MTS reports results for first quarter of 2016 as customer-first transformation enters next stage

Intrinsic value of Company reflected in $3.9 billion BCE acquisition bid

WINNIPEG, May 11, 2016 /CNW/ - (TSX: MBT) Manitoba Telecom Services Inc. (MTS), today, announced financial results for the first quarter of 2016 and provided an update on its transformation into a customer-first business.

"In 2015 we made notable progress in our pursuit of realizing the full potential of MTS. We built tremendous momentum with the successful completion of key strategic objectives and the launch of our transformation efforts. We are pleased to see this momentum has continued through the first quarter of 2016," said Jay Forbes, President & CEO.

Forbes noted that MTS' financial metrics are reflecting improvements from ongoing transformation efforts. "Our free cash flow has improved 35.7% from Q4 2015 and our operating metrics reflect the shift in focus to a customer-first company," said Forbes. "These improvements are indicative of the progress made through transformation efforts launched in the last half of 2015, and in the first quarter we have made substantial further progress on our transformation agenda."

BCE to purchase MTS
On May 1, 2016, we entered into a definitive arrangement agreement with BCE Inc. (BCE) whereby BCE agreed to purchase all the issued and outstanding common shares of MTS for $40.00 per common share. Shareholders of MTS will be entitled to elect to receive $40.00 per common share in cash or 0.6756 of a common share of BCE for each MTS common share, subject to proration. The transaction is valued at $3.9 billion and our Board of Directors has unanimously recommended that shareholders vote in favour of the transaction at the upcoming special meeting of shareholders scheduled to be held on June 23, 2016. The transaction is currently expected to close in late 2016 or early 2017, subject to customary regulatory approvals and closing conditions.

Further information regarding the transaction will be included in a management information circular to be mailed to shareholders in advance of the special meeting. Additional details regarding the arrangement agreement can be found in the material change report and the arrangement agreement which are available on SEDAR.

"While we are pleased to report solid progress in our first quarter of 2016, our most significant development was MTS' recently announced transaction with BCE," said Forbes. "The BCE offer contains terms that are compelling for our shareholders, our customers, and our employees, which will in turn support long-term growth and prosperity in Manitoba. We are proud of our history and what we have achieved as an independent company. We believe the proposed transaction with BCE will allow MTS to build on our successful past and achieve even more in the future."

Share repurchase program returns over $164 million to shareholders
In February we announced the launch of our $200 million share repurchase program using proceeds from the sale of Allstream. Under this program we could repurchase up to 7,086,000 of our outstanding common shares representing approximately 10% of the public float as at January 31, 2016.

As of March 31, 2016 we had purchased and cancelled 2,770,963 shares (3.5% of our total outstanding shares) at an average trade price of $32.30, returning approximately $90 million to our shareholders.

As of May 4, 2016 we have purchased 5,074,735 shares (6.4% of our total outstanding shares) at an average trade price of $32.37, returning approximately $164 million to our shareholders or 82.1% of our $200-million share repurchase program.

With our announcement that BCE will be acquiring all of the issued and outstanding shares of MTS, we have suspended the normal course issuer bid with May 4, 2016 being the last settlement date of shares that were repurchased under the share repurchase program.

Allstream sale closed
As disclosed on January 15, 2016, the sale of Allstream is complete. We realized gross proceeds of $465 million and net proceeds of $425 million following the final post-closing adjustments in the second quarter.

We expect to incur approximately $15 million to $20 million of one-time transition costs over the next two years associated with the Allstream sale.

Free cash flow per share
New to Q1 2016 is our introduction of free cash per share as another performance indicator which will reflect the impact of the share repurchase program.

"Starting this quarter, in addition to our other performance metrics, free cash flow per share will now be used as one of our key performance indicators." said Forbes.

While our journey to transform MTS into a true customer-first business began in Q3 2015 it wasn't until late in 2015 and early in 2016 that our free cash flow truly started to reflect the benefits to be gained through the program's initiatives. In Q1 2016 when compared to Q4 2015, our free cash flow was up $12.0 million to $45.6 million, an increase of 36% and our free cash flow per share increased by $0.16 or 38% to $0.58. Two proof points that show that our programs are delivering the expected results.

In Q1 2016, our free cash flow per share of $0.58 was $0.03 lower when compared to $0.61 in Q1 2015. Excluding the additional deferred wireless costs, free cash flow per share increased by $0.05 from Q1 2015. In Q1 2016 we continued to work through the impact of the wireless double cohort that started in Q2 2015.

Transformation program update
In Q4 2015, we announced the start of a three-year program to transform MTS into a customer-first business. We expect to capture $100 million in annualized free cash flow benefits from our transformation program initiatives, the vast majority of the improvements should be in place by the end of 2017. One-time cash costs associated with achieving these improvements of roughly the same amount, incurred over the same period, are anticipated. Our progress over the last two quarters has been significant with programs to deliver over 50% of the free cash flow improvements already implemented.

As of March 31, 2016, the transformation program has realized $53 million in annualized free cash flow improvements, and 241 employees had exited the business. To date we have made one-time cash investments of $20.5 million in our transformation program initiatives.

The following Phase l programs are materially complete:

• Streamline back-office support functions and management structure;
• Improve capital investment process; and
• Renew the MTS brand

The following Phase l programs are nearing completion of the design stage and beginning implementation:

• Rationalize pricing, promotions and discounts; and
• Introduce a new customer service and online strategy

The following Phase l and Phase ll programs have started and are in the design stage:

• Upgrade procurement and working capital management processes;
• Information Services transformation;
• Contact centre and channels transformation;
• Online experience; and
• Network and field services transformation

These initiatives are expected to deliver a superior customer experience and the remainder of our transformation program improvements through the end of 2017.

"The first quarter's transformation efforts got off to a solid start, building off the traction gained from our program launch in 2015. MTS is evolving and our strategies are starting to show results," said Forbes.

Further details can be found in our Q1 2016 MD&A.

Strategic objectives update
In our 2015 annual MD&A, we announced the following new strategies for 2016. In Q1 2016, we made progress on a number of these strategies as shown by the proof points in the table below and in the transformation program update summaries which can be found in our Q1 2016 MD&A.

First-quarter 2016 financial results

The following provides insight into the operating results variances for the quarter:

• Operating revenues: We saw a $5.2 million decrease in revenues from Q1 2015 as a result of lower local access, wireless voice, long distance and unified communications revenues, partly offset by growth in internet and wireless data revenues.
  
  
• Operations expense: Our voluntary workforce reduction program, which was launched in late 2015 to streamline back-office support functions and management structure, delivered $3.5 million in salaries and benefits savings in Q1 2016, which is in line with expected realized savings in 2016 of $17 million. In addition, productivity initiatives contributed to a reduction in other expenses, and lower equipment sales resulted in a reduced cost of goods sold. While these savings contributed to the overall decrease in operation expense year over year, they were partly offset by higher expensed labour costs due to efficiencies in our capital program ($4.2 million), and higher compensation expense due to credits recognized in Q1 2015 related to our short and long-term incentive programs ($2.5 million). See our Q1 2016 Supplemental for salaries and benefits variance details.
  
  
• EBITDA before restructuring and transformation expenses: EBITDA before restructuring and transformation expenses was down $4.7 million mainly due to a decline in revenues.
  
  
• Restructuring and transformation expenses: Restructuring and transformation expenses ($5.2 million) are mostly related to costs associated with the two recently launched transformation initiatives for rationalizing pricing, promotions and discounts, and enhancing customer service and online strategy.
  
  
• EPS from continuing operations: EPS from continuing operations was down $0.12 mainly the result of lower EBITDA, higher restructuring and transformation expenses, higher other expense, and depreciation and amortization.
  
  
• Capital investments: Capital investments decreased $12.1 million mainly the result of more disciplined capital investments which focuses on our strategic priorities and economic benefits. Included in capital investments and new for 2016 are $0.9 million of spend relating to our transformation and restructuring program. Our capital intensity ratio, excluding restructuring and transformation, is 11.9% a 4.8-point improvement from 16.7% in Q1 2015.
  
  
• Free cash flow: In Q1 2016, free cash flow decreased $2.6 million from Q1 2015, mainly due to a combination of increased deferred wireless costs and lower EBITDA before restructuring and transformation expenses, partly offset by a more efficient capital investment program.

The following table provides further free cash flow disclosure.

Dividend
Our Board of Directors declared a quarterly cash dividend of $0.325 per share for the second quarter of 2016, payable on July 15, 2016 to shareholders of record at the close of business on June 15, 2016. In accordance with the arrangement with BCE, this second quarter 2016 quarterly cash dividend is expected to be the last dividend we declare.

Investment community conference call and webcast
We will hold our first-quarter 2016 earnings results conference call with the investment community on Wednesday, May 11, 2016 at 5:30 p.m. (Eastern time). Participants include Jay Forbes, President & CEO; Paul Cadieux, Chief Financial Officer and Heather Tulk, Chief Customer Officer.

To participate, please dial toll-free 1-888-231-8191 or 647-427-7450. A replay will be available until May 18, 2016 by dialing 1-855-859-2056 and entering passcode 86945080.

Investors, media and the public are invited to participate on a listen-only basis by logging into the live audio webcast of the conference call on our website at www.mts.ca/aboutus or by entering http://event.on24.com/r.htm?e=1169427&s=1&k=B7C3AE211DBA4A276159A08D3347DC49.

A replay of the conference call will be available on our website for one year.

Forward-looking statements disclaimer
This news release includes forward-looking statements and information (collectively, "statements") including, but not limited to: statements pertaining to the purchase by BCE of all the issued and outstanding common shares of MTS ("Arrangement"), the anticipated timing for the special meeting of shareholders and closing of the Arrangement, the consideration to be received by shareholders, which may fluctuate in value due to common shares of BCE forming part of the consideration and the consideration not being as elected by shareholders due to proration, to our corporate direction, business opportunities, operations, financial objectives, future financial results and performance, ability to generate free cash flow in the future, BCE's binding agreement to purchase MTS, restructuring and transformation plans, strategic processes, guidance and outlook and pension plans funding.

Implicit in the statements referred to above, are assumptions regarding, among other things, the expected time required to prepare and mail shareholder special meeting materials, the ability of the parties to receive, in a timely manner and on satisfactory terms, the required shareholder approval, required approvals from the Canadian Radio-television and Telecommunications Commission, the Competition Bureau and Innovation, Science and Economic Development Canada (collectively, the Required Regulatory Approvals), court, stock exchange and other third party approvals, the ability of the parties to satisfy, in a timely manner, the conditions to the closing of the Arrangement and other expectations and assumptions concerning the Arrangement, future interest rates, the declaration of any future dividends and the amount thereof, the expectation of not having to pay cash income taxes until 2023; and the ability to reduce capital spending and operating expenses, future cash flows, liquidity, credit ratings and profitability, as well as other statements that are not historical facts.

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

Our forward-looking information includes forecasts and projections related to the following items, among others: revenues, expenses, property, plant and equipment additions, free cash flow, dividend payments, debt repayment, share repurchases, expected growth in subscribers and the services to which they subscribe, the cost of acquiring subscribers and the deployment of new services, continued cost reductions and efficiency improvements, the growth of new products and services and all other statements that are not historical facts.

We base our conclusions, forecasts, and projections on the following factors, among others: general economic and industry growth rates, currency exchange rates and interest rates, product pricing levels and competitive intensity, subscriber growth, pricing, usage and churn rates, government regulation changes, technology deployment, device availability, the timing of new product launches, content and equipment costs, the integration of acquisitions and industry structure and stability.

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

Forward-looking statements are subject to risks and uncertainties, including, but not limited to: the potential risk that the Arrangement will not be approved by shareholders; failure to, in a timely manner, or at all, obtain the Required Regulatory Approvals, stock exchange and court approvals for the Arrangement; failure of the parties to otherwise satisfy the conditions to complete the Arrangement; the possibility that the Board of Directors could receive an Acquisition Proposal and approve a Superior Proposal (each, as defined in the Arrangement Agreement); the effect of the announcement of the Arrangement on MTS' and BCE's respective strategic relationships, operating results and business generally; significant transaction costs or unknown liabilities; the risk of litigation or adverse actions or awards that would prevent or hinder the completion of the Arrangement; failure to realize the expected benefits of the Arrangement; compliance with all applicable laws and other customary risks associated with transactions of a similar nature to the Arrangement; and general economic conditions. In addition, if the Arrangement is not completed, and MTS continues as an independent entity, there are serious risks that the announcement of the Arrangement and the dedication of substantial resources of MTS to the completion of the Arrangement could have an adverse impact on MTS' business and strategic relationships (including with future and prospective employees, customers, retailers, vendors, suppliers and partners), operating results and businesses generally. As a consequence, actual results in the future may differ materially from any forward-looking conclusion, forecast or projection, whether expressed or implied. Therefore, forward-looking statements should be considered carefully and undue reliance should not be placed on them.

Please note that forward-looking statements in this news release reflect Management's expectations as at May 11, 2016, and thus are subject to change thereafter. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. This news release and the financial information contained herein have been reviewed by our Audit Committee and approved by our Board of Directors. Factors that could cause anticipated opportunities and actual results to differ materially include, but are not limited to, matters identified in the Risks and uncertainties section and elsewhere in our 2015 annual MD&A and our MD&A for Q1 2016, each of which is available on our website at www.mts.ca/aboutus and on SEDAR.

About MTS
At MTS, we're proud to be Manitoba's leading information and communications technology provider. We're dedicated to delivering a full suite of services for Manitobans – Wireless, Internet, TV, Phone Service and Security Systems plus a full suite of Information Solutions, including Unified Cloud and Managed Services. You can count on MTS to make connecting your world easy. We're with you.

We live where we work and actively give back to organizations that strengthen our communities. Through MTS Future First, we provide sponsorships, grants and scholarships, value-in-kind support and volunteer commitment in Manitoba.

MTS Inc. is wholly owned by Manitoba Telecom Services Inc. (TSX: MBT). For more on MTS' products and services, visit mts.ca. For investor information, visit www.mts.ca/aboutus.

Q1 2016

Management's discussion and analysis
For the three-month period ended March 31, 2016

Management's Discussion and Analysis

May 11, 2016
This Management's Discussion and Analysis (MD&A) of our financial results comments on our operations, performance and financial condition for the three months ended March 31, 2016. This MD&A is based on consolidated financial statements prepared under International Financial Reporting Standards (IFRS). All financial amounts, unless otherwise indicated, are in Canadian dollars and in accordance with IFRS.

Unless otherwise indicated, this MD&A is for the three months ended March 31, 2016 and is as at May 11, 2016.

In preparing this MD&A, we have taken into account information available to us up to May 11, 2016. In this MD&A, "we", "our" and "us" refer to Manitoba Telecom Services Inc. (MTS). This MD&A should be read in conjunction with our interim consolidated financial statements for the three months ended March 31, 2016.

About us
For more information about our company, including our Annual Information Form, audited consolidated financial statements and supplemental for the year ended December 31, 2015, dated February 4, 2016, please visit our website at www.mts.ca/aboutus or visit SEDAR.

Discontinued operations
We completed the sale of Allstream Inc. (Allstream) on January 15, 2016. Effective November 20, 2015 we started reporting Allstream as an asset held for sale, with their results of operations reflected as discontinued operations, and as a result Allstream's revenues and expenses are no longer reflected in our financial results. For more details regarding the accounting treatment, readers are encouraged to review the discontinued operations note disclosure in our interim consolidated financial statements for the period ended March 31, 2016, which can be found on our website at www.mts.ca/aboutus.

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

Regarding forward-looking statements
This interim MD&A includes forward-looking statements and information (collectively, "statements") including, but not limited to: statements pertaining to the purchase by BCE of all the issued and outstanding Common Shares of MTS ("Arrangement"), the anticipated timing for the Meeting of Shareholders and closing of the Arrangement, the consideration to be received by Shareholders, which may fluctuate in value due to common shares of BCE forming part of the consideration and the consideration not being as elected by Shareholders due to proration, our corporate direction, business opportunities, operations, financial objectives, future financial results and performance, ability to generate free cash flow in the future, restructuring and transformation plans, strategic processes, guidance and outlook and pension plans funding. Implicit in the statements referred to above, are assumptions regarding, among other things, the expected time required to prepare and mail Shareholder Meeting materials, the ability of the parties to receive, in a timely manner and on satisfactory terms, the Required Shareholder Approval, Required Regulatory Approvals, Court, stock exchange and other third party approvals, the ability of the parties to satisfy, in a timely manner, the conditions to the closing of the Arrangement and other expectations and assumptions concerning the Arrangement, future interest rates, the declaration of any future dividends and the amount thereof, the expectation of not having to pay cash income taxes until 2023; and the ability to reduce capital spending and operating expenses, future cash flows, liquidity, credit ratings and profitability, as well as other statements that are not historical facts.

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

Our forward-looking information includes forecasts and projections related to the following items, among others: revenues, expenses, property, plant and equipment additions, free cash flow, dividend payments, debt repayment, share repurchases, expected growth in subscribers and the services to which they subscribe, the cost of acquiring subscribers and the deployment of new services, continued cost reductions and efficiency improvements, the growth of new products and services and all other statements that are not historical facts.

We base our conclusions, forecasts, and projections on the following factors, among others: general economic and industry growth rates, currency exchange rates and interest rates, product pricing levels and competitive intensity, subscriber growth, pricing, usage and churn rates, government regulation changes, technology deployment, device availability, the timing of new product launches, content and equipment costs, the integration of acquisitions and industry structure and stability.

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

Forward-looking statements are subject to risks and uncertainties, including, but not limited to: the potential risk that the Arrangement will not be approved by Shareholders; failure to, in a timely manner, or at all, obtain the Required Regulatory Approvals, stock exchange and Court approvals for the Arrangement; failure of the parties to otherwise satisfy the conditions to complete the Arrangement; the possibility that the Board of Directors could receive an Acquisition Proposal and approve a Superior Proposal (each, as defined in the Arrangement Agreement); the effect of the announcement of the Arrangement on MTS' and BCE's respective strategic relationships, operating results and business generally; significant transaction costs or unknown liabilities; the risk of litigation or adverse actions or awards that would prevent or hinder the completion of the Arrangement; failure to realize the expected benefits of the Arrangement; compliance with all applicable laws and other customary risks associated with transactions of a similar nature to the Arrangement; and general economic conditions. In addition, if the Arrangement is not completed, and MTS continues as an independent entity, there are serious risks that the announcement of the Arrangement and the dedication of substantial resources of MTS to the completion of the Arrangement could have an adverse impact on MTS' business and strategic relationships (including with future and prospective employees, customers, retailers, vendors, suppliers and partners), operating results and businesses generally. As a consequence, actual results in the future may differ materially from any forward-looking conclusion, forecast or projection, whether expressed or implied. Therefore, forward-looking statements should be considered carefully and undue reliance should not be placed on them.

Please note that forward-looking statements in this interim MD&A reflect Management's expectations as at May 11, 2016, and thus, are subject to change thereafter.

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

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 our annual MD&A which can be found on our website www.mts.ca/aboutus and on SEDAR, and this interim MD&A. See Risks and uncertainties - Risks relating to the arrangement.

Business overview

At MTS, we're proud to be Manitoba's leading information and communications technology provider. We're dedicated to delivering a full suite of services that meet the unique needs of Manitoban consumers and businesses. We live where we work, and actively give back to organizations that strengthen our communities. You can count on MTS to make connecting your world easy. We're with you.

Headquartered in Winnipeg, Manitoba our common shares are listed on the TSX (trading symbol: MBT). Investor and corporate information can be found at www.mts.ca/aboutus.

We offer a full range of wireless and wireline communications services including wireless, internet, TV, phone service and security systems to residential customers in the province of Manitoba, provided by MTS and AAA Security (AAA).

We provide a wide array of business solutions including information solutions and business telecommunications services. These solutions include wireless, IP networking, phone services, security services, technology infrastructure, application development, managed services, networking services and unified cloud services provided by MTS, MTS Data Centres, AAA, EPIC Information Solutions (EPIC) and The Technology Consortium (TTC).

Strategic review progress

BCE to purchase MTS
On May 1, 2016, MTS entered into an arrangement agreement with BCE Inc. (BCE) whereby BCE agreed to purchase all of MTS' issued and outstanding common shares at a price of $40.00 per common share for total consideration of approximately $3.9 billion. Shareholders will be entitled to elect to receive $40.00 per common share in cash or 0.6756 of a common share of BCE for each MTS common share, subject to proration.

The Board of Directors has unanimously recommended that shareholders vote in favour of the transaction at the upcoming special meeting of shareholders scheduled to be held on June 23, 2016.

The transaction is currently expected to close in late 2016 or early 2017, subject to a number of closing conditions, including, among others, receipt of shareholder approval and receipt of regulatory approvals from the Canadian Radio-television and Telecommunications Commission (CRTC), the Competition Bureau and Innovation, Science and Economic Development Canada.

Additional details regarding the transaction can be found in the material change report and the arrangement agreement which have been posted on SEDAR. Further information regarding the transaction will be provided in a management information circular to be mailed to shareholders in advance of the June 23rd meeting.

Share repurchase program returns over $164 million to shareholders
In February we announced the launch of our $200 million share repurchase program using proceeds from the sale of Allstream.

Under this program we could repurchase up to 7,086,000 of our outstanding common shares representing approximately 10% of the public float as at January 31, 2016.

As of March 31, 2016 we had purchased and cancelled 2,770,963 shares (3.5% of our total outstanding shares) at an average trade price of $32.30, returning approximately $90 million to our shareholders.

As of May 4, 2016 we have purchased 5,074,735 shares (6.4% of our total outstanding shares) at an average trade price of $32.37, returning approximately $164 million to our shareholders or 82.2% of our $200-million share repurchase program.

With our announcement that BCE will be acquiring all of the issued and outstanding shares of MTS, we have suspended the normal course issuer bid with May 4, 2016 being the last settlement date of shares that were repurchased under the share repurchase program.

Allstream sale closed
As disclosed on January 15, 2016, the sale of Allstream is complete. We realized gross proceeds of $465 million and net proceeds of $425 million following the final post-closing adjustments in the second quarter.

We expect to incur approximately $15 million to $20 million of one-time transition costs over the next two years associated with the Allstream sale.

Free cash flow per share
New to Q1 2016 is our introduction of free cash per share as another performance indicator which will reflect the impact of the share repurchase program.

While our journey to transform MTS into a true customer-first business began in Q3 2015 it wasn't until late in 2015 and early in 2016 that our free cash flow truly started to reflect the benefits to be gained through the program's initiatives. In Q1 2016 when compared to Q4 2015, our free cash flow was up $12.0 million to $45.6 million, an increase of 36% and our free cash flow per share increased by $0.16 or 38% to $0.58. Two proof points that show that our programs are delivering the expected results.

In Q1 2016, our free cash flow per share of $0.58 was $0.03 lower when compared to $0.61 in Q1 2015. Excluding the additional deferred wireless costs, free cash flow per share increased by $0.05 from Q1 2015. In Q1 2016 we continued to work through the impact of the wireless double cohort that started in Q2 2015.

Transformation program update
In Q4 2015, we announced the start of a three-year program to transform MTS into a customer-first business. We expect to capture $100 million in annualized free cash flow benefits from our transformation program initiatives, the vast majority of the improvements should be in place by the end of 2017. One-time cash costs associated with achieving these improvements of roughly the same amount, incurred over the same period, are anticipated. Our progress over the last two quarters has been significant with programs to deliver over 50% of the free cash flow improvements already implemented.

As of March 31, 2016, the transformation program has realized $53 million in annualized free cash flow improvements, and 241 employees had exited the business. To date we have made one-time cash investments of $20.5 million in our transformation program initiatives.

Transformation program backgrounder
Following our 2015 strategic review, we launched a three-year transformation program consisting of three phases:

• Phase l - Unlocks funding to invest in building a market-leading customer experience, with the following initiatives having already been launched, currently ongoing or have been completed.
  • Streamline back-office support functions and management structure;
  • Improve capital investment process;
  • MTS brand renewal;
  • Rationalize pricing, promotions and discounts;
  • Customer service and online strategy; and
  • Upgrade procurement and working capital management processes
    
    
• Phase II will transform operations, simplify products and processes, and improve our customer experience. We have begun work on this next phase of our transformation program initiatives, which include:
  • Information Services transformation;
  • Contact centre and channels transformation;
  • Online experience; and
  • Network and field services transformation

Phase I - Update
Streamline back-office support functions and management structure – Completed
Late in 2015 we initiated a voluntary workforce reduction program for certain employees in back-office support and management functions, with approximately 250 non-customer facing positions targeted for elimination. As of April 1, 2016, 241 employees have exited the business, with the remaining employees to exit by Q4 2016.

This voluntary workforce reduction program is delivering annualized cost savings of $28 million through lower salaries and benefits. Of this amount, $7 million is reflected in lower capital through lower capitalization of labour.

In Q1 2016 we realized $3.5 million in salary and benefits expense savings from this initiative with 2016 full-year of savings estimated at $17 million.

Improve the capital investment process – Completed
The capital investment redesign initiative launched in 2015 has been successfully implemented company-wide with on-going training for all employees involved in the capital investment process. The new process is lowering our capital intensity, improving economic returns on capital investments and ensuring our investments are relevant to our strategic priorities.

MTS brand renewal – Completed
Launched for employees in October 2015, and for customers in February 2016, our new brand demonstrates our commitment to the transformation already underway and our promise to reinvent our customer experience and become a truly customer-first organization. We are focused on delivering the best experience at every interaction with our customers now and into the future. With the brand roll out, we introduced our external brand tagline We're With You that represents our commitment to our customers.

Rationalize pricing, promotions and discounts – Launched
We completed our situational assessment and identified a number of key strategies and opportunities that will simplify our pricing approach for residential and small business customers going forward:

• Taking targeted incremental rate action where gaps exist between our current pricing and market value;
• Re-evaluating our promotional activities, including design and effectiveness for retention, up-selling and cross-selling;
• Simplifying our pricing structures; and
• Improving our retention efforts to provide a better customer experience and reduced churn

We expect to realize a number of benefits as the result of this initiative:

• Simplifying our product catalogue by reducing the number of plans offered which is expected to make it easier for our customers and sales channels, along with driving efficiencies in system and order management;
• Improve our ability to remain competitive in the marketplace; and
• Improve our customer experience and reduce churn

This initiative is expected to positively impact EBITDA by $8 million to $10 million by 2018 with the majority of improvements in place by the end of 2017.

Customer service and online strategy – Launched
We have completed a comprehensive review of our customer experience and operational environment to identify opportunities for better delivery in our customer service and online environments. Through this work we have developed a customer experience roadmap that will be implemented, through the Phase II workstreams over the next two years, to improve our customer experience and capture additional operational efficiency while remaking MTS into a customer-first organization.

Upgrade procurement and working capital management processes – Launched
Work continues on developing the strategies for this initiative.

Phase Il – Started
We have begun to establish the workstreams that will deliver on our customer service and online strategy and transform all aspects of our operations. So far in 2016 we kicked-off the following workstreams to deliver on our customer service and online strategy roadmap.

Information Services transformation – Launched
We have begun work on this initiative with a focus on reviewing our current internal Information Services organization practices. Our goal is to increase efficiencies and effectiveness in order to better support our organizational needs. We are addressing this goal in four ways by:

1. Supporting implementation of key enabling systems in support of our customer service and online workstreams;
2. Retiring redundant and outdated software and infrastructure;
3. Determining appropriate service levels that the Information Services organization should provide; and
4. Assessing what work Information Services needs to augment, do better, do less of, or approach differently.

In April of 2016 we also launched the following workstreams to deliver on our customer service and online strategy:

• Contact centre and channels transformation;
• Online experience; and
• Network and field services transformation.

We will continue to provide updates on transformation program initiatives throughout 2016.

Strategic objectives update
In our 2015 annual MD&A, we announced the following new strategies for 2016. In Q1 2016, we made progress on a number of these strategies as shown by the proof points in the table below and in the transformation program update summaries which can be found in this Q1 2016 MD&A.

Free cash flow
Our free cash flow definition includes cash flows from operating activities and net intersegment revenues and expenses less capital investments, and excludes changes in working capital, pension solvency funding and lawsuit payments, restructuring and transformation amounts and non-cash taxes. The following table provides a reconciliation of free cash flow from EBITDA before restructuring and transformation costs.

Free cash flow decreased $2.6 million in Q1 2016. Discounting in the wireless market resulted in increased deferred wireless costs in Q1 2016 as we grew our wireless subscribers. We used improved cash flows from our more efficient capital investment program to fund deferred wireless costs.

Discussion of operations – financial results

Statement of net income and other comprehensive income (loss)

Operating revenues

Wireless
Our vast and reliable wireless networks keep our customers connected across Manitoba. The combined power of our network coverage and Wi-Fi hotspots ensures that our customers can use their smartphones and devices to their fullest. For our business wireless customers we also offer Fleetnet 800^TM and paging services.

Wireless revenues

Voice: Revenues decreased $3.0 million in Q1 2016 as a result of lower pricing on feature-rich plans in the Manitoba market and lower toll and pre-paid revenues. The latter had been in steady decline, but saw improvement from Q4 2015 due to a new strategy which is showing promising results.

Data: Driven by strong demand for smartphones and corresponding data usage, revenues increased in Q1 2016. Subscribers on data plans increased in Q1 2016 to 81% from 75% in Q1 2015.

Post-paid subscriber churn decreased from 0.97% in Q1 2015 to 0.91% in Q1 2016. We have seen significant improvement in our wireless churn since the initiation of our transformation program's customer-first strategy. See our Q1 2016 Supplemental for additional subscriber statistics.

Broadband and converged IP
Broadband services include revenues earned from providing high-speed internet and IPTV services to residential customers, as well as converged IP connectivity to business customers. Our high-speed internet service provides fast, reliable speeds with the most comprehensive internet coverage in Manitoba. IPTV service, branded as MTS Ultimate TV® is available in 17 communities in the province. Over 350,000 homes in Manitoba are eligible for both our high-speed internet service and MTS Ultimate TV®.

Broadband and converged IP revenues

Internet: Q1 2016 saw revenue growth of $3.0 million from Q1 2015, which is a result of strong subscriber growth of 3.7% and higher ARPU (resulting from higher penetration of higher-speed plans as well as price increases.)

IPTV: Revenues decreased slightly from Q1 2015, as a result of a decline in subscribers and channel subscriptions, partially offset by migrations to the higher-ARPU MTS Ultimate TV® and price increases.

Converged IP: Our Q1 2015 results include $1.7 million of converged IP revenues related to services provided by Allstream to our customers, which we no longer recognize. Excluding this change in reporting, converged IP revenues grew by $0.9 million or 15.5%.

See our Q1 2016 Supplemental for additional subscriber statistics.

Information solutions
Revenues from this line of business include revenues earned by EPIC, TTC and MTS Data Centres. The increase in revenues due to the acquisition of TTC in June 2015 is offset by softer demand for hardware in Q1 2016 as compared to strong demand in Q1 2015.

Unified communications
Unified communications revenues are earned from the sale of IP telephony products and services. Revenues decreased $1.4 million in Q1 2016 due to lower demand, resulting in decreased hardware installations and associated services.

Security and monitoring
Provided by AAA, these services include the installation and monitoring of alarm services to residential customers. Revenues were largely unchanged from Q1 2015.

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

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

Long distance and data revenues

Long distance: Revenues declined due to customer migration to lower-priced long distance plans and reduced volumes, as customers continue to replace long distance calling with alternative methods of communication.

Data: Revenues decreased in Q1 2016 as a result of declines resulting from reprice, migration to converged IP and competitive losses.

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

Other revenues

Operations expense
Our voluntary workforce reduction program which was launched in late 2015 to streamline back-office support functions and management structure delivered $3.5 million in salaries and benefits savings in Q1 2016, which is in line with expected realized savings in 2016 of $17 million. In addition, productivity initiatives contributed to a reduction in other expenses, and lower equipment sales resulted in a reduced cost of goods sold. While these savings contributed to the overall decrease in operation expense year over year, they were partly offset by higher expensed labour costs due to efficiencies in our capital program ($4.2 million), and higher compensation expense due to credits recognized in Q1 2015 related to our short- and long-term incentive programs ($2.5 million). See our Q1 2016 Supplemental for salaries and benefits variance details.

EBITDA before restructuring and transformation expenses
EBITDA before restructuring and transformation expenses was down $4.7 million mainly due to a decline in revenues.

Restructuring and transformation expenses
Restructuring and transformation expenses ($5.2 million) are mostly related to costs associated with the two recently launched transformation initiatives for rationalizing pricing, promotions and discounts, and enhancing customer service and online strategy.

Depreciation and amortization expense
Our depreciation and amortization expense increased by $1.4 million from Q1 2015 mainly the result of additional intangible asset amortization associated with software assets put into service later in 2015.

Other expense
Our other expense increased $2.3 million largely due to the recognition of unrealized foreign exchange losses associated with the accounting for our outstanding foreign currency forward contracts.

Income tax expense
We continue to have substantial capital cost allowance pools, tax losses and investment tax credits, which we expect will fully offset our taxable income and eliminate cash income taxes until 2023. The present value of these available tax assets is approximately $240 million. These tax assets have a book value of $411.8 million and are comprised of tax losses, the difference between the book value of fixed assets and their undepreciated capital cost for tax purposes, and unused Scientific Research and Experimental Development Investment Tax Credits (SR&ED ITCs). See our Q1 2016 Supplemental for additional tax information.

Income and EPS from continuing operations
Income from continuing operations was down $9.3 million in Q1 2016, and EPS from continuing operations was down $0.12, largely due to a combination of lower EBITDA along with, higher restructuring and transformation expenses, other expense, and depreciation and amortization.

Discontinued operations
On January 15, 2016, we completed the sale of Allstream and, after customary adjustments and transaction costs, we recognized net proceeds on sale of $420.2 million and a loss on disposition of $2.9 million. Final closing adjustments will be recognized and remaining proceeds of approximately $5 million will be received in the second quarter of 2016. Allstream's operating results for the first 15 days of 2016 and the 2015 comparatives have been reclassified as discontinued operations. For more details regarding the accounting treatment, readers are encouraged to review the discontinued operations note disclosure in our Q1 2016 consolidated financial statements, which can be found on our website at www.mts.ca/aboutus. See our Q1 2016 Supplemental for a restatement of our operating results for 2015.

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 obligations and in the fair value of our defined benefit pension assets. These items are recognized in other comprehensive income net of tax, and therefore, do not have an impact on net income or EPS.

The increase in other comprehensive loss was due to changes in the fair value of our defined benefit pension assets as a result of lower asset returns.

Selected quarterly financial information

Our Q1 2016 performance is reflected in our financial results. Our interim financial results for the last eight quarters (Q1 2016 to Q2 2014) reflect the following significant transactions and trends:

• Discontinued operations – On January 15, 2016, the sale of Allstream was completed and after customary adjustments and transaction costs, we realized net proceeds on sale of $420.2 million and a loss on disposition of $2.9 million. Final closing adjustments will be recognized and remaining proceeds of approximately $5 million will be received in the second quarter of 2016. In the fourth quarter of 2015, with the announcement of the sale of Allstream we recorded a non-cash post-tax impairment charge of $95.7 million. Allstream's operating results for the first 15 days of 2016 and the 2015 comparatives have been reclassified as discontinued operations. For more details regarding the accounting treatment, readers are encouraged to review the discontinued operations note disclosure in our Q1 2016 interim condensed consolidated financial statements, which can be found on our website at www.mts.ca/aboutus. See our Q1 2016 Supplemental for a restatement of our operating results for 2015.
  
  
• Restructuring and transformation expenses – In the first quarter of 2016 and fourth, third and second quarters of 2015 our restructuring and transformation expenses were $5.2 million, $32.5 million, $1.8 million and $3.6 million, respectively. Q1 2016 expenses are mainly related to the recently launched transformation initiatives for rationalizing pricing, promotions and discounts, and enhancing customer service and online strategy. The 2015 expenses are mainly associated with our transformation program (mostly relating to the voluntary workforce reduction program), along with severances and other costs incurred relating to other restructuring programs. Included in the $32.5 million recorded in the fourth quarter of 2015 is a non-cash pension curtailment loss of $17.1 million.
  
  
• Spectrum purchases – On July 31, 2015 we acquired 15 MHz of paired AWS-1 spectrum from WIND Mobile for $45 million. We intend to use this spectrum to upgrade our wireless network, significantly increasing the network speed and customer experience. In Q2 2015, we acquired 10 MHz of paired BRS spectrum in the Innovation, Science and Economic Development Canada (ISED Canada), formerly Industry Canada 2500 MHz (BRS) auction for $2.4 million. This is in addition to the 700 MHz spectrum which was acquired in Q2 2014 for $8.9 million.
  
  
• SR&ED ITC recovery adjustments – In Q3 2015, we realized positive SR&ED ITC recovery adjustments (relating to the 2012 taxation year) which increased EPS by $0.05 by reducing depreciation and amortization expense. In Q3 2014 we realized positive SR&ED ITC recovery adjustments which increased EPS by $0.11 by reducing depreciation and amortization expense. This SR&ED ITC adjustment reflects the final asset allocations to which the SR&ED ITC relate.
  
  
• Wireless double cohort – As a result of the May 19, 2015 Canadian Radio-television and Telecommunications Commission (CRTC) decision, in the second quarter of 2015 we have fully amortized any outstanding deferred wireless costs related to the now invalid three-year wireless contracts. With this accelerated amortization we recognized $9.9 million of additional expense in Q2 2015, of which $5.0 million and $3.4 million would have otherwise been expensed in Q3 and Q4 2015, respectively, with the remaining $1.5 million expensed in 2016.
  
  
• Pension plan pre-funding – On May 6, 2015 we completed the pre-funding of $120 million into our pension plans using our existing credit facilities. This one-time pre-funding eliminates the need for solvency payments for 2016 under any reasonable economic scenarios with the expectation of enhancing the stability and predictability of cash flows.

Liquidity and capital resources

Summary of cash flows

Operating activities
"Cash flows from (used in) operating activities" refers to cash we generate from our business activities.
Cash flows from operating activities increased $50.2 million in Q1 2016 mainly due to a combination of increases in non-cash working capital of $39.6 million, and the Q1 2015 pension solvency funding of $15.9 million and one-time pension lawsuit payment of $12.4 million. Partly offsetting these amounts were increases in deferred wireless costs of $6.0 million and lower EBITDA.

Investing activities
"Investing activities" refers to cash used for acquiring, and cash received from disposing of, long-term assets and other long-term investments.
Cash flows from investing activities increased $430.0 million due to net proceeds from the Allstream sale of $420.2 million and lower capital investments of $12.1 million which is mainly the result of more disciplined capital investments which focus on our strategic priorities and economic benefits. Included in capital investments and new for 2016 are $0.9 million of spend relating to our restructuring and transformation program. Our capital intensity ratio, excluding restructuring and transformation is 11.9% a 4.8-point improvement from 16.7% in Q1 2015.

Financing activities
"Financing activities" refers to actions we undertake to fund our operations through equity capital and borrowings.
Cash flows used in financing activities increased $258.0 million mainly due to the repayment of notes payable of $166.1 million and the share repurchases of $89.5 million. On February 4, 2016, the Board approved a share repurchase program under a normal course issued bid which allows for the repurchase of 7,086,000 common shares at a maximum cost of $200 million between February 9, 2016 and February 8, 2017, at prevailing market prices. With our announcement that BCE will be acquiring all of the issued and outstanding shares of MTS, we have suspended the normal course issuer bid with May 4, 2016 being the last settlement date of shares that were repurchased under the share repurchase program. See our Q1 2016 Supplemental for additional on the share repurchase programs.

In the first quarter of 2016, and third and fourth quarters of 2015, cash dividends of $0.325 per common share were paid out to shareholders. In the first and second quarters of 2015 and each quarter of 2014, cash dividends of $0.425 per common share were paid to shareholders, as approved by the Board. During 2015, 1,139,077 common shares were issued as a result of participation in our Dividend Reinvestment Plan. These shares were issued for net proceeds of $28.9 million. We are no longer issuing shares as a result of participation in our dividend reinvestment program. All shares are now purchased on the open market.

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

Credit facilities  

We renewed our medium-term note (MTN) program on October 2, 2015 for $500 million for a two-year period. We have a $400 million revolving credit facility, of which we had utilized $84.4 million at March 31, 2016 for undrawn letters of credit. We also have two additional credit facilities totalling $300 million, which are used solely for the issuance of letters of credit. As at March 31, 2016, a total of $299.8 million was utilized for undrawn letters of credit. In addition to these programs and facilities, we have a $50-million accounts receivable securitization program, of which nil was utilized as at March 31, 2016. On January 15, 2016, we repaid $122.1 million in notes issued under the revolving credit facility and the $48.1 million outstanding under the accounts receivable securitization program using proceeds from the Allstream sale.

Capital structure

Our capital structure illustrates the amount of our assets that is financed by debt versus equity. Our debt to total capitalization ratio of 47.2% as at March 31, 2016 continues to represent financial strength and flexibility.

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 May 2, 2016, S&P issued a press release noting its credit ratings on our long-term corporate credit and senior unsecured debt at "BBB" and our commercial paper rating of "A-2" were placed on credit watch with positive implications. DBRS issued a press release on May 2, 2016 placing all its credit ratings on our senior debentures of "BBB" and our commercial paper rating of "R-2 (high)" under review with positive implications.

Outstanding share data

Financial instruments, off-balance sheet arrangements and other financial arrangements
Foreign currency forward contracts
We use foreign currency forward contracts to manage the foreign currency exposure. Foreign exchange gains and losses on these foreign currency forward contracts are recorded in the consolidated statement of financial position as an asset or a liability, with changes in fair value recognized in the consolidated statement of net income. As at March 31, 2016, we had outstanding foreign currency forward contracts to purchase $22.3 million U.S.

Accounts receivable securitization
Under the terms of our accounts receivable securitization program, we have the ability to sell, on a revolving basis, an undivided interest in our accounts receivable to a securitization trust, to a maximum of $50 million. The program was reduced from $110 million to $50 million in December 2015, with the removal of Allstream as a seller under the program. We are required to maintain reserve accounts, in the form of additional accounts receivable over and above the cash proceeds received, to absorb any credit losses on the receivables sold. We are required to maintain certain financial ratios with respect to our accounts receivable, or the cash proceeds must be repaid. We also are subject to certain risks of default which, should they occur, could cause the agreement to be terminated early. As at March 31, 2016, we did not have any outstanding amounts under our accounts receivable securitization program.

Critical accounting estimates and assumptions

The preparation of our consolidated financial statements in accordance with IFRS requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. We make these estimates and assumptions based on reasonable methodologies, established processes and comparisons to industry standards. We continuously evaluate these estimates and assumptions, which rely on the use of professional judgment. Because professional judgment involves inherent uncertainty, actual results could differ from our estimates. Our estimates, assumptions and methods have been applied consistently.

In our 2015 annual audited consolidated financial statements and notes, as well as in our 2015 annual MD&A, we have identified the accounting policies and estimates that are critical to the understanding of our business operations and our results of operations. Our critical accounting estimates and assumptions remain substantially unchanged from those disclosed in our 2015 annual audited consolidated financial statements and notes and 2015 annual MD&A.

Changes in accounting policies

Our first-quarter 2016 interim condensed consolidated financial statements have been prepared using the same accounting policies as in the previous year except for the standard described below:

Effective January 1, 2016, we adopted Amendments to IAS 1, Presentation of Financial Statements. This standard provides guidance on the application of professional judgement in determining what information to disclose and how to structure it in the financial statements. The application of this standard has not had any impact on the amounts reported for the current or prior period.

Accounting standards issued but not yet effective
We have not yet adopted certain standards, interpretations to existing standards and amendments which have been issued but are not yet effective. Many of these updates are not relevant to us and are therefore not discussed. We expect the standards and amendments described below to be applicable to its consolidated financial statements at a future date. The following standards and interpretations are currently being reviewed to determine the potential impact.

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

IFRS 15, Revenue from Contracts with Customers
IFRS 15, Revenue from Contracts with Customers, was issued in May 2014 and establishes a five-step revenue recognition model that applies to revenue arising from contracts with customers. IFRS 15 requires revenue to be recognized in a manner that depicts the transfer of promised goods or services to customers at an amount that reflects the expected consideration receivable in exchange for transferring those goods or services. This standard also provides guidance on the accounting treatment for contract acquisition and contract fulfillment costs and requires enhanced disclosures as to the nature, timing and uncertainty of revenues and cash flows arising from contracts with customers. This standard supersedes IAS 18, Revenues, IAS 11, Construction Contracts and a number of revenue-related interpretations. IFRS 15 is effective for annual periods beginning on or after January 1, 2018 and is to be applied retrospectively, with earlier adoption permitted. Entities will transition following either a full or modified retrospective approach.

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

IFRS 16, Leases
IFRS 16, Leases, was issued in January 2016 and introduces a single lessee accounting model which requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognize a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. IFRS 16 is effective for annual periods beginning on or after January 1, 2019, and is to be applied retrospectively, with earlier adoption permitted of IFRS 15, Revenue from Contracts with Customers, is also adopted. Entities will transition following either a full or modified retrospective approach.

Risks and uncertainties

Risk evaluation processes
Risk management practices are part of our standard operations. Identifying and managing risks forms part of Management's regular business planning processes because risks, as well as associated opportunities, form the basis of many aspects of our future business models and plans.

As we set our strategic objectives, our business leaders and Enterprise Risk Management (ERM) team undertake to identify and assess the associated risks, and consider the activities being taken to mitigate them. The program is managed through our executive team, in conjunction with our ERM team.

Risks Relating to the Arrangement
Unless indicated otherwise, capitalized terms used in this section, but not otherwise defined shall have the meanings specified in the Arrangement Agreement.

Conditions precedent to Closing
The completion of the Arrangement is subject to a number of conditions precedent, some of which are outside MTS' and BCE's control, including receipt of the Final Order. Other conditions precedent which are outside of MTS' control include, without limitation, the receipt of the regulatory approvals from the Canadian Radio-television and Telecommunications Commission (CRTC), the Competition Bureau and Innovation, Science and Economic Development Canada ("Required Regulatory Approvals") and the required shareholder approval. In addition, the completion of the Arrangement by BCE is conditional on, among other things, Dissent Rights not having been exercised by the holders of more than 15% of the issued and outstanding common shares and no Award being in force and no Action being threatened or pending (other than frivolous or vexatious Actions) against or involving MTS or its Subsidiaries that, if decided against MTS or its Subsidiaries, would result in a Company Material Adverse Effect. There can be no certainty, nor can MTS or BCE provide any assurance, that all conditions precedent to the Arrangement will be satisfied or waived, or, if satisfied or waived, when they will be satisfied or waived. If the Arrangement is not completed, the market price of the common shares may be materially adversely affected. Moreover, a substantial delay in obtaining the Required Regulatory Approvals or the presence of an Award or Action that would result in a Material Adverse Effect could result in a prolonged extension of the Outside Date.

The Required Regulatory Approvals may not be obtained
To complete the Arrangement, each of MTS and BCE must make certain filings with and obtain certain consents and approvals from various governmental and regulatory authorities. MTS and BCE have not yet obtained the Required Regulatory Approvals, all of which are required to complete the Arrangement. Governmental or regulatory agencies could seek to block or challenge the Arrangement or could impose restrictions they deem necessary or desirable in the public interest as a condition to approving the Arrangement. Regulatory authorities may impose certain requirements or obligations as conditions for their approval. These could rise to the level of a Material Remedy, in which case neither MTS nor BCE will be obligated to complete the Arrangement.

Market Price of the Common Shares
If, for any reason, the Arrangement is not completed or its completion is materially delayed and/or the Agreement is terminated, the market price of the common shares may be materially adversely affected. MTS' business, financial condition or results of operations could also be subject to various material adverse consequences, including that MTS would remain liable for significant costs relating to the Arrangement including, among others, legal, accounting and printing expenses.

Termination in Certain Circumstances
Each of MTS and BCE has the right, in certain circumstances, in addition to termination rights relating to the failure to satisfy the conditions of Closing, to terminate the Agreement. Accordingly, there can be no certainty, nor can MTS provide any assurance, that the Agreement will not be terminated by either of MTS or BCE prior to the completion of the Arrangement.

Uncertainty Surrounding the Arrangement
As the Arrangement is dependent upon receipt, among other things, of the Required Regulatory Approvals and satisfaction of certain other conditions, its completion is uncertain. In response to this uncertainty, MTS' customers may delay or defer decisions concerning MTS. Any delay or deferral of those decisions by customers could adversely affect the business and operations of MTS, regardless of whether the Arrangement is ultimately completed. Similarly, uncertainty may adversely affect MTS' ability to attract or retain key personnel.

If the Arrangement is not completed for any reason, there are risks that the announcement of the Arrangement and the dedication of substantial resources of MTS to the completion thereof could have a negative impact on the MTS' current business relationships (including with future and prospective employees, customers, distributors, suppliers and partners) and could have a material adverse effect on the current and future operations, financial condition and prospects of MTS. If the Arrangement is not completed and the Board of Directors decides to seek an alternative transaction, there can be no assurance that it will be able to find a party willing to pay consideration for the common shares that is equivalent to, or more attractive than, the Consideration payable pursuant to the Arrangement.

While the Arrangement is pending, the MTS is restricted from taking certain actions
The Arrangement Agreement restricts MTS from taking specified actions until the Arrangement is completed without the consent of BCE. These restrictions may prevent MTS from pursuing attractive business opportunities that may arise prior to the completion of the Arrangement.

Additional details regarding the Arrangement can be found in the material change report regarding the Arrangement and the Agreement which MTS has filed with the Canadian securities regulators and are available on SEDAR.

Other than as disclosed above, there have been no other changes in our risks and uncertainties during our most recent interim period (ended March 31, 2016). Refer to our 2015 annual MD&A for detailed risks and uncertainties.

Regulatory developments

Background
We are subject to regulations that materially impact how we can conduct business. The telecommunications and broadcast industries in which we operate are federally regulated, pursuant to both the Telecommunications Act and the Broadcasting Act. We are also subject to other federal and provincial regulations that shape how we conduct our business. See Risks and Uncertainties - Risks Relating to the Arrangement.

We operate as an incumbent local exchange carrier whose telecommunications business is regulated primarily by the CRTC and by ISED Canada, in areas such as spectrum or ownership. Our television business is licensed as a BDU, which is subject to a different regulatory regime.

This regulatory section describes recent developments relating to regulatory and policy proceedings that could materially impact our business. Several years ago, the regulatory trend was towards more forbearance - meaning telecommunications services were subject to less regulation. Recently, we are seeing an accelerated pace of regulation by federal and provincial governments, as well as increasing intervention by the CRTC, ISED Canada and other regulatory bodies. We are facing a more dynamic environment, which is presenting both new risks and opportunities for our business.

We mitigate our risks and try to maximize opportunities by actively participating in regulatory and policy proceedings that are relevant to our business and directly impact us. Our regulatory environment is as described in our 2015 annual MD&A and is updated for material developments every quarter.

Basic telecommunications services
The scope of the CRTC's review of basic telecommunications services has been reframed and expanded to consider the appropriateness of a national broadband strategy and the possibility of requiring broadband service providers to provide an entry-level internet service to customers. The outcomes of this hearing could materially change the competitive landscape of broadband in Canada, including the potential requirement of extensive capital investments by MTS, the subsidization of broadband services given to our competitors, and may obligate internet service providers such as MTS to provide an entry-level internet service to our subscriber base (or a subset thereof). The possible outcomes could also put into jeopardy MTS' ability to fully recover transport costs, deployments costs and network investment while at the same time increasing operational complexity. As noted in our 2015 annual MD&A, this proceeding may also have a material impact on the net benefits MTS receives from the current subsidy mechanism which enables incumbent local exchange carriers such as MTS to be compensated for providing wireline voice services to high-cost serving areas.

A formal proceeding was commenced by the CRTC on March 29, 2016 to investigate whether wireless service providers should be required to participate in the National Public Alerting System. Depending on the outcomes of this proceeding, wireless service providers such as MTS may have to upgrade or accelerate its investments in wireless networks and could face higher operational costs or complexity and increased reporting requirements.

Controls and procedures

Management is responsible for establishing and maintaining disclosure controls and procedures, and internal control over financial reporting. These terms are defined in National Instrument 52-109, Certification of Disclosure in Issuers' Annual and Interim Filings , as adopted by the Canadian securities regulatory authorities.

Other than changes arising from the sale of Allstream, there have been no changes in our internal control over financial reporting during our most recent interim period (ended March 31, 2016) that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting. Internal control over financial reporting is described in our 2015 annual MD&A.

Non-IFRS measures of performance

In this Q1 2016 MD&A, we provide information concerning EBITDA and free cash flow because we believe investors use them as measures of our financial performance. These measures do not have a standardized meaning as prescribed by IFRS, and are not necessarily comparable to similarly titled measures used by other companies.

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

Free cash flow
We define free cash flow as "cash flows from operating activities including net intersegment revenues and expenses less capital investments, and excluding changes in working capital, pension solvency funding and pension lawsuit payments, restructuring and transformation amounts and non-cash taxes". More information about free cash flow can be found in our Q1 2016 Supplemental, which is available on our website at www.mts.ca/aboutus and is available on SEDAR.

Free cash flow per share
We define free cash flow per share as "cash flows from operating activities including net intersegment revenues and expenses less capital investments, and excluding changes in working capital, pension solvency funding and pension lawsuit payments, restructuring and transformation amounts and non-cash taxes divided by our weighted average shares outstanding". More information about free cash flow per share can be found in our Q1 2016 Supplemental, which is available on our website a www.mts.ca/aboutus and is available on SEDAR.

Capital intensity ratio
We define capital intensity ratio as "capital investments adjusted for current year SR&ED ITC impacts, divided by total operating revenues and excludes capital related to restructuring and transformation initiatives". More information about capital intensity ratio can be found in our Q1 2016 Supplemental, which is available on our website at www.mts.ca/aboutus and is available on SEDAR.

SOURCE Manitoba Telecom Services Inc.

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