MTS Allstream Reports Third Quarter 2010 Results
Highlights include:
- MTS and Allstream deliver stable sequential results
- MTS wireless and digital television revenues up strongly by 6.7% and
10.2% in Q3
- Number of bundled customers in Manitoba climbs by 10.2% in Q3
- Allstream achieves strong converged IP sales for fourth consecutive
month
- Cost reduction program reaches annual target range with $31.4 million
in annualized savings
- Board of Directors declares $0.425 per share cash Q4 dividend
Stock Symbol: MBT
WINNIPEG, Nov. 4 /CNW/ - Manitoba Telecom Services Inc. (the "Company" or "MTS Allstream"), including its two operating divisions "MTS" and "Allstream", announced today its financial results for the three and nine months ended September 30, 2010. The Company's results from continuing operations in the third quarter and first nine months of the year are consistent with the Company's updated financial outlook for 2010.
As detailed in the table below, MTS Allstream reported stable sequential EBITDA(1) and EPS(2) results from continuing operations(3) for the fourth quarter in a row. While some key metrics were lower when compared to the third quarter of 2009, the results were consistent with the fourth quarter of 2009 and the first half of 2010. The Company believes the sequential results in 2010 are a better indicator of performance given the economic decline that occurred in 2009.
"Our results for the third quarter of 2010 are in line with what we expected," said Pierre Blouin, Chief Executive Officer. "MTS in Manitoba produced another quarter of solid operating results. The total number of customers using our innovative bundled services was up by more than 10%, including strong growth in the number of customers using our four or five product bundles. These improving results, combined with the large number of customers signing up for bundles, have allowed us to maintain our leading market share in a tough competitive environment. Allstream delivered modest sequential EBITDA improvement reflecting our focus on driving growth in IP services where margins are the highest, attracting more on-net customers as well as the impact of our cost reduction programs."
QUARTERLY FINANCIAL HIGHLIGHTS*
2010 2009
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(in millions $, except EPS) Q3 Q2 Q1 Q4 Q3
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Revenue 446.3 443.1 442.0 453.8 452.3
EBITDA 149.1 149.3 145.3 146.8 157.7
EPS 0.53 0.54 0.46 0.59 0.68
Free cash flow(4) 56.5 62.3 54.9 43.4 62.3
Capital expenditures/ revenue 13.7% 13.3% 12.8% 16.1% 14.9%
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*All financial metrics in this table are from continuing operations
MTS
---
MTS continues to be a solid and stable foundation for the Company. While EBITDA was down by 7.2% in the third quarter of 2010 compared to the third quarter of 2009, this was primarily due to higher non-cash pension expenses and the timing of certain annual costs and adjustments.
MTS wireless revenue grew 6.7% compared to the prior year with net subscribers climbing by 5.4%. Wireless average revenue per user ("ARPU") continued to rise, reaching $57.13, driven by more than 40% growth in wireless data revenues during the third quarter of 2010. This strong level of wireless performance is expected to continue through the next quarter, leveraging MTS' CDMA partnership with Sprint PCS, with an enhanced handset line-up for the holiday season. MTS wireless revenues now represent 35% of total MTS revenues, up from 33% a year ago.
MTS continued to make excellent progress on its high-speed packet access ("HSPA") network build with Rogers and is now moving into a technical test phase and expects to fully launch HSPA services in the first quarter of 2011. "We are focusing on ensuring all of our wireless customers get the superior level of service they expect to receive from MTS," said Kelvin Shepherd, President, MTS. "We are undergoing detailed testing of both the HSPA network and related systems and with that in mind, it makes sense to launch HSPA early in the new year when activity in our customer service channels is typically lower."
Digital TV revenues increased by 10.2% for the quarter based on 6.4% subscriber growth and increased ARPU. MTS Ultimate TV, which is the Company's premium television service, now represents 34% of the Company's TV customer base. The unrivaled MTS Ultimate TV service is now available to 90% of Winnipeg households. High-speed Internet revenues were up 1.3% for the quarter compared to prior year with high-speed Internet customers increasing by 2.4% in the period. Residential line losses continue to compare favourably to the industry at 5.9% in the past year. The number of customers using bundled services climbed strongly in the quarter, by 10.2%.
Allstream
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During the third quarter of 2010, Allstream continued to show signs of improvement in a market that is recovering slowly. On a sequential basis compared to the second quarter of 2010, Allstream's EBITDA from continuing operations improved by 1.9%, which is the third sequential quarter of modest EBITDA growth. Allstream's converged IP services, the division's most strategic and profitable product line, continues to grow and now represents 26% of the division's revenues, or about $220 million in revenues on an annual basis. Allstream IP sales in the quarter were very solid, confirming its competitiveness in the Canadian IP market.
"The Canadian business environment remains challenging but I am pleased to report that the solid increase in IP sales activity we experienced in June and July has continued through to September, with sales reaching the level required to return to double-digit converged IP revenue growth rates again in 2011," said Dean Prevost, President of Allstream.
As announced previously, Allstream launched a targeted investment program this year to expand its national IP fibre network by 675 multi-tenant buildings over three years. In connection with this program Allstream won 38 new IP contracts in the third quarter of 2010, bringing the total IP contracts Allstream has won through this initiative to 87 as at September 30, 2010. This includes several follow on sales that have increased our penetration into these newly connected buildings. We have also achieved an additional 65 IP contracts in the expanded Alsltream IP co-location footprint.
"While most of our future IP revenue growth will come from our existing 2,000 fibre-fed multi-tenant buildings, our targeted investment program demonstrates that we can drive additional high-margin on-net IP revenues for what are really modest investments," added Mr. Prevost.
Subsequent Pension Solvency Funding
-----------------------------------
In October 2010, the Company made $29.6 million in pension solvency payments to meet its 2010 pension funding obligations as a result of government delays in bringing certain pension regulations into force under federal legislation that was passed earlier this year. The new legislation allows letters of credit to satisfy a portion of pension solvency obligations. The Company's pension funding for 2011 is expected to be significantly reduced as the new regulations are expected to be finalized and in force in the next few months.
Dividend
--------
The Company's Board of Directors declared a cash dividend of $0.425 per share for the fourth quarter of 2010, which is payable on January 14, 2011 to shareholders of record on December 15, 2010. The Board evaluates the Company's dividend each quarter based on the Company's long-term financial outlook as well as its current year financial performance.
Quarterly Conference Call
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MTS Allstream's third quarter 2010 conference call with the investment community is scheduled for 9:30 a.m. (Eastern time) on November 4, 2010. Investors are invited to listen to the conference call. 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 Allstream website (www.mtsallstream.com). A replay of the conference call will be available until midnight (Eastern time) on November 17, 2010, and can be accessed by dialing 1-800-642-1687 or 1-416-849-0833 (access code: 14612075).
Note
MTS Allstream's interim Management's Discussion and Analysis ("MD&A") for the three and nine months ended September 30, 2010 and supplementary financial information are available in the Investors section of the MTS Allstream website at www.mtsallstream.com.
About Manitoba Telecom Services Inc.
Manitoba Telecom Services Inc., through its wholly-owned subsidiary MTS Allstream Inc., is one of Canada's leading national communication solutions companies, providing innovative communications for the way Canadians live and work today. The Company has more than 100 years of experience, with 6,000 employees across Canada dedicated to a mission of delivering true value as seen through the eyes of our customers. MTS Allstream has nearly two million customer connections spanning business customers across Canada and residential consumers throughout the province of Manitoba. The Company's extensive national broadband and fibre optic network spans almost 30,000 kilometres. Manitoba Telecom Services Inc.'s common shares are listed on Toronto Stock Exchange (trading symbol: MBT). Customers, stakeholders and investors who want to learn more about MTS Allstream are encouraged to visit: www.mtsallstream.com.
Forward-looking Statements Disclaimer
This news release includes forward-looking statements and information (collectively, the "statements") about our corporate direction, business opportunities, operations, financial objectives and future financial results and performance that are subject to risks, uncertainties and assumptions. As a consequence, actual results in the future may differ materially from any conclusion, forecast or projection in such forward-looking statements. 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 third quarter of 2010, as well as our 2009 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.
(1) 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.
(2) EPS is earnings per share.
(3) Refer to MTS Allstream's third quarter 2010 interim MD&A for the
definition of continuing operations.
(4) Refer to MTS Allstream's third quarter 2010 interim MD&A for the
definition of free cash flow.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Unless otherwise indicated, this Management's Discussion and Analysis ("MD&A") of our financial results for the interim period ended September 30, 2010 is as at November 3, 2010. In preparing this MD&A, we have taken into account information available to us up to November 3, 2010. In this MD&A, "we", "our", and "us" refer to Manitoba Telecom Services Inc. (the "Company" or "MTS Allstream"). This interim MD&A should be read in conjunction with our interim consolidated financial statements for the period ended September 30, 2010. We also encourage you to read the discussion and analysis that accompanies our audited consolidated financial statements for the year ended December 31, 2009 (MTS Allstream's 2009 annual MD&A dated March 4, 2010), our first quarter 2010 interim MD&A dated May 5, 2010, as well as our second quarter 2010 interim MD&A dated August 5, 2010. You will also find more information about us, including our annual information form for the year ended December 31, 2009 dated March 4, 2010, on our website at www.mtsallstream.com or on SEDAR at www.sedar.com.
This MD&A comments on our operations, performance and financial conditions for the three months ("Q3") and nine months ("YTD") ended September 30, 2010 and 2009. Unless otherwise stated, all amounts are expressed in Canadian dollars.
Regarding forward-looking statements
This interim MD&A includes forward-looking statements and information (collectively, the "statements") about our corporate direction, business opportunities, operations, financial objectives, future financial results and performance and future cash flows and distributions to shareholders that are subject to risks, uncertainties and assumptions. As a consequence, actual results in the future may differ materially from any conclusion, forecast or projection in such forward-looking statements. 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 our third quarter 2010 interim MD&A, our second quarter 2010 interim MD&A, our first quarter 2010 interim MD&A, as well as our 2009 annual MD&A, 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 2010 excludes our non-telecommunications
information technology ("IT") consulting business, which has been
classified as discontinued operations; restructuring costs; costs
related to our high-speed packet access ("HSPA") deployment and
related billing implementation; an adjustment to the rebate related
to use of deferral account funds pursuant to Telecom Decision
Canadian Radio-television and Telecommunications Commission ("CRTC")
2010-638 ("Decision 2010-638"); certain legal costs associated with
our appeal of a Court decision relating to one of the Company's
pension plans; a one-time cash payment received as part of a
comprehensive settlement agreement with Bell Mobility; and solvency
funding to our pension plans.
Continuing operations in 2009 excludes our non-telecommunications 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 HSPA
deployment and related billing implementation; costs related to
certain regulatory proceedings; certain costs associated with our
transition from Canadian GAAP to IFRS; a rebate related to use of
deferral account funds pursuant to 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.
- 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 Allstream is a leading national communications provider in Canada and the market leader in Manitoba. Our company is organized into two principal business segments: the MTS unit ("MTS"), operating in Manitoba; and the Allstream unit ("Allstream"), operating nationally. Our common shares are listed on the Toronto Stock Exchange (trading symbol: MBT) and our website is www.mtsallstream.com.
MTS leads every telecommunications market segment in Manitoba, delivering a full suite of wireless, broadband (high-speed Internet and digital television), converged IP, unified communications, security, home alarm monitoring services, local access, as well as long distance and legacy data services. This complete range of products is unmatched by any other provider in the province. MTS serves both residential and business customers in Manitoba.
Allstream is a leading competitor in the national business and wholesale markets, offering small, medium and large businesses and government organizations a portfolio of telecommunications solutions tailored to meet their needs. Allstream's main products are Internet protocol ("IP")-based communications, unified communications, voice and data connectivity, and security services. Allstream 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.
STRATEGIC IMPERATIVES UPDATE
In summary, in the first nine months of 2010, we made the following progress on our four strategic imperatives:
1. Drive profitable increases in our growth services including converged
IP, wireless, high-speed Internet, and digital television.
In the first nine months of 2010, MTS' converged IP revenues were up
by 2.6% and digital television revenues increased by 8.5%. MTS'
wireless services revenues in the first nine months of the year were
up by 6.0%, after adjusting for the impact of a one-time $3.4 million
sale of handsets to the City of Winnipeg in the first quarter of
2009. Our high-speed Internet, digital television, and wireless
subscriber bases rose by 2.4%, 6.4% and 5.4%, respectively.
Allstream's converged IP revenues continued to grow, increasing by
2.6% in the first nine months of 2010.
2. Continue to focus on delivering superior customer service while
achieving further cost reductions.
Building on the considerable progress we made in 2009 improving our
cost structure, we are targeting an additional $30 million to
$40 million in 2010 in annualized cost reductions through operational
efficiency and restructuring initiatives. We achieved $31.4 million
in annualized cost savings from these initiatives within the first
nine months of the year. In 2009, we met and exceeded our customer
experience targets as measured through independent surveys. We remain
focused on achieving the same result in 2010.
3. Drive innovation in product and service development to exceed
customer expectations.
In 2009, we launched MTS Ultimate TV service, which provides
customers with unique whole home personal video recorder
functionality as well as access to our fastest Internet speeds.
Through the first nine months of 2010, we continued to roll out the
service to more areas of Winnipeg, which is now available to 90% of
Winnipeg households, up from 70% at the end of 2009, as well as 91%
of households in Brandon and also in Portage la Prairie. We expect to
reach 96% coverage of Winnipeg by the end of 2010. We continue to
enhance the attractiveness of our premium television offering by
adding new features. For example, MTS TV launched Ultimate Picks and
My Picks, two new services that provide customers with a unique
experience by allowing them to watch multiple channels
simultaneously.
During the third quarter of 2010, we announced our plans to
accelerate our investment in fibre-to-the-home, also referred to as
fibre optic network ("FiON"). FiON allows customers to access our
top-of-the-line digital television, high-speed Internet, and phone
services. (See the following strategic imperative for more
information.)
We also continue to enhance our wireless handset line-up by launching
MTS' first Android device, the HTC 6250 smartphone in August 2010.
4. Selectively and prudently investing in strategic initiatives to
broaden market reach and enhance leadership position.
We are making a number of targeted, focused investments to broaden
our market reach and enhance our leadership position, both in MTS in
Manitoba and Allstream nationally.
In July 2009, we entered into an agreement with Rogers Wireless
Partnership ("Rogers Wireless") that saw both companies share the
cost to deploy an HSPA wireless network across Manitoba. We
have moved into a test phase and expect to fully launch HSPA
services in the first quarter of 2011. The expansiveness and
sophistication of our wireless infrastructure in Manitoba is a
significant competitive advantage which will be strengthened by the
deployment of HSPA technology over our regional wireless network in
Manitoba. HSPA technology will give us access to new data services,
the potential to grow data average revenue per user ("ARPU") and an
efficient upgrade path overtime.
In August 2010, we announced our plans to invest $125 million over
the next five years as part of an accelerated deployment of our
fibre-to-the-home network, also referred to as fibre optic network
("FiON"),in Manitoba. We were the first in Manitoba to launch fibre-
to-the-home in January in the Waverley West neighbourhood of
Winnipeg. In July, we began deploying FiON in the City of Selkirk
along with an adjacent portion of St. Andrews and St. Clements. By
the end of 2015, we expect to deploy fibre to approximately 120,000
homes in close to 20 Manitoba communities such as Steinbach,
Thompson, The Pas, and in areas of Winnipeg. Once this plan is
completed, 65% of Manitoba households will be covered by either Very-
high-bit-rate Digital Subscriber Line ("VDSL") or fibre-to-the-home
service. This will enable MTS to provide customers with access to
the most advanced high-speed Internet and television services.
In 2010, we have been expanding our national IP fibre network to
improve the profitability of Allstream and support future growth. As
part of a three-year plan, we are making targeted investments to
extend fibre to 675 select multi-tenant buildings that are within
200 metres of our existing national network and to enhance our
Ethernet capabilities in our co-location areas. This investment will
extend our on-net reach and provide us with significant incremental
high margin revenue opportunities. In 2010, using a success-based
approach, we are targeting to extend fibre to approximately 185
buildings. At the end of the third quarter 2010, the results of this
initiative are in line with our targets. In the three months ending
September 30, 2010, Allstream won 38 new IP contracts through
this initiative. For the first nine months of 2010, we won a
total of 87 contracts. This includes several follow on sales
that have increased our penetration into these newly connected
buildings. We have also achieved an additional 65 IP contracts in
Allstream's expanded IP co-location footprint. Based on the sales
cycle for enterprise customers, we anticipate the benefits from this
program to begin to positively impact our financial results in 2011.
SUBSEQUENT PENSION SOLVENCY FUNDING
In October 2010, the Company made $29.6 million in pension solvency payments to meet its 2010 pension funding obligations as a result of government delays in bringing certain pension regulations into force under federal legislation that was passed earlier this year. The new legislation allows letters of credit to satisfy a portion of pension solvency obligations. Pension funding for 2011 is expected to be significantly reduced as the new regulations are expected to be finalized and in force in the next few months.
RESULTS OF OPERATIONS
Quarterly metrics for the most recent five quarters (continuing operations)
2010 2009
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(in millions $,
except EPS) Q3 Q2 Q1 Q4 Q3
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Revenue 446.3 443.1 442.0 453.8 452.3
EBITDA 149.1 149.3 145.3 146.8 157.7
EPS 0.53 0.54 0.46 0.59 0.68
Free cash flow 56.5 62.3 54.9 43.4 62.3
Capital expenditures/
revenue 13.7% 13.3% 12.8% 16.1% 14.9%
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Our results in the third quarter of 2010 were sequentially stable with the first and second quarters of 2010. While revenues, EBITDA, earnings per share ("EPS") and free cash flow were lower in the third quarter of 2010 compared to the same period in 2009, results have been consistent since that time. Our results in the first nine months of 2010 reflect the slow pace of economic recovery nationally, costs associated with aggressive competition in the Manitoba market, and higher non-cash pension expense. We have maintained our market share in most of our key growth products, although we have seen a slight increase in the rate of local line losses and a decrease in Internet ARPU, which affected our EBITDA.
Revenues by business segment (continuing operations)
(in millions $) Q3/10 Q3/09 % change YTD/10 YTD/09 % change
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MTS revenues 237.3 235.4 0.8 698.0 703.7 (0.8)
Allstream revenues 209.0 216.9 (3.6) 633.4 671.2 (5.6)
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Total revenues 446.3 452.3 (1.3) 1,331.4 1,374.9 (3.2)
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Total revenues from continuing operations decreased by $6.0 million in the third quarter of 2010 as compared to the third quarter of 2009. For the first nine months of 2010, total revenues from continuing operations declined by $43.5 million compared to the same period last year. These results reflect continued strong growth in our wireless, broadband and converged IP lines of business; offset by declines in our unified communications, security and monitoring, local access, long distance and legacy data lines of business, as well as lower CRTC mandated local contribution revenue. Our results for the first nine months of 2009 were also enhanced by a one-time $3.4 million wireless sale of FleetNet 800(TM) ("FleetNet") handsets. Further details on each of our main businesses' revenue performance (MTS and Allstream) are described below.
MTS Revenues
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Operating revenues (continuing operations)
(in millions $) Q3/10 Q3/09 % change YTD/10 YTD/09 % change
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Wireless 85.6 80.2 6.7 243.2 232.9 4.4
Broadband and
converged IP
services 45.8 44.3 3.4 135.5 132.1 2.6
Unified
communications,
security &
monitoring 9.3 7.9 17.7 25.8 24.5 5.3
Local access 72.1 76.4 (5.6) 217.8 230.4 (5.5)
Long distance and
legacy data 24.5 26.6 (7.9) 75.7 83.8 (9.7)
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Total MTS operating
revenues 237.3 235.4 0.8 698.0 703.7 (0.8)
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Revenues from continuing operations at MTS were higher by $1.9 million as compared to the third quarter of 2009. These results reflect continued growth in our wireless, broadband and converged IP, and unified communications services; offset by declines in our local access, and long distance and legacy data services. Our popular residential service bundles, which can include wireline, 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 strongly by 10.2% in the third quarter of 2010. Total MTS operating revenues for the first nine months of 2010 declined $5.7 million compared to the same period in 2009, reflecting the same factors identified above, as well as the one-time $3.4 million wireless FleetNet sale that occurred in the first quarter of 2009.
As an incumbent local exchange carrier ("ILEC") in the province of Manitoba, we receive a monthly subsidy per network access line for basic local access services we provide to customers in rural and remote parts of the province where the costs of providing service are higher. The CRTC reviews and adjusts ILEC subsidy rates annually. For 2010, the CRTC used a negative inflation rate in their calculation of subsidy rates which had the effect of reducing our local contribution revenue by $3.6 million for the nine months ending September 30, 2010. Excluding the impact of the one-time FleetNet sale in the first quarter of 2009 and lower local contribution revenues in 2010, MTS' revenues in the first nine months of the year would have increased by 0.2%.
Wireless services
(in millions $) 2010 2009 % change
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Q3 85.6 80.2 6.7
YTD 243.2 232.9 4.4
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Our wireless portfolio consists of cellular, wireless data, paging, and
group communications services that we offer in the Manitoba market to
both residential and business customers.
Our wireless services delivered strong growth in the third quarter of 2010 with revenues increasing by $5.4 million. For the first nine months of the year, our wireless revenues were up by $10.3 million. These strong levels of performance were driven mainly by solid growth in our subscriber base and significantly higher wireless data usage. In the first nine months of the year, wireless revenue growth was partly offset by a $3.4 million sale of FleetNet handsets to the City of Winnipeg in the first quarter of 2009. After adjusting for this sale, our wireless revenues increased by 6.0% in the first nine months of 2010. At September 30, 2010, we had 476,420 wireless subscribers, up by 5.4% from September 30, 2009. Revenues from our wireless data services were also up strongly by 40.7% in the third quarter of 2010 and by 44.6% in the nine months ended September 30, 2010.
Wireless ARPU for the nine months ended September 30, 2010 of $57.13 grew by 0.8% or $0.45 from $56.68 in the same period of 2009. This ARPU growth is mainly due to continued strong growth in our wireless data services and calling-feature utilization, partially offset by lower network charges resulting from the removal of system access fees on new plans and customer migration to these lower-priced plans.
Broadband and converged IP services
(in millions $) 2010 2009 % change
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Q3 45.8 44.3 3.4
YTD 135.5 132.1 2.6
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Broadband and converged IP services include revenues earned from
providing high-speed Internet and digital television services to
residential customers in Manitoba, as well as IP-based connectivity to
business customers based in Manitoba.
Revenues from our broadband and converged IP services were up by $1.5 million and by $3.4 million in the third quarter and first nine months of 2010, respectively. The third quarter increase is mainly attributable to growth in revenues from our digital television and high-speed Internet services, partially offset by lower converged IP revenues. The year-to-date increase reflects growth in digital television and converged IP services, partially offset by lower high-speed Internet revenues.
Our digital television services revenues (including both MTS Classic TV and MTS Ultimate TV services) were ahead by $1.4 million or 10.2% in the third quarter of 2010 as compared to the third quarter of 2009. For the first nine months of 2010, digital television services revenues grew by 8.5% or $3.4 million. This growth reflects an increase in MTS Ultimate TV subscribers, partially offset by an increase in subscribers on promotional plans. At the end of the third quarter, there were more than 30,000 subscribers on our MTS Ultimate TV service, as compared to approximately 25,000 at the end of the second quarter of 2010. In total, we had 89,604 digital television subscribers at September 30, 2010, representing a 6.4% increase year-over-year.
Our high-speed Internet services revenues were up by $0.3 million in the third quarter of the year, and down by $0.5 million for the first nine months of 2010, as compared to the same periods in 2009. At September 30, 2010, our high-speed Internet subscriber base totalled 184,797, up 2.4% from last year.
Our converged IP revenues for the first nine months of 2010 have increased by 2.6% compared to the same period of 2009.
Unified communications, security and monitoring services
(in millions $) 2010 2009 % change
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Q3 9.3 7.9 17.7
YTD 25.8 24.5 5.3
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Unified communications, security and monitoring services consist of
revenues earned from the provision of IP telephony products and services
to business customers in Manitoba. This line of business also includes
revenues earned from the installation and monitoring of alarm services to
residential and business customers in Manitoba.
Unified communications, security and monitoring services revenues grew by $1.4 million in the third quarter of 2010, and by $1.3 million year-to-date, reflecting variations in the timing of unified communications sales and installations.
Local access services
(in millions $) 2010 2009 % change
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Q3 72.1 76.4 (5.6)
YTD 217.8 230.4 (5.5)
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Local access services include revenues earned for the provision of both
residential and business voice connectivity including calling features,
payphone revenue, and wholesale revenue within Manitoba.
Local access services revenues decreased by $4.3 million in the third quarter of 2010, and by $12.6 million in the first nine months of the year. Lower local access services revenues in the third quarter and for the year-to-date mainly reflect decreased residential network access lines due to local competition and substitution, as well as lower local contribution revenue relating to high-cost serving areas.
As an ILEC in the province of Manitoba, we receive a monthly subsidy per network access line for basic local access services we provide to customers in rural and remote parts of the province where the costs of providing service are higher. The CRTC reviews and adjusts ILEC subsidy rates annually. For 2010, the CRTC used a negative inflation rate in their calculation of subsidy rates, which had the effect of reducing our contribution revenue by $1.2 million in the first quarter of 2010, by $1.3 million in the second quarter of 2010, and by $1.1 million in the third quarter of 2010, respectively.
Long distance and legacy data services
(in millions $) 2010 2009 % change
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Q3 24.5 26.6 (7.9)
YTD 75.7 83.8 (9.7)
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Long distance and legacy data services include revenues earned from the
provision of long distance calling along with traditional data services,
such as dial-up Internet connectivity, frame-relay networks, and private
line networks we offer to residential and business customers in Manitoba.
Revenues from our long distance and legacy data services decreased by $2.1 million for the third quarter of 2010, and by $8.1 million for the nine months ended September 30, 2010. Long distance services revenues declined mainly due to customer migration to lower-priced long distance plans, and reduced volumes. Our legacy data services revenues were also lower as a result of customers transitioning to broadband or other IP-based services.
Allstream Revenues
------------------
Operating revenues (continuing operations)
(in millions $) Q3/10 Q3/09 % change YTD/10 YTD/09 % change
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Converged IP 54.3 53.3 1.9 161.1 157.0 2.6
Unified
communications
& security 19.9 21.8 (8.7) 64.9 79.5 (18.4)
Local access 50.2 51.6 (2.7) 151.6 156.4 (3.1)
Long distance &
legacy data
services 84.6 90.2 (6.2) 255.8 278.3 (8.1)
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Total Allstream
operating revenues 209.0 216.9 (3.6) 633.4 671.2 (5.6)
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Revenues from continuing operations at Allstream were lower by $7.9 million in the third quarter and by $37.8 million for the year-to-date, as compared to the same periods in 2009. These results reflect growth in converged IP services which was offset by lower unified communications and security, local access, as well as long distance and legacy data revenues.
Converged IP services
(in millions $) 2010 2009 % change
-------------------------------------------------------------------------
Q3 54.3 53.3 1.9
YTD 161.1 157.0 2.6
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-------------------------------------------------------------------------
Converged IP services include revenues earned from the provision of IP-
based networking and related products and services to business customers
nationally.
Converged IP revenues in the third quarter of 2010 grew by $1.0 million compared to the same period of 2009. With the improvement in the economy and enterprise market, our sales team has been successful in winning service agreements with new customers. The solid increase in IP sales activity we experienced in the summer months has continued through September, returning our sales levels to the level required to achieve double-digit growth in 2011. For the first nine months of 2010, our converged IP revenues were up by $4.1 million. We continue to see growth in our IP-Virtual Private Network ("IP-VPN")customer base; as at September 30, 2010, Allstream had 357 IP-VPN customers, an 11.9% increase over last year.
Building on our national IP fibre network that currently reaches over 2000 multi-tenant buildings, we have undertaken a targeted expansion of our national IP fibre network that will extend our on-net reach and provide us with significant incremental high-margin revenue opportunities. The results of this success-based investment are in line with our targets. At the end of the third quarter, Allstream won 87 new IP contracts through this initiative, including several follow on sales that have increased our penetration into these newly connected buildings. We have also achieved an additional 65 IP contracts in the expanded Allstream IP co-location footprint.
Unified communications and security services
(in millions $) 2010 2009 % change
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Q3 19.9 21.8 (8.7)
YTD 64.9 79.5 (18.4)
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Unified communications and security services include revenues earned from
the provision of IP telephony products and services along with revenues
from our IP-based security offerings to national business customers.
Unified communications and security services revenue declined by $1.9 million in the third quarter and by $14.6 million for the first nine months of 2010. These decreases reflect lower revenues from both unified communications and security services, due to lower product sales. Beginning with the second quarter of 2009, Allstream's unified communications and security services have been affected by the recession and slow pace of economic recovery as many enterprise customers experienced lower business volumes and postponed capital investment decisions. We expect this line of business to start growing again as enterprise customers begin to reinvest in telecommunications and information technology.
Local access services
(in millions $) 2010 2009 % change
-------------------------------------------------------------------------
Q3 50.2 51.6 (2.7)
YTD 151.6 156.4 (3.1)
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Local access services include revenues earned for the provision of
business voice connectivity including calling features to national
business and wholesale customers.
Local access services revenues declined by $1.4 million for the third quarter, and by $4.8 million for the first nine months of 2010, as compared to the same periods in 2009. The decrease mainly reflects lower pricing, partially offset by growth in the number of small- and medium-sized business customers selecting bundled services.
Long distance and legacy data services
(in millions $) 2010 2009 % change
-------------------------------------------------------------------------
Q3 84.6 90.2 (6.2)
YTD 255.8 278.3 (8.1)
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Long distance and legacy data services include revenues earned from the
provision of long distance calling along with traditional data services,
such as primary rate interfaces, frame-relay networks, and private line
networks to business customers nationally.
Revenues from Allstream's long distance and legacy data services declined by $5.6 million in the third quarter of 2010 and by $22.5 million in the first nine months of the year.
The decline in Allstream's long distance services revenues in the third quarter of 2010 is mainly attributable to lower international and domestic rates, partly offset by higher international volumes. Reduced business activity by our customers that are based or have operations in the U.S. continue to result in lower cross-border long distance volumes. For the year-to-date September 30, 2010, lower long distance revenues primarily reflect lower international and domestic rates together with lower cross-border volumes, partially offset by higher international volumes. We have implemented sales and marketing initiatives to identify new customers, retain our existing customer base, and encourage higher long distance usage to counter these impacts.
Our legacy data services revenues continue to be affected by customers' transition to broadband and other IP-based services. In addition, the continuing migration of long distance and legacy data communications traffic by Rogers and AT&T to their respective networks has further impacted the year-over-year declines. Long distance and legacy data services revenues from these customers in the third quarter of 2010 totalled $14.8 million as compared to $17.5 million in the third quarter of 2009. For the nine months ended September 30, 2010, long distance and legacy data services revenues from these customers were $45.7 million as compared to $52.9 million in 2009.
Consolidated Results
--------------------
Operating Revenues
(in millions $) Q3/10 Q3/09 % change YTD/10 YTD/09 % change
-------------------------------------------------------------------------
Revenue (continuing
operations) 446.3 452.3 (1.3) 1,331.4 1,374.9 (3.2)
Adjustment to
deferral account
rebate 5.0 (13.5) n.m. 5.0 (13.5) n.m.
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Revenue 451.3 438.8 2.8 1,336.4 1,361.4 (1.8)
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As a result of Telecom Decision CRTC 2010-638, the Company's liability relating to customer rebates is $8.5 million. The resulting $5.0 million adjustment was recognized as additional local revenue, which increased our consolidated revenues by 1.1% in the third quarter. The estimated balance of the Company's deferral account is approximately $21 million as at September 30, 2010.
EBITDA
(in millions $) Q3/10 Q3/09 % change YTD/10 YTD/09 % change
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MTS EBITDA 120.7 130.0 (7.2) 363.4 387.7 (6.3)
Allstream EBITDA 27.1 27.7 (2.2) 79.7 92.4 (13.7)
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EBITDA* (continuing
operations) 149.1 157.7 (5.5) 443.7 480.5 (7.7)
Restructuring and
other costs (1.7) (9.0) (81.1) (22.5) (27.8) (19.1)
Deferral account
rebate 5.0 (13.5) n.m. 5.0 (13.5) n.m.
Wireless transition
recovery (costs) 10.0 (0.7) n.m. 10.0 (14.4) n.m.
-------------------------------------------------------------------------
EBITDA 162.4 134.5 20.7 436.2 424.8 2.7
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* Contains EBITDA from corporate operations.
Our EBITDA from continuing operations for the third quarter of 2010 was in line with our results for the last three quarters, but was lower by $8.6 million when compared to the third quarter of 2009. This decline primarily reflects higher non-cash pension expense and lower revenues, partially offset by savings from our cost reduction initiatives and by lower direct costs.
At $443.7 million, EBITDA from continuing operations for the nine months ended September 30, 2010 was down by $36.8 million as compared to the same period in 2009. This decrease is mainly due to higher non-cash pension expense and lower revenues, partially offset by lower direct costs.
Consolidated EBITDA for the three months ended September 30, 2010, and for the year-to-date benefitted from lower restructuring costs, a $5.0 million adjustment to our deferral account rebate, and a $10.0 million one-time cash payment received as part of a comprehensive settlement agreement with Bell Mobility.
On a segmented basis, MTS' EBITDA from continuing operations in the third quarter, at $120.7 million, was down by $9.3 million when compared to the prior year. The decrease is primarily due to higher non-cash pension expense and the timing of certain annual costs and adjustments. Although we have maintained our market shares overall, lower pricing has impacted MTS' performance in 2010. MTS' EBITDA margin in the third quarter of 2010 continues to be strong and market leading, at 50.9%. Allstream's EBITDA from continuing operations in the third quarter of 2010 was $27.1 million as compared to $27.7 million in the same quarter last year. On a sequential basis, Allstream's EBITDA from continuing operations improved by $0.5 million to $27.1 million, as compared to $26.6 million in the second quarter and $26.0 million in the first quarter 2010. This sequential EBITDA improvement reflects stabilizing performance primarily due to strong cost management and steady growth in our IP services.
Earnings per share ("EPS")
(in $) Q3/10 Q3/09 % change YTD/10 YTD/09 % change
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EPS (continuing
operations) 0.53 0.68 (22.1) 1.54 2.05 (24.9)
Restructuring and
other costs (0.02) (0.10) (80.0) (0.24) (0.30) 20.0
Discontinued
operations - (0.01) n.m. (0.03) - n.m.
Deferral account
rebate 0.05 (0.14) n.m. 0.05 (0.14) n.m.
Wireless transition
recovery (costs) 0.10 - n.m. 0.10 (0.14) n.m.
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Basic EPS 0.66 0.43 53.5 1.42 1.47 (3.4)
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-------------------------------------------------------------------------
Note: EPS for the three months ended September 30 is based on weighted
average shares outstanding of 64.7 million for 2009 and for 2010.
On a year-over-year basis, EPS from continuing operations decreased by $0.15 to $0.53 for the three months ended September 30, 2010; and by $0.51 to $1.54 for the first nine months of the year mainly as a result of lower EBITDA and higher debt charges.
Basic EPS increased by $0.23 to $0.66 in the third quarter due to fewer restructuring and other costs, an adjustment to the rebate related to the use of deferral account funds pursuant to Decision 2010-638 which we recognized as additional local revenue, as well as the recovery of $10.0 million which was a one-time cash payment received as part of a comprehensive settlement agreement with Bell Mobility.
Basic EPS decreased by $0.05 to $1.42 in the first nine months of 2010 as compared to the same period of 2009, which is mainly due to lower EPS from continuing operations and a loss from discontinued operations we incurred in connection with the sale of a portion of our non-telecommunications IT consulting business. These factors were partially offset by reduced restructuring and other costs, an adjustment to the rebate related to the use of deferral account funds pursuant to Decision 2010-638, and the $10.0 million payment from Bell Mobility.
Operating expenses
Operations expense (continuing operations)
(in millions $) 2010 2009 % change
-------------------------------------------------------------------------
Q3 297.2 294.6 0.9
YTD 887.7 894.4 (0.7)
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-------------------------------------------------------------------------
Operating expenses from continuing operations in the third quarter of 2010 were up by $2.6 million when compared to the same period in 2009 reflecting an increase in pension expense and the timing of certain annual costs and adjustments, partially offset by savings from our ongoing cost reduction initiatives.
For the nine months ended September 30, 2010, operating expenses from continuing operations were lower by $6.7 million as compared to the same period last year. This decrease reflects savings from our ongoing cost reduction initiatives, partially offset by higher pension expense and higher costs to fund certain growth services.
We continue to work on removing costs from our business. For 2010, we set a target of achieving between $30 million and $40 million of annualized savings from our operational efficiency programs. We achieved $31.4 million of annualized savings from these cost reduction initiatives in the first nine months of the year.
Restructuring and transition costs (recovery)
(in millions $) 2010 2009 % change
-------------------------------------------------------------------------
Q3 (8.3) 9.7 n.m.
YTD 12.5 42.2 (70.4)
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-------------------------------------------------------------------------
We recovered $8.3 million of restructuring and transition costs in the third quarter of 2010, as compared to the $9.7 million of costs we incurred last year. Transition costs were positively impacted by the receipt of a one-time payment from Bell Mobility of $10 million in the third quarter of 2010; partially offset by other non-recurring amounts associated with HSPA deployment and related billing implementation, and certain legal costs to appeal a court decision relating to one of the Company's pension plans. Restructuring and other transition costs in the first nine months of 2010 declined by $29.7 million compared to the same period last year.
Amortization expense
(in millions $) 2010 2009 % change
-------------------------------------------------------------------------
Q3 85.1 82.0 3.8
YTD 250.4 244.8 2.3
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Amortization expense increased by $3.1 million in the third quarter and by $5.6 million for the first nine months of 2010 when compared to the same periods last year, which is mainly due to a slight increase in depreciable assets.
Other income
(in millions $) 2010 2009 % change
-------------------------------------------------------------------------
Q3 1.1 2.6 (57.7)
YTD 4.4 5.9 (25.4)
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Other income for the third quarter was $1.5 million lower as compared to other income of $2.6 million for the same quarter in 2009.
Debt charges
(in millions $) 2010 2009 % change
-------------------------------------------------------------------------
Q3 17.0 15.1 12.6
YTD 51.9 43.9 18.2
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-------------------------------------------------------------------------
Debt charges were higher by $1.9 million in the third quarter of 2010 and by $8.0 million for the first nine months of 2010. This increase is primarily due to higher levels of outstanding debt and higher average coupon rates, which is indicative of a greater proportion of our debt being long-term compared to the prior year.
Income tax expense
(in millions $) Q3/10 Q3/09 % change YTD/10 YTD/09 % change
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Income tax on
continuing
operations 13.5 19.4 (30.4) 46.3 65.0 (28.8)
Tax effect on
one-time items 4.9 (7.5) n.m. (2.0) (17.9) (88.8)
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Total income tax 18.4 11.9 54.6 44.3 47.1 (5.9)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total income tax expense for the three months ended September 30, 2010 increased by $6.5 million compared to the same period in 2009 primarily due to an increase in one-time adjustments. For the first nine months of 2010, total income tax was lower by $2.8 million primarily due to lower net income from continuing operations, partially offset by an increase in taxes on one-time items.
We used the last of our available tax losses associated with the acquisition of Allstream during the first half of 2009 by deferring the use of our substantial capital cost allowance ("CCA") pools. By utilizing our deferred CCA deductions, we expect to fully offset our taxable income and not pay cash taxes before 2019, with the present value of our tax asset being approximately $310 million.
Consolidated quarterly financial data
Unaudited quarterly financial data for our eight most recently completed quarters is presented below:
(in millions $, except EPS) Q3/10 Q2/10 Q1/10 Q4/09
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Operating revenues 451.3 443.1 442.0 453.8
Operating income 77.3 57.8 50.7 59.4
Net income before discontinued
operations 43.0 29.6 21.4 9.0
Net income and comprehensive income 43.0 28.2 20.4 6.7
EPS before discontinued operations 0.66 0.46 0.33 0.14
Diluted EPS before discontinued
operations 0.66 0.46 0.33 0.14
EPS 0.66 0.44 0.32 0.10
Diluted EPS 0.66 0.44 0.32 0.10
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(in millions $, except EPS) Q3/09 Q2/09 Q1/09 Q4/08
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Operating revenues 438.8 452.8 469.8 465.5
Operating income 52.5 59.5 68.0 52.6
Net income before discontinued
operations 28.1 30.0 36.8 14.8
Net income and comprehensive income 27.9 30.1 37.0 13.7
EPS before discontinued operations 0.43 0.47 0.57 0.23
Diluted EPS before discontinued
operations 0.43 0.47 0.57 0.23
EPS 0.43 0.47 0.57 0.21
Diluted EPS 0.43 0.47 0.57 0.21
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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:
- Restructuring costs for our ongoing cost reduction initiatives were
$11.7 million in the first quarter, $1.8 million in the second
quarter, and $1.6 million in the third quarter of 2010. For each of
the four quarters of 2009 the amounts of restructuring costs were
$5.4 million, $12.3 million, $8.6 million, and $5.3 million, listed
chronologically. We also recorded restructuring costs of
$13.7 million in the fourth quarter of 2008.
- Costs related to our HSPA deployment and related billing
implementation were $0.8 million, $6.3 million, and $0.1 million in
the first, second and third quarters of 2010, respectively.
- Losses, net of tax, associated with discontinued operations in the
amounts of $1.0 million and $1.4 million in the first and second
quarters of 2010, respectively, and a $2.3 million loss in the fourth
quarter of 2009.
- A reduction in the deferral account rebate liability of $5.0 million
in relation to Decision 2010-638 in the third quarter of 2010 and
charges of $13.5 million for the deferral account rebate in relation
to Decision 2008-1 in the third quarter of 2009.
- A recovery of costs for $10 million relating to the one-time payment
received from Bell Mobility in the third quarter of 2010 from the
comprehensive settlement agreement; as well as costs in relation to
the transition of certain wireless service requirements away from
Bell Mobility and 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 $9.3 million in the
fourth quarter of 2008 for this transition and costs associated with
the AWS spectrum auction.
- 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 $9.0 million in the fourth quarter of
2008.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities
(in millions $) 2010 2009 $ change
-------------------------------------------------------------------------
Q3 118.5 121.2 (2.7)
YTD 322.1 224.4 97.7
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Cash flows from operating activities refer to cash we generate from our
normal business activities.
Cash flows from operating activities were $118.5 million in the third quarter of 2010 as compared to $121.2 million in the third quarter of 2009. For the nine months ended September 30, 2010, cash flows from operating activities totalled $322.1 million, as compared to $224.4 million in the same period in 2009. The $2.7 million decrease in the third quarter of 2010 compared to the same period of 2009 was mainly due to changes in working capital, higher deferred wireless costs, and higher debt charges, partially offset by higher consolidated EBITDA. The increase of $97.7 million for the nine months ended September 30, 2010 was mainly due to a $29.4 million decrease in pension costs in 2010 and a $50 million reduction in the utilization of the accounts receivable securitization program compared to 2009.
Cash flows used in investing activities
(in millions $) 2010 2009 $ change
-------------------------------------------------------------------------
Q3 (79.4) (77.2) (2.2)
YTD (236.5) (204.3) (32.2)
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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.
In the third quarter of 2010, we used $79.4 million of cash for investing activities as compared to $77.2 million in the third quarter of 2009. For the first nine months of 2010, cash flows used in investing activities increased by $32.2 million over the same period in 2009. These increases are primarily due to higher capital expenditures for the deployment of our HSPA network in Manitoba.
Capital expenditures (continuing operations)
(in millions $) 2010 2009 $ change
-------------------------------------------------------------------------
Q3 61.3 67.3 (6.0)
YTD 176.6 186.6 (10.0)
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We continue to allocate our capital to fund our higher growth services and to focus on spending capital prudently. Our capital expenditures from continuing operations in the third quarter of 2010 and first nine months of the year were lower by $6.0 million and $10.0 million, respectively.
Free cash flow
(in millions $) Q3/10 Q3/09 % change YTD/10 YTD/09 % change
-------------------------------------------------------------------------
Free cash flow
(continuing
operations) 56.5 62.3 (9.3) 173.7 190.1 (8.6)
Pension solvency
funding (8.1) (6.0) 35.0 (9.0) (23.5) (61.7)
HSPA & related
billing capital
expenditures (11.4) (6.5) 75.4 (45.7) (14.0) n.m.
Deferral account
rebate 5.0 (13.5) n.m. 5.0 (13.5) n.m.
Restructuring and
other costs (1.7) (9.0) (81.1) (22.5) (27.8) (19.1)
Restructuring
capital expenditures (6.0) (0.6) n.m. (12.2) (1.6) n.m.
Wireless transition
recovery (costs) 10.0 (0.7) n.m. 10.0 (14.4) n.m.
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Consolidated free
cash flow 44.3 26.0 70.4 99.3 95.3 4.2
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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 in the third quarter of 2010 was $56.5 million as compared to $62.3 million in the third quarter last year. This decrease is mainly attributable to lower EBITDA, higher deferred wireless costs, and higher debt charges; partially offset by lower capital expenditures. For the first nine months of 2010, free cash flow from continuing operations was $173.7 million compared to $190.1 million for the same period in 2009. The decrease is primarily due to lower EBITDA and higher debt charges, partially offset by lower capital expenditures.
Consolidated free cash flow was $44.3 million in the third quarter of this year and $99.3 million for the first nine months of 2010 as compared to $26.0 million and $95.3 million in the comparable periods in 2009. Details of the items not included in continuing operations are shown in the preceding table.
Cash flows used in financing activities
(in millions $) 2010 2009 $ change
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Q3 (52.0) (41.6) (10.4)
YTD (135.0) (17.4) (117.6)
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Financing activities refer to actions we undertake to fund our operations
through equity capital and borrowings.
Cash flows used in financing activities totalled $52.0 million in the third quarter of 2010 as compared to cash flow used in financing activities of $41.6 million in the third quarter of 2009. The $10.4 million increase in cash used in financing activities in the third quarter of 2010 was primarily due to the repayment of long-term debt of $11.9 million, partially offset by cash flows from other financing activities.
The year-to-date change is primarily due to $425.0 million of long-term debt issued in 2009 and used to repay maturing long-term debt of $220.0 million and notes payable of $95.0 million.
Credit facilities
utilized at
September 30,
(in millions $) capacity 2010
-------------------------------------------------------------------------
Medium term note program 500.0 200.0
Revolving credit facility 400.0 137.4
Letter of credit facility 150.0 -
Accounts receivable securitization 150.0 -
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Total 1,200.0 337.4
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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 October 16, 2009 for $500.0 million and we utilized $200.0 million of this facility to issue debt in December 2009. We also have a $400.0 million revolving credit facility, of which $150.0 million is available to back-stop our commercial paper program. At September 30, 2010, we utilized $137.4 million of our revolving credit facility for undrawn letters of credit. Of this amount, $110.2 million represents letters of credit issued under the Solvency Funding Relief Regulations enacted in 2006 under the Pension Benefits Standards Act, 1985 (Canada), which permits the extension of pension solvency payments from a five-year amortization period to a 10-year amortization period for our defined benefit pension plans. On September 20, 2010, we established an additional $150 million credit facility which is used solely for the issuance of letters of credit. As at September 30, 2010 this facility was unutilized. In addition to these programs and facilities, we have a $150.0 million accounts receivable securitization program which was unutilized at September 30, 2010.
Capital structure
September 30, December 31,
(in millions $) 2010 2009
-------------------------------------------------------------------------
(Cash and cash equivalents) (70.2) (110.2)
Capital lease obligations, including
current portion 18.2 17.6
Long-term debt, including current portion 1,040.4 1,051.5
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Total debt 988.4 958.9
Shareholders' equity 1,299.3 1,316.9
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Total capitalization 2,287.7 2,275.8
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Debt to capitalization 43.2% 42.1%
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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 43.2% at September 30, 2010 continues to represent financial strength and flexibility.
Credit ratings
-------------------------------------------------------------------------
BBB BBB
S&P - Senior debentures (stable) DBRS - Senior debentures (stable)
R-2
S&P - Commercial paper A-2 DBRS - Commercial paper (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 July 29, 2010, S&P confirmed their credit ratings on our long-term corporate credit and senior unsecured debt at "BBB" and confirmed our commercial paper rating of "A-2". S&P also confirmed its outlook as stable. DBRS confirmed its ratings on January 18, 2010, for our senior debentures as "BBB" and our commercial paper "R-2 (high)". DBRS' outlook remained stable.
Outstanding share data as at October 26, 2010
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:
Shares Number Book value (in millions $)
-------------------------------------------------------------------------
Common 64,732,650 $1,268.6
Stock options:
Weighted average
Options Number exercise price per share
-------------------------------------------------------------------------
Outstanding 3,063,290 $38.68
Exercisable 1,463,479 $41.25
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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 2009 annual MD&A. For additional details, please consult our 2009 annual MD&A, which is available on our website 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 2009 annual MD&A. For additional details, please consult our 2009 annual MD&A, which is available on our website at www.mtsallstream.com.
CHANGES IN ACCOUNTING POLICIES, INCLUDING INITIAL ADOPTION
International financial reporting standards ("IFRS")
The Canadian Accounting Standards Board ("AcSB") adopted a strategic plan in 2006, outlining plans for the convergence of Canadian GAAP with IFRS over a five-year period. In February 2008, the AcSB confirmed January 1, 2011 as the date IFRS will replace current Canadian GAAP for publicly accountable enterprises. As a Canadian reporting issuer, we will begin reporting our financial results under IFRS in the first quarter of 2011, which will include the 2010 comparative period.
Our IFRS changeover plan
We started our IFRS changeover activities in 2008 with the development of a detailed IFRS changeover plan. Our plan consists of four phases, which represent the activities we are undertaking from 2008 until 2011 to ensure we have the systems, business processes and controls in place to report our financial results on an IFRS basis effective January 1, 2011, with comparative information for 2010. A description of each of the four phases of our plan is set out on page 26 of our 2009 Annual Report.
Progress towards completion of our IFRS changeover plan
Our progress to date on key activities of our changeover plan is summarized in the following table:
Key Activities Progress to Date
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Financial - Identify accounting and - We have identified
Statement disclosure differences accounting and disclosure
Preparation between IFRS and our differences.
existing policies. - We evaluated accounting
- Evaluate accounting policy policy alternatives and
options and select IFRS our senior management has
accounting policies, selected initial IFRS
including policy choices accounting policies,
under First-time including IFRS 1 policy
Adoption of International choices. The Audit
Financial Reporting Committee of our Board of
Standards ("IFRS 1"). Directors reviewed these
- Develop IFRS-compliant preliminary selections.
financial statements and We continue to assess
note disclosure. certain accounting
- Quantify the impact of policies and not all
changeover to IFRS. decisions have been made
where choices of
accounting policy are
available.
- We continue to monitor
the effects of new or
amended IFRS.
- We have drafted our
preliminary IFRS
financial statements
format and note
disclosures.
- Quantification of the
impact of our IFRS
changeover is in
progress.
-------------------------------------------------------------------------
Systems and - Identify impacts of IFRS - We completed design and
Processes conversion on IT systems development activities
and accounting and related to IT system and
business processes. process changes resulting
- Design, test, and from differences in
implement IT solutions accounting standards for
and changes to accounting property, plant, and
and business processes. equipment. We tested and
- Design, test, and implement implemented this
a dual reporting system to solution.
maintain parallel records - We identified a dual
throughout 2010. reporting IT solution,
and tested and
implemented this
solution.
- We designed changes to
our accounting and
business processes and
are implementing these
changes during 2010.
- We have implemented
financial planning and
forecasting capabilities
under IFRS.
-------------------------------------------------------------------------
Controls and - Assess impact of - We have assessed the
Procedures changeover on disclosure impact of changeover on
controls and procedures our DC&P and ICFR.
("DC&P") and internal - We are designing and
control over financial implementing new and
reporting ("ICFR"). revised controls
- Design and implement new throughout 2010.
or revised controls, as - We have developed plans
considered necessary, to evaluate the operating
resulting from effectiveness of our DC&P
implementation of ongoing and ICFR.
IFRS accounting policies
and our one-time
transition adjustments.
- Evaluate the operating
effectiveness of new and
revised DC&P and ICFR for
certification requirements
in 2010 and 2011.
-------------------------------------------------------------------------
Communication - Communicate progress of - We provide updates on our
and Training IFRS changeover plan and changeover plan and
impacts of changeover to related impacts in our
internal and external MD&A on an ongoing basis.
stakeholders. - We provide regular
- Provide specific training updates to the Audit
to employees affected by Committee of our Board of
our IFRS changeover. Directors, our IFRS
- Provide general IFRS Steering Committee and
training to finance senior management on the
employees. progress made on our IFRS
changeover plan.
- We have completed
detailed training for
employees involved with
our IFRS changeover.
-------------------------------------------------------------------------
Accounting policies under IFRS and first-time adoption of IFRS
We have identified certain differences between Canadian GAAP and IFRS that impact our consolidated financial statements. The key areas where we expect changes in our accounting policies and the significant optional exemptions we expect to apply are set out on pages 26 to 27 of our 2009 Annual Report. We continue to assess certain accounting policies and not all decisions have been made where choices of accounting policy are available. Completion of these assessments may affect our accounting policy selections. The differences in the preliminary accounting policies we have identified are 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 that could affect the differences we have currently identified. Changes in accounting standards and our assessments of the estimated impacts may affect our final accounting policy selection. We have activities underway to quantify the financial impacts of the differences we have currently identified, and while the financial impacts may be material, we expect them to be similar to those of our peers. We expect to provide further information regarding the quantification of the impacts in the fourth quarter of 2010.
OUR REGULATORY ENVIRONMENT
The telecommunications and broadcast industries in which we operate are federally regulated pursuant to both the Telecommunications Act and the Broadcasting Act. The primary regulatory agency we are subject to is the CRTC. The Government of Canada ("the Government") through the Departments of Industry and Canadian Heritage, exercises legislative oversight of the CRTC. We are subject to policy decisions taken by the Government from time to time as well as any amendments to applicable legislation or regulatory instruments. We operate as an ILEC in Manitoba and as a competitive local exchange carrier outside of Manitoba. We also operate as a licensed broadcasting distribution undertaking ("BDU") in parts of Manitoba, including Winnipeg and the surrounding area. The following are significant updates to the Regulatory Environment sections described in our 2009 annual MD&A, as well as our first and second quarter 2010 interim MD&As, which are available on our website at www.mtsallstream.com.
Broadcasting policy
The reference to the Federal Court of Appeal, described in our first quarter 2010 interim MD&A, to determine whether the CRTC has authority to require that cable companies pay broadcasters a fee for the carriage of local over the air signals, was heard on September 13, 2010. The structure of the industry has changed dramatically since the issue of fee for carriage first came into prominence, with the larger BDUs now owning or in the process of acquiring the major broadcasters. Despite this change the position put forth by the larger BDUs at the Federal Court of Appeal continued to advocate that imposing a fee for carriage for over the air signals is beyond the jurisdiction of the CRTC. The Federal Court of Appeal is expected to issue a decision on this matter next year.
On June 7, 2010, the Federal Court of Appeal determined that Internet service providers are not acting as BDUs and are not subject to the Broadcasting Act when they provide Internet access, which includes broadcasting content via the Internet. On September 30, 2010 opposing parties sought leave to appeal this decision to the Supreme Court of Canada. We agree with the Federal Court of Appeal's decision that Internet service providers are not BDUs and will intervene in opposition to the leave and, if necessary, the appeal.
Telecommunications Policy
Essential Facilities
On August 30, 2010 the CRTC issued Decision 2010 - 632 mandating the incumbent telephone and cable companies to offer their wholesale DSL access service to competitors on a technologically neutral basis and at the same speed these incumbents make available to retail customers. The decision was a positive one and included the Company's views regarding the importance of wholesale access, especially in the business market.
As discussed in the 2009 MD&A, the proceeding was initiated in December 2009 by the CRTC as a consequence of the Federal Cabinet's request that the CRTC re-visit an earlier decision mandating matching speeds that was appealed to the Government by Bell Canada. The CRTC found, despite Bell Canada's assertions to the contrary, that competition drives investment and innovation and that wholesale access to the incumbents' underlying facilities and services is necessary to ensure that there is sufficient competition. The CRTC, through the mark-up allowed on the higher-speed wholesale DSL access services, recognized that the increased risk associated with incremental investment in fibre is needed to bring higher speed Internet access services to customers.
The Cabinet has 90 days from the date of the CRTC decision to modify the decision or to give further direction to the CRTC in this regard.
Deferral Account
On August 31, 2010 the CRTC issued Decision 2010-637 approving our plan to use the approximately $21 million funds remaining in the deferral account to roll-out broadband to 16 rural communities and to credit the remaining deferral monies to the accounts of residential urban customers in Manitoba. This decision brings to an end the process associated with the Company's deferral account. As noted in our 2009 MD&A, the costs associated with the broadband roll-out and residential customer credit had been estimated and we had accrued for them.
RISKS AND UNCERTAINTIES
Our risks and uncertainties remain substantially unchanged from those that were disclosed in our 2009 annual MD&A, as well as our first and second quarter 2010 interim MD&As. For additional details, please consult these documents; they are available on our website www.mtsallstream.com.
CONTROLS AND PROCEDURES
Internal control over financial reporting
There have been no changes in our internal control over financial reporting during our most recent interim period ended September 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
FOURTH QUARTER DIVIDEND
On November 3, 2010, the Board of Directors of MTS Allstream declared a quarterly cash dividend of $0.425 per share. The fourth quarter dividend is payable on January 14, 2011 to shareholders of record at the close of business on December 15, 2010.
The fourth quarter dividend is designated as an "eligible" dividend under the Income Tax Act (Canada) and any corresponding provincial legislation. Under this legislation, individuals resident in Canada may be entitled to enhanced dividend tax credits that reduce income tax otherwise payable.
Notes:
1. Supplementary financial information is available in the Investors
section of the MTS Allstream website at www.mtsallstream.com.
2. MTS Allstream's third quarter 2010 conference call with the
investment community is scheduled for 9:30 a.m. (Eastern time)
Thursday, November 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 Allstream website
(www.mtsallstream.com). A replay of the conference call will be
available until midnight November 18, 2010 and can be accessed by
dialing 1-800-642-1687 or 1-416-849-0833 (access code: 14612075).
The audio webcast will be archived on MTS Allstream's website.
MANITOBA TELECOM SERVICES INC.
CONSOLIDATED STATEMENTS OF NET INCOME AND
COMPREHENSIVE INCOME
(unaudited)
For the periods
ended September 30 Three months ended Nine months ended
-------------------------------------------------------------------------
(in millions, except
earnings per share) 2010 2009 2010 2009
-------------------------------------------------------------------------
Operating revenue $ 451.3 $ 438.8 $ 1,336.4 $ 1,361.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating expenses
Operations 297.2 294.6 887.7 894.4
-------------------------------------------------------------------------
Restructuring and
transition (Note 2) (8.3) 9.7 12.5 42.2
-------------------------------------------------------------------------
Amortization 85.1 82.0 250.4 244.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
374.0 386.3 1,150.6 1,181.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating income 77.3 52.5 185.8 180.0
-------------------------------------------------------------------------
Other income 1.1 2.6 4.4 5.9
-------------------------------------------------------------------------
Debt charges (17.0) (15.1) (51.9) (43.9)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income before income taxes 61.4 40.0 138.3 142.0
-------------------------------------------------------------------------
Income tax expense
Current - (2.0) 1.4 (1.8)
-------------------------------------------------------------------------
Future 18.4 13.9 42.9 48.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
18.4 11.9 44.3 47.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income before discontinued
operations 43.0 28.1 94.0 94.9
-------------------------------------------------------------------------
(Loss) income from
discontinued operations,
net of tax (Note 3) - (0.2) (2.4) 0.1
-------------------------------------------------------------------------
Net income and comprehensive
income for the period $ 43.0 $ 27.9 $ 91.6 $ 95.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted earnings
per share (Note 5)
Income before
discontinued operations $ 0.66 $ 0.43 $ 1.45 $ 1.47
-------------------------------------------------------------------------
Net income $ 0.66 $ 0.43 $ 1.42 $ 1.47
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MANITOBA TELECOM SERVICES INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(unaudited)
For the periods
ended September 30 Three months ended Nine months ended
-------------------------------------------------------------------------
(in millions) 2010 2009 2010 2009
-------------------------------------------------------------------------
Retained earnings (deficit),
beginning of period $ (5.1) $ 79.9 $ 30.4 $ 96.8
-------------------------------------------------------------------------
Net income for the period 43.0 27.9 91.6 95.0
-------------------------------------------------------------------------
Dividends declared (27.6) (42.1) (111.7) (126.1)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Retained earnings, end
of period $ 10.3 $ 65.7 $ 10.3 $ 65.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MANITOBA TELECOM SERVICES INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30, December 31,
2010 2009
-------------------------------------------------------------------------
(in millions)
Assets
Current assets
Cash and cash equivalents $ 70.2 $ 110.2
-------------------------------------------------------------------------
Accounts receivable 169.3 166.2
-------------------------------------------------------------------------
Future income taxes 79.2 79.0
-------------------------------------------------------------------------
Other current assets 67.5 58.0
-------------------------------------------------------------------------
Assets held for sale (Note 3) - 18.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
386.2 432.0
Capital assets
Property, plant and equipment 3,897.4 3,749.4
-------------------------------------------------------------------------
Intangible assets 557.1 505.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
4,454.5 4,254.5
-------------------------------------------------------------------------
Accumulated amortization 2,792.4 2,611.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
1,662.1 1,643.3
Other assets 436.9 417.2
-------------------------------------------------------------------------
Future income taxes 319.8 362.1
-------------------------------------------------------------------------
Goodwill 41.8 41.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$ 2,846.8 $ 2,896.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities
Accounts payable and accrued liabilities $ 332.4 $ 349.1
-------------------------------------------------------------------------
Advance billings and payments 55.9 52.5
-------------------------------------------------------------------------
Current portion of long-term debt 220.0 11.9
-------------------------------------------------------------------------
Current portion of capital lease obligations 6.8 4.2
-------------------------------------------------------------------------
Liabilities related to assets held for
sale (Note 3) - 9.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
615.1 426.7
Long-term debt 820.4 1,039.6
-------------------------------------------------------------------------
Long-term portion of capital lease obligations 11.4 13.4
-------------------------------------------------------------------------
Deferred employee benefits 44.3 43.1
-------------------------------------------------------------------------
Other long-term liabilities 55.3 55.5
-------------------------------------------------------------------------
Future income taxes 1.0 1.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
1,547.5 1,579.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Shareholders' equity
Share capital (Note 6) 1,268.6 1,266.9
-------------------------------------------------------------------------
Contributed surplus 20.4 19.6
-------------------------------------------------------------------------
Retained earnings 10.3 30.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
1,299.3 1,316.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$ 2,846.8 $ 2,896.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MANITOBA TELECOM SERVICES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the periods
ended September 30 Three months ended Nine months ended
-------------------------------------------------------------------------
(in millions) 2010 2009 2010 2009
-------------------------------------------------------------------------
Cash flows from operating
activities
Income before discontinued
operations $ 43.0 $ 28.1 $ 94.0 $ 94.9
-------------------------------------------------------------------------
Add (deduct) items not
affecting cash
Amortization 85.1 82.0 250.4 244.8
-------------------------------------------------------------------------
Future income taxes 18.4 13.9 42.9 48.9
-------------------------------------------------------------------------
Gain on sale of
intangible assets - - - (3.1)
-------------------------------------------------------------------------
Deferred wireless costs (12.4) (10.0) (33.1) (35.4)
-------------------------------------------------------------------------
Pension funding and net
pension credit (11.5) (15.1) (19.3) (48.7)
-------------------------------------------------------------------------
Other, net 0.4 1.5 (1.1) (3.9)
-------------------------------------------------------------------------
Changes in non-cash working
capital (4.5) 20.8 (11.7) (73.1)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash flows from operating
activities 118.5 121.2 322.1 224.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash flows from investing
activities
Capital expenditures, net (78.7) (74.4) (234.5) (202.2)
-------------------------------------------------------------------------
Acquisition - (2.1) - (2.1)
-------------------------------------------------------------------------
Net proceeds from sale of
intangible assets - - - 1.4
-------------------------------------------------------------------------
Other, net (0.7) (0.7) (2.0) (1.4)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash flows used in
investing activities (79.4) (77.2) (236.5) (204.3)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash flows from financing
activities
Dividends paid (42.1) (42.1) (126.2) (126.1)
-------------------------------------------------------------------------
Issuance of long-term debt - - - 425.0
-------------------------------------------------------------------------
Repayment of long-term debt (11.9) - (11.9) (220.0)
-------------------------------------------------------------------------
Repayment of notes payable,
net - - - (95.0)
-------------------------------------------------------------------------
Issuance of share capital
(Note 6) 1.4 0.1 1.7 0.9
-------------------------------------------------------------------------
Other, net 0.6 0.4 1.4 (2.2)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash flows used in
financing activities (52.0) (41.6) (135.0) (17.4)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash flows before
discontinued operations (12.9) 2.4 (49.4) 2.7
-------------------------------------------------------------------------
Cash flows from (used in)
discontinued operations
(Note 3) - (0.4) 9.4 (0.2)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Change in cash and cash
equivalents (12.9) 2.0 (40.0) 2.5
-------------------------------------------------------------------------
Cash and cash equivalents,
beginning of period 83.1 7.0 110.2 6.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 70.2 $ 9.0 $ 70.2 $ 9.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MANITOBA TELECOM SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
For the nine months ended September 30, 2010 and 2009 (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, 2009.
These interim consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial
statements for the year ended December 31, 2009.
2. RESTRUCTURING AND TRANSITION
The Company recorded net restructuring and transition expenses
(recoveries) as follows:
---------------------------------------------------------------------
Three months ended Nine months ended
---------------------------------------------------------------------
2010 2009 2010 2009
---------------------------------------------------------------------
Restructuring
---------------------------------------------------------------------
Workforce (0.6) 2.2 9.0 10.3
---------------------------------------------------------------------
Other 2.3 6.8 13.5 17.5
---------------------------------------------------------------------
---------------------------------------------------------------------
1.7 9.0 22.5 27.8
---------------------------------------------------------------------
Wireless transition (10.0) 0.7 (10.0) 14.4
---------------------------------------------------------------------
---------------------------------------------------------------------
(8.3) 9.7 12.5 42.2
---------------------------------------------------------------------
---------------------------------------------------------------------
The liability for restructuring costs as at September 30, 2010 is as
follows:
---------------------------------------------------------------------
Balance December 31, 2009 13.9
---------------------------------------------------------------------
2010 restructuring costs, net of a $1.4 million
reversal of previously recorded costs 22.5
---------------------------------------------------------------------
Less:
---------------------------------------------------------------------
Cash payments (24.7)
---------------------------------------------------------------------
Adjustments to existing real estate facility
consolidation reserves (1.2)
---------------------------------------------------------------------
Balance September 30, 2010 10.5
---------------------------------------------------------------------
---------------------------------------------------------------------
Restructuring activities are aimed at achieving further process
improvements and overall expense reductions, and include costs for
severance and other employee-related expenses that supported
workforce reduction initiatives undertaken throughout the period,
real estate facility consolidation charges, as well as costs to
review and improve efficiencies in current processes. Also included
are other non-recurring amounts associated with the high-speed packet
access deployment and related billing implementation, as well as
certain legal costs to appeal a court decision relating to one of the
Company's pension plans.
Wireless transition includes costs of transitioning certain wireless
service requirements away from Bell Mobility to new suppliers and to
the Company's wireless platform. The current year's wireless
transition recovery of $10.0 million represents a one-time cash
payment received as part of a comprehensive settlement agreement with
Bell Mobility.
3. DISCONTINUED OPERATIONS
On January 31, 2010, the Company sold the majority of its non-
telecommunications information technology consulting group, which is
a line of business within the Allstream unit, to
PricewaterhouseCoopers Canada ("PWC") for a preliminary purchase
price of $14.2 million. The initial purchase price review period of
120 days after the closing date of January 31, 2010 has been extended
by the Company and PWC to finalize the purchase price. The Company
expects to finalize the purchase price in the fourth quarter. 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:
2010 2009
---------------------------------------------------------------------
Revenues 2.9 39.4
---------------------------------------------------------------------
(Loss) income from discontinued operations
before income taxes (1.1) 0.2
---------------------------------------------------------------------
Loss on sale of discontinued operations
before income taxes (2.3) -
---------------------------------------------------------------------
Future income tax recovery (expense) related
to discontinued operations 1.0 (0.1)
---------------------------------------------------------------------
(Loss) income from discontinued operations,
net of tax (2.4) 0.1
---------------------------------------------------------------------
---------------------------------------------------------------------
The following table provides further information on the composition
of assets and liabilities held for sale:
September 30, December 31,
2010 2009
---------------------------------------------------------------------
Assets
---------------------------------------------------------------------
Current Assets - 17.7
---------------------------------------------------------------------
Property, plant and equipment, net - 0.9
---------------------------------------------------------------------
Assets held for sale - 18.6
---------------------------------------------------------------------
---------------------------------------------------------------------
Liabilities
---------------------------------------------------------------------
Current liabilities - 9.0
---------------------------------------------------------------------
Liabilities related to assets held for sale - 9.0
---------------------------------------------------------------------
---------------------------------------------------------------------
The following table provides further information on cash flows
relating to discontinued operations:
2010 2009
---------------------------------------------------------------------
Cash flows used in operating activities (1.1) (0.1)
---------------------------------------------------------------------
Cash flows from (used in) investing activities 10.5 (0.1)
---------------------------------------------------------------------
Cash flows from (used in) discontinued
operations 9.4 (0.2)
---------------------------------------------------------------------
---------------------------------------------------------------------
4. NOTES PAYABLE
As at September 30, 2010, the Company had a $400 million bank credit
facility with a syndicate of financial institutions which is used for
cash management purposes, the issuance of letters of credit and to
support the Company's $150 million commercial paper program. As at
September 30, 2010, the Company had $137.4 million in undrawn letters
of credit outstanding under this facility. The Company also has a
$150 million credit facility with a financial institution which is
used solely for the issuance of letters of credit. As at
September 30, 2010, the Company had not utilized this facility. The
Company did not pay short-term interest costs for the nine month
period ended September 30, 2010.
5. EARNINGS PER SHARE RECONCILIATION
The following table provides a reconciliation of the information used
to calculate basic and diluted earnings per share:
2010 2009
---------------------------------------------------------------------
Net income - basic and diluted
---------------------------------------------------------------------
Income before discontinued operations 94.0 94.9
---------------------------------------------------------------------
(Loss) income from discontinued operations,
net of tax (2.4) 0.1
---------------------------------------------------------------------
Net income 91.6 95.0
---------------------------------------------------------------------
---------------------------------------------------------------------
Weighted average shares outstanding (in millions)
---------------------------------------------------------------------
Weighted average number of shares outstanding
- basic and diluted 64.7 64.7
---------------------------------------------------------------------
---------------------------------------------------------------------
Earnings per share - basic and diluted ($)
---------------------------------------------------------------------
Income before discontinued operations 1.45 1.47
---------------------------------------------------------------------
Loss from discontinued operations, net of tax (0.03) -
---------------------------------------------------------------------
---------------------------------------------------------------------
Net income 1.42 1.47
---------------------------------------------------------------------
---------------------------------------------------------------------
6. SHARE CAPITAL
As at September 30, 2010, share capital consists of 64,732,650 issued
and outstanding Common Shares (December 31, 2009 - 64,667,817).
During 2010, the Company established a Dividend Reinvestment Plan and
Share Purchase Plan ("the Plan") which enables eligible holders of
its Common Shares to automatically reinvest their regular quarterly
dividends in additional Common Shares of the Company. Participants in
the Plan also have the option to make cash payments to purchase
additional Common Shares. The shares are issued from treasury at a
discount of 3% from the average market price. During the nine months
ended September 30, 2010, 53,833 Common Shares were issued as a
result of participation in the Plan at a cost of $1.4 million, which
was credited to share capital.
During the nine months ended September 30, 2010, 11,000 stock options
to purchase Common Shares were exercised for cash consideration of
$0.3 million, which was credited to share capital.
7. EMPLOYEE FUTURE BENEFITS
The Company's total net benefit expense for all of its defined
benefit and defined contribution pension plans, supplemental pension
arrangements, and other non-pension employee future benefits for the
three and nine months ended September 30, 2010 is $3.2 million and
$9.6 million respectively.
8. SEGMENTED INFORMATION
On January 1, 2010, the Company announced changes to its
organizational structure. Under this new structure, the Company
renamed its reportable operating segments as the MTS unit and the
Allstream unit. The MTS unit provides a full range of wireless,
broadband Internet and data, digital television, wireline voice
services, and security and alarm monitoring services to residential
and business customers in Manitoba. The Allstream unit provides
Internet protocol-based communications, unified communications, voice
and data connectivity, and security services to business customers in
Canada. Accordingly, segmented information for 2010 and 2009 is
provided under this new basis of segmentation.
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 table provides further segmented information:
-------------------------------------------------------------------------
Three months ended September 30
-------------------------------------------------------------------------
Allstream
MTS unit unit Other Total
---------------------------------------------------------
2010 2009 2010 2009 2010 2009 2010 2009
---------------------------------------------------------
Operating revenue
External 242.3 221.9 209.0 216.9 - - 451.3 438.8
-------------------------------------------------------------------------
Internal - 0.2 - - 9.5 8.3 9.5 8.5
-------------------------------------------------------------------------
EBITDA 134.9 116.4 27.2 19.1 0.3 (1.0) 162.4 134.5
-------------------------------------------------------------------------
Restructuring
and transition (9.2) 0.1 (0.1) 8.6 1.0 1.0 (8.3) 9.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nine months ended September 30
-------------------------------------------------------------------------
Allstream
MTS unit unit Other Total
---------------------------------------------------------
2010 2009 2010 2009 2010 2009 2010 2009
---------------------------------------------------------
Operating revenue
External 703.0 690.2 633.4 671.2 - - 1,336.4 1,361.4
-------------------------------------------------------------------------
Internal 0.2 0.4 - - 28.5 26.4 28.7 26.8
-------------------------------------------------------------------------
EBITDA 370.5 360.4 66.3 66.3 (0.6) (1.9) 436.2 424.8
-------------------------------------------------------------------------
Restructuring
and transition (2.1) 13.8 13.4 26.1 1.2 2.3 12.5 42.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Reconciliation to consolidated net income is as follows:
---------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
---------------------------------------------------------------------
2010 2009 2010 2009
---------------------------------------------------------------------
Total EBITDA 162.4 134.5 436.2 424.8
---------------------------------------------------------------------
Amortization (85.1) (82.0) (250.4) (244.8)
---------------------------------------------------------------------
Other income 1.1 2.6 4.4 5.9
---------------------------------------------------------------------
Debt charges (17.0) (15.1) (51.9) (43.9)
---------------------------------------------------------------------
Income tax expense (18.4) (11.9) (44.3) (47.1)
---------------------------------------------------------------------
---------------------------------------------------------------------
Income before discontinued
operations 43.0 28.1 94.0 94.9
---------------------------------------------------------------------
(Loss) income from
discontinued operations - (0.2) (2.4) 0.1
---------------------------------------------------------------------
---------------------------------------------------------------------
43.0 27.9 91.6 95.0
---------------------------------------------------------------------
---------------------------------------------------------------------
9. COMMITMENTS, GUARANTEES AND CONTINGENCIES
Commitments
On August 31, 2010, the Canadian Radio-television and
Telecommunications Commission ("CRTC") issued Follow-up to Telecom
Decision 2008-1 - Proposal by MTS Allstream Inc. to dispose of the
funds remaining in its deferral account, Telecom Decision CRTC 2010-
638. As a result of this decision, the estimated balance of the
Company's deferral account is approximately $21 million and the
Company's liability relating to customer rebates is $8.5 million.
10. COMPARATIVE FIGURES
The prior period figures have been reclassified when necessary to
conform to the current period'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 Communications, Manitoba Telecom Services Inc., (416) 345-3576 or (204) 941-8576, [email protected]
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