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2 FOCUSED: DELIVERING RESULTS AND INVESTING FOR THE FUTURE MTS Allstream, one of Canada's leading national communication companies, provides innovative services and solutions for the way Canadians live and work today. With more than 100 years of industry experience and success, our business today is driven by two operating divisions, each strong brands in their own right: MTS is the market leader in Manitoba, and Allstream is an innovative competitor in business markets across Canada. Our common shares are listed on Toronto Stock Exchange (trading symbol: MBT). PIERRE BLOUIN CEO, MTS ALLSTREAM Our strategy is delivering strong results. By focusing Allstream on IP and MTS on unique multi-product bundles, and by expanding our networks, we are making our Company stronger for the future. We expect another year of solid results in AT A GLANCE 1,918,130 customer connections nationally 5,500 employees across Canada 30,000+ KM national IP fibre network 11 consecutive years on the Jantzi Social Index for leadership in social responsibility $330 MILLION unique tax asset 2011 HIGHLIGHTS 10% TOTAL SHAREHOLDER RETURN MET 2011 IMPROVED FINANCIAL GUIDANCE ACROSS ALL METRICS EARNINGS PER SHARE INCREASED BY 17% EBITDA GREW BY 5% FREE CASH FLOW WAS UP BY MORE THAN $95 MILLION OVER $28 MILLION WAS ACHIEVED IN ANNUALIZED COST SAVINGS

3 FOCUSED: LEADING THE MARKET IN MANITOBA THROUGH INNOVATION AND INVESTMENT IN ADVANCED TECHNOLOGY MTS is the leading full-service communications provider for residential and business customers across Manitoba. One of the most innovative and profitable regional providers in North America, MTS operates advanced wireline and wireless networks offering the widest service coverage and richest bundling capabilities in Manitoba. MTS benefits from exceptional brand recognition, excellent distribution channels, a robust infrastructure, the most innovative products, and has a skilled and experienced workforce with a long track record of success in serving Manitoba customers. KELVIN SHEPHERD PRESIDENT, MTS Our continued focus on innovation and investment in broadband and wireless services combined with our deep understanding of the market reinforces our strength in Manitoba. Today we have unmatched capabilities to meet the total communications needs of our customers at home, at work and on the move. AT A GLANCE SERVICES 4G wireless High-speed Internet Television Home phone Home security FOUR-SERVICE BUNDLE unique to MTS in Manitoba 496,432 wireless customers in Manitoba 2011 HIGHLIGHTS REVENUES INCREASED BY 2% NUMBER OF BUNDLED CUSTOMERS GREW BY 5% WIRELESS REVENUES INCREASED BY 9% INTERNET REVENUES WERE UP 7% TELEVISION REVENUES WERE UP 19% 188,946 high-speed Internet customers in Manitoba 95,476 TV customers in Manitoba

4 FOCUSED: DRIVING IP GROWTH IN CANADA S BUSINESS MARKET Allstream is the only national communications provider that works exclusively with business customers. A Canadian leader in innovative IP-based communications solutions, Allstream leverages its nationwide high-performance fibre network to help businesses of all sizes unify and improve the many ways in which they connect with their employees, customers and partners. As a trusted advisor, Allstream is focused on helping customers get ready for the future by improving their network performance and workforce productivity while managing costs better. DEAN PREVOST PRESIDENT, ALLSTREAM Looking ahead, Allstream has strong momentum. Our 2011 results prove we re on the right track, and in 2012 we expect growth in IP by focusing on our converged IP portfolio and growing our share of an expanding market for these services. AT A GLANCE IP-BASED SOLUTIONS IP communications Managed IP network services Unified communications Cloud enablement Data and security management 2,388 fibre-fed buildings 50,000+ business customers INDUSTRY-LEADING customer satisfaction 2011 HIGHLIGHTS EBITDA CLIMBED BY 34% CONVERGED IP REVENUES GREW 9% 299 BUILDINGS ADDED TO IP FIBRE NETWORK, AN INCREASE OF 14% IP SALES WERE UP 21% FREE CASH FLOW INCREASED BY $55 MILLION

5 CONTENTS 2 FINANCIAL HIGHLIGHTS 4 CHAIR S MESSAGE TO SHAREHOLDERS 5 CEO S MESSAGE TO SHAREHOLDERS 7 MANAGEMENT S DISCUSSION AND ANALYSIS 9 Overview of Our Business in Review 13 Discussion of Operations 21 Liquidity and Capital Resources Financial Outlook 25 Critical Accounting Estimates and Assumptions 27 Changes in Accounting Policies 27 Non-IFRS Measures of Performance 27 Risks and Uncertainties 37 Our Regulatory Environment 39 Controls and Procedures 40 Social and Environmental Responsibility 43 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES 43 Responsibility for Financial Reporting 44 Independent Auditor s Report 45 Consolidated Statements 49 Notes to Consolidated Financial Statements 85 Five Years in Review 86 BOARD OF DIRECTORS 87 OFFICERS OF THE COMPANY AND EXECUTIVE COMMITTEE 88 INVESTOR INFORMATION

6 FINANCIAL HIGHLIGHTS (in millions $, except EPS and capital expenditures) % change Revenues 1, ,782.6 (1.0%) EBITDA % EPS 2 $2.55 $ % Free cash flow % Capital expenditures/revenues 16.3% 20.3% 1 EBITDA (earnings before interest, taxes, depreciation and amortization, and other income (expense)) is a non-ifrs measure of performance. See the section titled Non-IFRS measures of performance for further information. 2 Earnings per share ( EPS ) is based on weighted average shares outstanding of 65.5 million and 64.7 million for the twelve months ended December 31, 2011 and December 31, 2010, respectively. The increase in the number of weighted shares outstanding is mainly due to participation in our dividend reinvestment plan. 3 We define free cash flow as cash flows from operating activities, less capital expenditures, and excluding changes in working capital. See the section titled Non-IFRS measures of performance for further information. Consolidated revenues* (in millions $) (in millions $) Consolidated EBITDA* 1,864 1,873 1,815 1,783 1, MAR MAR Earnings per share* 2011 MTS Allstream revenue mix $2.61 $2.23 $2.18 $ % 20% $ % 25% Wireless MAR % Broadband & converged IP UC security & monitoring Local access 14MAR LD, legacy data & other * 2007, 2008, 2009 prepared under previous Canadian generally accepted accounting principles (GAAP); 2010, 2011 prepared under International Financial Reporting Standards (IFRS). 2 Manitoba Telecom Services Inc. Annual Report 2011

7 FINANCIAL HIGHLIGHTS FOCUSED ON OUR STRATEGIC GROWTH SERVICES MTS MTS Wireless revenues* High-speed Internet revenues* (in millions $) (in millions $) MAR MAR MTS Allstream IPTV revenues* Converged IP revenues* (in millions $) (in millions $) MAR MAR Annual Report This document discusses the financial results and business operations of Manitoba Telecom Services Inc. (TSX:MBT), which includes its principal operating subsidiary, MTS Allstream Inc. Within this document we may also refer to ourselves as the Company, or MTS Allstream. Non-IFRS measures of performance In this Annual Report, we provide information concerning EBITDA and free cash flow because we believe investors use them as measures of our financial performance. These measures do not have a standardized meaning as prescribed by IFRS and are not necessarily comparable to similarly titled measures used by other companies. Regarding forward-looking statements Our 2011 Annual Report includes forward-looking statements and information (collectively, the statements ) about our corporate direction, business opportunities, operations, financial objectives, future financial results and performance, future cash flows and distributions to shareholders that are subject to risks, uncertainties and assumptions. As a consequence, actual results in the future may differ materially from any conclusion, forecast or projection in such forward-looking statements. Therefore, forward-looking statements should be considered carefully and undue reliance should not be placed on them. Examples of statements that constitute 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. Please note that forward-looking statements reflect our expectations as at February 10, We disclaim any intention or obligation to update or revise any forwardlooking statements, whether as a result of new information, future events or otherwise except as required by law. Additional information relating to our company, including our Annual Information Form, is available on SEDAR at Unless otherwise stated, all amounts expressed in this report are in Canadian dollars. * 2007, 2008, 2009 prepared under previous GAAP; 2010, 2011 prepared under IFRS. Manitoba Telecom Services Inc. Annual Report

8 CHAIR S MESSAGE TO SHAREHOLDERS 25MAR David Leith Chair Dear fellow shareholders, In 2011, MTS Allstream delivered improved business performance and solid financial results, endorsing the Board s view that the Company is well-positioned today to compete successfully in a changing Canadian telecommunications industry. In Manitoba, our MTS business continues to be the leader in both residential and business markets. Nationally, our Allstream business delivered improved results in business markets across Canada, and focused on the promising opportunity in IP communications. On behalf of the Board and the Company, I would like to express my appreciation to the management team led by Pierre Blouin and to all our employees for their dedication, hard work and focus in making 2011 a year of progress for MTS Allstream. Their success is notable, considering the uncertain and, at times, difficult economy of the past several years. Looking ahead, the Board understands that the Canadian telecommunications industry is capital intensive, fiercely competitive and evolving rapidly in response to rising customer expectations for service and value. In this environment, the Company is moving forward with a strong balance sheet and solid cash flows to invest strategically in our businesses, an experienced and very capable workforce, and a services portfolio that is second to none in the industry. We are also welcoming a recent announcement by the federal government to support innovation in Canada s telecommunications sector by lifting some restrictions on foreign investment. This announcement means greater access to capital and the potential to open up new opportunities, particularly for Allstream. We believe that, once this legislation is passed, this change will make your company even stronger. Earlier this year, we announced a favourable court decision in respect of a lawsuit regarding one of our pension plans in Manitoba, in which the Manitoba Court of Appeal confirmed our long-standing position that we have always fully complied with all of our legal obligations. This decision reflects our commitment to our pension plans. In terms of Board governance, in recent years we have focused on initiatives that support our commitment to best practices. Last year, we adopted our say on pay program that reflects our philosophy of giving our shareholders a forum for input on our compensation practices. It s one reason, I believe, the Company was honoured to receive the 2011 Governance Gavel Award by the Canadian Coalition for Good Governance for our disclosure practices and our approach to executive compensation. My own perspective on governance is that corporate boards, in addition to providing oversight and decision-making counsel for management, have a responsibility to be actively engaged in shaping strategic direction and alternatives. In this regard, I am proud of the dedication and commitment of our Board members in serving the best interests of the Company and all our stakeholders. Donald H. Penny will retire from the Board effective at our AGM on May 10, 2012, after over 15 years of service having reached the mandatory retirement age of our Directors. Don served most notably as the Chair of the Audit Committee, a responsibility he performed tirelessly and with great competence. On behalf of the Board, I would like to thank Don for his valued contributions to the Board and the Company over many years. While we will miss his sound counsel and wisdom, we wish him well in the future. I would emphasize in closing that the Board views the strategic direction of the Company to be on sound footing. Given our 2011 results and outlook for this year, we believe the Company is focused, executing proven strategies and has turned the corner on financial performance, anchoring the foundation of our business for continuing to deliver attractive shareholder returns. Sincerely, 16FEB David Leith Chair March 26, Manitoba Telecom Services Inc. Annual Report 2011

9 CEO S MESSAGE TO SHAREHOLDERS 15MAR Pierre Blouin Chief Executive Officer Dear fellow shareholders, 2011 was a good year for our Company. We delivered significant year-over-year growth in EBITDA and free cash flow, driven by a solid increase in revenues for each of our strategic services wireless, high-speed Internet, television and nationally, converged IP. We also reduced our annualized operating costs by over $28 million demonstrating again our ability to improve our efficiency year after year. This good performance is the result of our focus on executing the clear strategies that we put in place a few years ago. For MTS, that strategy is leading the Manitoba market for telecommunications services and for Allstream, it is focusing on its IP suite of products across Canada. Our focus for each division in 2012 remains the same: we will continue to execute each of these strategies and support them with key investments to solidly position MTS Allstream for the future. Allstream focused on driving IP growth in Canada s business market Allstream is focused on executing its strategy of winning high-margin IP revenues from business customers across Canada connected to its fibre network, while exiting its lower-margin legacy services and transitioning those customers to IP-based services. The execution of this strategy has been nothing short of transformational for Allstream. After years of restructuring, Allstream delivered in 2011 IP sales growth of 21%, a 34% year-over-year increase in EBITDA and improved its free cash flow by $55 million. This is solid evidence that our strategy is working. To enable more IP growth, we added 299 buildings to our national IP fibre network, bringing the total number of fibre-fed buildings on the Allstream network to 2,388 across Canada. We expect this positive momentum to continue in 2012 by maintaining our IP focus and continuing to enhance our customer experience. We are doing this by implementing unique tools to help our sales force better serve and support our customers. MTS focused on leading the market in Manitoba through innovation and state-of-the-art technology MTS is focused on extending its lead in the Manitoba market. MTS has exceptional brand recognition, the most extensive wireless and wireline footprint, strong retail channels with nearly 100 retail outlets and unmatched bundling capabilities. As well, in 2011, we invested $108 million to strategically expand MTS wireless and broadband networks across Manitoba. This strategy is paying off. In 2011, MTS achieved strong subscriber and revenue growth in each of its strategic services. Revenues and average revenue per customer from wireless, high-speed Internet and television services all grew strongly, such as 19% growth for television revenues. Throughout the year, MTS achieved a number of exciting milestones. These include launching MTS s 4G wireless network, expanding our wireless handset line-up to include the iphone, and deploying state-of-the-art fibre-to-thehome technology to the communities of Dauphin and Steinbach. We were named the best wireless provider in a survey conducted by a major newspaper in Winnipeg and also achieved leading national customer retention. All of our employees are working hard to improve our customer experience and we plan to maintain our leading product offerings by continuing to leverage our unique four-service bundle. MTS is the only service provider in Manitoba able to offer such extensive and flexible bundles across the province. Building on this strong foundation, MTS expects to introduce LTE (Long Term Evolution), the latest generation of wireless technology, in Winnipeg and Brandon in MTS s new LTE network will provide an even superior performance for high-speed data, video and multi-media wireless applications. MTS will also continue to roll out its fibre-to-the-home network to more Manitoba communities, including the already announced deployment in The Pas and Thompson. The positive economic impact of these investments in those communities is another way MTS is contributing to the province s growth. Manitoba Telecom Services Inc. Annual Report

10 CEO S MESSAGE TO SHAREHOLDERS MTS also further strengthened its brand recognition when the Winnipeg Jets returned to the NHL in their home arena, the MTS Centre. We joined in the province s excitement to see the return of the NHL to Manitoba and expanded our long-standing partnership with True North Sports & Entertainment for the MTS Centre. Focused on community and environmental responsibility MTS Allstream and our employees believe in investing and contributing to the communities we serve. The Company supports the local economy through capital investment, job creation, sponsorship and charitable giving, while at the same time taking actions to reduce our environmental impact. Across the country, MTS Allstream participated in the United Way s national fundraising campaigns, and together with our employees, made a significant contribution to assist in bettering communities across Canada. We also supported many other charitable and community organizations. For example, in Manitoba, we contributed to the Canadian Red Cross to support relief efforts for thousands of Manitobans whose lives and livelihoods were so severely affected by the floods of We sponsored nearly 30 community festivals across Manitoba that showcase Manitoba s rich arts and culture. Education remains an important aspect of our community investment program. Last year, we supported several educational organizations with both monetary and value-in-kind contributions with our products and services. Driving successfully all of these activities is an amazing team of people who make our charitable initiatives come to life. Our dedicated employees not only commit themselves to service excellence, but to their communities as well, together contributing more than 50,000 volunteer hours this past year. On the sustainability front, we continue to make progress toward our goal of reducing our impact on the environment marked an important milestone for our green plan with the announcement of our 20% Greenhouse Gas reduction target by Positive regulatory changes As always, in 2011 your Company had a strong voice in Ottawa in debates important to our business. These included the implications of vertical integration in broadcasting and its impact on consumer choices; the long running debate over usage-based billing for the Internet; as well as wholesale network access to competitors networks for providers like Allstream. We have consistently argued for a pro-competitive regulatory and policy framework which we believe will benefit consumers and enable MTS Allstream to succeed. These efforts were rewarded on March 14, 2012 when Industry Minister Paradis announced that Canada will reduce limits on foreign investment in the telecom sector. We believe this long overdue policy shift is a positive development for MTS Allstream and for Canadians and Canadian businesses. For our Company, this announcement means greater access to foreign capital and the potential to open up new strategic partnerships and opportunities for Allstream. We believe that the removal of these restrictions is a step in the right direction to allow Canada to assume its place as a destination for investment and opportunity in the global digital economy. Entering 2012 focused on our strategies We enter 2012 with a clear view of what we need to do. In 2011, we validated that our strategies are working and delivering their expected results. In 2012, we will stay focused on executing these same strategies and working to continue to deliver a competitive shareholder return. With all that we have accomplished this past year, I would like to thank all of our employees and Board of Directors for their continued dedication and confidence in our direction and to the Company. I would also like to thank personally Mr. Donald Penny, who is retiring from our Board after over 15 years of service to our Company. Don has seen MTS Allstream through a changing telecom environment and it has been a pleasure to work with him as Audit Committee Chair, helping us implement improved governance in financial matters. I wish him all the best in his future endeavours. I look forward to an exciting year in telecom in Canada and I thank you for your continued investment and commitment to MTS Allstream. Sincerely, Pierre Blouin Chief Executive Officer March 26, FEB Manitoba Telecom Services Inc. Annual Report 2011

11 MANAGEMENT S DISCUSSION AND ANALYSIS Contents In this section: Page Overview of our business We describe our core businesses, products and services. 9 Our products and services 2011 in review We review our overall performance in 2011 and key developments in 11 Summary of results We describe progress achieved against our strategic objectives. Key developments in 2011 Strategic objectives Discussion of operations We review our financial results, as well as the performance of each of 13 Consolidated our divisions and lines of business. We provide detailed information statements of income about our performance in 2011 as compared to Divisional analysis Selected annual and quarterly financial information Liquidity and capital We discuss how we manage our financial condition and capital 21 resources resources. This includes a description of our credit facilities, capital Summary of cash flows structure, contractual obligations, financial instruments, guarantees Capital management and other financial arrangements financial outlook We discuss our anticipated performance for Critical accounting We outline important estimates and assumptions that we have made 25 estimates and assumptions in preparing our 2011 financial statements. Changes in accounting We confirm that we have used International Financial Reporting 27 policies Standards ( IFRS ) throughout the year. Non-IFRS measures of We define certain financial measures that we use for evaluating our 27 performance performance, which do not have a standardized meaning under IFRS. Risks and uncertainties We describe the major risks and uncertainties that may shape and 27 impact our business and our ability to achieve projected results going forward. Our regulatory We discuss the regulatory environment in which we operate our 37 environment business. Controls and procedures We confirm our compliance with the disclosure requirements of the 39 Canadian securities regulatory authorities relating to the design and effectiveness of our disclosure controls and procedures, and our internal control over financial reporting. Social and environmental We highlight our presence and commitment to our employees and to 40 responsibility the communities in which we operate, as well as our focus on environmentally responsible activities. This Management s Discussion and Analysis ( MD&A ) of our financial results comments on our operations, performance and financial condition for the years ended December 31, 2011 and This MD&A is based on financial statements prepared under IFRS. Prior to 2010, our consolidated financial statements were presented in accordance with previous Canadian generally accepted accounting principles ( GAAP ). All financial amounts, unless otherwise indicated, are in Canadian dollars and in accordance with IFRS. Unless otherwise indicated, this MD&A for the year ended December 31, 2011 is as at February 10, In preparing this MD&A, we have taken into account information available to us up to February 9, In this MD&A, we, our, and us refer to Manitoba Telecom Services Inc. (the Company or MTS Allstream ). This MD&A should be read in conjunction with our audited consolidated financial statements for the year ended December 31, You will also find more information about us, including our Annual Information Form ( AIF ) for the year ended December 31, 2011 dated February 10, 2012, on our website at and on SEDAR at Manitoba Telecom Services Inc. Annual Report

12 MANAGEMENT S DISCUSSION AND ANALYSIS Regarding forward-looking statements This MD&A includes forward-looking statements and information (collectively, the statements ) about our corporate direction, business opportunities, operations, financial objectives, future financial results and performance, future cash flows and distributions to shareholders that are subject to risks, uncertainties and assumptions. As a consequence, actual results in the future may differ materially from any conclusion, forecast or projection in such forward-looking statements. Therefore, forward-looking statements should be considered carefully and undue reliance should not be placed on them. Examples of statements that constitute 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. Please note that forward-looking statements reflect our expectations as at February 10, We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise except as required by law. This MD&A and the financial information contained herein have been reviewed by our Audit Committee and approved by our Board of Directors. 8 Manitoba Telecom Services Inc. Annual Report 2011

13 MANAGEMENT S DISCUSSION AND ANALYSIS OVERVIEW OF OUR BUSINESS MTS Allstream is a leading national communications provider in Canada and the market leader in Manitoba. Our company is organized into two principal divisions: MTS, operating in Manitoba; and Allstream, operating nationally. Our common shares are listed on the Toronto Stock Exchange (trading symbol: MBT) and our website is MTS MTS is the leading telecommunications provider in Manitoba, delivering a full suite of wireless, high-speed Internet, Internet protocol television ( IPTV ), converged Internet protocol ( IP ), unified communications, security, home alarm monitoring, local access and long distance services. This complete range of products and services is unmatched by any other provider in the province. MTS serves both residential and business customers in Manitoba. Allstream Allstream is a leading competitor in the national business and wholesale markets, offering small, medium and large businesses and government organizations a portfolio of telecommunications solutions tailored to meet their needs. Allstream s main products are IP-based communications, unified communications, voice and data connectivity, and security services. Allstream operates an extensive national broadband fibre optic network that spans more than 30,000 kilometres and provides international connections through strategic alliances and interconnection agreements with other international service providers. OUR PRODUCTS AND SERVICES We generate revenues from the following lines of business: (in millions $) MTS Allstream Total Wireless services Broadband and converged IP services Unified communications, security and monitoring services Local access services Long distance and legacy data services Other Total operating revenues ,765.6 MTS revenue mix Allstream revenue mix 10% 37% 35% 29% 29% 11% 3% 21% 25% Wireless Broadband & converged IP UC, security & monitoring Local access LD, legacy data & other 14MAR Manitoba Telecom Services Inc. Annual Report

14 MANAGEMENT S DISCUSSION AND ANALYSIS Wireless services Our wireless portfolio consists of cellular, wireless data, paging and group communications services that we offer in the Manitoba market to both residential and business customers. Our wireless services set our bundle offering apart from our competitors and further cement the strength of the MTS brand. With a market share of 57%, MTS is the leading provider of wireless services in Manitoba. With our combination of 4G, CDMA-EVDO, and WiFi hotspots, MTS has the best wireless network reach in Manitoba; we also have arrangements with other international wireless service providers that allow our customers to access cellular and data services outside of Manitoba. Due to increasing demand for high-speed wireless data, we expect strong growth in wireless revenues to continue. Broadband and converged IP services At MTS, broadband and converged IP services include revenues earned from providing high-speed Internet and IPTV services to residential customers in Manitoba, as well as IP-based connectivity to business customers in Manitoba. A strong broadband network is essential for offering these services and delivering a valuable bundle to our customers. We are well positioned with extensive fibre facilities in our regional Manitoba network. Our broadband network reaches 85% of Manitoba homes. Over 95% of homes in Winnipeg, Brandon, Portage la Prairie and Selkirk are being served by our very-high-bit-rate digital subscriber line ( VDSL ) or fibre-to-the-home ( FTTH ) network. Our broadband network reach is increasing as we expand our FTTH network. We launched in two new communities in December and have another six more scheduled for launch in At the end of 2011, 14,612 homes were passed by FTTH. At Allstream, converged IP services include revenues earned from the provision of IP-based networking and related products and services to our business customers nationally. Canadian businesses increasingly require IP connectivity solutions, resulting in growth in the converged IP market. We have the strategic advantage of long-term business relationships with many large companies in Canada. We also have a national IP fibre network that spans more than 30,000 kilometres. Over the past year, the number of Allstream fibre-fed buildings has grown by 14.3% to 2,388 buildings. Unified communications, security and monitoring services Unified communications, security and monitoring services consist of revenues earned from the provision of IP telephony products and services to business customers in Manitoba and nationally, along with revenues from our IP-based security offerings to national business customers. For certain customers, the ability to offer integrated security and equipment offerings is important for winning their business. At MTS, this line of business also includes revenues earned from the installation and monitoring of alarm services to residential, business and industrial customers in Manitoba. Local access services At MTS, local access services include revenues earned from the provision of residential and business voice connectivity including calling features (such as Call Answer, Call Display, Call Waiting and 3-Way Calling), payphone revenue, wholesale revenues from services provided to third parties, and contribution revenues. With 77% market share in Manitoba, the quality of our local wireline connection remains a competitive differentiator in the success of our voice services operations. It is the strategic entry point into customer premises for high-growth services, including high-speed Internet and IPTV. At Allstream, local access services includes revenues earned from the provision of business voice connectivity including calling features to national business and wholesale customers. Long distance and legacy data services Long distance and legacy data services include revenues earned from the provision of long distance calling along with the provision of networking and related products and services to our business customers. At MTS, long distance services enable residential customers in Manitoba and business customers across Canada to communicate with destinations outside the local exchange. Our long distance voice service portfolio includes basic, domestic, cross-border and international outbound long distance, basic and enhanced toll-free services, calling cards, a dial-around service, and audio conferencing, as well as a variety of enhanced long distance services and features. Other At MTS, other services include revenues earned from customer late payment charges, facilities rental and other miscellaneous items. At Allstream, other services include wholesale revenues earned from the routing and exchange of long distance network traffic (global hubbing), customer late payment charges, and other miscellaneous items. 10 Manitoba Telecom Services Inc. Annual Report 2011

15 MANAGEMENT S DISCUSSION AND ANALYSIS 2011 IN REVIEW SUMMARY OF RESULTS outlook 2010 (in millions $, except EPS and capital expenditures/revenues) results (at August 4, 2011) results Revenues 1, ,700 to 1,780 1,782.6 EBITDA to EPS 2 $2.55 $2.40 to $2.80 $2.18 Free cash flow to Capital expenditures/revenues 16.3% 16% to 18% 20.3% 1 EBITDA (earnings before interest, taxes, depreciation and amortization, and other income (expense)) is a non-ifrs measure of performance. See the section titled Non-IFRS measures of performance for further information. 2 Earnings per share ( EPS ) are based on weighted average shares outstanding of 65.5 million and 64.7 million for the twelve months ended December 31, 2011 and December 31, 2010, respectively. The increase in the number of weighted shares outstanding is mainly due to participation in our dividend reinvestment plan ( DRIP ). 3 We define free cash flow as cash flows from operating activities, less capital expenditures, and excluding changes in working capital. See the section titled Non-IFRS measures of performance for further information. On August 4, 2011, we issued our improved financial guidance to reflect MTS Allstream s better-than-expected results in the first half of 2011; our 2011 results were in line with that updated outlook in Operating revenues decreased $17.0 million, or 1.0% over 2010, mainly due to a decrease in local access, long distance, legacy data and other revenues, which more than offset increases in wireless revenues and broadband and converged IP revenues. MTS Allstream s EBITDA increased $29.6 million in 2011, or 5.2% over last year. The year-over-year EBITDA increase in 2011 was mainly due to increased wireless revenues, increased converged IP revenues, increasing Allstream margins, and lower restructuring costs, partly offset by declining revenues from legacy lines of business. EPS increased by $0.37, or 17.0% in 2011 when compared to 2010 mainly due to increased EBITDA and other income when compared to Capital expenditures were $288.0 million in 2011, representing a capital intensity ratio of 16.3%. Capital expenditures were favourably impacted by $18.5 million in adjustments related to a scientific research & experimental development investment tax credit ( SR&ED ITC ) recognized in Excluding the impact of this ITC, the capital intensity ratio was 17.4%, down from 20.3% in 2010 related to our wireless 4G network build that was completed in the first quarter of Free cash flow for 2011 was up $95.7 million due to higher EBITDA, lower capital spending, and lower pension solvency funding, partly offset by higher wireless costs of acquisition and a one-time $4.0 million charge related to the settlement of an Ontario Sales Tax audit, when compared to KEY DEVELOPMENTS IN 2011 Launch of 4G wireless network On March 31, 2011, MTS launched a new 4G wireless network across Manitoba. Our 4G wireless network enabled us to strengthen MTS s already advantageous position of being the only full service provider in Manitoba. The 4G network provides high-speed data coverage that is 35% larger and delivers speeds that are up to seven times faster than was previously possible. We can now deliver cellular voice and high-speed mobile data coverage of up to 21 Mbps to 97% of Manitobans. We developed our 4G wireless network through a strategic arrangement with Rogers Wireless that saw both companies share the cost to deploy a 4G wireless network across Manitoba; our customers can now access the best national and international roaming capabilities with Rogers Wireless as our primary roaming partner. Development of LTE wireless network In September 2011, we announced our plans to deploy Long Term Evolution ( LTE ) technology in Winnipeg and Brandon in 2012, which will allow MTS to offer cellular voice and high-speed mobile data speeds of up to 75 Mbps. Planning and infrastructure development for the initial urban LTE deployment was undertaken in We expect to invest $20 million to $25 million for LTE technology in 2012; this capital investment will be accommodated within our normal capital funding envelope. Manitoba Telecom Services Inc. Annual Report

16 MANAGEMENT S DISCUSSION AND ANALYSIS STRATEGIC OBJECTIVES At MTS Allstream, we are committed to remaining a leading national telecommunications provider and the market leader in Manitoba. To this end, we concentrated on three strategic objectives in 2011, and by meeting these strategic objectives, we continued to produce strong cash flows in support of our dividend policy. In 2011, we made the following progress on our three strategic objectives: 1. Maintain our industry-leading position in Manitoba. In Manitoba, we are the market leader because of our strong brand recognition, customer loyalty, exclusive distribution channels, product leadership, and unmatched bundling capabilities. To maintain our market leadership, we continue to enhance our unique bundling capability by investing in the reach and quality of our wireless and broadband networks. We continue to be the only provider in Manitoba that can include all major telecommunications products, including wireless, in our bundle offerings. In 2011, our wireless subscribers increased by 2.6% and our average revenue per user ( ARPU ) increased by 4.1%, when compared to We launched our 4G wireless data network in Manitoba on March 31, 2011; this wireless network delivers high-speed data to 97% of Manitoba s population and, combined with our exclusive distribution channels, gives us a very strong competitive presence in Manitoba. MTS s extensive 4G wireless network, together with the planned deployment of LTE technology in Winnipeg and Brandon in 2012, is expected to meet demand for smartphones and to drive continuing growth in wireless data services for years to come. In 2011, MTS s ARPU for high-speed Internet and IPTV services increased by 8.1% and 16.1%, respectively, driven by disciplined marketing that resulted in fewer customers on promotional plans, while the subscriber bases rose by 2.9% and 6.5%, respectively. As at December 31, 2011, 64% of our IPTV customer base is now subscribing to our premium IPTV service, Ultimate TV, which is available to over 95% of households in each of Winnipeg, Portage La Prairie and Brandon. In 2010, we announced plans to invest $125 million over the next five years to expand our fibre-to-the-home reach, beginning with rural Manitoban communities where MTS faces cable telephony competitors, but does not currently have a VDSL network. Our expanded fibre-to-the-home network provides residents in rural Manitoba with access to some of the fastest high-speed Internet speeds and our premium IPTV service. The first community to receive FTTH under this initiative was Selkirk, Manitoba beginning in In 2011, we expanded the number of homes passed with fibre in Selkirk to cover 96% of the city, and have connected 89% of MTS customers with nearly one third of those connected households now subscribing to Ultimate TV. In 2011, we deployed FTTH to Dauphin and Steinbach, Manitoba. We plan to deploy fibre to six more communities in Our fibre-to-the-home network is expected to improve MTS s competitive position and provide an opportunity for revenue growth by offering services that were not previously available to those communities. As part of this initiative, we expect to deploy fibre to approximately 120,000 homes in over 20 Manitoba communities, including some parts of Winnipeg. 2. Drive growth in IP-based services and improve profitability. In 2011, we connected 299 buildings to our network with fibre, extending our on-net reach and providing us with significant incremental high margin revenue opportunities. Allstream s fibre-fed buildings now total 2,388 as at December 31, Due to our targeted sales approach, Allstream s EBITDA margin and gross margin improved 3.9 and 3.2 points to 13.5% and 57.5%, respectively, over Allstream continued to grow converged IP revenues, achieving 8.7% growth in 2011 when compared to Converged IP sales levels increased 21% year over year, as a result of our improved sales and marketing strategy. Through our new building programs, the transitioning of existing customers to IP services, and new customer sales into existing buildings, we have maintained high levels of sales activity and are well positioned to achieve strong IP revenue growth in Allstream s performance is expected to be positively affected by continued growth in market demand for IP services. 3. Deliver superior customer service, while aggressively improving our cost structure. In 2011, we remained committed to delivering superior customer service and improving the customer experience. Coupled with improving its delivery metrics, MTS improved on its customer satisfaction performance relative to its 2010 results and exceeded its 2011 targets for customer service. Allstream continued to be an industry leader in customer satisfaction and, in 2011, improved on its customer service and delivery metrics when compared to the same period of In 2011, we reached our target range of $25 million to $35 million in annualized cost savings for the year. Through operational efficiency programs mainly associated with legacy product lines and restructuring initiatives, our total annualized cost savings at December 31, 2011 was $28.8 million. 12 Manitoba Telecom Services Inc. Annual Report 2011

17 MANAGEMENT S DISCUSSION AND ANALYSIS DISCUSSION OF OPERATIONS CONSOLIDATED STATEMENTS OF INCOME (in millions $, except EPS) % change Operating revenues 1, ,782.6 (1.0%) Operations expense 1, ,217.8 (3.8%) EBITDA % Depreciation and amortization % Other income (expense) 2.5 (5.2) n.m. Finance costs (65.5) (64.0) 2.3% Income before income taxes % Income tax expense % Net income for the year % Other comprehensive loss for the year, net of tax (143.1) (110.6) 29.4% Total comprehensive income for the year (21.8%) EPS 1 $2.55 $ % 1 Earnings per share is based on weighted average shares outstanding of 65.5 million and 64.7 million for the twelve months ended December 31, 2011 and December 31, 2010, respectively. The increase in the number of weighted shares outstanding is mainly due to participation in our DRIP. Operating revenues (in millions $) % change MTS % Allstream (4.6%) Total operating revenues 1, ,782.6 (1.0%) Growth in strategic services (including wireless, broadband and converged IP) was offset by declines in traditional services. In 2011, MTS operating revenues increased by $21.8 million year over year, driven by 8.6% growth in wireless revenues and 10.7% growth in broadband and converged IP revenues, partly offset by declines in local access, long distance and legacy data, and other revenues. At Allstream, 8.7% growth in high-margin converged IP revenues partly offset the 9.2% revenue declines that were expected for our unified communications and security, local, long distance and legacy data, and other lines of business, resulting in a $38.8 million revenue decrease at Allstream when compared to last year. Operations expense Operations expense decreased by $46.6 million in 2011 when compared to 2010, mainly due to lower restructuring costs and lower operating costs from operational efficiency and restructuring initiatives completed in previous periods, along with lower direct costs as a result of higher margins and lower revenues at Allstream. In 2011, we achieved annualized cost savings of $28.8 million, thus achieving our target range of $25 million to $35 million. These savings are a result of our operational efficiency programs mainly associated with legacy product lines and restructuring initiatives. Restructuring expenses were $6.7 million in 2011, which is lower than our total restructuring and other expenses of $35.5 million in Manitoba Telecom Services Inc. Annual Report

18 MANAGEMENT S DISCUSSION AND ANALYSIS Consolidated revenues* EBITDA* (in millions $) (in millions $) 1,864 1,873 1,815 1,783 1, MAR MAR EBITDA (in millions $) % change MTS % Allstream % Other (4.2) (2.7) 55.6% Total EBITDA % MTS Allstream s EBITDA increased $29.6 million in 2011 due to Allstream s continued focus on converged IP revenues and improving margins, growth in MTS revenues, strong management of our cost structure (from operational efficiency initiatives implemented in previous years), as well as lower restructuring expenses. At MTS, the increase in EBITDA was due to higher revenues from wireless, IPTV and Internet lines of business, partly offset by increased operations expense associated with our growth lines of business and a decrease in revenues in legacy lines of business. MTS achieved an EBITDA margin of 50.8% in Allstream s EBITDA in 2011 was up 34.0% or $27.5 million year over year. The increase in EBITDA was mainly due to lower restructuring costs, lower operating costs, and improved margins in 2011 compared to the prior year. We continued to focus on increasing on-net IP revenues, managing the decline of low-margin, off-net and legacy revenues, and removing costs from the business. Direct costs decreased by 11.2% in 2011 compared to 2010, while revenues decreased by 4.6% as part of Allstream s plan to exit less profitable lines of business, such as global hubbing and low margin equipment sales. Overall, Allstream s gross margin increased to 57.5% in 2011 from 54.3% in Depreciation and amortization Depreciation and amortization expense increased by $8.2 million in 2011 compared to 2010, reflecting growth in our asset base and higher amortization of our wireless costs of acquisition related to wireless data growth, partly offset by the impact of adjustments to SR&ED ITC in Other income (expense) Other income was $2.5 million in 2011 compared to other expense of $5.2 million in the previous year. This increase was mainly due to losses related to Allstream s sale of its non-telecommunications information technology consulting group in 2010, and a one-time recovery of a previous year s expenditure in the first quarter of Finance costs Finance costs were comparable to the prior year. * 2007, 2008, 2009 prepared under previous GAAP. 14 Manitoba Telecom Services Inc. Annual Report 2011

19 MANAGEMENT S DISCUSSION AND ANALYSIS Income tax expense Income tax expense increased by $1.8 million in 2011 compared to 2010, mainly due to higher income before taxes, partly offset by lower tax rates. The Company continues to have substantial capital cost allowance ( CCA ) pools and tax losses. By utilizing our CCA deductions and tax losses, we expect to fully offset our taxable income and not pay cash taxes before 2019, with the present value of our tax asset being approximately $330 million. Net income and EPS Net income and EPS increased by $25.8 million and $0.37, respectively, in 2011 compared to 2010, mainly due to EBITDA growth and an increase in other income, partially offset by higher depreciation and amortization expense, increased income taxes, and increased finance costs. Other comprehensive loss Other comprehensive loss represents actuarial gains and losses arising from changes in the present value of our defined benefit plans obligations and changes in the fair value of our defined benefit plans assets. These items are recognized in other comprehensive income net of tax, and therefore, do not have an impact on our net income or EPS. DIVISIONAL ANALYSIS MTS operating revenues (in millions $) % change Wireless % Broadband and converged IP % Unified communications, security and monitoring (6.7%) Local access (6.3%) Long distance and legacy data (4.4%) Other (5.9%) Total MTS operating revenues % MTS MTS Revenues* Wireless revenues* (in millions $) (in millions $) MAR MAR Wireless Wireless revenues increased $28.1 million in 2011 when compared to 2010, mainly due to higher wireless ARPU and growth in our subscriber base. Wireless ARPU was $59.66 in 2011, an increase of 4.1% from $57.32 in Year-over-year wireless ARPU growth was driven by higher wireless data usage, resulting in an increase in wireless data revenues of 46.1% in 2011 when compared to the prior year. At December 31, 2011, we had 496,432 wireless subscribers, a 2.6% increase over the prior year. At December 31, 2011, 41% of post-paid subscribers had data plans, a significant increase from 27% in Nearly 70% of all upgrades and new activations in 2011 were data plans. The launch of our 4G wireless network and the release of both the iphone 4 and later in the year the iphone 4S have been significant contributors to the increase in data plans, higher ARPU, and the overall success of our wireless line of business. Our advanced wireless networks, coupled with increasing data usage among subscribers, are expected to contribute to strong growth in wireless revenues in the future. * 2007, 2008, 2009 prepared under previous GAAP. Manitoba Telecom Services Inc. Annual Report

20 MANAGEMENT S DISCUSSION AND ANALYSIS MTS MTS Broadband and converged IP revenues* Wireless customers and ARPU (in millions $) 394,463 $ , , , ,432 $ $57.40 $56.68 $ MAR MAR Broadband and converged IP Broadband and converged IP revenues increased $19.4 million due to IPTV and high-speed Internet revenue growth. Revenues from our IPTV services increased by $11.4 million, or 19.3% in 2011 when compared to 2010, due to year-over-year ARPU and subscriber growth. Our ARPU for IPTV services was $62.38 for 2011, an increase of 16.1% from $53.71 in 2010, mainly due to our efforts to reduce the number of subscribers on promotional plans, more subscribers on our premium television service, and price increases. At December 31, 2011, we had a total of 95,476 IPTV subscribers, representing a year-over-year increase of 6.1%. Of these customers, 64% subscribe to our premium IPTV service, Ultimate TV, which generates higher ARPU compared to our Classic TV service. Internet services revenue grew $6.5 million, or 6.8%, in 2011, reflecting higher ARPS due to fewer subscribers on promotional plans, price increases, and subscriber growth. At December 31, 2011, our high-speed Internet subscriber base was 188,946, an increase of 2.9% from the prior year. Revenues from MTS converged IP services increased $1.5 million, or 5.7%, in 2011 due to increased demand for MPLS services. MTS IPTV customers and ARPU* MTS High-speed Internet customers and ARPU* 76,758 $ ,544 $ ,520 $ ,967 $ ,476 $ ,968 $ ,434 $ ,742 $ ,571 $ ,946 $ MAR MAR Unified communications, security and monitoring Unified communications revenues decreased $2.4 million in 2011 due to the timing of equipment sales. Security and monitoring services revenues for 2011 remained consistent with the prior year. Local access Local access services revenues decreased $18.6 million mainly due to a 5.1% decline in residential local access lines resulting from local competition and wireless substitution, a 2.7% decrease in business local access lines, and a $5 million one-time deferral account adjustment in Because of our unrivaled bundled offers, we are experiencing one of the lowest rates of decline in Canada, a trend that is expected to continue. * 2007, 2008, 2009 prepared under previous GAAP. 16 Manitoba Telecom Services Inc. Annual Report 2011