existing credit facilities. This one-time pre-funding will eliminate the need for solvency payments for 2015 and 2016 under any reasonable economic scenario (and for 2017 and beyond based on consensus bank forecasts for long-term interest rates) with the expectation of enhancing the stability and predictability of free cash flows. Further details on our pension plans and projected funding requirements under various economic circumstances can be found in our Q1 2015 supplemental at www.mtsallstream.com/investors/financials.

Competitive carrier cost structure
Narrowing Allstream's strategic focus has created the opportunity to quickly address our cost structure; 100 employees have left the business and a further 400 have received working notice and will exit the business throughout the current year and into 2016. These reductions - representing about 25% of Allstream's workforce - will generate approximately $50 million in annualized free cash flow improvement. The benefits of these changes will be realized over the next 18 months as these employees exit the business. In the first quarter of 2015, salaries and benefits paid to those employees directly impacted by work force reduction plans is $12.7 million, of which $11.5 million was charged to operations expense and $1.2 million was charged to capital expenditures. In addition, we have made changes to the capital investment review process within Allstream to reflect the new strategic priorities and economic expectations. We expect that this will generate a 20% to 30% reduction in annual capital investment in 2015 and beyond.

Sustainable dividend with long-term growth potential
Our Board has declared a second-quarter 2015 dividend of $0.325 per share ($1.30 annualized). This represents a payout ratio of 70% to 80% of the expected free cash flows from our MTS operations; the free cash flows of Allstream have been excluded given its non-strategic status. We expect that the MTS business (together with the pension solvency pre-payment) is fully capable of generating stable and predictable free cash flow at a level that is readily sufficient to support the new dividend.

The new dividend rate has been set with the expectation of:

• Maintaining a strong balance sheet;
• Providing flexibility for any contingencies such as additional pension funding if required and
• Delivering competitive payout ratios in line with our peers

It is also intended that surplus cash would be used to enhance shareholder value, re-investing in the core business or near-adjacent growth opportunities (such as our MTS Data Centre) and/or repurchasing shares.

Beginning in Q3 2015, a 3% discount will no longer be offered as part of our dividend re-investment program ("DRIP"). The DRIP program will continue, but shares issued under the program will be sourced on the open market to reduce further dilution.

MTS SRATEGY - A STRONG FOUNDATION TO BUILD UPON
For our Manitoba operations, the results of the strategic review have demonstrated that MTS is a great company with even greater potential. With a large customer base, an extensive network and a well-admired brand, MTS is well-positioned to capture its fair share of market growth while improving the profitability of its operations. There are still great opportunities to grow in Manitoba, a market that has generated stable nominal gross domestic product ("GDP") growth of 4.5% on average, over the last four years.

Our new strategic focus for MTS will center on the following areas:

Create a customer-first organization
Develop an organization that is fully aligned around putting the customer first, continually enhancing the customer experience, growing revenue and increasing customer loyalty.

Grow revenue faster
Capitalize on our brand, existing customer base and unparalleled bundling offers in order to grow core revenues and under-penetrated Consumer and Business Solutions segments.

Invest in the future
Increase the productivity of past and future investments in our mature telecom market and allocate more of our capital to investments creating the potential for greater future growth.

Make it simple
Simplify our systems and processes for both customers and employees, improving the end-to-end customer experience.

Drive efficiencies
Imbed the knowledge and expertise of our retiring workforce into our processes and systems, creating operational cost savings. Create a performance-based culture where accountabilities are set, met and celebrated.

Reinvent the MTS brand
Invest in a substantial renewal of the brand in the Consumer segment while crafting a parallel brand strategy for Business Solutions.

 ALLSTREAM STRATEGY - CHANGING HOW WE DO BUSINESS
While Allstream's strategic review identified a clear path to profitable growth, it has also affirmed that Allstream is not integral or strategic to MTS's future. With the expectation of being free cash flow positive hereafter, we will evaluate our options from a position of strength, executing our new strategy to create value for our shareholders.

Our situational assessment for Allstream revealed a company that:

• Lacked strategic focus - we essentially went to market in every product, in every segment and in every geography;
• Had an unsustainable cost structure - our fixed costs hadn't fallen in tandem with revenue declines, badly eroding operating margins;
• Struggled with revenue retention and growth - we had a low-level of new customer acquisition and inadequate churn management and
• Lacked the necessary rigor around capital expenditures - investment decisions that have not yielded sufficient economic benefit

We expect our new strategy for Allstream to create immediate and lasting value through a:

• Laser focus on converged IP products, in key customer segments and in our five-major markets;
• Competitive carrier cost structure
• Reduce headcount by 25% for an approximate $50 million in annualized free cash flow improvement;
• Revitalized marketing and sales function - focused on being the disruptor in the incumbent local exchange carrier legacy market
• Improved sales force productivity through changes to compensation, training and sales management
• Dedicated churn management and
• Rigorous discipline with capital investments
• Reduce capital investments by 20% to 30% to reflect the shift in focus to more profitable customer segments

These new strategies are already creating benefits for Allstream and we have the right management team in place to carry out this transformation.

As we work through implementing our new strategies in 2015 we will continue to provide updates on how we are achieving these goals.

Our new strategy maintains our current strong credit metrics and supports our BBB credit ratings.

2015 Guidance
Our 2015 financial guidance reflects a focus on our strategic objectives. Our financial guidance for 2015 is as follows:

($ millions, except for EPS)

2015 Guidance

2014 results

MTS^1 EBITDA

Higher

466.4

MTS^1 free cash flow

Higher

139.2

Allstream EBITDA

Lower - primarily due to restructuring costs

99.5

Allstream free cash flow

Positive

(1.6)

Earnings per share

$0.90 to $1.20

$1.70

^1	MTS includes MTS and Other

MATERIAL ASSUMPTIONS
We have made a number of material assumptions in preparing our 2015 financial guidance and when making certain forward-looking statements, which include, but are not limited to, the following:

Economic assumptions

• MTS's services are expected to benefit from a Manitoba economy that is forecast to show nominal GDP growth of 3.8% in 2015, according to the Government of Manitoba Finance Department.
• Allstream assumes that the Canadian economy will remain strong and real GDP growth will be 2.0% in 2015 (Canada Revenue Agency, Budget 2015).

Market assumptions
Both MTS and Allstream expect competition in 2015 to be similar to 2014 across all lines of business.

MTS

• MTS expects it will remain the only telecommunications provider in Manitoba that can bundle the full spectrum of consumer telecommunications services such as wireless, IPTV, Internet, home phone and security. As a result, we expect to be able to maintain market share and churn, as well as grow high ARPU customers.
• We anticipate an increase in wireless costs of acquisition as three-year plans come up for renewal. It is also assumed that new entrants will not enter the Manitoba market in 2015.
• Residential local line losses and related revenues will continue to decline at the same pace as in prior years, largely due to wireless substitution.

Allstream

• Allstream expects to benefit from the converged IP sales contracts previously won, with growth in converged IP revenues expected to be in line with or exceeding those of the overall converged IP market.
• Declines in legacy lines of business are expected to be moderate compared to those in prior years. We will continue to implement the largely completed planned exits from certain low‑margin legacy services in the course of 2015.

Financial assumptions

• We assume that cash debt financing costs will be similar to those in 2014.
• We will continue to maintain our investment-grade credit rating.
• We have assumed that we will not pay cash taxes by utilizing our substantial capital cost allowance pools and available tax losses. We are not expected to pay cash taxes until 2023 at the earliest. Our company's effective tax rate is expected to be approximately 27%.
• Allstream will incur approximately $16 million in restructuring costs.
• There will be no material changes to today's regulatory framework.

 EPS
The decline in EPS is impacted by the following significant items:

• Certain non-cash items including the 2014 Scientific Research and Experimental Development Investment Tax Credits ("SR&ED ITCs") impacting EPS by $0.23, higher amortization associated with wireless costs of acquisition as three-year plans come up for renewal ($0.15), and an increase in pension expense ($0.10)
• Allstream EBITDA declines and restructuring costs relating to the workforce reduction plan.

Discussion of operations - consolidated results
CONSOLIDATED

Consolidated statements of net income and other comprehensive income (loss)

($ millions, except EPS and weighted average shares outstanding)							Q1 2015				Q1 2014			% variance
	MTS operating revenues						255.8				248.5			2.9
	Allstream operating revenues						160.0				161.9			(1.2)
	Intersegment eliminations						(7.8)				(8.9)			12.4
Total consolidated operating revenues							408.0				401.5			1.6
Operations expense							267.6				253.9			(5.4)
	MTS EBITDA						118.4				120.1			(1.4)
	Allstream EBITDA						20.1				27.9			(28.0)
	Other EBITDA						1.9				(0.4)			n.a.*
Consolidated EBITDA							140.4				147.6			(4.9)
Depreciation and amortization							89.2				73.5			21.4
Other Income							0.7				1.8			(61.1)
Finance costs							(15.4)				(17.6)			12.5
Income before income taxes							36.5				58.3			(37.4)
Income tax expense							(9.8)				(16.4)			40.2
Net income for the period							26.7				41.9			(36.3)
Other comprehensive income (loss) for the period, net of tax							12.3				(6.3)			n.a.*
Total comprehensive income for the period							39.0				35.6			9.6
Weighted average shares outstanding (in millions)							78.4				77.1			1.7
EPS							$0.34				$0.54			(37.0)

^*not applicable

A discussion of our operating revenues can be found in the discussion of operations for MTS and Allstream.

Operations expense
Our operations expense increased by $13.7 million in Q1 2015. The increase is attributed to a combination of favourable one-time impacts in Q1 2014 relating mostly to tax provisions ($3.4 million), increased pension expense of $1.8 million, an increase in cost of goods sold driven by higher Q1 2015 equipment sales ($9.0 million) and $1.7 million of Allstream 2015 restructuring costs in connection with the workforce reduction plan. Included in the Q1 2015 operating expenses are $11.5 million of salaries and benefits associated with employees who will be exiting the business as part of Allstream's workforce reduction plan.

EBITDA
During the first quarter 2015, MTS EDITDA was down by $1.7 million, or 1.4% as compared to Q1 2014. Revenue growth from information solutions was mostly offset by the related cost of goods sold, while increased operating expenses resulting from higher pension expense and the one-time favourable tax provision impacts in Q1 2014, offset the net growth in other lines of business. 

Allstream's Q1 2015 EBITDA was down by $7.8 million or 28.0%, from Q1 2014 due to net revenue declines and higher restructuring costs associated with the workforce reduction plan. The following table provides an adjusted EBITDA removing the costs associated with employees who are included in Allstream's workforce reduction plan.

($ millions)								Q1 2015		Q1 2014		% variance
Allstream EBITDA								20.1		27.9		(28.0)
	Salaries and benefits							11.5		-		n.a.*
	Restructuring costs							1.7		-		n.a.*
Adjusted Allstream EBITDA								33.3		27.9		19.4

^*not applicable 

Depreciation and amortization expense
Our depreciation and amortization expense increased by $15.7 million in the first quarter of 2015 as a result of two factors. Firstly, Q1 2014 depreciation and amortization expense included an $11.8 million recovery of SR&ED ITCs. The remaining $3.9 million difference is mainly due to increased amortization of wireless costs of acquisition, as we complete the transition from three- to two-year contracts.

Finance costs
Our finance costs decreased $2.2 million in the first quarter, mainly a result of lower long-term interest expense.

Income tax expense
Income tax expense decreased $6.6 million in Q1 2015 mainly due to decreased income before taxes.

We continue to have substantial capital cost allowance pools, tax losses and investment tax credits, which we expect will fully offset our taxable income and eliminate cash income taxes until 2023 at the earliest. The present value of these available tax assets is approximately $260 million. These tax assets have a book value of $423 million and are comprised of tax losses, the difference between our book value of fixed assets and their undepreciated capital cost for tax purposes, and unused SR&ED investment tax credits.

Net income and EPS
Net income and EPS were down $15.2 million and $0.20, respectively, in Q1 2015 due largely to the increase in depreciation and amortization expense resulting from one-time SR&ED ITCs recorded in Q1 2014, along with the decline in Allstream EBITDA, partly offset by lower income tax expense.

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

The increase in other comprehensive income in Q1 2015 was due to a decrease in long-term interest rates being more than offset by a solid return on pension assets.

MTS

MTS operating revenues

($ millions)							Q1 2015		Q1 2014		% variance
Wireless							87.6		85.9		2.0
Broadband and converged IP							62.6		58.6		6.8
Information solutions							11.7		5.7		n.a.*
Security and monitoring							3.1		3.1		—
Unified communications							7.0		5.4		29.6
Local access							58.9		61.2		(3.8)
Long distance and data							15.3		16.9		(9.5)
Other							9.6		11.7		(17.9)
Total MTS operating revenues							255.8		248.5		2.9

^*not applicable

Wireless
MTS's vast and reliable wireless networks keep our customers connected across Manitoba. The combined power of our network coverage and Wi-Fi hotspots ensures that our customers can use their smartphones and devices to the fullest. To our business wireless customers we also offer Fleetnet 800^TM and paging services. In March 2015, we launched an innovative new wireless plan called MyPlan. MyPlan is a customizable pricing program that comes with standard popular features but provides customers the flexibility to pick the minutes and the amount of Canada-wide data they need.

Wireless revenue detail

($ millions)						Q1 2015		Q1 2014		% variance
Voice						44.1		48.1		(8.3)
Data						40.3		34.9		15.5
Other						3.2		2.9		10.3
Total wireless revenues						87.6		85.9		2.0

Voice: revenues decreased in Q1 2015, as a result of lower pricing on feature rich plans in the Manitoba market, and less airtime and toll revenue.
Data: driven by strong demand for smartphones and corresponding data usage, revenues increased in Q1 2015. Subscribers on data plans increased in Q1 2015 to 75% from 69% in Q1 2014.
Other: revenue increases resulted from higher one-time Fleetnet 800^TM sales.

See our Q1 2015 supplemental for additional subscriber statistics.

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

Broadband and converged IP revenue detail

($ millions)						Q1 2015		Q1 2014		% variance
Internet						33.6		30.6		9.8
IPTV						22.1		21.1		4.7
Converged IP						6.9		6.9		—
Total broadband and converged IP revenues						62.6		58.6		6.8

Internet: Q1 2015 saw strong revenue growth at 9.8% due to subscriber growth of 4% and higher ARPU of 8% resulting from price increases and customers taking higher-speed Internet services.
IPTV: revenues increased in Q1 2015 resulting from an increase in new IPTV customers, migration to the higher APRU
MTS Ultimate TV®, a lower number of customers receiving promotional pricing and price increases.

See our Q1 2015 supplemental for additional subscriber statistics.

Information solutions
Revenues from this line of business include revenues earned by EPIC. Information solutions revenues were up $6.0 million, reflecting higher one-time equipment sales when compared to Q1 2014.

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

Unified communications
Unified communications are earned from the sale of IP telephony products and services. Increased revenues in Q1 2015 reflect greater hardware sales and maintenance.

Local access
Our local access services includes revenues earned from the sale of residential and business voice connectivity, including calling features, payphone revenue, wholesale revenues from services provided to third parties and contribution revenues. Local revenues were down in Q1 2015, reflecting a combination of competitive losses and wireless substitution.

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

Long distance and data revenue detail

($ millions)						Q1 2015		Q1 2014		% variance
Long distance						8.3		9.4		(11.7)
Data						7.0		7.5		(6.7)
Total long distance and data revenues						15.3		16.9		(9.5)

Long distance: revenues declined in Q1 2015, due to customer migration to lower-priced long distance plans and reduced volumes, as customers continue to replace long distance calling with alternative methods of communication.
Data: revenues were down in Q1 2015, reflecting reprice and circuit loss.

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

Other revenue detail

($ millions)						Q1 2015		Q1 2014		% variance
Wholesale						2.0		4.5		(55.6)
Intersegment revenues						3.7		3.9		(5.1)
Other						3.9		3.3		18.2
Total other revenues						9.6		11.7		(17.9)

Wholesale: revenues were down as we continue to see other carriers move their customers from our CDMA network to their own networks.

ALLSTREAM

Allstream operating revenues

($ millions)					Q1 2015		Q1 2014		% variance
Converged IP					68.6		62.7		9.4
Unified communications, hosting and security services					22.5		18.2		23.6
Local access					30.5		35.3		(13.6)
Long distance and data					29.7		35.6		(16.6)
Other					8.7		10.1		(13.9)
Total Allstream operating revenues					160		161.9		(1.2)

Converged IP
Converged IP services revenues are earned from the provision of converged IP-based networking and related products and services to business customers nationally. Allstream's Business converged IP virtual private network ("VPN") service provides business organizations with a connectivity solution that enables growth and expansion to any location, while reducing costs and increasing productivity. Converged IP revenues grew in Q1 2015 as a result of both new converged IP installations and expansion of existing converged IP connections. The contract for Shared Services Canada awarded in 2012 was 93% installed at the end of Q1 2015.

Unified communications, hosting and security services
Unified communications and other revenues are earned from the sale of IP-related telephony products and services, along with revenues from IP-based security offerings to national business customers.

Unified communications, hosting and security services revenue detail

($ millions)						Q1 2015		Q1 2014		% variance
Unified communications						15.4		13.1		17.6
Hosting						5.5		4.1		34.1
Security services						1.6		1.0		60.0
Total unified communications, hosting and security services revenues						22.5		18.2		23.6

 

Unified communications: revenue increase in Q1 2015 reflects growth in hardware installations and associated services.
Hosting: revenues were up in Q1 2015 as a result of an increase in cloud services.
Security services: revenues were up in Q1 2015 as a result of one-time sales.

Local access
Revenues earned for the provision of business voice connectivity, including calling features, to national business and wholesale customers. Local access revenues were down in Q1 2015, reflecting declines in rates and line counts.

Long distance and data
Long distance and data services include revenues earned from the provision of long distance calling, along with data services such as private line networks, to business customers nationally.

Long distance and data revenue detail

($ millions)						Q1 2015		Q1 2014		% variance
Long distance						15.5		18.1		(14.4)
Data						14.2		17.5		(18.9)
Total long distance and data revenues						29.7		35.6		(16.6)

Long distance: revenues were down due to customer migration to lower-priced long distance plans and reduced volumes as customers continue to seek out alternative methods of communication.
Data: revenue declines were due to a combination of competitive churn, customer migration to converged IP-based services and re-pricing of services.

Other
Other services includes revenues earned from MTS, the routing and exchange of wholesale long distance network traffic, customer late-payment charges and other miscellaneous items.

Other revenue detail

($ millions)						Q1 2015		Q1 2014		% variance
Intersegment revenues						4.2		5.0		(16.0)
Other						4.5		5.1		(11.8)
Total other revenues						8.7		10.1		(13.9)

 

SELECTED QUARTERLY FINANCIAL INFORMATION

Selected quarterly financial results - consolidated

($ millions, except EPS and weighted average shares outstanding)				Q1 2015			Q4 2014			Q3 2014			Q2 2014			Q1 2014			Q4 2013			Q3 2013			Q2 2013
Operating revenues				408.0			404.8			402.4			403.3			401.5			408.5			408.4			410.1
EBITDA				140.4			135.7			140.1			142.5			147.6			128.0			142.7			132.0
Net (loss) income				26.7			24.2			36.8			28.8			41.9			(87.8)			25.4			(52.9)
EPS				$0.34			$0.31			$0.47			$0.37			$0.54			($1.25)			$0.38			($0.78)
Weighted average shares outstanding^1 (in millions)				78.4			78.1			77.7			77.4			77.1			70.3			67.7			67.5

^1

The Q1 2014 and Q4 2013 increases in the number of weighted average shares outstanding are due to the December 2013 issuance of 8,855,000 common shares and participation in the Company's dividend re-investment program. The increase in the number of weighted average shares outstanding in other quarters is due to participation in our dividend re-investment program.

Our interim financial results for the last eight quarters (Q1 2015 to Q2 2013) reflect the following significant transactions and trends:

• Allstream workforce reduction plan and restructuring costs - In Q1 2015 we paid $11.5 million in salaries and benefits costs related to staff who will be leaving Allstream and $1.7 million in restructuring costs. Narrowing our strategic focus has created the opportunity to quickly address our cost structure; 100 employees have left the business and a further 400 have received working notice and will exit the business throughout the current year and into 2016. 
  
  
• SR&ED ITCs recovery adjustments - In Q3 2014 and Q1 2014, we realized positive SR&ED ITCs recovery adjustments which increased EPS by $0.11 in Q3 2014 and by $0.12 in Q1 2014 by reducing depreciation and amortization expense. The Q1 2014 SR&ED ITCs recovery constitutes the net adjustment relating to four taxation years, ending December 31, 2011. The Q3 2014 SR&ED ITCs adjustment reflects the final asset allocations to which the ITCs relate.
  
  
• 700 MHz spectrum - In Q1 2014, MTS acquired a prime block of 700 MHz spectrum in an Industry Canada 700 MHz auction for $8.9 million.
  
  
• Equity issuance - On December 6, 2013, we announced that we had issued 8,855,000 common shares, issued at a purchase price of $28.10 per common share, for gross proceeds of $248.8 million. The net proceeds were approximately $238 million, determined after deducting the underwriters' commission and expenses.
  
  
• Costs related to Supreme Court of Canada's ("SCC") ruling - In Q4 2013, the Company recorded a $142.1-million non-cash charge against income to reflect the total estimated value of pension benefits and other estimated costs related to the SCC's ruling on a lawsuit regarding the administration of one of MTS's pension plans following the Company's 1997 privatization. The SCC's decision negatively impacted Q4 2013 EPS by $1.48.
  
  
• Allstream - As a result of the proposed sale of Allstream in 2013, we recorded after-tax impairment charges of $16.7 million or $0.24 per share and $79.2 million or $1.17 per share in Q3 2013 and Q2 2013, respectively. These accounting adjustments do not affect cash and are required by IFRS.

Liquidity and capital resources
SUMMARY of CASH FLOWS

($ millions)							Q1 2015				Q1 2014			% variance
Cash flows from (used in):
	Operating activities						36.6				77.0			(52.5)
	Investing activities						(61.0)				(67.4)			9.5
	Financing activities						1.1				(99.7)			n.a.*
Change in cash and cash equivalents for the period							(23.3)				(90.1)			74.1

*not applicable

Operating activities
"Cash flows from operating activities" refers to cash we generate from our business activities.
Cash flows from operating activities decreased $40.4 million in Q1 2015 mainly due to a combination of higher pension deficit funding of $16.9 million, one-time pension lawsuit payments of $12.4 million and a decrease in EBITDA of $7.2 million.

Investing activities
"Investing activities" refers to cash used for acquiring, and cash received from disposing of long-term assets and other long-term investments.
Cash flows used in investing activities decreased year over year due to planned reductions in capital spending. Capital expenditures were up $16.9 million due to the Q1 2014 impact of the $21.7-million SR&ED ITCs on capital expenditures. Other investing activities decreased as the corresponding SR&ED ITCs recoverable was recorded in Q1 2014 as the company is not currently taxable. After adjusting for the SR&ED ITCs, capital expenditures are down year over year due to planned reductions in spending.

Financing activities
"Financing activities" refers to actions we undertake to fund our operations through equity capital and borrowings.
Cash flows from financing activities increased $100.8 million in Q1 2015 mainly due to re-payment of $75.0 million in long-term debt in Q1 2014 and the issuance of a $25.0 million note payable under our accounts receivable securitization program in Q1 2015. In Q1 2015 and each quarter of 2014, cash dividends of $0.425 per common share were paid to shareholders, as approved by the Board.

Free cash flow
Our free cash flow definition differs from prior years and includes cash flows from operating activities less investing activities and excludes changes in working capital, pension solvency funding and pension lawsuit payments. See our Q1 2015 supplemental for restated prior year cash flows. The following table provides a reconciliation of free cash flow from EBITDA by subsidiary to consolidated results.

First-quarter free cash flow					MTS^1						Allstream						Consolidated
($ millions)					Q1 2015			Q1 2014			Q1 2015			Q1 2014			Q1 2015			Q1 2014		% variance
EBITDA					120.3			119.7			20.1			27.9			140.4			147.6		(4.9)
Add back (deduct):
	Deferred wireless costs				(17.9)			(15.0)			-			-			(17.9)			(15.0)		(19.3)
	Finance costs				(14.6)			(17.1)			(0.8)			(0.5)			(15.4)			(17.6)		12.5
	Current income tax expense				(2.4)			(0.1)			—			—			(2.4)			(0.1)		n.a.*
	Other operating activities, net				(3.3)			(3.4)			(0.9)			(1.0)			(4.2)			(4.4)		4.5
	Pension funding and net pension expense				5.6			3.8			0.7			0.6			6.3			4.4		43.2
	Other income				0.5			0.7			0.2			1.1			0.7			1.8		(61.1)
	Loss on disposal of assets				0.2			0.3			-			(0.6)			0.2			(0.3)		n.a.*
Total					88.4			88.9			19.3			27.5			107.7			116.4		(7.5)
	Investing activities				(43.2)			(46.7)			(17.8)			(20.7)			(61.0)			(67.4)		9.5
Free cash flow for the period					45.2			42.2			1.5			6.8			46.7			49.0		(4.7)

^1	MTS includes MTS and Other
*not applicable

Consolidated free cash flow was down $2.3 million from Q1 2014 mainly due to a decreased EBITDA of $7.2 million and increased deferred wireless costs of $2.9 million, partially offset by our planned reductions in capital spending.

CAPITAL MANAGEMENT
We have arrangements in place that allow us to access the debt capital markets for funding when required. Borrowings under these facilities typically are used to re-finance maturing debt, to fund new initiatives and to manage cash flow fluctuations.

Credit facilities 

($ millions)											Utilized at March 31, 2015					Capacity
Medium-term note program											225.0					500.0
Revolving credit facility											78.6					400.0
Additional credit facilities											299.3					300.0
Accounts receivable securitization											25.0					110.0
Total											627.9					1,310.0

We renewed our medium-term note ("MTN") program on September 30, 2013 for $500 million. On May 26, 2014 we issued $225 million of 4.0% MTNs under this program with a maturity date of May 27, 2024. We have a $400-million revolving credit facility, of which we had utilized $78.6 million at March 31, 2015 for undrawn letters of credit. We also have two additional credit facilities totalling $300 million, which are used solely for the issuance of letters of credit. As at March 31, 2015, a total of $299.3 million was utilized for undrawn letters of credit. In addition to these programs and facilities, we have a $110-million accounts receivable securitization program, of which $25 million was utilized as at March 31, 2015.

Capital structure

($ millions)									March 31, 2015				December 31, 2014
Cash and equivalents									(10.1)				(33.4)
Notes payable									25.0				—
Long-term debt, including current portion									873.3				873.1
Net debt									888.2				839.7
Shareholders' equity									1,067.7				1,052.3
Total capitalization									1,955.9				1,892.0
Debt to capitalization									45.4%				44.4%

Our capital structure illustrates the amount of our assets that is financed by debt versus equity. Our debt to total capitalization ratio of 45.4% at March 31, 2015 continues to represent financial strength and flexibility.

Credit ratings

S&P - Senior debentures

BBB (stable)

DBRS - Senior debentures

BBB (stable)

S&P - Commercial paper

A-2

DBRS - Commercial paper

R-2 (high)

Two leading rating agencies, Standard & Poor's ("S&P") and DBRS Limited ("DBRS"), analyze us and assign ratings based on their assessments. We consistently have been assigned solid investment-grade credit ratings. On March 5, 2014, S&P confirmed its credit ratings on our long-term corporate credit and senior unsecured debt at "BBB", and also confirmed our commercial paper rating of "A-2". S&P also confirmed its outlook as stable. DBRS confirmed its ratings on May 27, 2014, with our senior debentures at "BBB" and our commercial paper rating of "R-2 (high)". DBRS's outlook remained stable.

Pensions
The Company has implemented the settlement agreement reached with its MTS unions and retiree representatives. This settlement required the Company to pay $27.4 million directly to MTS employees, of which $15.0 million was paid in the fourth quarter of 2014 and the remaining $12.4 million was paid in the first quarter of 2015. The remaining balance of the settlement which relates to our pensioners and other persons with interests in the pension plan will be paid out of the pension plan. Further discussion on our pension plans can be found in our Q1 2015 supplemental.

Outstanding share data

											As at April 27, 2015				As at March 31, 2015
Common shares outstanding											78,934,718				78,490,224
Stock options outstanding											1,851,504				1,851,504
Stock options exercisable											1,816,176				1,816,176

FINANCIAL INSTRUMENTS, OFF-BALANCE SHEET ARRANGEMENTS and OTHER FINANCIAL ARRANGEMENTS

Foreign currency forward contracts
We use foreign currency forward contracts to manage the foreign currency exposure. Foreign exchange gains and losses on these foreign currency forward contracts are recorded in the consolidated statement of financial position as an asset or a liability, with changes in fair value recognized in the consolidated statement of net income. As at March 31, 2015, we had outstanding foreign currency forward contracts to purchase $23.6 million U.S.

Accounts receivable securitization
Under the terms of our accounts receivable securitization program, we have the ability to sell, on a revolving basis, an undivided interest in our accounts receivable to a securitization trust, to a maximum of $110 million. We are required to maintain reserve accounts, in the form of additional accounts receivable over and above the cash proceeds received, to absorb any credit losses on the receivables sold. We are required to maintain certain financial ratios with respect to our accounts receivable, or the cash proceeds must be repaid. We also are subject to certain risks of default which, should they occur, could cause the agreement to be terminated early. As at March 31, 2015, the Company had $25-million outstanding under its accounts receivable securitization program.

Critical accounting estimates and assumptions
In our 2014 annual audited consolidated financial statements and notes, as well as in our 2014 annual MD&A, we have identified the accounting policies and estimates that are critical to the understanding of our business operations and our results of operations. Our critical accounting estimates and assumptions remain substantially unchanged from those disclosed in our 2014 annual audited consolidated financial statements and notes and 2014 annual MD&A.

Changes in accounting policies
Our first-quarter 2015 interim condensed consolidated financial statements have been prepared using the same accounting policies and methods of application as those used in our audited consolidated financial statements for the year ended December 31, 2014.

We have not yet adopted certain standards, interpretations to existing standards and amendments which have been issued but are not yet effective. We expect the following standards and amendments described below to be applicable to our consolidated financial statements at a future date. The following standards and interpretations are currently being reviewed to determine the potential impact:

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

IFRS 15, Revenue from Contracts with Customers
IFRS 15, Revenue from Contracts with Customers, was issued in May 2014 and establishes a five-step revenue recognition model that applies to revenue arising from contracts with customers. IFRS 15 requires revenue to be recognized in a manner that depicts the transfer of promised goods or services to customers at an amount that reflects the expected consideration receivable in exchange for transferring those goods or services. This standard also provides guidance on the accounting treatment for contract acquisition and contract fulfillment costs and requires enhanced disclosures as to the nature, timing and uncertainty of revenues and cash flows arising from contracts with customers. This standard supersedes IAS 18, Revenues, IAS 11, Construction Contracts and a number of revenue-related interpretations. IFRS 15 is effective for annual periods beginning on or after January 1, 2017 and is to be applied retrospectively, with earlier adoption permitted. Entities will transition following either a full or modified retrospective approach.

We expect the application of this new standard to impact the reported results in our consolidated financial statements. The expected impacts include a change in the allocation of contract revenues between services and equipment, and a shift in the timing over which those revenues are recognized. We also expect a shift in the timing of recognition for contract acquisition and fulfillment costs.

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

Regulatory developments
MTS and Allstream are subject to regulations that materially impact how they can conduct business. The telecommunications and broadcast industries in which we operate are federally regulated, pursuant to both the Telecommunications Act and the Broadcasting Act. We are also subject to other federal and provincial regulations that shape how we conduct our business. Our regulatory environment is as described in our 2014 annual MD&A, and is updated for material developments every quarter.
In the past quarter, there have been the following material developments:

Wireless roaming
In late 2013 and early 2014, the Canadian Radio-television and Telecommunications Commission ("CRTC") initiated various proceedings to evaluate the competitiveness of the Canadian wireless industry including wholesale wireless roaming rates and tower sharing. In June 2014, the federal government adopted legislation that caps the domestic roaming rates that Canadian carriers charge one another at the level that these carriers charge their retail customers. Thereafter, the CRTC held hearings and on May 5, 2015, issued its decision regarding wholesale wireless roaming. In its decision, the CRTC determined that Bell Canada, TELUS and Rogers Communications Inc. must offer wholesale wireless roaming to all other Canadian wireless carriers, at regulated rates. The CRTC also recommended that the Government of Canada repeal roaming caps introduced in June 2014, and permit market forces to determine all other wholesale roaming rates. MTS is continuing to review this decision to determine its potential impacts.

Wireless spectrum auctions
MTS was not successful in acquiring spectrum in Industry Canada's AWS-3 auction held on March 3, 2015. TELUS acquired the two open blocks in Manitoba while Industry Canada retained the set-aside block for new entrants. MTS applied and submitted an auction deposit to participate in Industry Canada's BRS (2500 MHz) spectrum auction which commenced on April 14, 2015, but there is no guarantee that we will obtain spectrum.

Pick-and-pay television services
During Q1 2015, the CRTC issued decisions on the revised framework for television programming and distribution. All discretionary television programming services must be distributed on a pick-and-pay basis or in small, themed packages, which may be selected by the customer or pre-assembled by the distributor, by March 2016. By December 2016, all licensed broadcast distribution undertakings ("BDUs") must distribute all discretionary television programming services both on a pick-and-pay and in small, themed packages. MTS already offers small, themed television packages, so we are compliant with the requirement for March 2016. Because we offer a number of services on a standalone basis today, the changes to our systems to implement pick-and-pay by December 2016 should also be relatively simple to implement. However, given MTS's existing commitments to suppliers of TV content (many of whom are MTS competitors and subject to pre-existing contractual obligations), it is unclear how the requirement to offer services on a pick-and-pay basis could impact MTS's cost structure or our ability to recover these costs (if any) from customers.

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

Emergency alerting system
As of March 31, 2015, licensed BDUs were required to be ready to distribute emergency alert messages to all their customers as part of the National Public Safety Alerting System ("NPAS").  While MTS was able to implement a solution for our MTS Ultimate TV® service, we were unable to do so for our Classic TV service, which still has around 8,300 customers. The CRTC has given us until September 30, 2015 to move these remaining customers off the service or start providing alerts. Migrating the roughly 8,300 remaining Classic TV customers in this time frame will be challenging and we risk losing customers to other service providers, having to cut off some customers at the end of September 2015, or being in violation of our conditions of licence, which could affect the renewal of our broadcasting licences next year.

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

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

30-day cancellation policy
On November 6, 2014, the CRTC determined that 30-day cancellation policies for local voice, Internet, and broadcasting distribution services will be prohibited as of January 23, 2015. This decision was consistent with a previous decision to eliminate 30-day cancellation notice on wireless services as part of the wireless code of conduct introduced in 2013. We anticipate the annual impact to MTS to be approximately $700,000 of reduced revenue.

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

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

The risks and uncertainties summarized below highlight changes and additions to the risks and uncertainties disclosed in our 2014 annual MD&A.

Strategic review
Executing on our new strategy requires shifts in employee skills and capital investments to implement our strategies and operating priorities. If our management, processes or employees are not able to adapt to these changes or if required capital is not available on favourable terms, we may fail to achieve certain or all of our strategic imperatives. This could have an adverse effect on our business, financial performance and growth prospects.

In particular, our strategies require us to continue to transform our cost structure including significant staff reductions at Allstream. Our objectives for targeted cost reductions continue to be aggressive. There is no assurance that we will be successful in improving profitability, as there could be negative impact on future revenues and incremental cost savings could be more difficult to achieve on an ongoing basis.

Pick-and-pay for television services
The CRTC has recently issued decisions that require broadcasting distributors to offer more individual choice and selection of their channels. It also means customers do not have to obtain a "package" of channels, other than a small basic service for which the rate is capped at $25.00 per month. The rate cap could negatively impact MTS's ability to cover costs for TV programming. It is unclear how the requirement to make all channels available individually, as well as in the small theme groups we already offer, will impact the Company and how this could be achievable, given certain existing contractual arrangements pursuant to which we acquire such content.

Spectrum
As a result of Industry Canada's AWS-3 wireless spectrum auction held on March 3, 2015, TELUS acquired the two open blocks in Manitoba while Industry Canada retained the set-aside block for new entrants. MTS has applied and submitted an auction deposit in order to participate in Industry Canada's BRS (2500 MHz) April 14, 2015 spectrum auction commencing, but there is no guarantee that the Company will obtain spectrum. This spectrum auction will make additional spectrum available to wireless service providers that are currently in our market and to new market entrants. The acquisition of this spectrum by such party or parties could cause overall competition in the Manitoba wireless market to intensify.

Controls and procedures
There have been no changes in our internal control over financial reporting during our most recent interim period (ended March 31, 2015) that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting. Internal control over financial reporting is described in our 2014 annual MD&A.

Non-IFRS measures of performance
In this interim Q1 2015 MD&A, we provide information concerning EBITDA and free cash flow because we believe investors use them as measures of our financial performance. These measures do not have a standardized meaning as prescribed by IFRS, and are not necessarily comparable to similarly titled measures used by other companies.

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

We define Allstream adjusted EBITDA as "earnings before interest, taxes, depreciation and amortization, and other income (expense), and add back salaries and benefits relating to the workforce reduction plan, and associated restructuring costs".

FREE CASH FLOW
We define free cash flow as "cash flows from operating activities less investing activities and excluding changes in working capital, pension solvency funding and pension lawsuit payments."

 

 

 

SOURCE MTS Allstream

Investors: 

Paul Peters, Investor Relations
204-941-6178
[email protected]

Media: 

Melanie McKague, Corporate Communications
204-941-8576
[email protected]