Consolidated Financial Statements

Transcription

1 2016 Consolidated Financial Statements For the three months ended March 31, 2016 and 2015 Manitoba Telecom Services Inc.

2 CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME Three months ended March 31 (in millions of Canadian dollars, except earnings per share) Note (Note 14) Operating revenues 6 $ $ Operating expenses Operations Restructuring and transformation Depreciation and amortization Operating income Other (expense) income Finance costs (1.8) 0.5 (14.7) (15.0) Income before income taxes Income tax expense Income from continuing operations Income from discontinued operations, net of tax Net income for the period $ 18.7 $ 26.7 Other comprehensive income Items that will not be reclassified to net income Net actuarial (losses) gains from defined benefit plans and other employee benefits 5,13 $ (135.7) $ 16.9 Deferred income taxes on items in other comprehensive income 36.7 (4.6) Other comprehensive (loss) income for the period, net of tax (99.0) 12.3 Total comprehensive (loss) income for the period $ (80.3) $ 39.0 Basic and diluted earnings per share Income from continuing operations 9 $ 0.22 $ 0.34 Income from discontinued operations Net income 9 $ 0.24 $ 0.34 Page 1

3 CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY Share Contributed (in millions of Canadian dollars) Note capital surplus Deficit Total Balance as at December 31, 2015 $ 1,675.1 $ 21.1 $ (648.0) $ 1,048.2 Net income for the period Other comprehensive loss for the period (99.0) (99.0) Total comprehensive loss for the period (80.3) (80.3) Share-based compensation Issuance of common shares Purchase of outstanding common shares 12 (58.6) (30.9) (89.5) Dividends declared (24.9) (24.9) Balance as at March 31, 2016 $ 1,616.5 $ 21.1 $ (784.1) $ Balance as at December 31, 2014 $ 1,646.2 $ 21.1 $ (615.0) $ 1,052.3 Net income for the period Other comprehensive income for the period Total comprehensive income for the period Share-based compensation Issuance of common shares Dividends declared (33.3) (33.3) Balance as at March 31, 2015 $ 1,655.8 $ 21.2 $ (609.3) $ 1,067.7 Page 2

4 CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION March 31, December 31, (in millions of Canadian dollars) Note Assets Current assets Cash and cash equivalents $ $ Accounts receivable Prepaid expenses Inventories Assets held for sale Property, plant and equipment 1, ,062.7 Intangible assets Other assets Deferred tax assets Total assets $ 2,281.7 $ 2,674.4 Liabilities and shareholders' equity Current liabilities Bank indebtedness $ $ 15.0 Accounts payable and accrued liabilities Advance billings and payments Current provisions Notes payable Current portion of long-term debt Current portion of finance lease obligations Liabilities related to assets held for sale Long-term debt Long-term portion of finance lease obligations Long-term provisions Employee benefits Other long-term liabilities Deferred tax liabilities Total liabilities 1, ,626.2 Shareholders' equity Share capital 1, ,675.1 Contributed surplus Deficit (784.1) (648.0) ,048.2 Total liabilities and shareholders' equity $ 2,281.7 $ 2,674.4 Page 3

5 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Three months ended March 31 (in millions of Canadian dollars) Note Cash flows from operating activities Income from continuing operations $ 17.3 $ 26.4 Add items not affecting cash Depreciation and amortization Deferred income tax expense Loss on disposal of assets Deferred wireless costs (23.9) (17.9) Pension funding and net pension expense Pension solvency payments (0.6) (16.5) Pension plan lawsuit payment (12.4) Other, net (2.8) (3.3) Changes in non-cash working capital 15.3 (24.3) Cash flows from operating activities Cash flows from investing activities Capital investments (31.0) (43.1) Proceeds from Allstream sale, net Other, net (2.4) (0.1) Cash flows from (used in) investing activities (43.2) Cash flows from financing activities Dividends paid 11 (25.8) (23.5) Repayment of notes payable, net (166.1) Purchase of outstanding Common Shares 12 (89.5) Other, net (0.5) (0.4) Cash flows used in financing activities (281.9) (23.9) Cash flows from (used in) continuing operations (32.1) Cash flows (used in) from discontinued operations 5 (11.1) 8.8 Change in cash and cash equivalents (23.3) (Bank indebtedness) cash and cash equivalents, beginning of period (15.0) 33.4 Cash and cash equivalents, end of period $ $ 10.1 Page 4

6 1. CORPORATE INFORMATION Manitoba Telecom Services Inc. (referred throughout these condensed consolidated financial statements as we, us, our, MTS and the company) provides a full range of wireless, broadband and converged IP, information solutions, unified communications, security and home alarm monitoring, local access and long distance and data services to residential and business customers in Manitoba. MTS is incorporated in Manitoba, Canada, and its Common Shares are listed on the Toronto Stock Exchange ( TSX ). Our head and registered office is located at 333 Main Street, P.O. Box 6666, Winnipeg, Manitoba, Canada, R3C 3V6. 2. SIGNIFICANT ACCOUNTING POLICIES Statement of compliance These interim condensed consolidated financial statements of MTS were prepared in accordance with International Financial Reporting Standards ( IFRS ) in compliance with International Accounting Standard 34, Interim Financial Reporting, as issued by the International Accounting Standards Board ("IASB") and have been prepared using the same accounting policies and methods of application as those used in our audited consolidated financial statements for the year ended December 31, 2015, except as described in Note 3. These interim condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the year ended December 31, These interim condensed consolidated financial statements were approved for issuance by the Board of Directors of the Company on May 11, Basis of presentation These interim condensed consolidated financial statements have been prepared on a historical cost basis, which is generally based on the fair value of the consideration at the time of the transaction. These interim condensed consolidated financial statements are presented in Canadian dollars and all values are rounded to the nearest million unless otherwise indicated. 3. ADOPTION OF NEW ACCOUNTING STANDARDS Effective January 1, 2016, the Company 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. 4. 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 following standards and amendments described below to be applicable to our 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. Page 5

7 4. ACCOUNTING STANDARDS ISSUED BUT NOT YET EFFECTIVE (continued) 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 its 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. It also expects 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 rightof-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 if IFRS 15, Revenue from Contracts with Customers, is also adopted. Entities will transition following either a full or modified retrospective approach. 5. DISCONTINUED OPERATIONS On November 20, 2015, we entered into an agreement with Zayo Group Holdings Inc. ("Zayo") to sell the shares of our wholly-owned subsidiaries, Allstream Inc., Allstream Fibre U.S., Inc. and Delphi Solutions Corp. (collectively Allstream, which has now been renamed Zayo Canada Inc. ("Zayo Canada")), for an aggregate purchase price of $465 million. As at November 20, 2015, the assets and liabilities of the Allstream disposal group have been reclassified as assets held for sale and liabilities related to assets held for sale. The financial results attributable to Allstream have been presented as discontinued operations. On January 15, 2016 we completed the sale and, after preliminary 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 $5.0 million will be received in the second quarter of As part of the sale agreement, we retain Allstream's existing defined benefit pension plans. Once regulatory approval is received, we will transfer assets from these defined benefit pension plans related to pre-closing service obligations for active employees to new Zayo Canada pension plans. We will retain the benefit obligations for retirees and other former employees under the Allstream defined benefit pension plans. In addition, if the pre-closing benefit obligation for the active employees on a solvency basis exceeds the assets transferred to the new Zayo Canada pension plans (the Zayo Canada Solvency Deficit ), we have agreed to fund the Zayo Canada Solvency Deficit until the later of the asset transfer date or the date at which it is determined that no further Zayo Canada Deficit exists. As at March 31, 2016, the net defined benefit pension asset associated with the active employees of Zayo Canada of $0.7 million is disclosed as assets held for sale (December 31, net defined benefit liability of $6.1 million disclosed as liabilities related to assets held for sale). As a result of the sale, we recognized a curtailment gain of $12.6 million for the active employees. This gain reflects that, as a result of the sale, there will no longer be additional future salary increases or service reflected in the projected benefit obligation for the affected employees. During the three months ended March 31, 2016, we also recognized an actuarial loss of $7.3 million on the net defined benefit pension asset as a result of asset returns. Until the date that we transfer assets from the existing pension plans to the new Zayo Canada pension plans (the Pension Asset Transfer Date ), the pre-closing benefits and related assets will continue to be accounted for under IAS 19, Employee Benefits ( IAS 19 ). On the Pension Page 6

8 5. DISCONTINUED OPERATIONS (continued) Asset Transfer Date, we will record a settlement loss or gain in discontinued operations based on the net benefit asset or liability determined under IAS 19 and the amount of the asset transfer on that date. We expect the Pension Asset Transfer Date to occur in late 2017 or early The results of discontinued operations for the periods ended March 31 are as follows: Operating revenues Operating expenses Other income (expense) and finance costs, net 9.0 (0.2) Income from discontinued operations before income tax expense Income tax expense 1.5 Income from discontinued operations before loss on sale Loss on sale (2.9) Income tax recovery related to loss on sale Income from discontinued operations, net of tax Other income (expense) and finance costs include a curtailment gain recognized with respect to the defined benefit pension plans for active employees of Zayo Canada, net of other expenses related to the disposal of Allstream. The following table provides further information on cash flows relating to discontinued operations for the periods ended March 31: Cash flows (used in) from operating activities (3.0) 1.6 Cash flows used in investing activities (8.1) (17.8) Cash flows from financing activities 25.0 Cash flows (used in) from discontinued operations (11.1) OPERATING REVENUES Operating revenues are comprised of: Wireless Broadband and converged IP Information solutions Unified communications Security and monitoring Local access Long distance and data Other Page 7

9 7. OPERATING EXPENSES The key components of operating expenses for the periods ended March 31 are as follows: Operations Salaries and benefits expense Bad debt expense Other operations expenses Restructuring and transformation Depreciation and amortization Depreciation of property, plant and equipment Amortization of intangible assets Operating expenses Restructuring and transformation costs are comprised of costs associated with our MTS Transformation program of $3.9 million and other productivity initiatives to improve our effectiveness of $1.3 million. 8. INCOME TAXES Income tax expense is comprised of current income taxes of $0.1 million ( $2.4 million) and deferred income taxes of $6.4 million ( $7.4 million). In 2015, $2.2 million of current income tax expense of $2.4 million is related to the utilization of non-cash SR&ED investment tax credits. Reconciliations to statutory tax rate:: % $ % $ Income before income taxes Income tax at combined federal and provincial statutory tax rate Effect of: Other items Income tax reported in the condensed consolidated statements of net income The statutory tax rate used represents the combined federal and provincial statutory tax rates applicable to our Company's major operating entity. Page 8

10 9. EARNINGS PER SHARE The following table provides a reconciliation of the information used to calculate basic and diluted earnings per share: Net income from continuing operations for the period Basic and diluted Net income from discontinued operations Basic and diluted Net income for the year Basic and diluted Weighted average number of shares outstanding (in millions) Weighted average number of shares outstanding basic and diluted Earnings per share from continuing operations ($) Basic and diluted Earnings per share from discontinued operations ($) Basic and diluted 0.02 Earnings per share ($) Basic and diluted The diluted earnings per share calculation excludes the effect of anti-dilutive options. The number of excluded options was 529,818 (2015-2,176,774). 10. FINANCIAL INSTRUMENTS Notes payable During the three months ended March 31, 2016, we repaid notes payable of $166.1 million. This was comprised of $118.0 million of short-term borrowings issued under our syndicated facility, and $48.1 million under our accounts receivable securitization program that was outstanding as at December 31, DIVIDENDS Dividends declared On May 11, 2016, our Board of Directors declared a quarterly cash dividend of $0.325 per share. Dividends paid During the three months ended March 31, 2016, we paid cash dividends of $0.325 per share for a total of $25.8 million ( $0.425 per share for a total of $23.5 million). Page 9

11 12. SHARE CAPITAL As at March 31, 2016, share capital consists of 76,491,506 issued and outstanding common shares (December 31, ,262,469 ). On February 4, 2016, the Board approved the launch of a Normal Course Issuer Bid ("NCIB") program which will allow 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. During the three months ended March 31, 2016, we purchased and cancelled 2,770,963 common shares for cash consideration of $89.5 million pursuant to our NCIB. The purchase price was charged to share capital for the stated capital of the common shares in the amount of $58.6 million. The excess of the purchase price over the stated capital in the amount of $30.9 million was charged to deficit. During the three months ended March 31, 2015, 366,832 common shares were issued as a result of participation in the Company's Dividend Reinvestment Plan. These shares were issued for net proceeds of $9.6 million and credited to share capital. Starting with the October 15 dividend payment, the common shares were no longer issued from Treasury at a discount, and were instead purchased on the open market. 13. EMPLOYEE BENEFITS During the three months ended March 31, 2016, we recognized an actuarial loss in continuing operations of $128.4 million on our defined benefit pension liabilities and assets as a result of asset returns and changes in discount rates. 14. PRIOR PERIOD FIGURES AND COMPARATIVE RESULTS The prior period figures have been reclassified when necessary to conform to 2016 presentation. In 2015, intersegment revenues and expenses with Allstream were eliminated upon consolidation. Following the sale of Allstream in January 2016 (Note 5), we recognize transactions with Zayo Canada as external revenues and expenses. The following table presents our 2015 financial results on a comparable basis to our 2016 financial results. Operating revenues, as previously reported Add: 2015 intersegment revenues 3.7 Total operating revenues Operating expenses, as previously reported Add: 2015 intersegment expenses 3.5 Total operating expenses Restructuring and transformation expenses Depreciation and amortization Operating income Other (expense) income (1.8) 0.5 Finance costs (14.7) (15.0) Income before income taxes Income tax expense Income from continuing operations, for the period Page 10

12 15. SUBSEQUENT EVENT Arrangement with BCE On May 2, 2016, it was announced that we have entered into a definitive arrangement agreement pursuant to which BCE Inc. ("BCE") will purchase all of the issued and outstanding common shares of MTS. The transaction has been unanimously approved by the Board of Directors of each of MTS and BCE and is supported by the management teams of both companies. The transaction is structured to proceed by way of a court approved plan of arrangement under The Corporations Act (Manitoba) pursuant to which BCE will purchase all of the issued and outstanding common shares of MTS subject to shareholder approval from two-thirds of the votes cast by MTS shareholders and satisfaction of other required approvals, including receipt of regulatory approvals by the Canadian Radio-television and Telecommunications Commission, the Competition Bureau and Innovation, Science and Economic Development Canada. The arrangement agreement between MTS and BCE provides for, among other things, a non-solicitation covenant on the part of MTS, subject to customary fiduciary out provisions that entitle MTS to consider and accept an acquisition proposal that constitutes or may reasonably be expected to constitute a superior proposal and a right in favour of BCE to match any superior proposal. If the arrangement agreement is terminated in certain circumstances, including if MTS enters into a definitive agreement with respect to a superior proposal, BCE is entitled to a break-fee payment of $120 million. The transaction also includes a reverse break-fee payment of $120 million payable by BCE in certain circumstances. NCIB During the period from April 1 to May 4, 2016, we purchased an additional 2,303,772 common shares for cancellation for cash consideration of $74.8 million pursuant to our NCIB. As a result of the agreement with BCE, this concludes the purchases to be made under our NCIB and no further repurchases will be made. Page 11