Q Management s Discussion and Analysis. For the period ended September 30, Manitoba Telecom Services Inc.

Transcription

1 Management s Discussion and Analysis For the period ended September 30, 2014 Manitoba Telecom Services Inc.

2 Table of contents Page Section 1 Business overview 2 Performance highlights 6 Discussion of operations Liquidity and capital resources Critical accounting estimates and assumptions Changes in accounting policies Regulatory developments Risks and uncertainties Controls and procedures Non-IFRS performance measures Glossary Content Description of our company and its subsidiaries Strategic priorities measurement section, key developments and financial scorecard Our operating performance summary: Consolidated MTS Allstream Selected quarterly financial information Summary of cash flows, capital management and commitments and contractual obligations Accounting estimates that are critical to our financial statements Description of changes in accounting policies Key regulatory developments affecting the Canadian telecommunications sector Description of major risks and uncertainties that could affect our future performance Evaluation of our controls and procedures Definition of certain financial measures which do not have a standardized meaning under IFRS Financial and telecommunications terms and definitions Management s Discussion and Analysis November 5, 2014 This interim Management s Discussion and Analysis ( MD&A ) of our financial results comments on our operations, performance and financial condition for the three and nine months ended September 30, 2014 and This MD&A is based on financial statements prepared under International Financial Reporting Standards ( IFRS ). All financial amounts, unless otherwise indicated, are in Canadian dollars and in accordance with IFRS. MTS Allstream implemented changes to its organizational structure on January 1, Accordingly, segmented information for 2011 has been re-stated. Unless otherwise indicated, this MD&A for the three and nine months ended September 30, 2014 is as at November 5, In preparing this MD&A, we have taken into account information available to us up to November 5, In this MD&A, we, our and us refer to Manitoba Telecom Services Inc. ( the Company ). This MD&A should be read in conjunction with our interim condensed consolidated financial statements for the three and nine months ended September 30, About us For more information about our company, including our Annual Information Form, audited consolidated financial statements and annual MD&A for the year ended December 31, 2013, dated February 6, 2014, please visit our website at or visit SEDAR at Risks and uncertainties In conjunction with our third quarter 2014 interim condensed consolidated financial statements and this interim MD&A, we urge you to read the important risks and uncertainties that are detailed on page 24 of this MD&A, in addition to those outlined in our audited consolidated financial statements and annual MD&A for the year ended December 31, To view these financial reports, go to Therefore, forward-looking statements should be considered carefully and undue reliance should not be placed on them. Please note that forward-looking statements in this interim MD&A reflect Management s expectations as at November 5, 2014, and thus, are subject to change thereafter. The Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. This interim MD&A and the financial information contained herein have been reviewed by the Company s Audit Committee and approved by the Company s Board of Directors ( the Board ). Factors that could cause anticipated opportunities and actual results to differ materially include, but are not limited to, matters identified in the Risks and uncertainties section of this interim MD&A. Non-IFRS measures of performance (EBITDA and free cash flow) In this MD&A, we provide information concerning earnings before interest, taxes, depreciation and amortization ( EBITDA ) and free cash flow because we believe investors use them as measures of our financial performance. These measures do not have a standardized meaning as prescribed by IFRS, and are not necessarily comparable to similarly titled measures used by other companies. Please refer to the glossary section of this MD&A for a discussion of these terms. Regarding forward-looking statements This interim MD&A and, in particular, but not limited to, the Risks and uncertainties section of this interim MD&A, include forward-looking statements and information (collectively, statements ) including, but not limited to, statements pertaining to the Company s corporate direction, business opportunities, operations, financial objectives, future financial results and performance, 4G Long Term Evolution ( LTE ) wireless network expansion, fibre-to-the-home ( FTTH ) deployment, national IP fibre network expansion, pension funding, as well as other statements that are not historical facts. Examples of statements that constitute forward-looking information may be identified by words such as believe, expect, project, should, anticipate, could, target, forecast, intend, plan, outlook, see, set, pending and other similar terms. All forward-looking statements are made pursuant to the safe harbour provisions of applicable Canadian securities legislation. Forward-looking statements are subject to risks, uncertainties and assumptions. As a consequence, actual results in the future may differ materially from any forward-looking conclusion, forecast or projection, whether expressed or implied. i Manitoba Telecom Services Inc. Management s discussion and analysis

3 Business overview The COMPANY Manitoba Telecom Services Inc. is the market leader in Manitoba and a leading national communications provider in Canada. We provide innovative communications solutions for the way Canadians live and work today, serving all market segments in Manitoba through our MTS Inc. subsidiary ( MTS ) and business customers across Canada through our Allstream Inc. subsidiary ( Allstream ). Our common shares are listed on the TSX (trading symbol: MBT). Our company is headquartered in Winnipeg, with eight other corporate offices across Canada. Our website is MTS the UNDISPUTED MARKET LEADER in MANITOBA MTS is the leading full-service telecommunications provider for residential and business customers. We have strong in-region distribution and the richest bundling capabilities among our peers, all supported by our pervasive infrastructure and exceptional brand recognition. A technology leader, MTS operates advanced wireless networks delivering the best coverage for Manitobans with its 4G, (LTE and HSPA+), CDMA and Wi-Fi wireless networks. More than 850,000 Manitobans now have access to MTS's 4G LTE wireless network. This 4G LTE network gives LTE devices the power to stream movies and download music, pictures and apps faster than ever before, to play multi-player games and to quickly access s and business documents. Our advanced fibre and VDSL2+ network brings up to 50 Mbps high-speed Internet and Internet Protocol television ( IPTV ) to 70% of Manitoba homes and world-class services to local businesses. We also continue to invest to build out our extensive FTTH network with 14 Manitoba communities along with various areas of new urban development within Winnipeg now being served with FTTH coverage. Services Wireless (4G LTE, 4G HSPA+, CDMA and Wi-Fi) High-speed Internet IPTV Wireline voice Home and commercial security Information solutions Business services (Data, converged IP and unified communications) 505,006 Wireless subscribers 51% MB market share 215,744 High-speed Internet subscribers 54% MB market share 111,548 Television subscribers 34% Winnipeg market share 207,965 Business network access lines 268,747 Residential network access lines 42,213 Security and monitoring customers MTS offers a full suite of wireless, high-speed Internet, IPTV, wireline voice, and home security services, together with a complete package of information solutions and business telecommunications services. Information solutions currently includes IT infrastructure, application development, managed services, networking services and unified cloud services provided by EPIC Information Solutions ( EPIC ) and will include our new EPIC data centre once it is open. The data centre is currently under construction with an expected mid-2015 opening date. To view more information on our services, visit ALLSTREAM a LEADER in the CANADIAN BUSINESS SECTOR Allstream is the only Canadian-owned national communications provider that works exclusively with business customers. An industry leader in innovative IP-based solutions, Allstream leverages its nationwide high-performance IP network to help businesses of all sizes unify the many ways they connect - to better serve customers, and to improve efficiency and productivity. All our services run on a secure national network, which is built and managed using advanced IP and fiber technologies. IP-based solutions IP connectivity Unified communications Security and hosting services 1 Manitoba Telecom Services Inc. 1 of only 3 Truly national providers in business markets 3,167 IP fibre-connected buildings Over 38,000 customers across Canada Nearly 600,000 customer connections 30,000 km+ National IP fibre network with 9 U.S. network access points Management s discussion and analysis

4 Allstream is a strong competitor in the Canadian telecommunications market, with converged IP revenues growing at 10.1% in. With our extensive national IP network, we connect businesses across our nation with state-of-the-art telecommunication services. As at September 30, 2014, this IP-network spans over 30,000 kilometers with connections to a total of 3,167 buildings (up 214 buildings from ). To view our IP network map, go to For more details on Allstream's products and services, visit Performance highlights Core strategic objectives for MTS and Allstream were described in the executive summary of our 2013 annual MD&A. Included below are the achievements and efforts that support, in part, our strategic initiatives. STRATEGIC OBJECTIVES MTS Bring the latest technology to Manitoba MTS has long been recognized as an industry innovator, often being the first to introduce services in areas such as digital television, high-speed Internet, electronic commerce and other telecommunications advancements. Our own cloud Construction of our new $53-million data centre is on track with the expected opening mid The external structure of the 64,000-square-foot building is nearing completion with installation of power systems and environmental control equipment being the next major step. This facility is unique, being the first and only commercial Tier 3 data centre in the province, providing IT solutions and cloud services to Manitoba businesses as well as organizations across North America. Sales efforts are continuing with strong interest from prospective customers, indicating high demand for data centre services, as expected. It is expected that data centre and cloud services will provide a new and important growth opportunity for MTS over the next several years. The EPIC Data Centre under construction in Winnipeg, Manitoba as of October From left to right; Graham Calvin, Project Manager, Ehvert Mission Critical; Paul Cadieux, VP Finance, Procurement & Real Estate, MTS Allstream; Michel Côté, Chief Technology Officer, OneCap Investment Corp; Russ Friesen, VP Special Projects, MTS Allstream; Wayne Demkey, Chief Financial Officer, MTS Allstream; Kelvin Shepherd, President, MTS; Daniel Dorey, Chairman of the Board, OneCap Investment Corp; Pierre Setlakwe, Chief Executive Officer (CEO) - OneCap Investment Corp; Bart Leung, Senior Associate, Ehvert Mission Critical; Matt Hotrum, Procurement Manager, Ehvert Mission Critical; Chris Johnston, Construction Manager - Ehvert Mission Critical. To view more information on the data centre go to Monitor, predict and prevent MTS unveiled its new multi-million dollar network monitoring and management facility, the Manitoba Network Operations Centre on October 9, Unique to Manitoba, this facility will provide 24/7 monitoring, surveillance and management of MTS's critical network infrastructure. To read more about the centre, go to MTS's newsroom at LTE network ranked number-one by PCMag.com MTS's blazing-fast LTE wireless network retained its title as "the fastest and most reliable LTE network in Winnipeg" for the second year in a row according to PCMag.com. This leading technology website, known for its rigorous testing and reviews, also named MTS as the fastest Internet service provider in the province. 2 Manitoba Telecom Services Inc. Management s discussion and analysis

5 Phones, tablets and Internet sticks We recently added the Samsung Galaxy Note 4, the Apple iphone6, iphone 6 Plus, ipad, ipad mini with retina display and the ipad mini, the Sony Xperia Z3 and the BlackBerry Passport to our device line-up. All MTS smartphone plans include messaging, call display, and voic lite. To view a complete list of all of our devices, go to Expand our network reach Expanding the MTS FTTH network into additional communities allows us to provide more customers with the most advanced telecommunications services, including our innovative MTS Ultimate TV service. The MTS Ultimate TV service is currently available to 97% of Winnipeg households, to 99% of Brandon households, to 97% of Portage la Prairie households and to a growing number of homes in connected communities. Customers on the MTS FiON Network have exclusive access to the newest and fastest high-speed Internet plans which offer unlimited access and download speeds of up to 250 Mbps. Providing the best Internet coverage MTS provides high-speed Internet coverage to over 87% of homes, making it the most comprehensive Internet service in the province. High-speed Internet subscribers increased by 10,996 or 5.4% over the same period last year. Tune in to MTS Ultimate TV MTS customers can choose from smaller, more flexible channel groups to build a package of television channels that's right for them. Users can also log into MyAccount, where they can add, change channel groups while selecting from nearly 500 channels, including more than 170 HD channels and access to Video on Demand and Pay-Per-View events. Since, we increased MTS Ultimate TV subscribers by 11,278, for a 13.2% increase in subscribers. Investing to deliver the best possible wireless experience Since its introduction in 2012, MTS has doubled 4G LTE wireless network speeds and now supports lab-verified peak download speeds of up to 150 Mbps. In 2014, we added 15 LTE locations in Manitoba. By the end of 2014, we expect to add 40 LTE locations, expanding our LTE coverage to 80% of Manitobans. Our HSPA+ wireless network currently covers over 97% of Manitoba's population and our LTE wireless network has expanded to over 75% of Manitobans, with plans to cover more than 90% of Manitoba's population with 4G LTE wireless service over the next five years. Connect at an MTS Wi-Fi hotspot With over 870 Wi-Fi hotspots across the province, MTS provides high-speed Internet access where customers need it the most - at businesses, schools, community and health care centres, cafes and restaurants. Through a City of Winnipeg agreement, we are expanding our Wi-Fi service into 350 city-wide community centres and facilities. To locate our Wi-Fi service, go to Continue to offer an industry-leading bundling service mix MTS customers can select an assortment of services from some of our most popular plans, which includes wireless, IPTV, Internet, home phone and home security services. To find out more about our bundling service, go to MyBundle - it's a big deal Historically, our bundling service has contributed to very low churn and higher average revenue per user ( ARPU ). In we had a total of 104,463 bundled customers, a 6.0% increase over. Bundle customers can wrap-up four-, five- or six-services into one neat package which can include up to five MTS post-paid wireless plans. Started in July this year, our unique five- and six-bundle options provide additional support of lower churn. Our MyBundle option presents the best value and is recognized as the gold standard in Manitoba. 57.9% of MTS's bundle mix is made up of four to six services. STRATEGIC OBJECTIVES ALLSTREAM Improve our profitability and margins By focusing our sales efforts on our growing high-margin IP based products that are delivered on our network and managing our legacy lines of business to maximize cash flow while migrating to IP, Allstream achieved an EBITDA margin percentage of 15.5% in. Allstream s performance reflects its continuing transition to an IP-based company, with strong growth in IP revenues, partly offset by declining legacy services revenues. IP network connections momentum carries on Allstream continues to build on its momentum of IP installations with the fourth consecutive quarter of year-over-year IP growth. We also expanded our industry leading service offerings with such nationally recognized brands as Canadian Tire Corporation Limited. Consistent improvements in IP sales For the third consecutive quarter, we achieved an increase in year-over-year IP sales wins. IP sales wins for increased by 4.9% over Q3 last year. Customer installations into already-connected buildings were up 23.9% over Q3 last year. Allstream IP revenues were 10.1% higher in versus, with 64% of IP revenues being on-net or near-net. Expand our on-net footprint Allstream is a national communications provider focused on serving Canadian business. We are able to leverage our multi-billion dollar investment in our extensive IP network, along with the popularity of IP-based products in the Canadian business marketplace. Being a national communications provider, Allstream is able to bring its extensive multi-billion dollar IP network and popular IP-based products to serve Canadian business customers. 3 Manitoba Telecom Services Inc. Management s discussion and analysis

6 Strength of our national IP fibre network Our IP network is a competitive differentiator and as of September 30, 2014 we had 3,167 buildings connected, an increase of 53 over last quarter, or 214 since. NAV CANADA's 2014 Supplier Performance Award of Excellence winner This award is part of NAV CANADA's supplier recognition program, aimed at acknowledging Allstream's performance as the official telecommunications supplier to NAV CANADA.The award is given to the supplier that best exemplifies responsiveness, quality improvement, reliability and who provides a strong technology and proficiency/skill set. Ongoing focus on improving cost efficiencies In carefully managing our costs we can increase our overall profitability. Streamlined organization We continue to rationalize our cost structure at Allstream with annualized cost savings of $18.5 million achieved as at September 30, KEY DEVELOPMENTS Corporate update MTS Allstream announced on August 12, 2014 that Pierre Blouin plans to retire as the Company's Chief Executive Officer later this year. The Board of Directors has commenced a CEO search. They expect to announce Mr. Blouin s successor in advance of Mr. Blouin s retirement date in order to ensure a seamless and orderly transition. Guidance update Consolidated revenues and EBITDA are trending approximately $10 million below the low end of the 2014 financial guidance provided on November 7, 2013, which was $1,620 million and $580 million, respectively. EPS, free cash flow and capital intensity ratio continue to be in line with the Company's original 2014 financial guidance. MTS had faster than expected declines in wholesale wireless revenues and unanticipated short-term softness in the wireless pricing environment in Manitoba, which will impact 2014 results. MTS is expected to return to solid performance once these short-term wireless impacts have ended, based on solid post-paid subscriber growth of 2.7% and wireless price increases recently implemented in the Manitoba market. MTS is approximately one-third of the way through the transition of three-year contracts in its customer base to lower-priced two-year contracts and remaining CDMA roaming revenues are only expected to be $9 million in Additionally, given the 2015 opening of MTS's new data centre and continuing strong broadband revenue growth, MTS is expected to continue to generate the solid performance and strong cash flows seen in the past. With strong IP revenue growth at 10.1% in and 42% of total revenue now coming from IP-based services, Allstream is continuing its transition to an IP-based company. Offsetting this positive momentum, Allstream had higher than expected declines in legacy revenues. These declines will negatively impact 2014 results and delay the expected improvements in EBITDA and free cash flow. Allstream expects to be close to free cash flow neutral in 2014, with minimal impact on consolidated free cash flow. 4 Manitoba Telecom Services Inc. Management s discussion and analysis

7 CONSOLIDATED FINANCIAL SCORECARD Revenues ($ millions) EBITDA ($ millions) EPS ($) 0.38 Capital expenditures ($ millions) Free cash flow ($ millions) EBITDA Consolidated EBITDA was down $2.6 million, or 1.8% year over year, due to Allstream legacy revenue declines, lower wholesale wireless revenues and a one-time $2.4 million in-quarter charge relating to a CRTC* decision on the prior year's local contribution subsidy. The decrease was offset in part, by the growth in our strategic services. EPS Earnings per share ("EPS") up by $0.09, largely a reflection of lower depreciation and amortization expense in following the determination of the final asset allocations to which the SR&ED ITCs** booked earlier in the year related ($0.11). In, the IFRS-required non-cash $16.7-million impairment charge on Allstream's long-term assets, or $0.24 per share, was fully offset by lower depreciation and amortization at Allstream due to those assets being held for sale during that quarter revenues Consolidated revenues down 1.5% in comparison to, mostly due to declines in Allstream legacy revenues, along with a decline in wireless wholesale and voice revenues, partly offset by strong revenues from converged IP, broadband, wireless data and information solutions services. Strategic lines of business revenues1 were up $12.4 million, or 5.8%. Legacy lines of business revenues2 were down $17.9 million, or 11.4%. Wholesale wireless revenues were down $3.4 million, or 57.6%, as other carriers move their customers from MTS s legacy CDMA network to their own networks capital expenditures Capital expenditures increased $16.1 million as a result of timing. When adjusted for the SR&ED ITC recorded in Q1 2014, year-to-date capital expenditures have increased in line with the Company's 2014 plans to allow for investment in growth and strategic initiatives at MTS and Allstream. free cash flow ("FCF") Consolidated free cash flow was down by $17.8 million mostly due to an increase in capital expenditures. Year-todate free cash flow was up resulting from EBITDA growth and lower finance costs, offset by higher capital expenditures when adjusted for the SR&ED ITC recorded in Q Strategic lines of business consist of wireless, broadband converged IP and information solutions services Legacy lines of business consist of local access, long distance and legacy data services *Canadian Radio-television and Telecommunications Commission **Scientific research and experimental development investment tax credits 2 5 Manitoba Telecom Services Inc. Management s discussion and analysis

8 Discussion of operations consolidated results CONSOLIDATED STATEMENTS of NET INCOME and OTHER COMPREHENSIVE (LOSS) INCOME ($ millions, except EPS and weighted average shares outstanding) MTS operating revenues (0.2) Allstream operating revenues (3.3) (4.9) (26.1) (25.7) (1.6) Intersegment eliminations (8.4) (8.4) Total consolidated operating revenues (1.5) 1, ,225.2 Operations expense (2.1) MTS EBITDA (0.4) (1.4) (20.4) (6.9) (0.3) (4.8) (0.9) Allstream EBITDA before transaction and restructuring costs Other EBITDA before transaction costs (4.9) Consolidated EBITDA before transaction and restructuring costs Allstream transaction and restructuring costs 5.4 Other transaction costs 3.4 (7.5) (1.5) (3.3) (0.4) (1.4) Allstream EBITDA (3.5) Other EBITDA (4.9) (3.7) (32.4) (4.8) (6.8) 29.4 Total transaction and restructuring costs MTS EBITDA (1.8) Depreciation and amortization (13.5) (1.5) Other income (expense) (1.0) (0.2) (0.8) (22.7) Consolidated EBITDA Impairment loss - Allstream 0.2 (130.4) (15.4) (20.4) 24.5 (50.5) (60.9) 17.1 Income before income taxes Income tax expense (43.3) Net income for the period Other comprehensive (loss) income for the period, net of tax (54.9) (16.8) Total comprehensive income for the period (23.8) Weighted average shares outstanding1 (in millions) $0.47 $ $1.39 $0.05 Finance costs EPS * not applicable The increase in the number of weighted average shares outstanding is due to the December 2013 issuance of 8,855,000 common shares and participation in the Company s dividend re-investment program. 1 DISCUSSION OF CONSOLIDATED OPERATIONS Operating revenues Total operating revenues were down $6.0 million in and $18.0 million year-to-date when compared to the same periods in These declines are mainly due to legacy revenue declines and a decrease in wireless wholesale and voice revenues, partly offset by strong revenue growth from wireless data, converged IP, broadband and information solutions services. A more thorough review of MTS and Allstream operating revenues can be found on pages 8 through 18. Operations expense Our operations expense increased $5.4 million in due to a full quarter of EPIC operations, acquired in. On a year-to-date basis, operations expense decreased $3.2 million, as a result of efficiency programs, partly offset by the addition of EPIC for three quarters in Manitoba Telecom Services Inc. Management s discussion and analysis

9 EBITDA Consolidated third-quarter 2014 EBITDA decreased $2.6 million and year-to-date EBITDA increased $6.9 million. The in-quarter decrease was mainly due to declines in legacy revenues and the impact of the one-time $2.4 million charge relating to the CRTC's decision on the prior year's local contribution subsidy rate, partly offset by growth in revenues from strategic services, cost reductions and reduced Allstream sale transaction and restructuring costs. The year-to-date increase was due to reduced transaction and restructuring costs, and growth in revenues from strategic services, partly offset by legacy revenue declines. Depreciation and amortization expense Our depreciation and amortization expense increased $8.7 million in the third quarter of 2014 due to Allstream being held for sale in ($22.2 million), partly offset by the SR&ED ITC adjustment ($12.0 million) which reflects the final asset allocations to which the ITCs relate. On a year-to-date basis, depreciation and amortization expense increased $3.5 million due to Allstream being held for sale in 2013 ($31.5 million), partly offset by the SR&ED ITC recovery recorded in Q ($11.8 million) and the SR&ED ITC adjustment ($12.0 million). IFRS does not allow amortization of assets while they are classified as held for sale. Other income (expense) Our other income (expense) decreased over the third quarter of 2013 by $0.8 million and $1.0 million on a year-to-date basis. Finance costs The Company s finance costs decreased $5.0 million in the third quarter and $10.4 million year-to-date mainly a result of a significant reduction in our pension solvency deficit, which decreased pension plan non-cash interest expense. Income tax expense Income tax expense increased $4.2 million in due to higher net income. On a year-to-date basis, income tax expense increased $39.1 million, mainly due to a write-down of Allstream's long-term assets in The Company continues to have substantial capital cost allowance pools, tax losses and investment tax credits, which we expect will fully offset our taxable income and eliminate cash income taxes until 2020 at the earliest. The present value of these available tax assets is approximately $280 million. Net income and EPS Net income and EPS were up $11.4 million or $0.09, respectively, in due to the write-down of Allstream's long-term assets in, offset by higher depreciation and amortization expense. Year-to-date, net income and EPS were up $104.1 million or $1.34, respectively, mainly due to the 2013 write-down of Allstream's long-term assets. Other comprehensive (loss) income Other comprehensive (loss) income represents net actuarial gains and losses arising from changes in the present value of our defined-benefit pension liabilities and in the fair value our defined-benefit pension assets. These items are recognized in other comprehensive income net of tax, and therefore, do not have an impact on net income or EPS. The decreases in other comprehensive income in and year-to-date were due to a decrease in long-term interest rates partly offset by a solid return on pension assets. 7 Manitoba Telecom Services Inc. Management s discussion and analysis

10 MTS LINES of BUSINESS Described below are MTS s seven business lines. The following pages then provide an analysis of the results for each line of business, on an interim basis. Wireless services Leading networks and devices MTS s wireless portfolio for residential and business customers consists of cellular, wireless data and group communications. Our market share and combined 4G LTE, 4G HSPA+, CDMA-EVDO and Wi-Fi hotspot networks demonstrate that we are the market leader, with the best wireless network reach in the province. We are also the only Manitoba provider to offer unlimited data plans. Our 4G HPSA+ network coverage is available to 97% of Manitobans and our 4G LTE network covers over 75% of Manitobans. We were the first 4G LTE provider in Manitoba - this advanced network is currently capable of delivering download speeds of up to 150 Mbps and upload speeds of 50 Mbps, ensuring our customers can use their smartphones or tablets to the fullest. To view the map of our wireless network coverage, please visit Broadband and converged IP services Top priority to grow broadband Broadband and converged IP services include revenues earned from providing high-speed Internet and IPTV services to residential customers, as well as IP-based connectivity to business customers. Our high-speed Internet service provides fast, reliable speeds with the most comprehensive Internet service in Manitoba. MTS has an extensive VDSL2+ and fibre-to-the-home network that covers more than 70% of Manitoba households including 97% of the seven biggest communities, with 70% of Manitoba homes eligible for MTS Internet speeds up to 50 Mbps on VDSL2+ and 250 Mbps on FTTH, with access to the most-advanced IPTV service in Manitoba. To find out more about our Internet plans, please visit MTS has a multi-year program to expand our FTTH network in Manitoba. Since 2010, we have launched the MTS FiON Network in 14 communities. To learn more about our customized TV viewing experience, please visit Information solutions Connecting the dots between technology, business and people Revenues from this line of business include revenues earned by EPIC, which specializes in customized information technology solutions for business customers in Manitoba and Saskatchewan. EPIC services include IT infrastructure, application development, managed services, networking services and unified cloud services. This line of business will include our new EPIC data centre once it is up and running. An exciting, first-of-its-kind addition to the Manitoba business community, the data centre will have a strong customer focus. Currently under construction, the facility's opening is on-track with an expected mid-2015 roll-out date. To learn more about EPIC, please visit Unified communications, security and monitoring services Seamless integration Revenues for this line of business are earned from the sale of IP telephony products and services to business customers in Manitoba, along with our IP-based security offerings to national business customers. For certain customers, the ability to offer integrated security and equipment services is important for winning their business. This business line also includes revenues earned by AAA Alarms, which involves the installation and monitoring of alarm services to residential, business and industrial customers. To learn more about AAA Alarms, please visit Local access services Quality sets us apart Our local access services include revenues earned from the sale 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. The quality of our local wireline connection remains a competitive differentiator in the success of our voice service operations. Long distance and legacy data services Enhanced services and features Long distance and legacy data services include revenues earned from long distance calling charges, along with the marketing of networking and related products and services to our business customers. Long distance services enable residential and business customers in Manitoba to communicate with destinations outside their local exchange. Services include outbound long distance, toll-free services, calling cards, audio conferencing, and other services and features. Legacy data services support businesses in sharing information between multiple office locations by providing them with, and connecting them to, a local area network. 8 Manitoba Telecom Services Inc. Management s discussion and analysis

11 Other Other services include revenues earned from intersegment transactions, customer late-payment charges, charges from the routing and exchange of long distance network traffic nationally and the sale and maintenance of terminal equipment such as telephone switches and hardware to business customers, both in Manitoba and nationally. MTS FINANCIALS MTS revenue mix MTS revenue mix *Unified communications MTS operating revenues Wireless services Broadband and converged IP services (1.8) (2.6) Information solutions Unified communications, security and monitoring services Local access services (8.3) (5.4) Long distance and legacy data services (7.3) (6.9) (18.3) (6.8) (0.2) ($ millions) Other services Total MTS operating revenues *not applicable MTS operating revenues ($ millions) Q Q Q Manitoba Telecom Services Inc Management s discussion and analysis

12 MTS EBITDA ($ millions) Q and 2011 EBITDA are not shown as they have not been amended for IFRS 19. EBITDA During the third quarter 2014 and on a year-to-date basis, respectively, MTS EBITDA was down $0.5 million and $5.2 million, when compared to These decreases were due to declines in legacy revenues, wireless wholesale and voice revenues and in part due to the one-time $2.4-million charge relating to a CRTC decision on the prior year's local contribution subsidy. The decreases were partly offset by cost reductions and growth in Internet, IPTV, and wireless data revenues. Wireless services Wireless revenues were down $1.7 million, or 1.8%, in and down $7.4 million or 2.6% year-to-date. These decreases were due to a reduction in wholesale roaming revenues and lower voice revenues largely due to lower pricing in the competitive four-player Manitoba market, partly offset by strong growth in wireless data revenues along with a very solid increase in the number of wireless subscribers. Wireless subscriber revenues (which exclude wireless wholesale revenues) were up 1.9% or 0.1% in quarter and year-todate, respectively. Wireless data revenues and subscribers: Currently, 73.1% of our growing post-paid subscriber base now has data plans, driven by strong demand for smartphones and corresponding data usage, which contributed to a 17.9% increase in wireless data revenues. Since, subscribers with data plans increased by 42,523, reflecting the value of our feature-rich data plan offering and contributing to industry-leading post-paid churn of 0.98% in. We also saw a 2.7% increase in wireless post-paid subscribers since, a positive reflection of continued strong adoption and usage of smartphones and data applications. Wireless wholesale revenues: Wireless wholesale revenues continue to decline as other carriers move their customers from MTS s legacy CDMA network to their own networks. Revenues from CDMA roaming were $16.7 million in 2013 and are expected to be approximately $9 million in Wireless revenues ($ millions) Q Q Q Wireless customers and ARPU 505, ,749 Q ,564 Q ,462 Q Manitoba Telecom Services Inc. 476,420 $60.21 $62.35 $60.58 $59.14 $57.02 ARPU ARPU ARPU ARPU ARPU Management s discussion and analysis

13 Wireless revenues ($ millions) Voice and other revenues Data revenues Subscriber revenues Wholesale revenues 2.5 (7.5) (9.5) (57.6) (42.8) (1.8) (2.6) Post-paid subscribers with data plans 303, , Total post-paid subscribers 414, , ,786 66,605 (2.7) Total subscribers 479, , Other customers 25,523 26,322 (3.0) 505, , Subscriber data ARPU $24.31 $ Subscriber cellular ARPU $33.62 $37.41 (10.1) Subscriber ARPU $57.93 $58.30 (0.6) $2.28 $4.05 (43.7) $60.21 $62.35 (3.4) Post-paid churn (excluding wholesale) Blended churn Penetration rate Total wireless revenues Wireless subscriber statistics Pre-paid subscribers Total wireless customers Wireless ARPU statistics Other ARPU Blended wireless ARPU Other wireless statistics (percentage) Broadband and converged IP services Strong growth from high-speed Internet and IPTV services drove the increase in broadband and converged IP revenues. Internet: Internet revenues increased $2.4 million or 7.9% in and $8.7 million or 10.0% year-to-date, due to 5.4% growth in high-speed Internet subscribers and greater ARPU resulting from price increases and customers taking higher-speed Internet services, partly offset by a higher proportion of subscribers receiving promotional pricing. IPTV: IPTV revenues increased $1.2 million or 6.0% in and $2.8 million or 4.6% year-to-date, resulting from a 5.3% increase in new IPTV customers, Classic TV subscribers migrating to higher-arpu MTS Ultimate TV and a price increase, partly offset by a greater number of customers receiving promotional pricing. Subscriber statistics include a 13.2% increase in higher-arpu MTS Ultimate TV subscribers, mostly due to lower-arpu Classic TV subscribers migrating to MTS Ultimate TV. Our superior product enables us to maintain our market share and industry-leading low churn rates. As at September 30, 2014, 89.6% of our IPTV customer base subscribed to our premium IPTV service - MTS Ultimate TV. Converged IP: Revenues from converged IP decreased $0.8 million in and decreased $0.7 million year-to-date, due to lower one-time installation revenues in 2013, partially offset by continued demand for IP services from Manitoba s business community and migration from legacy data services. 11 Manitoba Telecom Services Inc. Management s discussion and analysis

14 Broadband and converged IP revenues ($ millions) Q Q Q Residential HSI customers and ARPU 199, ,546 Q Q Q , , ,377 $45.35 $42.73 $41.59 $38.31 ARPU ARPU ARPU ARPU $35.39 ARPU IPTV customers and ARPU 107, ,181 Q ,374 Q Q ,244 89,604 $64.68 $66.20 $66.79 $61.30 $52.81 ARPU ARPU ARPU ARPU ARPU Broadband and converged IP revenues ($ millions) Internet revenues IPTV revenues (10.4) (3.3) ,335 6,925 (23.0) Converged IP revenues Total broadband and converged IP revenues Internet statistics Dial-up Internet subscribers 16,097 15, Residential high-speed Internet subscribers 199, , Total Internet subscribers 221, , Business high-speed Internet subscribers 12 Manitoba Telecom Services Inc. Management s discussion and analysis

15 Television statistics Ultimate TV subscribers 96,438 85, Classic TV subscribers 11,145 17,021 (34.5) Total IPTV subscribers 107, , Other TV subscribers 3,965 4,225 Total TV subscribers 111, , $64.68 $66.20 (2.3) IPTV ARPU (6.2) Information solutions EPIC contributed revenues of $6.3 million in and $17.3 million year-to-date. EPIC was acquired in September 2013 and has performed as expected, providing a new source of revenue and a trusted source for IT services for our customers. This line of business will also include the new data centre when it opens in mid It will be the only custom-built commercial data centre of this size in Manitoba, enabling customers to securely host IT equipment. EPIC will provide the skills and expertise needed to effectively operate the facility. Sales efforts are ongoing with strong interest expressed by prospective customers. Unified communications, security and monitoring services The increases in unified communications revenues in and year-to-date reflect greater hardware sales. Security and monitoring service revenues in and year-to-date increased reflecting increased alarm monitoring revenue. Unified communications, security and monitoring revenues Unified communications revenues Security and monitoring revenues Total unified communications, security and monitoring revenues ($ millions) Local access services Local access service revenues were down in and year-to-date, reflecting a combination of 5.3% decline in residential local access lines resulting from wireless substitution, a 3.2% reduction in business local access lines, and a one-time $2.4-million in-quarter charge relating to a CRTC decision on the prior year's local contribution subsidy. Adjusting for this one-time CRTC charge, the rate of local access revenue decline would have been 4.5%. Although some customers are choosing a wireless-only household, MTS is maintaining its share of home phone customers. On the competitive front, our offering is resonating with customers who choose a home phone. In six of the past nine months, the strength of our bundle offering has resulted in a net gain in new home phone subscribers from cable. Local access revenues ($ millions) Local access revenues (8.3) (5.4) Local access statistics Residential network access services lines 268, ,887 (5.3) Business network access services lines 207, ,810 (3.2) Long distance and legacy data services Long distance revenues were down, due to customer migration to lower-priced long distance plans and reduced volumes, as customers continue to replace long distance calling with alternative methods of communication, such as , text messaging and social 13 Manitoba Telecom Services Inc. Management s discussion and analysis

16 networking. This ongoing trend is expected to continue, but with only 3.7% of MTS revenues being generated by long distance services, this decline is having an increasingly negligible impact on the Company. Legacy data revenues decreased as customers continue to migrate towards MTS s converged IP services. Long distance and legacy data revenues ($ millions) Long distance revenues Legacy data revenues Total long distance and legacy data revenues (8.8) (9.1) 7.5 (5.3) (3.9) 17.7 (7.3) (6.9) Other services Other service revenues declined $1.5 million for both and year-over-year. Other revenues ($ millions) Other revenues (18.3) (6.8) ALLSTREAM LINES of BUSINESS Allstream has five lines of business, each of which is described below. The following pages then provide an analysis of the results for each line of business on an interim basis. Converged IP services Demand for on-net IP services continues to drive sales. It is the core of what we do for Canadian businesses Converged IP services include revenues earned from the provision of IP-based networking and related products and services to business customers nationally. Allstream s Business IP virtual private network ( VPN ) service provides business organizations with a connectivity solution that enables growth and expansion to any location, while reducing costs and increasing productivity. Our IP network allows us to offer a full suite of secure, reliable IP connectivity options, which include IP-VPN, Wavelength, Switched Ethernet, IP Trunking, Dedicated Internet Access and Managed Network Services. To read more about our national IP fibre network services, please visit Unified communications, hosting and security services Helping customers share vital data and expertise Unified communications, hosting and security services include revenues earned from the provision of IP-related telephony products and services, along with revenues from IP-based security offerings to national business customers. Local access services Keeping your business properly connected Local access services include revenues earned for the provision of business voice connectivity, including calling features, to national business and wholesale customers. Long distance and legacy data services Providing telecommunications links to the people you need to stay in touch with - wherever they are Long distance and legacy data services include revenues earned from the provision of long distance calling, along with legacy data services such as private line networks, to business customers nationally. Other Offering easy access and reliable service Other services include revenues earned from MTS, the routing and exchange of wholesale long distance network traffic, customer late-payment charges and other miscellaneous items. 14 Manitoba Telecom Services Inc. Management s discussion and analysis

17 ALLSTREAM FINANCIALS Allstream revenue mix Allstream revenue mix *Unified communications Allstream operating revenues Converged IP services Unified communications, hosting and security services Local access services (13.8) (13.4) Long distance and legacy data services (16.0) (15.7) (16.8) (10.4) (3.3) (4.9) ($ millions) Other services Total Allstream operating revenues Allstream operating revenues ($ millions) Q Q Q Allstream EBITDA ($ millions) Q and 2011 EBITDA are not shown as they have not been amended for IFRS IAS Manitoba Telecom Services Inc. Management s discussion and analysis

18 EBITDA Q3 EBITDA was down $0.9 million or 3.5% from due to lower legacy services revenues. On a year-to-date basis, EBITDA was up $10.1 million or 15.1% from 2013, due to transaction and restructuring costs incurred in The following table adjusts 2013 EBITDA for transaction/restructuring costs. ($ millions) Allstream EBITDA Add back transaction and restructuring costs Adjusted Allstream EBITDA for the period (3.5) (20.4) (6.9) *not applicable In Q3, adjusted Allstream EBITDA was down $6.3 million, mostly due to legacy revenue declines. Year-to-date adjusted Allstream EBITDA was down $5.7 million due to legacy revenue declines, offset by growth in converged IP revenues. Converged IP services Converged IP revenues grew by $6.1 million or 10.1% in and $13.0 million or 7.2% on a year-to-date basis, reflecting an increase in the number of customers connecting to Allstream's IP network. marks the fourth consecutive quarter of IP revenue growth. Our Shared Services Canada contract circuit installations are nearly 80% complete, with an expected second-quarter 2015 completion. To-date this year, the Shared Services Canada contract has contributed $4.9 million in revenues, and will eventually represent $1.4 million of monthly recurring revenues once all circuits are fully installed. Most important, IP sales wins continue to be strong with a 4.9% increase in compared to Q3 last year. We are also having success with installations pertaining to subsequent sales into already-connected buildings, which were up 23.9% in compared to Q3 last year. Allstream added 53 buildings to its fibre network in, bringing its on-net total to 3,167 buildings as at September 30, Converged IP revenues ($ millions) Q Q Q IP fibre-fed buildings 3,167 2,953 Q Q Q Manitoba Telecom Services Inc. 2,644 2,313 2,022 Management s discussion and analysis

19 Converged IP statistics ($ millions, unless otherwise stated) Revenues Cost of goods sold Gross margin Gross margin percentage 72.1% 75.5% (3.4) pts 73.2% 3,167 Fibre-fed buildings (#) % (1.9) pts 2, Unified communications, hosting and security services Unified communications, hosting and security service revenues increased mainly due to an increase in one-time hardware-only sales. Unified communications, hosting and security statistics ($ millions, unless otherwise stated) (0.7) Hosting revenues Security revenues Total unified communications, hosting and security revenues Cost of goods sold % 27.9% Unified communications revenues Gross margin Gross margin percentage % 27.7% 0.3 pt (0.2) pt Local access services Local access revenues declined, mainly due to our decision to exit from low-margin resold business lines. Local access statistics ($ millions, unless otherwise stated) Revenues (13.8) (13.4) Cost of goods sold (10.7) (14.1) Gross margin (15.6) (13.0) Gross margin percentage 61.5% 62.9% 62.4% 62.1% 0.3 pt (1.4) pts Long distance and legacy data services Revenues from long distance services decreased, mainly due to reduced volumes and rates. The legacy data revenue decrease was due to a combination of competitive churn, customer migration to IP-based services and re-pricing of services. Allstream continues to implement its strategy of improving profitability by reducing costs and transitioning customers to IP-based service. Long distance and legacy data statistics ($ millions, unless otherwise stated) Long distance revenues (13.2) (13.1) Legacy data revenues (18.8) (18.3) Total long distance and legacy data revenues (16.0) (15.7) Cost of goods sold (8.1) (8.0) Gross margin (20.3) (19.9) Gross margin percentage 61.3% 64.6% 61.4% 64.6% (3.3) pts 2,8 17 Manitoba Telecom Services Inc. Management s discussion and analysis (3.2) pts

20 Local access, long distance & legacy data revenues ($ millions) Q Q Q SELECTED QUARTERLY FINANCIAL INFORMATION Selected quarterly financial results consolidated ($ millions, except EPS and weighted average shares outstanding) Q Q Q Q Q Q Operating revenues EBITDA (87.8) 25.4 (52.9) $0.47 $0.37 $0.54 ($1.25) $0.38 ($0.78) $0.46 $ Net (loss) income EPS Weighted average shares outstanding1 (in millions) 1 The Q and Q increases in the number of weighted average shares outstanding are due to the December 2013 issuance of 8,855,000 common shares and participation in the Company s dividend re-investment program. The increase in the number of weighted average shares outstanding in other quarters is due to participation in our dividend re-investment program. Our performance in the third quarter of 2014 at both MTS and Allstream is reflected in our financial results. Our interim financial results for the last eight quarters ( to Q4 2012) reflect the following significant transactions and trends: SR&ED ITC recovery adjustments In and Q1 2014, we realized positive SR&ED ITC recovery adjustments which impacted EPS by $0.11 in and by $0.12 in Q The Q SR&ED ITC recovery constitutes the net adjustment relating to four taxation years, ending December 31, The SR&ED ITC adjustment reflects the final asset allocations to which the ITCs relate. 700 MHz spectrum In Q1 2014, MTS acquired a prime block of 700 MHz spectrum in an Industry Canada 700 MHz auction for $8.9 million in total, enhancing MTS s capability to add more high-speed data capacity and support advanced wireless services. Equity issuance On December 6, 2013, we announced that we had closed our previously-announced financing agreement of 8,855,000 common shares, issued at a purchase price of $28.10 per common share, for gross proceeds of $248.8 million. The net proceeds were approximately $238 million, determined after deducting the underwriters' commission and expenses. The Company has used a total of $55 million of the net proceeds to make a pre-funded solvency payment into its pension plans. In addition, the Company used $70 million of the proceeds to repay the short-term debt incurred in February 2013 to prefund the pension plans. Costs related to SCC's ruling In Q4 2013, the Company recorded a $142.1-million non-cash charge against income in Q4 2013, to reflect the total estimated value of pension benefits and other estimated costs related to the SCC's ruling on a lawsuit regarding the administration of one of MTS's pension plans following the Company's 1997 privatization. The SCC's decision negatively impacted Q EPS by $1.48. IFRS required that the Company treat this ruling as a past service cost, to be expensed immediately, regardless of the timing of any potential cash flow impact. 18 Manitoba Telecom Services Inc. Management s discussion and analysis