Annual Information Form

Transcription

1 Annual Information Form For the year ended December 31, 2012 Manitoba Telecom Services Inc.

2 TABLE OF CONTENTS CORPORATE STRUCTURE... 1 Name and incorporation... 1 Intercorporate relationships... 2 GENERAL DEVELOPMENT OF THE BUSINESS... 2 Company structure changes... 3 Strategic review of Allstream... 3 Launch of the most advanced wireless network technology... 3 Expansion of Allstream IP fibre network and decision to reduce legacy revenues... 3 Regulatory developments... 3 Investments in broadband and FTTH networks... 4 Initiatives to streamline business operations by $96.8 million over three years... 4 Settlement with Bell Mobility... 4 Establishment of DRIP... 4 DESCRIPTION OF THE BUSINESS... 5 Business segments... 5 Wireless services... 6 Broadband and converged IP services... 6 Unified communications, hosting, security and monitoring services... 8 Local access services... 8 Long distance and legacy data services... 9 Other services... 9 Employee relations... 9 Distribution channels Environmental policy Social responsibility Risk factors INCOME TAXES LEGAL PROCEEDINGS CAPITAL STRUCTURE General description Credit facilities Credit ratings Share capital Constraints Dividend policy MARKET FOR SECURITIES DIRECTORS AND OFFICERS Directors Additional information on Directors Officers AUDIT COMMITTEE Composition Policy on engagement of external auditors External auditor service fees INTERESTS OF EXPERT TRANSFER AGENT AND REGISTRAR ADDITIONAL INFORMATION APPENDIX A: AUDIT COMMITTEE CHARTER... 21

3 In this Annual Information Form ( AIF ), we, our and us refer to Manitoba Telecom Services Inc. ( MTS, MTS Allstream or the Company ) and, where the context so requires, to its subsidiaries. This AIF and the financial information contained herein have been reviewed by our Audit Committee and approved by our Board of Directors. This AIF 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, which are subject to risks, uncertainties and assumptions. As a consequence, actual results in the future may differ materially from any conclusion, forecast or projection in such forward-looking statements. Therefore, forward-looking statements should be considered carefully and undue reliance should not be placed on them. Examples of statements that constitute forward-looking information may be identified by words such as believe, expect, project, should, anticipate, could, target, forecast, intend, plan, outlook, see, set, pending and other similar terms. Factors that could cause anticipated opportunities and actual results to differ materially include, but are not limited to, matters identified throughout this AIF. Please note that forward-looking statements reflect our expectations as at February 13, 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. You will also find more information about us, including our Annual Management s Discussion and Analysis ( MD&A ) for the year ended December 31, 2012 dated February 13th, 2013, on our website at and on SEDAR at Unless otherwise stated, all amounts are expressed in Canadian dollars. CORPORATE STRUCTURE Name and incorporation MTS commenced its operations in the province of Manitoba in 1908, first as a department of the provincial government, and then as a Crown corporation that was incorporated in On January 7, 1997, MTS was continued as a share capital corporation pursuant to The Manitoba Telephone System Reorganization and Consequential Amendments Act (Manitoba). MTS subsequently was continued under The Corporations Act (Manitoba) pursuant to a Certificate and Articles of Continuance dated April 5, MTS s articles, as amended, were restated by Certificates and Restated Articles of Incorporation dated May 15, 2001 and June 28, Pursuant to a Certificate and Articles of Amalgamation dated August 3, 2004, MTS amalgamated with its wholly owned subsidiary, Qunara Inc. Our head and registered office is located at 333 Main Street, PO Box 6666, Winnipeg, Manitoba, R3C 3V6. Manitoba Telecom Services Inc. 1 Fiscal year 2012

4 Intercorporate relationships The following organization chart illustrates the voting share ownership of the principal subsidiaries of MTS as of December 31, 2012, and indicates their respective jurisdictions of incorporation. 100% voting 100% voting 100% voting 100% voting 50% voting 100% 100% voting voting 100% voting 100% voting GENERAL DEVELOPMENT OF THE BUSINESS The general development of our business over the last three years has been influenced by several events, including: our company structure changes our strategic review of our Allstream business; our launch of the most advanced wireless network technology; our expansion of our Allstream Internet protocol ( IP ) fibre network and decision to reduce legacy revenues; regulatory developments; our investments in broadband and fibre to the home ( FTTH ) networks in Manitoba; our initiatives to streamline our business operations by $96.8 million over three years; our settlement with Bell Mobility and our establishment of a Dividend Reinvestment Plan ( DRIP ). Manitoba Telecom Services Inc. 2 Fiscal year 2012

5 Each of these developments is described below. Company structure changes On January 1, 2012 we implemented changes to our organizational structure. The changes better align our legal structure with the way the business has operated over the past several years. Accordingly, segmented information for 2011 has been restated. Strategic review of Allstream On September 13, 2012, we announced the launch of a wide-ranging strategic review of our Allstream business, with the intention to explore any possible new prospects over the following year. At the time of this report, the strategic review is ongoing. We do not intend to disclose any developments with respect to this strategic review process until such time as the Board of Directors approves a particular course of action or otherwise determines that further disclosure is appropriate or required. There is no assurance or expectation that any changes will be made as a result of this process. Launch of the most advanced wireless network technology As part of our commitment to providing the latest in wireless services to Manitobans, we launched a new 4G Long Term Evolution ( LTE ) wireless network in Manitoba on August 28, MTS s 4G LTE wireless network is currently available in Winnipeg and Brandon, and offers high-speed mobile data at up to 75 Megabits per second ( Mbps ). MTS is the first and only provider to offer Manitobans LTE wireless technology, which is known as the latest in wireless technologies and recognized as the world's fastest mobile network. MTS plans to expand LTE coverage to more communities in We launched our 4G High Speed Packet Access ( HSPA ) wireless network across Manitoba on March 31, 2011, enabled in part by our strategic wireless arrangement with Rogers Wireless Partnership. The expansiveness and sophistication of our 4G HSPA wireless network is a significant competitive advantage and delivers cellular voice and high-speed mobile data coverage to 97% of Manitobans. Expansion of Allstream IP fibre network and decision to reduce legacy revenues In 2012, we continued with the expansion of our Allstream IP fibre network to improve the profitability of Allstream and support future growth of on net converged IP services. Our targeted investment plan to extend fibre to select multi-tenant buildings, which are mostly within 200 metres of our existing national network contributed to the addition of 335 buildings in Allstream has grown its IP fibre reach to a total of 2,723 buildings. This focused approach has supported our goal to deliver more profitability in Allstream with modest capital investments. Since 2010, these success-based investments have extended our on-net reach. Our targeted approach has provided us with incremental high-margin revenue opportunities, also resulting in a positive change in our revenue mix. We are focusing on revenues from the high-margin converged IP line of business and deliberately exiting revenues from legacy lines of business, such as global hubbing and low-margin equipment sales. As such, converged IP revenues as a percentage of total Allstream operating revenues continue to increase from 29% in 2011, to 32% in Regulatory developments The telecommunications and broadcast industries in which we operate are federally regulated. As a result, our business is affected by decisions made by various regulatory agencies of the federal government, including the Canadian Radio-television and Telecommunications Commission and Industry Canada. For a description of the principal regulatory initiatives and proceedings affecting us, please refer to Our regulatory environment section of our 2012 MD&A. Manitoba Telecom Services Inc. 3 Fiscal year 2012

6 Investments in broadband and FTTH networks Our Broadband Evolution program continues to enhance our broadband access infrastructure across several communities in Manitoba, allowing us to offer improved high-speed Internet ( HSI ) and Internet Protocol television ( IPTV ) services. Our standard HSI service is now available to more than 85% of Manitoba households in 187 communities. IPTV service is now available to 96% of Winnipeg households, as well as in Brandon, Portage La Prairie and a growing number of homes in Selkirk, Steinbach, Dauphin, Thompson, The Pas, Neepawa, Carberry, Killarney and Minnedosa. Our IPTV service provides state-ofthe-art entertainment, including up to 108 HD channels, Whole Home personal video recorder ( PVR ), Video on Demand, Pay Per View, as well as access to our fastest Internet speeds. Since 2010 MTS has continued to invest in the deployment of our FTTH network in Manitoba. This investment allows us to deliver enhanced broadband services in communities where we do not currently have a very-high-bit-rate digital subscriber line ( VDSL ) network deployed. FTTH allows customers to access our top-of-the-line IPTV, HSI and phone services. At the end of 2012, 21,937 homes have been passed by FTTH. Important investments in our national fibre coast-to-coast broadband network have also been made. In 2012, we continued the expansion of our IP networks to increase capacity and geographic reach to support the growth of our converged IP services. Over the last number of years, we have made investments in our national Allstream dense wave division multiplexing ( DWDM ) network to support our national Lightspeed wavelength product offering, with 2.5G and 10G wavelength services in key cross-sections across the country. In 2012 we completed the deployment of our new 40/100G capable next generation DWDM system in two additional spans across our national network and continued investments to expand our on net fibre footprint through our Advanced Ethernet Program. Initiatives to streamline business operations by $96.8 million over three years In 2012, we continued with our ongoing cost reduction initiatives aimed at achieving further process improvements and further cost reductions with a focus on Allstream. We incurred costs of $2.0 million, which include severance and other employee-related expenses. Our 2012 efficiency program achieved $33.6 million in annualized cost savings as at December 31, 2012 from these initiatives, which met our target of $25 million to $35 million. Over the past three years we have achieved a total of $96.8 million in annualized cost savings from these ongoing cost reduction initiatives. Settlement with Bell Mobility In 2010, we executed a comprehensive settlement agreement with Bell Mobility in respect of various historical disputes, including an arbitration proceeding relating to the provision of wireless services in Manitoba. Under this confidential settlement agreement, we received a $10 million one-time cash payment in 2010 from Bell Mobility and its affiliates, which along with other consideration represents over $20 million in value. Establishment of DRIP In 2010, we established a DRIP, which enables eligible holders of the Company s Common Shares to automatically reinvest their regular quarterly dividends in additional Common Shares of the Company without incurring brokerage fees. Participants in our DRIP 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. Participation in our DRIP remained over 25% throughout 2012, reducing the cash cost of our dividend by $33.5 million. Manitoba Telecom Services Inc. 4 Fiscal year 2012

7 DESCRIPTION OF THE BUSINESS Business segments We are a leading national communications provider in Canada and the market leader in Manitoba. As at December 31, 2012, we had two reportable operating segments, MTS and Allstream. MTS is the leading telecommunications provider in Manitoba, delivering a full suite of wireless, HSI, IPTV, converged IP, unified communications, local access, as well as long distance and legacy data services under the MTS brand and security and home alarm monitoring services through a wholly-owned subsidiary, AAA Alarm Systems Ltd. ( AAA Alarm ). This complete range of products is unmatched by any other provider in the province. MTS provides services to both residential and business customers in Manitoba. Allstream is a leading competitor in the national business and wholesale markets; offering small, medium and large businesses and government organizations a portfolio of telecommunications solutions tailored to meet their needs. Allstream s main products are IP-based communications, unified communications, and voice and data connectivity services. Allstream operates an extensive national fibre optic network that spans over 30,000 kilometres, and provides international connections through strategic alliances and interconnection agreements with other international telecommunications service providers. Our operating segments are responsible for business strategies, investment priorities for new products and services, sales and marketing, and distribution channels. Total revenues by operating segment for the past two years are as follows: For the years ended December 31 (in millions $) MTS Allstream Intersegment eliminations (34.7) (36.4) Total revenue reported 1, ,765.6 Further detail on our operating revenues by segment are as follows: For the years ended December 31 (in millions $) MTS revenue Wireless services Broadband and converged IP services Unified communications, security and monitoring services Local access services Long distance and legacy data services Other services Total operating revenues Manitoba Telecom Services Inc. 5 Fiscal year 2012

8 For the years ended December 31 (in millions $) Allstream revenue Converged IP services Unified communications, hosting and security services Local access services Long distance and legacy data services Other services Total operating revenues Wireless services MTS provides wireless services to both consumer and business customers in Manitoba. Our wireless services include post-paid and pre-paid cellular, wireless data, paging and group communications services. Our Wireless revenues increased $5.8 million for the year compared to 2011, mainly the result of higher wireless average revenue per user ( ARPU ) and growth in our subscriber base. Wireless ARPU was $60.35 in 2012, an increase of 1.2% from $59.66 in At December 31, 2012, we had 497,367 wireless subscribers, a 0.2% increase from Wireless ARPU growth was driven by higher wireless data usage, resulting in an increase in wireless data revenues of 29.7% over On the consumer side, the growth has been fuelled by the increased adoption of smartphones which provide customers with a gateway for multiple messaging mediums for example, text messaging and instant messaging, social networking services and streaming video and music. On the business side, the adoption of wireless broadband internet sticks and the continued adoption of smartphones to access and corporate data have been increasing steadily. The faster data speeds available on our 4G wireless networks to 97% of Manitobans are ideal for high bandwidth applications like streaming media, further supporting the growth of wireless data services. Our new LTE wireless network officially launched on August 28, 2012 offers even higher speed data, as well as a wide range of newer and more powerful devices to customers in Winnipeg and Brandon. MTS also offers customers access to national and international roaming in more than 200 countries worldwide. Along with the implementation of new technologies to support the evolving needs of our customers, MTS operates a code division multiple access network, a high quality network covering over 97% of Manitobans. Our group communications services include FleetNet 800, which is a two-way wireless communications solution used by enterprises with requirements for dispatch communications. Organizations using this service include police departments, the Royal Canadian Mounted Police, other emergency services and transportation companies. Our main competitors in the wireless market in Manitoba include Rogers Communications Inc. ( Rogers ), TELUS Communications Inc. ( Telus ) and Bell Canada ( Bell ). Broadband and converged IP services Our broadband and converged IP services provide HSI and IPTV services in Manitoba as well as IP-based connectivity to business customers in Manitoba and nationally. Internet services In 2012, Internet services revenue grew $8.5 million, or 8.4%, reflecting subscriber growth and higher average revenue per subscriber due to fewer subscribers on promotional plans and price increases. At December 31, 2012, our HSI subscriber base was 193,690, an increase of 2.3% from Manitoba Telecom Services Inc. 6 Fiscal year 2012

9 We offer Internet services to both residential and business customers within Manitoba including both highspeed and dial-up Internet services. We offer various pricing and plan options to meet the needs of our residential and business customers. As at December 31, 2012, more than 85% of households provincewide have access to our HSI services. Speeds of up to 20Mbps are available on our VDSL networks and up to 250 Mbps on our FTTH networks which together cover over 95% of each of Winnipeg, Brandon, Portage la Prairie and Selkirk households along with a growing number of households in eight other communities. The majority of our residential customers subscribe to our standard Lightning service which is up to 10 Mbps. In addition to the MTS HSI services, MTS also offers MTS Dedicated Internet Access (DIA) which allows customers to access speeds of up to 4 gigabits per second. DIA is currently available in 40 communities across Manitoba. In the high-speed market in Manitoba, our main competitors include Shaw Cablesystems Limited ( Shaw ) in Winnipeg and surrounding communities, and Westman Media Cooperative Ltd. in Brandon and surrounding communities. IPTV services To enhance the MTS IPTV Service launched in 2003 (now MTS Classic TV), MTS launched MTS Ultimate TV in Winnipeg in MTS Ultimate TV continues to offer the choice and flexibly in programming selection of MTS Classic TV but also provides a comprehensive High Definition (HD) channel offering and Whole Home PVR, which allows customers to record up to three programs simultaneously and play them back on any TV within the home; all accessed through the award-wining Microsoft Mediaroom platform and interactive user interface. At December 31, 2012, 77% of IPTV customers subscribed to Ultimate TV, up from 64% at the end of Since its launch MTS Ultimate TV has continued to expand its HD channel line-up making it a clear leader over cable in total number of available HD channels. Coverage also continues to expand with MTS Ultimate TV now available in Brandon, Portage la Prairie, Selkirk, Dauphin, Steinbach, Thompson, The Pas, Neepawa, Carberry, Minnedosa and Killarney. MTS Ultimate TV also offers a growing list of converged and interactive features including TV Call Display, MTS Centre on Demand, Winnipeg Jets on Demand, Facebook on TV, Games4tv, MyPicks, Ultimate Picks, Galaxie MusicRoom, Ultimate Events Calendar, Yellow Pages TV, My Remote, MyPVR, The KARAOKE Channel, TumbleBooks TV, Lobby Camera, Message Centre, My PVR Space and The Weather Network App. These features help differentiate MTS UTV from Cable TV competitors Shaw and Westman as well as DTH Satellite competitors Bell Satellite and Shaw Direct. In 2012, revenues from MTS TV services totalled $78.5 million, representing an increase of 11.2% over 2011 revenues of $70.6 million. As at December 31, 2012, our customer base was 101,550, of which 97,232 are IPTV subscribers. Converged IP services Our converged IP services include the provisioning of IP-based networking, and related products and services through our extensive national broadband fibre optic network. Converged IP combines the flexibility and intelligence of IP routing with the transport quality of a high performance network. This combination provides a secure mode of data transport for a defined set of users including employees or customers, allowing IP connectivity to run data, video and voice traffic over a single network reducing infrastructure costs and improving business flexibility. In 2012, we continued to transition our customers from legacy data services to converged IP services with revenues growing by 1.9% to $267.9 million from $262.9 million in Our competitors in the converged IP market include Telus and Bell. Manitoba Telecom Services Inc. 7 Fiscal year 2012

10 Unified communications, hosting, security and monitoring services Unified communications services We offer a full suite of unified communications solutions and services. Unified communications is the integration of real-time communication services such as telephony (including IP telephony) and video conferencing with non-real-time communication services such as integrated voic and . Unified communications is not a single product, but a set of products that provides a single-user interfacing across multiple devices and media types. Our differentiation is our ability to provide a full unified communication solution with network connectivity, Session Initiation Protocol ( SIP ) trunking and managed services, which provides a cohesive user experience across all channels. Integrating voice, data and video conferencing on our IP network with SIP trunking enables streamlined network management, improved operational efficiencies, and further reduced infrastructure and communications costs. In 2012, our combined unified communications revenues were $79.9 million, representing a decrease of 5.0% over 2011 revenues of $84.1 million. This decline is due to a decrease in one-time product sales and our decision to shift away from stand-alone low-margin security product sales. Our competitors in the unified communications market include Telus, Bell, multiple local resellers and Systems Integrators. Hosting services We also offer a full product suite of collocation and managed hosting services. Collocation services allow our customers to locate their servers or telecommunications equipment in a fully equipped, secure and environmentally controlled environment. Managed hosting services provide our customers with access to secure state-of-the-art data centres where they can store and easily access any of their IT software, programs or databases they choose to store on our servers. These services are often packaged with converged IP services providing customers with a complete solution. Security and monitoring services We provide IP-based security offerings for IP networks, applications, and underlying databases, as well as managed security services to help manage IT risk to our Allstream business customers. Through AAA Alarm we provide security installation and monitoring services to residential and small business customers in Manitoba. AAA Alarm is the leading security services provider in Manitoba for residential customers. Local access services We provide local voice access services for residential and business customers within Manitoba s local exchanges. A local exchange is a geographic or metropolitan area in which customers are able to connect to each other for a flat monthly fee. We also earn local services revenues from payphones and enhanced local calling features, such as Call Answer, Call Display, Call Waiting and 3-Way Calling. In addition, we earn wholesale revenues by providing our competitors with access to our local exchange facilities. Local services revenues include subsidies paid to us for providing local services in high-cost serving areas. Our competitors in Manitoba for local access services include Shaw, Westman, and Web-based telephone service providers, such as Primus Telecommunications Canada Inc. and Vonage Canada Corp. Our position in the Manitoba market continues to be strong, with an estimated 74% and 83% market share respectively, for the residential and business markets. Nationally through Allstream, we provide a full range of local access services to business customers. These services allow customers to complete calls in their local exchange, to access long distance and the Internet. We also earn wholesale revenues for providing competitors with access to our local exchange facilities. Nationally, our competitors in the local services market include Telus and Bell. In 2012, our combined local access services revenues were $446.2 million, representing a decrease of 5.8% over 2011 revenues of $473.9 million. Manitoba Telecom Services Inc. 8 Fiscal year 2012

11 Long distance and legacy data services Long distance services In Manitoba, we provide long distance voice services which allow residential and business customers to communicate with destinations outside the local exchange. We offer a variety of long distance savings plans to our Manitoba customers and dial-around service in British Columbia and Alberta. We offer calling cards and pre-paid cards for national and international long distance calling. We also offer teleconferencing, toll-free and featured long distance services to our business customers. We also provide long distance voice services to business customers on a national basis. We offer a variety of long distance savings plans, network access options, calling cards for national and international long distance calls, and audio teleconferencing to business customers on a retail and wholesale basis. We also offer an advanced toll-free service to business customers. In 2012, our combined long distance services revenues totalled $136.2 million, representing a decrease of 13.1% from 2011 revenues of $156.8 million. We will continue to experience further declines in our long distance services revenues as they are being replaced by IP based services. In the long distance market, our principal competitors in the provision of business long distance services nationally include carriers such as Bell, Bell Aliant, Telus and Rogers. In the Manitoba market, our competitors for the provision of residential and business long distance include Shaw, Westman, long distance dial-around service providers, resellers, discount packagers of long distance services and broadband voice over IP providers. Legacy data services We provide legacy data services to business customers across Canada. Legacy data services provided by both MTS and Allstream connect data, video and voice networks to establish private connections across office locations and to integrate traffic over highly secure networks. Our legacy data line of business also includes revenues from the provision of data connectivity and transport. In 2012, our combined legacy data services revenues totalled $125.9 million, representing a decrease of 8.9% from 2011 revenues of $138.2 million. We will continue to experience further declines in our legacy data services revenues as they are replaced by IP based services. Our competitors in the legacy data market include Bell, Telus and some local utility and cable providers. Other services Other services include revenues earned from intersegment transactions, from the routing and exchange of long distance network traffic nationally and from the sale and maintenance of terminal equipment such as telephone switches and hardware to business customers both in Manitoba and nationally. Employee relations As at December 31, 2012, the number of full-time and regular part-time employees of MTS and Allstream was 3,049 and 2,300, respectively. Of these employees, 3,303 were members of a labour union. Our employees are represented by five labour unions, which are the Telecommunications Employees Association of Manitoba International Federation of Professional and Technical Engineers, Local 161 ( TEAM-IFPTE ); the International Brotherhood of Electrical Workers, Local 435 ( IBEW ); the Communications, Energy and Paperworkers Union of Canada, Local 7 ( CEP ); the Canadian Auto Workers, Local 2000 ( CAW ); and the United Steelworkers, TC Local 1976 ( USW ). TEAM-IFPTE represents certain management and professional employees in Manitoba. The collective agreement with this union expires on February 19, IBEW represents craft and allied employees, such as warehouse, shopcraft and building utility workers. The collective agreement with IBEW in relation to these employees expires on January 31, The collective agreement between IBEW and AAA Alarm expires on April 27, Manitoba Telecom Services Inc. 9 Fiscal year 2012

12 CEP represents operators and clerical employees who are covered by a collective agreement which expires on December 19, CEP also represents operators employed by AAA Alarm, who are covered by a collective agreement which expires on November 20, CAW represents Allstream technical and non-technical employees who are covered by a collective agreement which expires on December 31, USW represents Allstream technical employees. The collective agreement with USW expires on December 31, Distribution channels MTS offers a variety of distribution channels to keep customers and employees engaged. New and existing customers use these channels to access both residential and business services, including: landline plans and hardware, legacy data, long distance options, wireless (data, post-paid and pre-paid) service and hardware, broadband (Internet and TV), and a host of other products and services. Our main points of contact include: retail and corporate sales channels, MTS Connect stores, customer contact centres (includes call centres and business offices), bill payments agents, multi-dwelling unit programs and our corporate website MTS Connect store locations act as our central retail outlets, servicing both residential and small business customers. We currently operate three MTS Connect stores, all staffed by MTS employees, and hold agreements with 40 partners who own and operate 47 full-service MTS Connect store locations around Manitoba. On top of this, we also have an extensive province-wide network of wireless and Internet partners who operate retail locations offering sales and service to our customers. MTS Contact centres are another important sales channel, providing service for residential local and long distance inbound customers. Our partner channel provides solutions and wireless fulfillment through an established outbound program. Allstream s distribution channels include a direct sales force, alliance partner channel, inside sales, customer care contact centres, a customer service portal and our Web site We use these channels to provide our business customers with technology solutions that include converged IP services; unified communications; voice and data connectivity; and Managed IP Services, including Security, Cloud and Data Centre. Our direct and alliance sales channels are used to serve our business customers across Canada and to provide business solutions to meet their needs. Inside sales provide a channel for inbound calls, as well as outbound telemarketing. Our customer care contact centre and portal allow our customers to access customer assistance, tools and information regarding their products and services. Environmental policy We have a formal Environmental Management System (the EMS ), which was approved by our Board of Directors. The EMS functions as an operational manual and reference guide for environmental compliance and management. It is comprised of several components which specify the organizational structure, responsibilities, practices, procedures and resources employed in implementing our Environmental Policy and complying with environmental laws. The foundation of the EMS is our Environmental Policy, which was established to ensure that we operate our business in a manner that reflects concern for the environment and supports the principles of sustainability. Our Environmental Policy is designed to support: compliance with applicable laws and regulations regarding the environment and sustainable development; appropriate communication to, and education of, our employees to foster environmentally aware attitudes and knowledge of environmental matters; Manitoba Telecom Services Inc. 10 Fiscal year 2012

13 reduction, reuse and recycling where appropriate in order to minimize the creation of waste; disposition of waste in an environmentally sound manner; development and maintenance of environmental emergency procedures; substitution of environmentally friendly substances where appropriate; innovation regarding products and services that contribute to the preservation of the environment and regular reporting on environmental compliance and initiatives. For a further discussion of our environmental policy, please refer to the Social and environmental responsibility section of our 2012 MD&A. Social responsibility As a constituent of the Jantzi Social Index, we rank among the top socially and environmentally responsible companies in Canada. As one of the country s leading national communications providers, we have a goal to contribute to the welfare of the communities in which it operates and serves. Our aim is to continuously have a positive impact on the lives of our employees, customers and other stakeholders through our products and services, as well as through our actions in our workplace, communities and environment. We remain focused on our corporate social responsibility efforts by engaging with our employees, investing in our communities and reducing our impact on the environment. For a further discussion on our social responsibility, please refer to the Social and environmental responsibility section of our 2012 MD&A. Risk factors Risk management practices are part of our standard operations, across all of our businesses. Identifying and managing our principal risks forms part of our management s regular business planning process because risks, as well as associated opportunities, form the basis of many aspects of the Company s future business model and opportunities. Annually, we conduct a formal risk assessment process that is directly linked to our business plan, and regular updates are performed throughout the year to identify potential emerging or previously unidentified risks. Risk factors include, but are not limited to areas such as: competitive environment, changes in regulation of telecommunications and broadcast industries, market conditions, financing and debt requirements, future cash flow requirements, pension funding, pension litigation, operational execution and process, continuous rapid changes in technology, scale of operations, security and network failures, litigation and legal matters, human resources, tax matters and the strategic review of our Allstream subsidiary. For a complete and detailed summary of our risks, please refer to the Risks and uncertainties section of our 2012 MD&A. INCOME TAXES The Company continues to have substantial capital cost allowance pools and tax losses, which we expect will fully offset our taxable income and eliminate cash income taxes until The present value of our tax asset is approximately $300 million. Realization of these deferred tax assets is dependent on our ability to utilize the underlying future deductions against future taxable income. For a further discussion on the impact of income taxes, please refer to the Critical accounting estimates and assumptions section of our 2012 MD&A. LEGAL PROCEEDINGS In August 2004, a national class action claim was filed in the Saskatchewan Court of Queen s Bench against certain wireless carriers, including us, on behalf of a class of plaintiffs described as subscribers or customers of wireless or cellular services. This claim alleges that each of the carriers is in breach of contract and has violated competition, trade practices and consumer protection legislation in connection with certain system access fees, system licensing charges and other similar charges that the carriers have Manitoba Telecom Services Inc. 11 Fiscal year 2012

14 billed to their wireless customers. The claim seeks unspecified general, aggravated, punitive and exemplary damages. Similar class action claims have been filed in various jurisdictions across Canada, but these actions have been held in abeyance pending the outcome of a certification process in respect of the Saskatchewan claim. In September 2007, the Saskatchewan court certified this claim as a class action. The defendants in this action, including us, appealed this certification order. The Court of Appeal issued its written decision dismissing the appeal on November 15, The defendants, including MTS Allstream, filed a motion with the Supreme Court of Canada seeking leave to appeal the Court of Appeal decision, but this motion was denied in June The matter will now proceed on its merits. We are also a defendant in a 2008 national class action lawsuit filed in Saskatchewan on behalf of the class of plaintiffs described as subscribers or customers for wired, wireless or cellular services who have paid extra fees and charges in the nature of, but not limited to, 911 fees. The damages claimed include the recovery of all charges relating to 911 or emergency service access, charged to all customers over and above what the defendants were entitled to charge, as well as aggravated, punitive and exemplary damages and the disgorgement of all profits relating to such charges. The defendants are the major Canadian telecommunications carriers including wireless carriers. The class in this action has not yet been certified by a court, which is required before the claim can proceed on the merits of the claim. Even if the plaintiffs are successful in obtaining certification of the class, they must still prove their case on the merits of their claims. The potential for liability and magnitude of potential loss cannot be determined at this time. In 1999, three of our unions and a retiree suing on behalf of other retirees and their surviving spouses filed a claim against us in respect of the Manitoba Telecom Services Inc. and Participating Subsidiaries Employee Pension Plan ( the Pension Plan ). This claim was based on events that had occurred at the time of our privatization in This matter proceeded to trial in 2008, and in 2010 the trial court ruled that the we were obligated to make a one-time payment to the Pension Plan. We believed the decision was legally incorrect and appealed. In 2012, a panel of the Manitoba Court of Appeal agreed unanimously with us, dismissed the claim in its entirety, and concluded that we had complied with our obligations and that no changes to the future funding requirements or any other aspects of the Pension Plan were required as a result of this past litigation. The plaintiffs subsequently sought leave to appeal the decision to the Supreme Court of Canada. On October 25, 2012 it was announced that the Supreme Court of Canada has decided to hear the plaintiffs appeal. We do not believe that the pending hearing will change the unanimous decision of the Manitoba Court of Appeal. A decision from the Supreme Court is expected within the next 8 to 12 months. CAPITAL STRUCTURE General description The composition of our capital structure is summarized in the following table: As at December 31 (in millions $) Bank indebtedness (cash and cash equivalents) 12.6 (16.8) Notes payable Finance lease obligations, including current portion Long-term debt, including current portion ,020.8 Total debt 1, ,019.0 Shareholders equity Total capitalization 1, ,808.7 Debt to capitalization 55.4% 56.3% Manitoba Telecom Services Inc. 12 Fiscal year 2012

15 Credit facilities (in millions $) Utilized at December Capacity 31, 2012 Medium term note program Revolving credit facility Additional credit facility Accounts receivable securitization Total 1, 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 have a $500.0 million medium term note program, under which we have utilized $200 million for the issuance of debt. In accordance with the terms and conditions of our medium term note program, we have the right to redeem any series of notes issued pursuant to this program if so stated in the applicable pricing supplement. For further information regarding our medium term note program please see our Short Form Base Shelf Prospectus dated August 23, We also have a $400.0 million revolving credit facility, of which we have utilized $119.6 million for undrawn letters of credit. Additionally, we have a $150.0 million credit facility, which is used solely for the issuance of letters of credit. As at December 31, 2012, we utilized $149.3 million of this facility for undrawn letters of credit. In addition to these programs and facilities, we have a $110.0-million accounts receivable securitization program, of which we have utilized $54.5 million as at December 31, Of the $268.9 million in total letters of credit outstanding, $235.9 million represents letters of credit issued under federal pension regulations enacted in 2011 under the Pension Benefits Standards Act, 1985 (Canada), which permits the use of letters of credit to satisfy a portion of pension solvency obligations. We issued letters of credit to satisfy our pension solvency funding obligations for On February 6, 2013 we prefunded $70 million into the pension plan utilizing existing borrowing facilities. Credit ratings 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 9, 2012, S&P confirmed its credit ratings on our long-term corporate credit and senior unsecured debt at BBB, and our commercial paper rating of A-2. S&P also confirmed its outlook as stable. On December 21, 2012 DBRS confirmed its ratings on our senior debentures at BBB and our commercial paper rating of R-2 (high). The credit ratings provided by DBRS and S&P (collectively the Rating Agencies ) as at December 31, 2012 also are summarized in the following table. S&P Senior debentures BBB (stable) S&P Commercial paper A-2 DBRS Senior debentures BBB (stable) DBRS Commercial paper R-2 (high) The credit ratings of the Rating Agencies are not recommendations to purchase, hold or sell the instruments to which they relate, inasmuch as such ratings do not comment as to market price or suitability for a particular investor. Credit ratings are intended to provide investors with an independent measure of the credit quality of an issue of securities. We provide the Rating Agencies with confidential, in-depth information in support of their rating processes. There is no assurance that any rating will remain in effect Manitoba Telecom Services Inc. 13 Fiscal year 2012

16 for any given period of time, or that any rating will not be revised or withdrawn entirely by a Rating Agency in the future if, in its judgment, circumstances so warrant. According to the S&P rating system, the BBB rating is the fourth highest of 22 available rating categories and means that the obligor s capacity to meet its financial commitment on the obligation is adequate. According to the DBRS rating system, the BBB rating is the fourth highest of 26 available rating categories, and means that the debt security is of adequate credit quality. The A-2 rating assigned to our commercial paper is the third highest of eight available rating categories and means that our capacity to meet our financial commitment on an obligation is satisfactory. The R-2 (high) rating assigned to our commercial paper is the fourth highest of ten available rating categories and means that our commercial paper is considered to be at the upper end of adequate credit quality. Share capital Our authorized share capital consists of an unlimited number of Common Shares of a single class, and an unlimited number of Preference Shares of two classes. The holders of Common Shares have the following rights: to receive notice of, and attend and vote at, meetings of shareholders; to receive such dividends as may be declared by the Board of Directors; and to share in the distribution of the assets of the Company upon liquidation, winding-up or dissolution, subject to the rights, privileges and conditions attaching to any other class of shares ranking in priority thereto. The Company's share capital also allows for the issuance of Preference Shares, that were historically created for certain contemplated holders in very specific and unique situations. For that reason, from a practical perspective, these shares could not be reasonably issued on a general basis, and are therefore not considered to be "blank cheque" preferred shares. Subject to certain very bespoke terms that limit the practical issuability of these shares, the attributes of these shares are identical to those of the Common Shares except for the following: The holders of Class A Preference Shares are not entitled to vote at meetings of shareholders on resolutions electing directors. The Class A Preference Shares are convertible, at any time, into Common Shares, on a one-for-one basis. The holders of Class B Preference Shares are not entitled to vote at meetings of shareholders, and are not entitled to share in the distribution of the assets of the Company upon a liquidation, winding-up or dissolution. The Class B Preference Shares are convertible into Common Shares on a one-for-one basis at the option of the holder at any time subject to foreign ownership restrictions, or upon the occurrence of certain events, or at the option of the Company at any time. Dividends on each class of Preference Shares are payable on the same dates as dividends are paid on the Common Shares of the Company, using the same record date for determining holders of Preference Shares entitled to dividends as the record date for Common Share dividends, in an amount per Preference Share equal to the corresponding amount of dividends per Common Share. Both classes of Preference Shares participate in the earnings of the Company on an equal basis with the Common Shares and, therefore, are included in the weighted average number of shares outstanding for purposes of calculating basic and diluted earnings per share. Manitoba Telecom Services Inc. 14 Fiscal year 2012

17 As at December 31, 2012, our issued and outstanding share capital consisted of 65,936,973 Common Shares. There are no outstanding Preference Shares. Constraints Our Articles set out the following ownership restrictions in relation to our voting shares, which consist of those shares that give the holder the right to receive notice of, and attend and vote at, meetings of shareholders on resolutions electing directors: Individual Holdings The total number of voting shares that may be beneficially owned by any one person or by the members of any one group of associated persons, other than by way of security only, may not exceed 20% of the total number of issued and outstanding voting shares. Non-residents of Canada The number of voting shares that may be beneficially owned by non-residents of Canada, other than by way of security only, may not exceed in the aggregate the maximum percentage of the total number of issued and outstanding voting shares of the Company permitted by applicable law from time to time. Government Ownership No voting shares of the Company or any affiliate may be beneficially owned by any government or government agency, other than the Government of Manitoba and its agents or an entity that invests funds or assets under a pension plan or insurance arrangement. In order to ensure that we continue to be in compliance with the ownership restriction respecting nonresidents of Canada, our share ownership is monitored by our transfer agent and registrar in relation to registered shareholders, and by CDS Clearing and Depository Services Inc. in relation to non-registered shareholders. Dividend policy Our dividend policy is to provide sustained growth in dividends to shareholders to the extent that it is appropriate considering growth in earnings per share, results of operations, financial condition, and our cash position and investment opportunities. The declaration and payment of dividends are at the sole discretion of the Board of Directors. Accordingly, there can be no assurances as to the amount or timing of any dividend in the future. In 2012 we declared dividends per outstanding Common Share of $0.425 in each of February, May, August and November. In 2011 we declared dividends per outstanding Common Share of $0.425 in each of February, May, August and November. In 2010 we declared dividends per outstanding Common Share of $0.65 in each of February and May and of $0.425 in each of August and November. MARKET FOR SECURITIES Our Common Shares are listed on the Toronto Stock Exchange under the trading symbol of MBT. The following is a summary of the trading volumes and price ranges of our Common Shares by month during Manitoba Telecom Services Inc. 15 Fiscal year 2012

18 Month Trading volumes Price ranges ($) January 7,147,105 $ $31.80 February 7,039,216 $ $33.70 March 9,097,707 $ $35.09 April 5,909,984 $ $34.97 May 5,271,340 $ $35.04 June 6,049,963 $ $34.23 July 5,315,981 $ $34.11 August 5,731,482 $ $34.70 September 4,277,334 $ $34.17 October 4,230,588 $ $33.72 November 5,440,748 $ $33.72 December 4,455,956 $ $33.72 DIRECTORS AND OFFICERS Directors The following persons are the directors of the Company as at December 31, 2012, each of whom was elected at the annual meeting of shareholders held on May 10, All directors hold office until the next annual meeting of shareholders, unless a director resigns or a director s office becomes vacant for any reason. Information about our director nominees standing for election in May 2013 can be found in our Management Proxy Circular which will be available in April The directors are members of the committees of the Board of Directors as specified below. The information specified below shows the month and year in which each director first became a director of the Company. In the case of a director who was a member of the Board of Commissioners of The Manitoba Telephone System prior to January 7, 1997 (the date on which The Manitoba Telephone System ceased to be a Crown corporation and was continued as a publicly-traded company under the name Manitoba Telecom Services Inc.), the month and year shown is when such director first became a member of the Board of Commissioners. Name and province of residence Principal occupation Director since Pierre J. Blouin Manitoba, Canada Jocelyne M. Côté-O'Hara,C.M. Ontario, Canada (2) (3) N. Ashleigh Everett Manitoba, Canada (2) (3) The Honourable Gary A. Filmon, P.C., O.C., (2) (3) O.M. Manitoba, Canada Gregory J. Hanson, FCA, FCIP, FLMI (1) Manitoba, Canada Kishore Kapoor, CA Manitoba, Canada (4) (5) David G. Leith Ontario, Canada (1) (5) Chief Executive Officer of the Company March 2006 Corporate Director January 1997 President and Corporate Secretary, Royal Canadian Securities Limited, (own and manage various properties) January 1997 Corporate Director April 2003 Corporate Director May 2007 Corporate Director May 2006 Chair, Manitoba Telecom Services Inc. and certain of its subsidiaries May 2009 Manitoba Telecom Services Inc. 16 Fiscal year 2012

19 Name and province of residence Principal occupation Director since (1) (5) H. Sanford Riley, C.M., J.D. Manitoba, Canada D. Samuel Schellenberg (1) Manitoba, Canada (2) (3) Carol M. Stephenson, O.C. Ontario, Canada President and CEO Richardson Financial Group Ltd. May 2011 Corporate Director August 1989 Dean of Richard Ivey School of Business University of Western Ontario May 2008 (1) Member of the Audit Committee (4) Ex-officio member of all Committees of the Board (2) Member of the Governance & Nominating Committee (5) Member of the Strategic Committee (3) Member of the Human Resources & Compensation Committee Additional information on Directors During the past five years, each of our directors had the principal occupation indicated above, except as outlined below. Certain other information relating to the directors is outlined below. David G. Leith was Deputy Chairman and Managing Director of CIBC World Markets and Head of the firm's Investment, Corporate and Merchant Banking activities prior to March D. Samuel Schellenberg was CEO of Pembina Valley Water Cooperative Inc. prior to April Kishore Kapoor, CA was President of Wellington West Holdings Inc. prior to July Officers The following persons are the officers of the Company. Name and province of residence Principal occupation Pierre J. Blouin Manitoba, Canada Wayne S. Demkey, CA Manitoba, Canada Dean L. Prevost Ontario, Canada Kelvin A. Shepherd, P.Eng. Manitoba, Canada Paul A. Beauregard Manitoba, Canada Christopher W. Peirce Ontario, Canada Michael R. Strople Ontario, Canada Aliana Rozenek Ontario, Canada Brenda M. McInnes, CA Manitoba, Canada Chief Executive Officer Chief Financial Officer President, Allstream President, MTS Chief Legal Officer and Corporate Secretary Chief Corporate Officer Chief Technology Officer Chief Human Resources Officer Vice-President & Treasurer During the past five years, each of our officers had the principal occupation indicated above, except as outlined below. Dean L. Prevost was Chief Corporate Officer of MTS Allstream Inc. prior to December 2008, Chief Strategy Officer of MTS Allstream Inc. prior to September Paul A. Beauregard was Vice-President, General Counsel & Corporate Secretary of Manitoba Telecom Services Inc. and MTS Allstream Inc. prior to June 2011, Vice-President & General Counsel of Manitoba Telecom Services Inc. 17 Fiscal year 2012

20 Manitoba Telecom Services Inc. and MTS Allstream Inc. prior to June 2010, Vice-President, Law of Manitoba Telecom Services Inc. and MTS Allstream Inc. prior to January He was also Vice- President, Law Mergers and Acquisitions of BCE Inc. and Bell Canada prior to September 2008, Assistant General Counsel of BCE Inc. and Bell Canada prior to June Christopher W. Peirce was Chief Regulatory Officer of MTS Allstream Inc. prior to January Michael R. Strople was Vice-President, Technology Development of MTS Allstream Inc. prior to September Our directors and officers as a group own, directly or indirectly, or exercise control or direction over 4.3% of the issued and outstanding Common Shares of MTS. In addition, our directors and officers as a group own (vested and unvested) deferred compensation units, restricted share units and performance share units, which if converted to Common Shares of MTS, would represent, incrementally, 0.7% of the issued and outstanding Common Shares of MTS. AUDIT COMMITTEE Composition Our Audit Committee is comprised of four directors appointed by our Board of Directors. Each member of the Audit Committee is independent as defined in Multilateral Instrument Audit Committees. Each Audit Committee member is financially literate. The following is a description of the education and experience of each member that is relevant to his or her responsibilities as an Audit Committee member. Kishore Kapoor, CA has been the Chair of the Audit Committee since May 2012 and the Chair of the Strategic Committee since September Mr. Kapoor received a Bachelor of Science from the University of Manitoba. He is a chartered accountant and a former tax partner with the international accounting firm of KPMG LLP. Mr. Kapoor was until recently President of Wellington West Holdings Inc., the parent company of a number of subsidiaries that provide wealth management and corporate finance services to retail and institutional clientele in Canada. Mr. Kapoor was a founder of Assante Corporation, an organization providing wealth and asset management services through a network of financial advisors, and served as its Executive Vice-President Corporate Development from 1994 to From 2003 to 2005, Mr. Kapoor was Executive Vice-President Corporate Development of Loring Ward International Ltd., a public company formed to hold the U.S. operations of Assante Corporation. Gregory J. Hanson, FCA, FCIP, FLMI has been a member of the Audit Committee since May Mr. Hanson has a Bachelor of Commerce from the University of Manitoba and is a Chartered Accountant. He obtained Fellowship in both the Life Management Institute (FLMI) and the Insurance Institute of Canada (FIIC) and completed one month Advanced Executive Education Program at Wharton Business School, University of Pennsylvania. From November 1992 to May 2007, Mr. Hanson was President and Chief Executive Officer of The Wawanesa Mutual Insurance Company. Mr. Hanson is a Director of each of The Wawanesa Mutual Insurance Company, The Wawanesa Life Insurance Company, Wawanesa General Insurance Company and James Richardson & Sons Limited, of which he is the Chair of its Audit Committee. H. Sanford Riley, C.M., J.D. has been a member of the Audit Committee since May Mr. Riley obtained a B.A. in Political Science from Queen s University and a J.D. from Osgoode Hall Law School. H. Sanford Riley is President and Chief Executive Officer of Richardson Financial Group, Ltd., a specialized financial services company. Between 1992 and 2001, he served as President and Chief Executive Officer of Investors Group Inc., a personal financial services organization, retiring as Chairman in Mr. Riley has been a director of Molson Coors Brewing Company since February 2005, North West Company since 2002, becoming Chairman in 2008, and is also a director of GMP Capital, a publicly traded investment dealer, Canadian Western Bank, Winnipeg Airports Authority and The Canada West Foundation. Mr. Riley serves as Chairman of the University of Winnipeg Foundation, is a past Chancellor of the University of Winnipeg and past Chairman of the Manitoba Business Council. Mr. Riley was also appointed a Member of the Order of Canada in 2002 Samuel Schellenberg has been a member of the Audit Committee since January He is a graduate of the University of Manitoba with a Bachelor of Arts. Mr. Schellenberg has many years of Manitoba Telecom Services Inc. 18 Fiscal year 2012