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Press release from CNW Group

MTS Allstream Reports Second Quarter 2011 Results

Friday, August 05, 2011

MTS Allstream Reports Second Quarter 2011 Results06:00 EDT Friday, August 05, 2011Stock Symbol:  MBTQ2 highlights include: 2011 financial outlook ranges increased for revenues, EBITDA and EPSMTS Allstream's EBITDA increases by 8.6% to $150.8 millionAllstream delivers strong IP growth with converged IP revenues up 10.6% Allstream achieves strong EBITDA growth of $4.6 million or 19.7% MTS wireless revenues climb by 9.3% in the first half of 2011, wireless data revenues up 45.5%Annualized cost savings for the first half of the year reach $20.6 millionBoard of Directors declares $0.425 per share Q3 cash dividendWINNIPEG, MB, August 5, 2011 /CNW/ - Manitoba Telecom Services Inc. (the "Company" or "MTS Allstream"), including its two operating divisions MTS and Allstream, today reported strong second quarter 2011 financial results.  MTS Allstream's Board of Directors also approved an update to the Company's 2011 financial outlook."Our past investments and strong focus on IP technology nationally and on unique bundles of home services in Manitoba contributed to another quarter of solid financial results for both MTS and Allstream," said Pierre Blouin, Chief Executive Officer. "Based on our strong results in the first half of the year, we are increasing our 2011 financial guidance ranges for revenues, EBITDA and EPS."Quarterly Financial Highlights  2011 2010 (in millions $, except EPS1)Q2Q1Q4Q3Q2Revenues443.7439.3446.7451.0      442.9EBITDA2150.8149.8135.5159.9      138.8EPS ($)0.760.670.460.76      0.54Free cash flow357.824.4(64.1)44.3      33.3Capital expenditures/revenue12.3%15.4%29.0%17.4%17.6%All financial metrics in this table are presented on a consolidated basis and reported in accordance with International Financial Reporting Standards ("IFRS").The second quarter reflected strong growth in wireless, broadband and converged IP, offset by lower revenues from legacy services, making the Company's revenues stable compared to the same period in the prior year. Solid EBITDA growth from both MTS and Allstream divisions contributed to MTS Allstream's overall EBITDA growth of 8.6 per cent in the second quarter year over year.Earnings per share were $0.76 in the second quarter of 2011 - an increase of $0.22 or 40.7 per cent compared to the same period in the prior year. This increase was mainly due to the strong EBITDA growth and a $10.3 million decrease in depreciation and amortization expense. This depreciation expense decrease resulted from $20.7 million of additional scientific research and experimental development ("SR&ED") investment tax credits for the 2005 to 2008 taxation years recognized in the second quarter, and reflects management's increased focus on SR&ED investment over the past several years. The favourable SR&ED impact on earnings per share is $0.12.Free cash flow reached $57.8 million in the second quarter, compared to $33.3 million a year ago, due primarily to higher EBITDA and the impact of the $20.7 million one-time SR&ED investment tax credit adjustment, partly offset by higher wireless costs of acquisition related to wireless data growth.The Company achieved $20.6 million in annualized cost savings in the first six months of 2011. Management remains well on track to reach its full-year target of annualized cost savings of between $25 million and $35 million.Updated 2011 Financial OutlookMTS Allstream's updated financial outlook for 2011 is outlined in the table below. In the first and second quarters of 2011, MTS Allstream delivered strong growth in wireless, high-speed Internet, IP TV and converged IP revenues; lower than expected declines in enterprise legacy revenues; and lower non-cash pension expense than anticipated in management's original 2011 outlook provided on December 15, 2010. Management expects these trends to continue into the second half of 2011, pushing revenue, EBITDA and EPS higher than original 2011 guidance ranges. Management's revised EPS range also reflects lower depreciation and amortization expense due to the favourable impact of the one-time SR&ED investment tax credit adjustment. Updated 2011 OutlookOriginal 2011 OutlookRevenues$1.700 billion to $1.780 billion$1.665 billion to $1.765 billionEBITDA$580 million to $610 million$550 million to $590 millionEPS$2.40 to $2.80$2.00 to $2.45Free cash flowNo change$110 million to $150 millionCapital expendituresNo change16% to 18% of revenuesMTSMTS's revenues and EBITDA were up by 2.9 per cent and 6.8 per cent, respectively, in the second quarter of 2011 when compared to the second quarter of 2010. These increases are driven by strong growth in wireless, high-speed Internet, and IP TV revenues which increased collectively by 9.6 per cent year over year. MTS's bundling strategy continues to deliver strong results, with bundled customers having higher than average revenue and lower churn. The number of customers using MTS's bundled services grew by 4.2 per cent when compared to the same period of 2010."We are pleased with the trends we saw in the second quarter. Overall, more customers are upgrading to higher value services, such as smartphones with larger data plans, higher-speed Internet plans and our premium Ultimate TV service," said Kelvin Shepherd, President of MTS. "This confirms that MTS's value proposition - product leadership and innovative bundles at a fair price - is competitive and attractive to customers."Wireless revenues were up by 9.3 per cent in the first half of the year when compared to the same period last year, driven by a 45.5 per cent increase in wireless data revenue growth, higher average revenue per user and subscriber growth. Since the launch of its 4G wireless network on March 31, 2011, MTS has seen an increased demand for smartphones. In the second quarter, two thirds of gross additions signed up for a data plan which bodes well for continuing strong growth in wireless data revenues.MTS's broadband and converged IP revenues were up by 10.0 per cent in the second quarter of 2011 when compared to the same period of 2010, reflecting increases in IP TV, high-speed Internet and converged IP revenues. IP TV revenues increased by 17.8 per cent in the quarter, based on 2.3 per cent subscriber growth and a 16.4 per cent increase in average revenue per user, year over year. In Selkirk, Manitoba, the first community where MTS deployed fibre-to-the-home technology starting in 2010, MTS is making excellent progress. Eighty per cent of Selkirk households are now eligible for fibre-to-the-home services, and MTS is experiencing a strong take-up of its premium Ultimate TV services in this community in connection with this deployment. MTS is also on track to launch its fibre-to-the-home technology in four new communities in rural Manitoba in the second half of the year - Steinbach, Dauphin, Thompson and The Pas."We are already seeing the benefits of our investment in our 4G wireless network in our financial results, and we are gearing up for the deployment of fibre-to-the-home technology in four new communities this fall," added Mr. Shepherd. "Our fibre-to-the-home plans are the most cost-effective way to improve our broadband capabilities in locations where we do not currently have existing VDSL broadband service and provides MTS with new growth and bundling opportunities."AllstreamAllstream continues to make strong progress executing its IP strategy and again delivered strong improvements in its operating results, profitability and cash flows. The strategy includes focusing on winning high-margin on-net IP revenues, discontinuing sales or exiting various legacy services, reinvesting cash flows from legacy services into IP platforms and reducing its operating costs.In the second quarter of 2011, Allstream's EBITDA improved by $4.6 million or 19.7 per cent when compared to the same period in the prior year, which marks Allstream's third consecutive quarter of year-over-year EBITDA growth. The increase is mainly attributable to improved margins, lower operating costs, and lower restructuring expenses in the second quarter of 2011 compared to the same period in 2010."We are a much stronger company today than we were even a year ago.  We still have a lot of work to do, but the evidence the business is improving is growing," said Dean Prevost, President of Allstream.  "We had two of our best months of IP sales this quarter, which creates an important funnel of pre-sold wins that will support IP revenue growth in quarters to come."Converged IP revenues were up by 10.6 per cent in the second quarter when compared to the same period last year. Allstream is supporting this IP growth with continued success-based investments that are adding new fibre-fed buildings to its network.  In the second quarter of 2011, Allstream added a total of 47 buildings to the network.  This increased Allstream's total number of fibre-fed buildings to 2,211 at June 30, 2011.A significant part of Allstream's investment plan began in 2010, when the Company announced a multi-year program to expand Allstream's IP fibre network and increase profitability.  This program specifically targets select multi-tenant buildings that are very close to existing fibre assets and can be connected at a very low cost. These investments extend Allstream's on-net reach and provide incremental, high-margin revenue opportunities.Dividend The Company's Board of Directors declared a cash dividend of $0.425 per share for the third quarter of 2011, which is payable on October 14, 2011 to shareholders of record on September 15, 2011.Quarterly Conference Call   MTS Allstream's second quarter 2011 conference call with the investment community is scheduled for 8:30 a.m. (Eastern Time) on Friday, August 5, 2011.  Investors, media and the public are invited to listen to the conference call.  The dial-in number is 1-888-231-8191.  A live audio Webcast of the conference call can be accessed by visiting the Investors section of the MTS Allstream website (www.mtsallstream.com).  A replay of the conference call will be available until midnight (Eastern Time) on August 19, 2011, and can be accessed by dialing 1-800-642-1687 or 1-416-849-0833 (access code 80945084).NoteMTS Allstream's interim Management's Discussion and Analysis ("MD&A") for the three and six months ended June 30, 2011 and supplementary financial information are available in the Investors section of the MTS Allstream website at www.mtsallstream.com.About Manitoba Telecom Services Inc. Manitoba Telecom Services Inc., through its wholly-owned subsidiary MTS Allstream Inc., is one of Canada's leading national communication solutions companies, providing innovative communications for the way Canadians live and work today. The Company has more than 100 years of experience, with 5,500 employees across Canada dedicated to a mission of delivering true value as seen through the eyes of our customers. MTS Allstream has nearly two million customer connections spanning business customers across Canada and residential consumers throughout the province of Manitoba. The Company's extensive national broadband and fibre optic network spans almost 30,000 kilometres. Manitoba Telecom Services Inc.'s common shares are listed on the Toronto Stock Exchange (trading symbol: MBT). Customers, stakeholders and investors who want to learn more about MTS Allstream are encouraged to visit: www.mtsallstream.com.Forward-looking Statements DisclaimerThis news release includes forward-looking statements and information (collectively, the "statements") about our corporate direction, business opportunities, operations, financial objectives and future financial results and performance that are subject to risks, uncertainties and assumptions.  As a consequence, actual results in the future may differ materially from any conclusion, forecast or projection in such forward-looking statements. Therefore, forward-looking statements should be considered carefully and undue reliance should not be placed on them. Examples of statements that constitute forward-looking information may be identified by words such as "believe", "expect", "project", "should", "anticipate", "could", "target", "forecast", "intend", "plan", "outlook", "see", "set", "pending", and other similar terms.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 interim MD&As for the first and second quarters of 2011, as well as our 2010 annual MD&A, and our Annual Information Form, all of which are available on SEDAR at www.sedar.com.Please note that forward-looking statements reflect our expectations as at the date hereof.  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.Footnotes:1. EPS is earnings per share.2.     EBITDA is earnings before interest, taxes, depreciation and amortization and other income (expense). Refer to the "Non-IFRS measures of performance" section of MTS Allstream's second quarter 2011 interim MD&A for more information.3.     MTS Allstream defines free cash flow as cash flows from operating activities, less capital expenditures, and excluding changes in working capital. Refer to the "Non-IFRS measures of performance" section of MTS Allstream's second quarter 2011 interim MD&A for more information.MANAGEMENT'S DISCUSSION AND ANALYSISThis Management's Discussion and Analysis ("MD&A") of our financial results comments on our operations, performance and financial condition for the three months ("Q2") and six months ("year to date" or "YTD") ended June 30, 2011 and 2010.  This MD&A is based on financial statements that reflect the adoption of International Financial Reporting Standards ("IFRS").  Prior to 2011, our consolidated financial statements were presented in accordance with previous Canadian generally accepted accounting principles ("GAAP").  All financial amounts, unless otherwise indicated, are in Canadian dollars and in accordance with IFRS.Unless otherwise indicated, this MD&A for the three and six months ("interim period") ended June 30, 2011 is as at August 4, 2011.  In preparing this MD&A, we have taken into account information available to us up to August 4, 2011.  In this MD&A, "we", "our", and "us" refer to Manitoba Telecom Services Inc. (the "Company" or "MTS Allstream").  This interim MD&A should be read in conjunction with our condensed interim consolidated financial statements for the period ended June 30, 2011. We also encourage you to read the MD&A that accompanies our audited consolidated financial statements for the year ended December 31, 2010 dated March 3, 2011.  You will also find more information about us, including our annual information form for the year ended December 31, 2010 dated March 3, 2011, on our website atwww.mtsallstream.com and on SEDAR at www.sedar.com.Regarding forward-looking statements This interim MD&A includes forward-looking statements and information (collectively, the "statements") about our corporate direction, business opportunities, operations, financial objectives, future financial results and performance, future cash flows and distributions to shareholders that are subject to risks, uncertainties and assumptions.  As a consequence, actual results in the future may differ materially from any conclusion, forecast or projection in such forward-looking statements.  Examples of statements that constitute forward-looking information may be identified by words such as "believe", "expect", "project", "should", "anticipate", "could", "target", "forecast", "intend", "plan", "outlook", "see", "set", "pending", and other similar terms.Factors that could cause anticipated opportunities and actual results to differ materially include, but are not limited to, matters identified in our 2010 Annual MD&A.Please note that forward-looking statements reflect our expectations as at the date hereof.  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.OVERVIEW OF OUR BUSINESS MTS Allstream is a leading national communications provider in Canada and the market leader in Manitoba.  Our company is organized into two principal business segments: MTS, operating in Manitoba; and Allstream, operating nationally.  Our common shares are listed on the Toronto Stock Exchange (trading symbol: MBT) and our website is www.mtsallstream.com.MTSMTS leads every telecommunications market segment in Manitoba, delivering a full suite of wireless, high-speed Internet, Internet protocol television ("IP TV"), converged Internet protocol ("IP"), unified communications, security, home alarm monitoring, local access and long distance services.  This complete range of products is unmatched by any other provider in the province.  MTS serves both residential and business customers in Manitoba.AllstreamAllstream is a leading competitor in the national business and wholesale markets, offering small, medium and large businesses and government organizations a portfolio of telecommunications solutions tailored to meet their needs.  Allstream's main products are IP-based communications, unified communications, voice and data connectivity, and security services.  Allstream operates an extensive national broadband fibre optic network that spans 30,000 kilometres and provides international connections through strategic alliances and interconnection agreements with other international service providers.SECOND QUARTER IN REVIEWSummary of results(in millions $, except EPS andcapital expenditures/revenues) Q2 2011 Q1 2011 Q4 2010 Q3 2010 Q2 2010Revenues443.7439.3446.7451.0442.9EBITDA1150.8149.8135.5159.9138.8EPS2$0.76$0.67$0.46$0.76$0.54Free cash flow357.824.4(64.1)44.333.3Capital expenditures/revenues12.3%15.4%29.0%17.4%17.6In accordance with IFRS     1 EBITDA (earnings before interest, taxes, depreciation and amortization, and other income (expense)) is a non-IFRS measure of performance. See the section titled "Non-IFRS measures of performance" for further information.2 Earnings per share ("EPS") is based on weighted average shares outstanding of 65.4 million for the three months ended June 30, 2011, 65.2 million for the three months ended March 31, 2011, 64.9 million for the three months ended December 31, 2010, 64.7 million for the three months ended September 30, 2010, and 64.7 million for the three months ended June 30, 2010. Increases in the number of weighted shares outstanding are mainly due to participation in our dividend reinvestment program. 3We define free cash flow as cash flows from operating activities, less capital expenditures, and excluding changes in working capital.  See the section titled "Non-IFRS measures of performance" for further information.Both MTS and Allstream continued to deliver strong results in the second quarter of 2011. The results for the first half of the year demonstrated strong performance in all strategic areas.With revenue growth of 2.9% and EBITDA growth of 6.8% in the second quarter of 2011, MTS built on the success of the first quarter of 2011 and continued to provide a solid foundation for the Company. MTS leveraged its product leadership and unique bundling capabilities to face a competitive market, resulting in strong performance in its wireless, high-speed Internet and IP TV lines of business.  The revenue growth in these strategic areas, along with active cost management efforts, offset declines in legacy revenues and supported MTS's industry-leading EBITDA margin of 51.5%.Allstream's results for the second quarter of 2011 continued to reflect improvements in its business with a 10.6% increase in high-margin, on-net IP revenues and further reductions to its cost structure, partly offset by legacy revenue declines.  We continued our strategy to manage our legacy lines of business for profitability and positive cash flows by exiting low-margin legacy services, removing costs, and transitioning customers to our IP-based services.  For the first half of 2011, the shift towards high-margin IP revenues increased Allstream's gross margin percentage by 2.1 bps to 56.6% and Allstream's EBITDA margin percentage by 5.4 bps to 13.9%, demonstrating the success of our converged IP strategy.Consolidated revenues of $443.7 million in the second quarter of 2011 were consistent with those achieved earlier this year and in the second quarter of 2010. The declines in our legacy services were offset by 9.6% growth in MTS's strategic services (wireless, high-speed Internet and IP TV services) and 10.6% growth in Allstream's IP revenues.The EBITDA increases in the second quarter and first half of 2011 were due to stable consolidated revenues, improvements to our cost structure, improved margins at Allstream, and $12.6 million and $8.2 million of restructuring and transition expenses incurred in the first and second quarters of 2010, respectively.  Excluding restructuring and transition expenses, consolidated EBITDA in the first six months of 2011 increased by $10.4 million, or 3.6%, over the same period of 2010.EPS increases were mainly due to EBITDA growth and a decrease in depreciation and amortization expense. In the second quarter of 2011, we recognized $20.7 million of additional scientific research and experimental development ("SR&ED") investment tax credits ("ITC") due to the completion of Canada Revenue Agency's ("CRA") audit for the 2005 to 2008 taxation years. The additional SR&ED ITC reduced depreciation expense by $10.3 million, partially offset by income tax expense of $2.7 million, resulting in an increase to net income of $7.6 million. The year-to-date increase was also affected by an increase in other income.  Excluding the impact of the SR&ED ITC adjustment in the first half of 2011, EPS was $1.31, up 9.2% from $1.20 for the same period last year (after excluding the restructuring costs recognized in 2010).The $24.5 million increase in free cash flow in the second quarter of 2011 was primarily due to higher EBITDA and lower capital expenditures due to the favourable one-time $20.7 million adjustment to SR&ED ITC claims, partly offset by increased wireless costs of acquisition related to wireless data growth, when compared to the same period of 2010.  The $28.3 million increase in free cash flow for the first half of 2011 was primarily due to higher EBITDA and lower capital spending (including the impact of the SR&ED ITC adjustment), partly offset by an increase in pension solvency funding and increased wireless costs of acquisition, when compared to the same period of 2010.  The SR&ED ITC adjustment reflects management's commitment to develop leading-edge products across all of our strategic services. The ITC will be utilized when the Company becomes taxable in future years.  Excluding the impact of the SR&ED ITC, free cash flow was up $3.8 million in the second quarter and $7.6 million in the first half of the year, when compared to the same periods of 2010.For the first half of the year, our capital intensity ratio was 13.9%, down from 17.4% in the same period of 2010. Excluding the impact of the additional SR&ED ITC on capital expenditures, our capital intensity ratio was 16.2% for the first half of the year. These capital intensity ratios are in line with our outlook for 2011 and include ongoing investments for fibre-to-the-home ("FTTH") deployment at MTS, and our success-based, targeted investment program to extend IP fibre at Allstream.Updated 2011 financial outlookIn light of our positive financial results in the second quarter and first half of 2011, management is revising 2011 guidance ranges for revenues, EBITDA and EPS.  Updated 2011 outlookOriginal 2011 outlookRevenues$1.700 billion to $1.780 billion$1.665 billion to $1.765 billionEBITDA$580 million to $610 million$550 million to $590 millionEPS$2.40 to $2.80$2.00 to $2.45Free cash flowNo change$110 million to $150 millionCapital expendituresNo change16% to 18% of revenuesWe are raising our consolidated revenues guidance range. In the first half of 2011, MTS achieved higher-than-anticipated Internet and IP TV revenues, due to price increases and fewer subscribers on promotional plans, and higher-than-expected wireless data revenues. We expect the second half of 2011 to be similar to the first half of the year. Allstream long distance and legacy data revenues were higher than forecast in the first half of the year due to higher volumes, a more favourable pricing environment, and lower churn than anticipated. We expect this trend to continue through the end of the year.We are raising our EBITDA guidance range mainly due to greater than expected consolidated revenue and lower than expected non-cash pension expense.In the first half of 2011, earnings per share have increased mainly due to increased EBITDA and lower depreciation and amortization due to the impact of the SR&ED ITC adjustment. These items will have a positive impact on EPS for 2011.Free cash flow is expected to remain within the original outlook ranges. Higher-than-expected EBITDA (net of $13 million lower-than-expected non-cash pension expense) and the $20.7 million SR&ED ITC will be partially offset by additional pension solvency payments related to the delayed implementation of new federal pension regulations and higher-than-expected wireless costs of acquisition related to wireless data growth. We expect no additional pension solvency payments for the balance of the year.We anticipate capital expenditures will remain within the original 16% to 18% of revenues. In the first half of 2011, capital expenditures were lower than expected due to an adjustment for SR&ED ITC claims. Due to the cyclical nature of our capital spending program, capital expenditures will be higher in the second half of 2011 when compared to the first half of the year.Strategic objectivesAt MTS Allstream, we are committed to remaining a leading national telecommunications provider and the market leader in Manitoba. To this end, we are concentrating on three strategic objectives in 2011.  By meeting these strategic objectives, we expect to continue to produce strong cash flows in support of our dividend policy. In the second quarter of 2011, we made the following progress on our three strategic objectives:Maintain our industry-leading position in Manitoba.  In Manitoba, we are the market leader because of our strong brand recognition, customer loyalty, exclusive distribution channels, product leadership, and unmatched bundling capabilities. To maintain our product leadership, we continued to invest in our wireless and broadband networks and enhance our unmatched bundling capabilities.On March 31, 2011, we launched our 4G wireless network in Manitoba, which provides customers with cellular voice and high-speed mobile data coverage of up to 21 megabits per second.  Our 4G network delivers high-speed data to 97% of Manitoba's population, improving on our evolution data optimized ("EVDO") network, which reaches 72% of the population.  We also introduced new service bundles and a new line-up of smartphones, including the iPhone 4, which we launched on April 26, 2011.  The expansiveness and sophistication of our wireless network in Manitoba is a significant competitive advantage.  Our wireless services set our bundle offering apart from our competitors and further reinforce the strength of the MTS brand.  In the second quarter of 2011, our wireless revenues and average revenue per user ("ARPU") increased by 8.9% and 3.8%, respectively, when compared to the same period of 2010.In the second quarter of 2011, we continued to make investments in our broadband network by deploying our fibre-to-the-home network.  In 2010, we announced plans to invest $125 million over the next five years to deploy FTTH to approximately 120,000 homes in over 20 Manitoba communities.  The first community to receive FTTH under this initiative was Selkirk, Manitoba. We launched FTTH in Selkirk last year and began migrating customers over from our copper network. We are on track to achieve our migration target for the year. In 2011, we will deploy FTTH to four new communities in Manitoba where we currently do not have very-high-bit-rate digital subscriber line ("VDSL").  A strong broadband network is a competitive advantage, creates growth opportunities, and allows MTS to provide high-speed Internet and IP TV services. In the second quarter of 2011, MTS's Internet and IP TV revenues increased by 7.1% and 17.8%, while the subscriber bases rose by 1.5% and 2.3%, respectively, when compared to the same period of the previous year.Drive growth in IP-based services and improve profitability.Allstream continued to grow converged IP revenues, achieving 10.6% growth in the second quarter of 2011 when compared to the same period of 2010. We are supporting this growth with success-based investments; we connected a total of 47 buildings to the network in the second quarter.  This increased the total number of fibre-fed buildings to 2,211 as at June 30, 2011.  Through our new building programs, the transitioning of existing customers to IP services, and new customer sales into existing buildings, we have maintained high levels of sales activity and are well positioned to achieve strong IP revenue growth in 2011.A significant part of our investment plan began in 2010 when we announced a multi-year plan to expand Allstream's IP fibre network and increase profitability. This program specifically targets select multi-tenant buildings that are very close to existing fibre assets and can be connected at a very low cost.  These investments extend our on-net reach and provide us with incremental high-margin revenue opportunities.  Since we launched this initiative in March 2010, we have extended fibre into 174 new multi-tenant buildings on a cost-effective basis and won a total of 247 new IP contracts.Deliver superior customer service, while aggressively improving our cost structure.In 2011, we remain committed to delivering superior customer service and improving the customer experience. MTS continued to meet its targets for customer service in the second quarter of 2011.  Allstream continued to be among industry leaders when it comes to customer satisfaction and, in the second quarter of 2011, improved on its customer service and delivery metrics when compared to the same period of 2010.In the first half of 2011, we achieved $20.6 million in annualized cost savings through operational efficiency programs mainly associated with legacy product lines and restructuring initiatives. We are targeting a total of $25 million to $35 million in annualized cost savings in 2011.DISCUSSION OF OPERATIONS CONSOLIDATED STATEMENTS OF INCOME(in millions $, except EPS)Q2 2011Q2 2010% changeYTD 2011YTD 2010% changeOperating revenues443.7442.90.2883.0884.9(0.2)Operations expense292.9304.1(3.7)582.4615.5(5.4)EBITDA150.8138.88.6300.6269.411.6Depreciation and amortization64.372.0(10.7)139.1142.2(2.2)Other income (expense)(0.2)1.3n.m.1.5(2.7)n.m.Finance costs(16.6)(16.5)0.6(32.2)(32.1)0.3Income before income taxes69.751.635.1130.892.441.6Income tax expense19.916.421.337.629.826.2Net income for the period49.835.241.593.262.648.9Other comprehensive income (loss) for the period, net of tax(10.7)(65.1)n.m.45.9(95.8)n.m.Total comprehensive income (loss) for the period39.1(29.9)n.m.139.1(33.2)n.m.EPS1$0.76$0.5440.7$1.43$0.9747.4IIn accordance with IFRS      1 Earnings per share is based on weighted average shares outstanding of 65.4 million for the three months ended June 30, 2011 and 64.7 million for the three months ended June 30, 2010. Earnings per share is based on weighted average shares outstanding of 65.3 million for the six months ended June 30, 2011 and 64.7 million for the six months ended June 30, 2010. Increases in the number of weighted shares outstanding are mainly due to participation in our dividend reinvestment program. Operating revenues(in millions $)Q2 2011Q2 2010% changeYTD 2011YTD 2010% changeMTS239.5232.82.9474.1460.53.0Allstream204.2210.1(2.8)408.9424.4(3.7)Total operating revenues443.7442.90.2883.0884.9(0.2)In accordance with IFRS      In the second quarter of 2011, the $6.7 million revenue increase at MTS (due to growth in wireless, high-speed Internet and IP TV services) offset Allstream's $5.9 million revenue decrease (due to legacy revenue declines, partly offset by strong growth in converged IP revenues).In the first half of 2011, MTS operating revenues increased by $13.6 million, or 3.0%, driven by 9.3% growth in wireless revenues and 8.6% growth in broadband and converged IP revenues, partly offset by declines in local access, long distance and legacy data revenues. At Allstream, solid growth of 9.2% in high-margin converged IP revenues partly offset the managed revenue declines of 13.4% in our long distance, legacy data and other lines of business, resulting in a $15.5 million, or 3.7%, revenue decrease for the six months ended June 30, 2011 when compared to the same period of the prior year.Operations expense Operations expense decreased by $11.2 million, or 3.7%, in the second quarter of 2011 compared to the same period of 2010.  This decrease was mainly due to lower restructuring and transition costs, resulting from operational efficiency and restructuring initiatives completed in previous periods, and margin improvements at Allstream.  In the second quarter of 2011 and first half of the year, we did not incur any restructuring and transition expenses compared to the $8.2 million incurred in the second quarter and the $20.8 million incurred in the first half of 2010.Restructuring expenses are expected to be up to $10 million in 2011, which is lower than our total restructuring and transition expenses of $35.5 million in 2010; our results in the first half of the year reflect these plans.  We continue to remove costs from our business and, in the first half of 2011, we achieved $20.6 million of annualized savings from our operational efficiency programs.  We are targeting total annualized cost reductions in 2011 of $25 million to $35 million mainly associated with legacy product lines and restructuring initiatives.EBITDA(in millions $)Q2 2011Q2 2010% changeYTD 2011YTD 2010% changeMTS123.4115.56.8245.2233.74.9Allstream28.023.419.756.836.256.9Other(0.6)(0.1)n.m.(1.4)(0.5)n.m.Total EBITDA150.8138.88.6300.6269.411.6In accordance with IFRS      The EBITDA increase for the three and six months ended June 30, 2011 is attributable to improving margins at Allstream, growth in MTS revenues, improvements to our cost structure resulting from operational efficiency initiatives implemented in previous years, and a decrease in restructuring and transition expenses.At MTS, the increases in EBITDA were due to overall revenue growth of 3.0% and 2.9% in the first and second quarters of 2011, respectively, partly offset by increased operations expense mainly associated with our growth lines of business.  MTS's EBITDA margin in the second quarter of 2011 was 51.5%, up from 49.6% in the same period of 2010.At Allstream, the significant increases in EBITDA were mainly due to lower restructuring expenses, lower operating costs, and improved margins in the second quarter of 2011 compared to the same period of 2010.  We continued to focus on increasing on-net IP revenues, managing the decline of low-margin off-net and legacy revenues, and removing costs from the business.  Direct costs decreased by 7.6% in the second quarter of 2011 compared to the same period of 2010, while revenues were intentionally decreased by 2.8% as part of Allstream's plan to exit less profitable lines of business.  Overall, Allstream's gross margin increased to 57.0% in the second quarter of 2011 from 54.8% in the same period of 2010. This trend is also reflected in our year-to-date results; in the first six months of the year, direct costs decreased by 8.1%, while revenue was lower by 3.7%. Allstream's gross margin for the first half of the year increased to 56.6%, up from 54.5% for the same period last year.Depreciation and amortization Depreciation and amortization expense decreased by $7.7 million, or 10.7%, in the second quarter of 2011, and by $3.1 million, or 2.2%, in the first half of 2011 compared to the same periods of 2010.  These decreases reflected the impact of the one-time adjustment to SR&ED ITC recognized in the second quarter of 2011, partly offset by growth in our wireless, high-speed Internet and IP TV asset bases and higher amortization of our wireless costs of acquisition related to wireless data growth.Other income (expense) Other expense in the second quarter of 2011 was $0.2 million compared to other income of $1.3 million in the same period of the previous year.  This decrease was due to the impact of foreign exchange on foreign currency forward contracts, an increase in losses on the disposal of property, plant and equipment, somewhat offset by losses related to Allstream's sale of its non-telecommunications information technology consulting group in 2010.Year-to-date other income was $1.5 million compared to other expense of $2.7 million in the previous year.  This increase was mainly due to losses related to Allstream's sale of its non-telecommunications information technology consulting group in 2010 and a one-time recovery of a previous year's expenditure in the first quarter of 2011, partially offset by the impact of foreign exchange on foreign currency forward contracts.Finance costs Finance costs remained consistent when compared to the same periods of 2010.  Finance costs were $16.6 million and $16.5 million in the second quarters of 2011 and 2010, respectively, and $32.2 million and $32.1 million year to date in 2011 and 2010, respectively.Income tax expense Income tax expense increased by $3.5 million, or 21.3%, to $19.9 million in the second quarter of 2011 compared to the same period of 2010. Year-to-date income tax expense was $37.6 million, an increase of $7.8 million, or 26.2%, compared to the same period of 2010.  These increases were mainly due to higher income before income taxes.The Company continues to have substantial capital cost allowance ("CCA") pools and tax losses.  By utilizing our CCA deductions and tax losses, we expect to fully offset our taxable income and not pay cash taxes before 2019, with the present value of our tax asset being approximately $315 million.Net income and EPS Net income and EPS increased by $14.6 million and $0.22, or 41.5% and 40.7%, respectively, in the second quarter of 2011 compared to the same period of 2010.  These increases were mainly due to EBITDA growth and lower depreciation and amortization expense, partly offset by income tax expense. Net income and EPS increased by $30.6 million and $0.46, or 48.9% and 47.4%, respectively, year to date compared to the same period of 2010.  These increases were mainly due to EBITDA growth, an increase in other income, and lower depreciation and amortization expense, partly offset by income tax expense.Other comprehensive income (loss) Other comprehensive income (loss) represents actuarial gains and losses arising from changes in the present value of our defined benefit plans' obligations and changes in the fair value of our defined benefit plans' assets.  These items are recognized in other comprehensive income net of tax, and therefore, do not have an impact on our net income or EPS.DIVISIONAL ANALYSISMTS operating revenues(in millions $)Q2 2011Q2 2010% changeYTD 2011YTD 2010% changeWireless88.080.88.9172.0157.49.3Broadband and converged IP49.745.210.097.489.78.6Unified communications, security and monitoring8.28.02.516.316.5(1.2)Local access69.573.1(4.9)138.5145.7(4.9)Long distance and legacy data21.222.4(5.4)43.645.2(3.5)Other2.93.3(12.1)6.36.05.0Total MTS operating revenues239.5232.82.9474.1460.53.0In accordance with IFRS      WirelessOur wireless portfolio consists of cellular, wireless data, paging and group communications services that we offer in the Manitoba market.The 8.9% wireless revenue growth in the second quarter of 2011 was mainly due to an increase in ARPU from higher wireless data usage and growth in our subscriber base.  The 9.3% wireless revenue growth for the first half of 2011 was mainly due to 45.5% wireless data revenue growth from higher wireless data usage resulting in higher ARPU, and growth in our subscriber base.Our 4G wireless network, which was launched on March 31, 2011, delivers high-speed data to 97% of Manitoba's population, improving on our EVDO network coverage which reaches 72% of the population. Our 4G wireless network and enhanced handset line-up are expected to meet demand for smartphones and drive continuing growth in wireless data services for the future.  At June 30, 2011, we had 489,722 wireless subscribers, a 4.3% increase from 469,744 in the second quarter of 2010.Our wireless ARPU was $59.36 for the second quarter of 2011, an increase of 3.8% from $57.20 in the same period of 2010.  Wireless ARPU was $58.05 for the first half of 2011, an increase of 3.7% from $55.99 for the same period of 2010. These increases primarily reflected higher wireless data services revenues, partly offset by lower network charges resulting from the removal of system access fees on new plans.Broadband and converged IPBroadband and converged IP services include revenues earned from providing high-speed Internet and IP TV services to residential customers in Manitoba, as well as IP-based connectivity to business customers based in Manitoba. Broadband and converged IP revenues grew 10.0% in the second quarter of 2011 and 8.6% in the first half of 2011 mainly due to increases in revenues from our IP TV and high-speed Internet services.Revenues from our IP TV services (which include both MTS Classic TV and MTS Ultimate TV) increased by 17.8% in the second quarter and by 17.5% in the first half of 2011, when compared to the same periods of 2010, reflecting increased ARPU and subscriber growth.  Our ARPU for IP TV services was $61.32 for the second quarter of 2011, an increase of 16.4% from $52.66 in the second quarter of 2010, mainly due to general price increases and fewer subscribers on promotional plans.  At June 30, 2011, we had a total of 91,633 subscribers to our IP TV services, representing a year-over-year increase of 2.3%.  More than half of these customers subscribe to our MTS Ultimate TV service which produces higher ARPU and premium revenues compared to our Classic TV service. At June 30, 2011, our Ultimate TV service was available to 95% of Winnipeg households as well as 94% and 99% of households in each of Portage La Prairie and Brandon, respectively.Internet services revenue growth of 7.1% in the second quarter of 2011 was driven by a 9.2% increase in Internet residential average revenue per subscriber ("ARPS"). High-speed residential ARPS was $38.58 in the second quarter of 2011, a 9.1% increase from the second quarter of 2010. This ARPS increase was due to targeted and general price increases and fewer subscribers on promotional plans.Internet services revenue growth of 5.5% for the first half of the year reflects higher ARPS due to targeted and general price increases introduced in the second quarter and fewer subscribers on promotional plans, partly offset by decreases in subscribers on our basic high-speed and dial-up Internet services. Our fasterhigh-speed Internet service, Lightning, saw an increase of ARPS and subscribers, which offset the decrease in subscribers on our dial-up and basic high-speed Internet services in the period.  With the launch of our 4G network on March 31, 2011, dial-up Internet subscribers began migrating to our high-speed wireless connectivity devices. At June 30, 2011, our high-speed subscriber base remained strong at 186,037, an increase of 1.5% from the prior year.Revenues from converged IP services for the second quarter and first half of 2011 were consistent with the same periods of 2010.Unified communications, security and monitoringUnified communications, security and monitoring services consist of revenues earned from the provision of IP products and services to business customers in Manitoba. This line of business also includes revenues earned from the installation and monitoring of alarm services to residential and business customers in Manitoba.Unified communications, security and monitoring services revenues in the second quarter and first half of 2011 remained consistent with the same periods of 2010.Local accessLocal access services include revenues earned for the provision of both residential and business voice connectivity including calling features, payphone revenue, and wholesale revenue within Manitoba.Local access services revenues decreased $3.6 million in the second quarter and $7.2 million in the first half of 2011 mainly due to a 5.6% decline in residential local access lines resulting from local competition and substitution and a 2.3% decrease in business local access lines.Long distance and legacy dataLong distance and legacy data services include revenues earned from the provision of long distance calling along with legacy data services, such as private line networks, that we offer to business customers in Manitoba.Long distance and legacy data services revenues decreased by $1.2 million, or 5.4%, in the second quarter and by $1.6 million, or 3.5%, in the first half of 2011 compared to the same periods of 2010.  Long distance services revenues decreased as a result of customer migration to lower-priced long distance plans and reduced volumes as customers continue to substitute long distance calling with alternative methods of communication, such as email, text messaging, and social networking.  Legacy data services revenues declined due to migration to IP products and the decommissioning of legacy products.OtherOther services include revenues earned from customer late payment charges, facilities rental and other miscellaneous items.The $0.4 million decrease in other services revenues for the second quarter of 2011 was mainly due to the recognition of a one-time settlement charge for terminating broadcasting service received in June 2010, partly offset by a one-time retroactive rate change for rentals of support structures following a decision by the Canadian Radio-television and Telecommunications Commission ("CRTC"). The $0.3 million increase in other services revenues for the first half of 2011 was due to a one-time retroactive rate change for rentals of support structures and increases in several other miscellaneous items, partly offset by the one-time settlement charge for terminating broadcasting service received in June 2010.Allstream operating revenues(in millions $)Q2 2011Q2 2010% changeYTD 2011YTD 2010% changeConverged IP58.552.910.6116.0106.29.2Unified communications and security22.222.2-44.345.8(3.3)Local access50.250.7(1.0)100.5101.4(0.9)Long distance and legacy data53.660.7(11.7)109.7123.1(10.9)Other19.723.6(16.5)38.447.9(19.8)Total Allstream operating revenues204.2210.1(2.8)408.9424.4(3.7)In accordance with IFRS      Converged IPConverged IP services include revenues earned from the provision of IP-based networking and related products and services to business customers nationally.This was the third consecutive quarter of significant year-over-year IP revenue growth. These improved converged IP results are due to increased sales activity that began in June 2010 and have continued throughout the first half of 2011. These increased sales levels are expected to support strong IP revenue growth for the full year of 2011.Unified communications and securityUnified communications and security services include revenues earned from the provision of IP telephony products and services along with revenues from our IP-based security offerings to national business customers.Unified communications and security services revenues reflected an increase in hosting revenue which largely offset lower product sales in both unified communications and security services. The decrease in one-time product sales is due to management's actions to exit low-margin resale product lines at Allstream.Local accessLocal access services include revenues earned for the provision of business voice connectivity, including calling features, to national business and wholesale customers.Local access revenues declines were primarily due to decreases in local access rates, partially offset by continued growth in the number of small- and medium-sized business customers subscribing to bundled services and increased volumes.Long distance and legacy dataLong distance and legacy data services include revenues earned from the provision of long distance calling along with legacy data services, such as private line networks, to business customers nationally.The decline in long distance services revenues was mainly due to lower domestic and cross-border rates along with decreased volumes in the cross-border and international markets, somewhat offset by higher domestic volumes.The decrease in our legacy data revenues was mainly due to our customers' continued transition to broadband and other IP-based services.  We continue to implement our strategy to improve profitability of our legacy services by exiting low-margin services, reducing costs, and transitioning our customers to IP-based services.OtherOther services include wholesale revenues earned from the routing and exchange of long distance network traffic, customer late payment charges, and other miscellaneous items. Other services revenue decreases were mainly due to lower international rates for global hubbing, partly offset by an increase in late payment charges, higher collections and increased rates. Continued decreases are expected as part of our decision to reduce our participation in low-margin lines of businesses.SUMMARY OF QUARTERLY RESULTSOur financial results for our eight most recently completed quarters are presented below: IFRSIFRSIFRSIFRS(in millions $, except EPS)Q2 2011Q1 2011Q4 2010Q3 2010Operating revenues443.7439.3446.7451.0EBITDA150.8149.8135.5159.9Net income49.843.429.848.9Basic and diluted EPS1$0.76$0.67$0.46$0.76      IFRSIFRSPreviousGAAPPreviousGAAP(in millions $, except EPS)Q2 2010Q1 2010Q4 2009Q3 2009Operating revenues442.9442.0453.8438.8EBITDA138.8130.6137.3134.5Net income35.227.46.727.9Basic and diluted EPS1$0.54$0.42$0.10$0.431 Earnings per share is based on weighted average shares outstanding of 65.4 million for the three months ended June 30, 2011, 65.2 million for the three months ended March 31, 2011, 64.9 million for the three months ended December 31, 2010, and 64.7 million for the three months ended September 30, 2010, June 30, 2010, March 31, 2010, December 31, 2009 and September 30, 2009. Our consolidated financial results for the eight most recently completed quarters reflected the following significant transactions and trends:In general, over the last eight quarters, operating revenues reflected strong growth in MTS's strategic services (wireless, high-speed Internet and IP TV services) in Manitoba, along with strong growth in Allstream's converged IP services, and declines in total legacy services revenues.  We have seen an increase in demand for IP-based telecommunications services, with Allstream showing four quarters of sequential IP revenue growth beginning in the third quarter of 2010.  Allstream revenues, particularly those generated from our long distance and legacy data services and our unified communications portfolio, were negatively impacted by the economic downturn and slow pace of economic recovery from the second quarter of 2009 to the second quarter of 2010.Over the past several years, we have improved our cost structure through operational efficiency and restructuring initiatives.  Expenses related to these ongoing cost reduction initiatives resulted in decreases in EBITDA.  In 2010, restructuring and transition expenses were $12.6 million in the first quarter, $8.2 million in the second quarter, $1.7 million in the third quarter, and $13.0 million in the fourth quarter.  In 2009, restructuring and transition expenses were $9.0 million and $5.8 million in the third and fourth quarters, respectively.In the second quarter of 2011, we recognized $20.7 million of additional SR&ED ITC due to the completion of CRA's audit for the 2005 to 2008 taxation years. The impact of the SR&ED ITC reduced depreciation expense by $10.3 million, partially offset by income tax expense of $2.7 million, resulting in an increase to net income of $7.6 million.In the third quarter of 2009, a decision by the CRTC related to the use of deferral account funds required us to recognize a $13.5 million customer rebate, resulting in a decrease in operating revenues.  In the third quarter of 2010, the CRTC reduced our requirements to rebate customers by $5.0 million, resulting in an increase in operating revenues.In 2010, MTS executed a comprehensive settlement agreement with Bell Mobility in respect of various historical disputes.  Under this settlement, we received a $10.0 million one-time cash payment from Bell Mobility in the third quarter of 2010, which resulted in an increase in EBITDA.  We also incurred expenses over the past several years in relation to the transition of certain wireless service requirements away from Bell Mobility and to new suppliers and our wireless platform.  These expenses were $0.7 million and $3.7 million in the third and fourth quarters of 2009, respectively.In 2010, we completed the sale of the majority of our Allstream non-telecommunications IT consulting group.  We recognized losses, net of tax, associated with this line of business in the amounts of $1.0 million and $1.4 million in the first and second quarters of 2010, respectively, and $2.3 million in the fourth quarter of 2009.  These losses resulted in decreases in net income and EPS.In the fourth quarter of 2009, under previous GAAP, we recognized deferred income tax expense of $23.4 million to reflect a decrease in the value of our income tax asset as a result of reductions in future income tax rates and rate differentials on temporary differences.  This transaction resulted in a decrease in net income and EPS.LIQUIDITY AND CAPITAL RESOURCES SUMMARY OF CASH FLOWS(in millions $)Q2 2011Q2 2010$ changeYTD 2011YTD 2010$ changeCash flows from (used in):      Operating activities74.8103.0(28.2)102.2200.6(98.4)Investing activities(76.0)(78.7)2.7(144.5)(144.7)0.2Financing activities(12.9)(41.7)28.8(27.1)(83.0)55.9Change in cash and cash equivalents for the period(14.1)(17.4)3.3(69.4)(27.1)(42.3)In accordance with IFRS      Operating activitiesCash flows from operating activities refer to cash we generate from our normal business activities.The $28.2 million decrease in cash flows from operating activities in the second quarter of 2011 was mainly due to a delay in customer payments caused by the postal service strike and a $7.8 million increase in wireless costs of acquisition related to growth in wireless data plans, partly offset by increased cash flows as a result of higher EBITDA, when compared to the same period last year.The $98.4 million decrease in cash flows from operating activities for the first half of 2011 was mainly due to a delay in customer payments because of the postal service strike, cash used in the first quarter of 2011 for trade accounts payable associated with higher capital expenditures on our 4G network in the fourth quarter of 2010 compared to the fourth quarter of 2009, and higher year-over-year pension funding.  These uses of cash were partly offset by increased cash flows resulting from higher EBITDA.Investing activitiesInvesting activities represent cash used for acquiring, and cash received from disposing of, long-term assets and other long-term investments.Cash flows used in investing activities decreased by $2.7 million in the second quarter and $0.2 million on a year-to-date basis.In the second quarter, capital expenditures were reduced by a $20.7 million one-time adjustment to SR&ED ITC claims for the 2005 to 2008 taxation years.  This amount is offset in investing activities by a $20.7 million increase in a long-term receivable relating to the SR&ED ITC reported as "Other, net".  The ITC will be utilized when the Company becomes taxable in future years.  The SR&ED ITC adjustment accounts for the vast majority of the $23.6 million decrease in capital expenditures from $78.1 million to $54.5 million in the quarter.Capital expenditures were $122.3 million in the first half of 2011, a decrease of $31.6 million from $153.9 million in the same period of 2010. The difference was mainly due to the $20.7 million SR&ED ITC adjustment and higher capital expenditures in 2010 related to our 4G wireless network build.Capital spending in the first three and six months of 2011 was focused on our strategic lines of business.  At MTS, our capital spending was focused on our 4G wireless network and billing implementation, deploying fibre to the home, and increasing the functionality of our broadband products.  At Allstream, we focused our capital spending on Allstream's IP fibre network where we are making targeted investments to extend fibre to select multi-tenant buildings and to enhance our Ethernet capabilities in our co-location areas. Capital spending is expected to increase in the third and fourth quarters of 2011 due to seasonality; we are on track to achieve our 2011 guidance ranges for capital intensity.Financing activitiesFinancing activities refer to actions we undertake to fund our operations through equity capital and borrowings.Cash flows used in financing activities decreased by $28.8 million in the second quarter and by $55.9 million in the first half of 2011 when compared to the same periods of 2010. These decreases were due to a decrease in our quarterly dividend, strong participation in our dividend reinvestment program ("DRIP") and the issuance of notes payable in the first and second quarters of 2011.In the first and second quarters of 2011, cash dividends paid were based on a quarterly dividend of $0.425 per outstanding common share as approved by our Board of Directors.  This was compared to a quarterly dividend paid of $0.65 per outstanding common share in the first and second quarters of 2010.  In the third quarter of 2010, our Board of Directors approved an update to the Company's dividend policy and established a new dividend payout ratio target of 70% to 80% of free cash flows from our Manitoba operations.In the second quarter of 2010, we established a DRIP with a 3% discount, which enables eligible holders of the Company's common shares to automatically reinvest their regular quarterly dividends in additional common shares of the Company without incurring brokerage fees.  Participation in our DRIP was 25% in the second quarter of 2011 and resulted in $6.9 million additional cash available for operations, when compared to the same period of the prior year.Free cash flowFree cash flow refers to cash flows from operating activities, less capital expenditures, and excluding changes in working capital. Free cash flow is the amount of discretionary cash flow that we have for purchasing additional assets beyond our annual capital expenditure program, paying dividends, buying back shares, and/or retiring debt. (in millions $)Q2 2011Q2 2010$ changeYTD 2011YTD 2010$ changeCash flows from operating activities74.8103.0(28.2)102.2200.6(98.4)Add: Changes in non-cash working capital37.58.429.1102.37.295.1Deduct: Capital expenditures(54.5)(78.1)23.6(122.3)(153.9)31.6Free cash flow for the period57.833.324.582.253.928.3In accordance with IFRS      The $24.5 million increase in free cash flow in the second quarter of 2011 was primarily due to higher EBITDA and lower capital expenditures due to a favourable one-time $20.7 million adjustment to SR&ED ITC claims for the 2005 to 2008 taxation years, partly offset by increased wireless costs of acquisition related to wireless data growth, when compared to the same period of 2010.  The $28.3 million increase in free cash flow for the first half of 2011 was primarily due to higher EBITDA and lower capital spending (including the impact of the SR&ED ITC adjustment), partly offset by an increase in pension solvency funding and increased wireless costs of acquisition, when compared to the same period of 2010.The SR&ED ITC will be used to offset tax payable when the Company becomes taxable in future years. Excluding the impact of the SR&ED ITC, free cash flow was up $3.8 million in the second quarter and $7.6 million in the first half of the year, when compared to the same periods in 2010. The second quarter increase reflects higher EBITDA, partly offset by higher wireless costs of acquisition. The year-to-date increase reflects higher EBITDA and lower capital spending, partly offset by the additional pension solvency payments made in the first quarter of 2011 and higher wireless costs of acquisition. These results are in line with the guidance ranges provided for free cash flow last December.In the first quarter of 2011, we contributed $24.4 million in pension solvency payments to meet our 2011 funding obligations.  With the introduction of new federal pension funding regulations effective April 1, 2011, no additional pension solvency payments were made in the second quarter of 2011. We expect that any further solvency funding obligations in 2011 will be satisfied using letters of credit.CAPITAL MANAGEMENTCredit facilities We have arrangements in place that allow us to access the debt capital markets for funding when required.  Borrowings under these facilities typically are used to fund new initiatives, refinance maturing debt, and manage cash flow fluctuations. (in millions $)Utilized atJune 30, 2011Capacity atJune 30, 2011Medium term note program200.0   500.0Revolving credit facility37.4   400.0Letter of credit facility116.7   150.0Accounts receivable securitization13.0   110.0Total367.11,160.0In accordance with IFRS  We have a $500.0 million medium term note program under which we have utilized $200.0 million for the issuance of debt.  We also have a $400.0 million revolving credit facility, of which $150.0 million is available to back-stop our commercial paper program.  As of June 30, 2011, we had utilized $37.4 million of our revolving credit facility for undrawn letters of credit.  We also have a $150.0 million credit facility, which is used solely for the issuance of letters of credit.  As at June 30, 2011, we utilized $116.7 million of this facility for undrawn letters of credit.  In addition to these programs and facilities, we have a $110.0 million accounts receivable securitization program, of which $13.0 million was utilized at June 30, 2011.  On April 22, 2011, we renewed our accounts receivable securitization program, decreasing the amount available under this facility from $150.0 million to $110.0 million.Of the $154.1 million in total letters of credit outstanding, $124.1 million represents letters of credit issued in accordance with the Pension Benefits Standards Act, 1985 (Canada), which permits the use of letters of credit in lieu of cash funding for solvency special payments to our defined benefit pension plans.  Effective April 1, 2011, new federal pension regulations allowing letters of credit to satisfy a portion of pension solvency obligations came into force, and the letters of credit previously issued under the Solvency Funding Relief Regulations are now considered letters of credit under the new federal pension regulations.  We expect to issue letters of credit to satisfy our pension solvency funding obligations for the remainder of 2011.Capital structure(in millions$)June 30,2011December 31,2010Bank indebtedness (cash and cash equivalents)19.4    (50.0)Notes payable13.0    -Finance lease obligations, including current portion16.8    16.4Long-term debt, including current portion1,041.01,040.6Total debt1,090.21,007.0Shareholders' equity946.5   848.0Total capitalization2,036.71,855.0Debt to capitalization53.5%54.3%In accordance with IFRS  Our capital structure illustrates the amount of our assets that are financed by debt versus equity.  Our debt to total capitalization ratio of 53.5% at June 30, 2011 continues to represent financial strength and flexibility.Credit ratings S&PDBRSSenior debenturesBBB (stable)BBB (stable)Commercial paperA-2R-2 (high)Our credit ratings remain unchanged from those disclosed in our 2010 Annual MD&A.Outstanding share data As at July 22, 2011As at June 30, 2011Common shares outstanding65,720,77865,466,371Stock options outstanding2,944,0832,944,083Stock options exercisable1,737,2261,737,226Contractual obligations, financial instruments, off-balance sheet arrangements, and other financial arrangementsOur contractual obligations, financial instruments, off-balance sheet arrangements, and other financial arrangements remain substantially unchanged from those disclosed in our 2010 Annual MD&A, except for:Foreign currency forward contractsWe use foreign currency forward contracts to manage our foreign currency exchange exposure. These instruments hedge anticipated transactions and are not recorded on our balance sheet. As at June 30, 2011, we have outstanding foreign currency forward contracts to purchase US$37.8 million compared to the US$48.6 million as at December 31, 2010.CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS Our critical accounting estimates and assumptions remain substantially unchanged from those disclosed in our 2010 Annual MD&A.CHANGES IN ACCOUNTING POLICIES 2011 adoption of IFRSIn 2008, the Canadian Accounting Standards Board confirmed January 1, 2011 as the date for IFRS to replace Canadian GAAP for publicly accountable enterprises.  In May 2011, the Company filed its interim condensed consolidated financial statements for the three months ended March 31, 2011, which represent the initial presentation of its results and financial position under IFRS.  These interim condensed consolidated financial statements for the period ended June 30, 2011 are prepared using the same accounting policies as applied in the Company's interim condensed consolidated financial statements for the period ended March 31, 2011.Further information regarding the financial impact of our conversion to IFRS is available in note 9 to the condensed interim consolidated financial statements for the three and six months ended June 30, 2011 and in our 2010 Annual MD&A.OUR REGULATORY ENVIRONMENT The telecommunications and broadcast industries in which we operate are federally regulated pursuant to both the Telecommunications Act and the Broadcasting Act.  The primary regulatory agency we are subject to is the CRTC.  The Government of Canada ("the Government"), through the Departments of Industry and Canadian Heritage, exercises legislative oversight of the CRTC.  We are subject to policy decisions taken by the Government from time to time, as well as any amendments to applicable legislation or regulatory instruments.  We operate as an incumbent local exchange carrier ("ILEC") in Manitoba and as a competitive local exchange carrier ("CLEC") outside of Manitoba.  We also operate as a broadcasting distribution undertaking ("BDU") in parts of Manitoba, including Winnipeg and the surrounding area.  The following describes significant developments relating to regulatory and policy proceedings in the second quarter of 2011:Broadcasting policyOn June 7, 2010, the Federal Court of Appeal unanimously determined that retail Internet service providers ("ISPs") do not carry on, in whole or in part, "broadcasting undertakings" subject to the Broadcasting Act when, in their role as ISPs, they provide access through the Internet to "broadcasting" requested by end-users.  On September 30, 2010, opposing parties sought leave to appeal this decision to the Supreme Court of Canada, which was granted on March 24, 2011.  We agree with the Federal Court of Appeal's decision, and will participate with other Internet service providers as respondents in the appeal.On February 28, 2011, the Federal Court of Appeal, in a majority decision, ruled that the Broadcasting Act empowers the CRTC to establish a regime where private local television stations negotiate with BDUs a fair value in exchange for the distribution of the programming services they broadcast.  At least one BDU has announced its intention to seek leave to appeal the decision to the Supreme Court of Canada.Telecommunications policy Usage Based BillingOn January 25, 2011, the CRTC issued a decision permitting incumbent carriers to apply usage-based billing ("UBB") rates on their wholesale residential high-speed Internet access services at a discount of 15% from the carrier's comparable UBB rates for its retail Internet services.  This decision provoked considerable public outcry, which led to an examination of the issue by the parliamentary Standing Committee on Industry, Science and Technology.On February 8, 2011, the CRTC put implementation of its UBB decision on hold and initiated a review of billing practices for wholesale residential high-speed access or broadband services.  MTS Allstream is participating in this proceeding, including the public hearing which began on July 11, 2011.Unbundled local loopsThroughout 2010, the CRTC conducted a detailed review of how to set prices for competitors who use the ILEC's copper facilities, known as unbundled local loops, to provide local telephone service to customers.  The review, which was triggered by an application submitted on June 2, 2009 by Bell Canada and Bell Aliant Regional Communications, Limited Partnership, considered the issue of obsolescence of copper facilities in light of greatly expanded deployment of fibre in the applicants' access networks.On January 12, 2011, the CRTC issued Telecom Decision CRTC 2011-24 approving new rates for unbundled local loops leased from the applicants.  The new prices reflect recovery of the applicants' net book values of copper facilities over the assumed remaining useful life.  There is also a possibility of additional applications for other services using copper facilities or applications from other ILECs.  We have identified certain issues with the CRTC's analysis and calculations and filed an application on March 7, 2011 to review and vary the decision, with the expectation of reducing or eliminating the price increase.  On May 13, 2011, the Bell companies filed their own application to review and vary the methodology used by the CRTC and to introduce new data, with the aim of protecting or growing the price increase.Deferral accountOn August 31, 2010, the CRTC issued Decision 2010-638 approving our plan to use the funds remaining in our deferral account to roll-out broadband to 16 rural Manitoban communities by the end of 2013, and to rebate any remaining deferral amounts to residential urban customers in Manitoba.  This decision concludes the process associated with the Company's deferral account.   As at December 31, 2010, the estimated balance of the Company's deferral account is approximately $21 million, and our deferral account liability for the residential customer rebate is approximately $8.5 million.  These customer rebates were paid out in the first quarter of 2011.  MTS Allstream also has an obligation to invest $1.2 million of deferral account funds by the end of 2011, to improve accessibility to telecommunications services for persons with disabilities.Review of network interconnection regulatory regimesThe CRTC has initiated a proceeding to review the regulatory and compensation regimes for network interconnection between local, toll, and wireless service providers.  The proceeding will consider technological neutrality, enhancements to competition, and benefits to customers which could arise from the consolidation, modification, or simplification of these regimes.  The proceeding will also consider how, if at all, the network interconnection requirements based on circuit-switched technologies should be modified in light of the industry's increasing use of IP technology.  The proceeding will last throughout most of 2011, with a decision expected in early 2012.Industry Canada radio spectrum consultationsThe Government has identified that making suitable spectrum available for next-generation wireless networks and services is a key component of its digital economy strategy.  Accordingly, in November 2010, the Government initiated consultations on the policy and technical framework that will govern the wireless spectrum auctions for the 700 MHz spectrum band.  As well, on February 10, 2011, the Government initiated a similar consultation for the 2500-2690 MHz spectrum band, which may be auctioned jointly with the 700 MHz spectrum.  The timing and sequencing of the auction(s) remains to be determined.  The Government has also indicated that it will link its decision on foreign investment to the policy and structure of these auctions.  We participated in both consultations, which concluded in May 2011, and we will participate in subsequent consultation(s) on the licensing framework for the auctioning of the spectrum.As in our submissions in other forums, we continue to advocate for pro-competitive auction measures (in addition to the lifting of the foreign investment restrictions) and conditions of licence that will contribute to sustainable competition in the Canadian telecommunications marketplace for the benefit of all Canadians in all regions.Manitoba Consumer Protection Office ConsultationIn December 2010, the Manitoba Consumer Protection Office launched a public consultation on potential new rules governing cell phone and wireless device contracts. MTS Allstream, as a member of the Canadian Wireless Telecommunications Association ("CWTA"), contributed to, and supported, an industry-backed submission on January 14, 2011, highlighting the range of consumer-friendly practices which CWTA members have implemented or begun implementing.  Flowing from the consultation, the Government of Manitoba introduced Bill 35, The Consumer Protection Amendment Act (Cell Phone Contracts) on May 16, 2011.  Bill 35, as drafted, imposes several new legal obligations on cell phone service providers, including  allowing consumers to cancel contracts before the end of term; prohibiting unreasonable cancellation fees, while allowing cost recovery for equipment provided or subsidized as a contract incentive; prohibiting unilateral amendments to a material element of a contract if the change does not benefit the customer; and requiring the minimum monthly cost of services to be included in advertisements.On June 8, 2011, MTS Allstream presented its views on Bill 35 to the Legislative Assembly of Manitoba Standing Committee on Social and Economic Development. MTS Allstream, which already operates in close alignment with the key provisions of Bill 35, supports the objectives and intended outcomes of the measures included in Bill 35. The Bill passed third reading in the legislature on June 15, and we will continue to work constructively with public officials in the coming months in any consultations on regulations made under the Bill.RISKS AND UNCERTAINTIES Our risks and uncertainties remain substantially unchanged from those disclosed in our 2010 Annual MD&A.NON-IFRS MEASURES OF PERFORMANCE In this 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.EBITDAWe 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 flowWe define free cash flow as cash flows from operating activities, less capital expenditures, and excluding changes in working capital.  Free cash flow is the amount of discretionary cash flow that we have for purchasing additional assets beyond our annual capital expenditure program, paying dividends, buying back shares, and/or retiring debt.CONTROLS AND PROCEDURESInternal control over financial reportingThere have been no changes in our internal control over financial reporting during our most recent interim period ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.THIRD QUARTER DIVIDEND On August 4, 2011, the Board of Directors of MTS Allstream declared a quarterly cash dividend of $0.425 per common share.  The third quarter dividend is payable on October 14, 2011 to shareholders of record at the close of business on September 15, 2011.  The third quarter dividend is designated as an "eligible" dividend under the Income Tax Act (Canada) and any corresponding provincial legislation. Under this legislation, individuals resident in Canada may be entitled to enhanced dividend tax credits that reduce income tax otherwise payable.NotesSupplementary financial information is available in the Investors section of the MTS Allstream website at www.mtsallstream.com.MTS Allstream's second quarter 2011 conference call with the investment community is scheduled for 8:30 a.m. (Eastern Time) Friday, August 5, 2011.  The dial-in number is 1-888-231-8191.  A live audio webcast of the investor conference call can be accessed by visiting the Investors section of the MTS Allstream website (www.mtsallstream.com).  A replay of the conference call will be available until midnight August 19, 2011 and can be accessed by calling 1-800-642-1687 or 1-416-849-0833 (access code: 80945084).  The audio webcast will be archived on MTS Allstream's website. MANITOBA TELECOM SERVICES INC.          CONDENSED CONSOLIDATED STATEMENTS OF NET INCOME           AND OTHER COMPREHENSIVE INCOME (LOSS)          (unaudited)                                          Periods ended June 30     Three months ended Six months ended(in millions of Canadian dollars, except earnings per share)Note  2011 2010 2011 2010                            Operating revenues    $443.7 $442.9$883.0 $884.9              Operating expenses             Operations     292.9  304.1 582.4  615.5 Depreciation and amortization     64.3  72.0 139.1  142.2       357.2  376.1 721.5  757.7              Operating income     86.5  66.8 161.5  127.2              Other income (expense)     (0.2) 1.3 1.5  (2.7)Finance costs     (16.6) (16.5) (32.2) (32.1)              Income before income taxes    69.7  51.6 130.8  92.4              Income tax expense   4  19.9  16.4 37.6  29.8              Net income for the period   $49.8 $35.2$93.2 $62.6              Other comprehensive income           Net actuarial gains (losses) from defined benefit plans and other employee benefits  $(14.5)$(88.0)$62.1 $(161.6)Change in the effect of the minimum funding requirement   -   - -  32.0Deferred taxes on items in other comprehensive income   3.8  22.9 (16.2) 33.8Other comprehensive income (loss) for the period, net of tax  (10.7) (65.1) 45.9  (95.8)              Total comprehensive income (loss) for the period  $39.1 $(29.9)$139.1 $(33.2)              Basic and diluted earnings per share 5 $0.76 $0.54$1.43 $0.97  MANITOBA TELECOM SERVICES INC.         CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY       (unaudited)                                        Share Contributed    (in millions of Canadian dollars)Note  capital surplus Deficit Total                        Balance at December 31, 2010  $1,275.0 $20.1 $(447.1)$848.0             Net income for the period   -  -  93.2  93.2Other comprehensive income for the period  -  -  45.9  45.9 Total comprehensive income for the period   -  -  139.1  139.1 Share-based compensation   -  0.4  -  0.4 Issuance of shares   14.5  -  -  14.5 Dividends declared6  -  -  (55.5) (55.5)            Balance at June 30, 2011  $1,289.5 $20.5 $(363.5)$946.5                         Balance at January 1, 2010  $1,266.9$19.3$(338.5)$947.7            Net income for the period   - - 62.6 62.6Other comprehensive loss for the period   - - (95.8) (95.8)Total comprehensive loss for the period  - - (33.2) (33.2)Share-based compensation   - 0.5 - 0.5Issuance of shares   0.3 - - 0.3Dividends declared6  - - (84.1) (84.1)            Balance at June 30, 2010  $1,267.2$19.8$(455.8)$831.2 MANITOBA TELECOM SERVICES INC.      CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION     (unaudited)                                June 30 December 31(in millions of Canadian dollars)  Note 2011 2010                  Assets        Current assets        Cash and cash equivalents   $- $50.0Accounts receivable     174.1  152.3Prepaid expenses     48.4  33.1Inventories     29.6  25.4      252.1  260.8         Property, plant and equipment     1,501.9  1,497.6Intangible assets     286.3  279.5Other assets      65.6  43.0Deferred tax assets    495.9  549.7         Total assets    $2,601.8 $2,630.6         Liabilities and shareholders' equity               Current liabilities       Bank indebtedness   $19.4 $-Accounts payable and accrued liabilities    288.2  343.4Advance billings and payments   56.0  55.3Current provisions    24.6  29.9Current portion of long-term debt   320.0  220.0Notes payable     13.0  -Current portion of finance lease obligations    6.5  4.9      727.7  653.5         Long-term debt      721.0  820.6Long-term portion of finance lease obligations    10.3  11.5Long-term provisions    6.1  5.7Employee benefits    156.3  256.2Other long-term liabilities     32.8  34.0Deferred tax liabilities    1.1  1.1Total liabilities     1,655.3  1,782.6                  Shareholders' equity       Share capital    7 1,289.5  1,275.0Contributed surplus    20.5  20.1Deficit     (363.5) (447.1)      946.5  848.0         Total liabilities and shareholders' equity  $2,601.8 $2,630.6 MANITOBA TELECOM SERVICES INC.          CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS         (unaudited)                                Periods ended June 30       Three months ended Six months ended(in millions of Canadian dollars)  Note  2011 2010 2011 2010                      Cash flows from operating activities             Net income      $49.8 $35.2$93.2 $62.6 Add items not affecting cash              Depreciation and amortization      64.3  72.0 139.1  142.2  Deferred income tax expense   4  19.9  15.1 37.6  28.4  Loss on disposal of assets     1.0  2.2 1.1  2.8 Deferred wireless costs     (19.2) (11.4) (28.3) (20.7) Pension funding and net pension expense   (6.1) (3.6) (41.2) (6.9) Other, net         2.6  1.9 3.0  (0.6) Changes in non-cash working capital   (37.5) (8.4) (102.3) (7.2) Cash flows from operating activities     74.8  103.0 102.2  200.6             Cash flows from investing activities             Capital expenditures       (54.5) (78.1) (122.3) (153.9) Proceeds on disposal of assets held for sale   -  - -  10.5 Other, net          (21.5) (0.6) (22.2) (1.3) Cash flows used in investing activities   (76.0) (78.7) (144.5) (144.7)           Cash flows from financing activities             Dividends paid       (27.7) (42.1) (55.3) (84.1) Issuance of notes payable     7.0  - 13.0  - Issuance of share capital   7  7.4  0.1 14.4  0.3 Other, net         0.4  0.3 0.8  0.8 Cash flows used in financing activities   (12.9) (41.7) (27.1) (83.0)           Change in cash and cash equivalents     (14.1) (17.4) (69.4) (27.1)           Cash and cash equivalents (bank indebtedness), beginning of period  (5.3) 100.5 50.0  110.2           (Bank indebtedness) cash and cash equivalents, end of period  $(19.4)$83.1$(19.4)$83.1 MANITOBA TELECOM SERVICES INC.  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010(unaudited)All amounts are in millions of Canadian dollars, unless otherwise indicated1. CORPORATE INFORMATIONManitoba Telecom Services Inc. (the "Company") is incorporated in Manitoba, Canada, and its Common Shares are listed on the Toronto Stock Exchange.  The Company's head and registered office is located at 333 Main Street, P.O. Box 6666, Winnipeg, Manitoba, Canada, R3C 3V6.2.SIGNIFICANT ACCOUNTING POLICIESStatement of complianceThese interim condensed consolidated financial statements have been prepared in accordance with International Accounting Standards ("IAS") 34, Interim Financial Reporting, International Financial Reporting Standards ("IFRS") 1, First-time Adoption of International Financial Reporting Standards and the same accounting policies as those disclosed in note 2 of the Company's interim condensed consolidated financial statements for the three months ended March 31, 2011.  These policies are based on the standards as issued by the International Accounting Standards Board ("IASB"), and which have been incorporated by the Canadian Accounting Standards Board into current generally accepted accounting principles ("GAAP") for publicly accountable enterprises.In May 2011, the Company filed its interim condensed consolidated financial statements for the three months ended March 31, 2011, which represent the initial presentation of its results and financial position under IFRS.  These interim condensed consolidated financial statements for the period ended June 30, 2011 should be read in conjunction with the Company's interim condensed consolidated financial statements for the period ended March 31, 2011.  As the Company's interim consolidated financial statements were previously prepared in accordance with previous GAAP, disclosure of the transition from previous GAAP to IFRS is included in note 9.These interim condensed consolidated financial statements were approved by the Board of Directors on August 4, 2011.Basis of presentationThese 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. ACCOUNTING STANDARDS ISSUED BUT NOT YET EFFECTIVEThe Company has not yet adopted certain standards, interpretations to existing standards and amendments which have been issued but have an effective date of later than January 1, 2011. Many of these updates are not relevant to the Company and are therefore not discussed.  The Company reasonably expects the following standards and amendments described below to be applicable to its consolidated financial statements at a future date:IFRS 9, Financial InstrumentsIFRS 9, Financial Instruments, issued by the IASB in November 2009 and amended in October 2010 introduces new requirements for the classification and measurement of financial assets and liabilities.  IFRS 9 requires all financial assets within the scope of IAS 39, Financial Instruments - Recognition and Measurement to be subsequently measured at amortized cost or fair value replacing the multiple classification options in IAS 39. IFRS 9 also requires an entity choosing to measure a financial liability at fair value to present the portion of the change in its fair value due to changes in the entity's own credit risk in the other comprehensive income section of the income statement, rather than within the statement of net income.IFRS 9 reflects the first phase of a project to replace IAS 39.  In subsequent phases, the IASB will address hedge accounting and the impairment of financial assets.  IFRS 9 is effective for annual periods beginning on or after January 1, 2013, with earlier application permitted.IFRS 10, Consolidated Financial StatementsIFRS 10, Consolidated Financial Statements, issued by the IASB in May 2011, provides a single consolidation model that identifies control as the basis for consolidation for all types of entities.  IFRS 10 replaces IAS 27 Consolidated and Separate Financial Statements and Standing Interpretations Committee ("SIC") 12 Consolidation - Special Purpose Entities.  IFRS 10 is to be applied retrospectively and is effective for annual periods beginning on or after January 1, 2013, with earlier application permitted.IFRS 11, Joint ArrangementsIFRS 11, Joint Arrangements, issued by the IASB in May 2011, describes the accounting for arrangements in which there is joint control by focusing on the rights and obligations of the arrangement, rather than its legal form.  IFRS 11 also removes the ability to use proportionate consolidation for joint ventures.  IFRS 11 replaces IAS 31 Interests in Joint Ventures and SIC 13 Jointly Controlled Entities - Non-Monetary Contributions by Venturers,and is effective for annual periods beginning on or after January 1, 2013, with earlier application permitted.  When adoption of IFRS 11 requires a change in accounting, the impact of the change is calculated at the beginning of the earliest period presented and the comparative periods are restated.IFRS 12, Disclosure of Interests in Other EntitiesIFRS 12, Disclosure of Interests in Other Entities, issued by the IASB in May 2011, is a new standard that addresses the disclosure requirements for all interests in other entities, including subsidiaries, joint arrangements, associates, and unconsolidated structured entities. IFRS 12 is effective for annual periods beginning on or after January 1, 2013, with earlier application permitted.IFRS 13, Fair Value MeasurementIFRS 13, Fair Value Measurement, issued by the IASB in May 2011, replaces the fair value measurement guidance currently dispersed across different IFRS standards with a single definition of fair value and a comprehensive framework for measuring fair value when such measurement is required under other IFRSs.  It also establishes disclosure requirements about fair value measurements.  IFRS 13 is to be applied prospectively and is effective for annual periods beginning on or after January 1, 2013, with earlier application permitted.Amendments to IAS 1, Presentation of Financial Statements The amendments to IAS 1, Presentation of Financial Statements, issued by the IASB in June 2011, requires companies preparing financial statements to group together items within other comprehensive income ("OCI") on the basis of whether they may be reclassified to the profit or loss section of the income statement.  The amendments also reaffirm existing requirements that items in OCI and profit or loss should be presented as either a single statement or two consecutive statements.  The amendments are effective for annual periods beginning on or after July 1, 2012, with earlier application permitted.Amended IAS 19, Employee BenefitsThe amended version of IAS 19, Employee Benefits, issued by the IASB in June 2011, amends the accounting for pensions and other post-employment benefits.  It changes the method of calculating the net interest component of pension expense and also expands disclosure requirements for defined benefit plans, providing better information about the characteristics and associated risks of defined benefit plans. The accounting treatment for termination benefits has also been modified, specifically the point in time when an entity would recognize a liability for termination benefits. The amended version of IAS 19 comes into effect for annual periods beginning on or after January 1, 2013, with earlier application permitted.The Company is currently evaluating the impact of the above standards on its financial statements. 4. INCOME TAX EXPENSEIncome tax expense is comprised of the following:Six months ended June 3020112010Current income tax expense- 1.4Deferred income tax expense37.628.4Income tax expense  37.6  29.85. EARNINGS PER SHARE The following table provides a reconciliation of the information used to calculate basic and diluted earnings per share: 20112010   Net income for the period  Basic and diluted93.262.6   Weighted average shares outstanding (in millions)  Weighted average number of shares outstanding - basic65.364.7Dilutive effect of stock options- (0.1)Weighted average number of shares outstanding - diluted65.364.6   Earnings per share ($)  Basic and diluted earnings per share  1.43    0.97As at June 30, 2011, 3.0 million stock options have an anti-dilutive effect (2010 - 3.2 million), and therefore, were excluded from the diluted weighted average number of shares outstanding.6.DIVIDENDSOn August 4, 2011, the Company's Board of Directors declared a quarterly cash dividend of $0.425 per share (2010 - $0.65 per share). The liability of $27.8 million (2010 - $42.0 million) is payable on October 14, 2011 to shareholders of record on September 15, 2011.7. SHARE CAPITALAs at June 30, 2011, share capital consists of 65,466,371 issued and outstanding Common Shares (December 31, 2010 - 64,959,635).During the six months ended June 30, 2011, 491,845 Common Shares were issued under the Company's Dividend Reinvestment Plan and Share Purchase Plan. These shares were issued for proceeds of $13.9 million and credited to share capital.During the six months ended June 30, 2011, 15,600 stock options to purchase Common Shares were exercised for cash consideration of $0.5 million, of which $0.6 million was credited to share capital and $0.1 million was charged to contributed surplus.8.SEGMENTED INFORMATIONAs at June 30, 2011, the Company had two reportable operating segments: MTS and Allstream.  MTS provides a full range of wireless, broadband, high-speed Internet, IPTV, converged IP, unified communications, security, home alarm monitoring, local access and long distance services to residential and business customers in Manitoba.  Allstream provides IP-based communications, unified communications, voice and data connectivity, and security services to business customers in Canada.The Company evaluates performance based on EBITDA (earnings before interest, taxes, depreciation and amortization, and other income (expense)).  EBITDA, as reported below, includes intersegment revenues and expenses.  The Company accounts for intersegment revenues and expenses at either prices that approximate current market prices or cost, depending on the type of service.The following tables provide further segmented information:   MTS   Allstream  Other  TotalThree months ended June 30  2011  2010  2011  2010  2011  2010  2011  2010Operating revenue         External239.5232.8204.2210.1- -443.7442.9 Internal- 0.1- -9.29.59.29.6EBITDA123.4115.528.023.4(0.6)(0.1)150.8138.8Depreciation and amortization47.053.817.118.10.20.164.372.0Capital expenditures31.149.223.228.70.20.254.578.1   MTS   Allstream  Other  TotalSix months ended June 30  2011  2010  2011  2010  2011  2010  2011  2010Operating revenue         External474.1460.5408.9424.4- -883.0884.9 Internal0.10.2- -18.419.018.519.2EBITDA245.2233.756.836.2(1.4)(0.5)300.6269.4Depreciation and amortization102.5105.936.436.10.20.2139.1142.2Capital expenditures70.9103.851.249.70.20.4122.3153.9Reconciliation to consolidated income before income taxes is as follows:  Three months endedJune 30Six months endedJune 30  20112010         2011         2010Income before income taxes     Total EBITDA 150.8138.8300.6269.4Depreciation and amortization (64.3)(72.0)(139.1)(142.2)Other income (expense) (0.2)1.31.5(2.7)Finance costs (16.6)(16.5)(32.2)(32.1)Income before income taxes 69.751.6130.892.49. TRANSITION TO IFRSThese interim condensed consolidated financial statements for the period ended June 30, 2011 are prepared in accordance with IFRS.  As such, these financial statements have been prepared in accordance with IFRS 1, as well as the accounting policies as described in note 2 of the Company's interim condensed consolidated financial statements for the three months ended March 31, 2011.Prior to 2011, the Company's consolidated financial statements were prepared in accordance with previous GAAP, which differs in certain areas from IFRS.  Therefore, in preparing the consolidated opening statement of financial position at January 1, 2010, the Company's date of transition to IFRS (the "Transition Date"), certain adjustments have been made to amounts previously reported in the consolidated financial statements under previous GAAP.  An explanation of how the transition from previous GAAP to IFRS has affected the Company's financial position and financial results is set out in this note.(a)  Exemptions upon IFRS adoptionOn adoption of IFRS, entities are required to implement accounting policies that are in accordance with IFRS and apply these policies retrospectively.  IFRS 1 allows first-time adopters of IFRS to apply certain optional exemptions to this retrospective application.  The relevant exemptions applied by the Company are as follows:  (i)  Business combinations  The Company elected not to apply IFRS 3, Business Combinations, retrospectively to business combinations that occurred prior to the Transition Date.  (ii)  Employee benefits  The Company elected to recognize all cumulative actuarial gains or losses and transitional assets on pension and other non-pension future employee benefits in opening retained earnings at the Transition Date.  The Company also elected to disclose amounts required by paragraph 120A(p) of IAS 19, Employee Benefits, as the amounts are determined for each accounting period prospectively from the Transition Date.  (iii)  Share-based payments  The Company elected to apply IFRS 2, Share-based Payments, retrospectively to all stock options granted after November 7, 2002, and which were not fully vested at the Transition Date.  (iv)  Borrowing costs  The Company elected to apply IAS 23 Borrowing Costs, as it relates to the determination of the capitalization rate prospectively from the Transition Date.(b)  Notes to explain the effects of IFRS in the financial statementsIn adopting IFRS, the Company has applied accounting policies that are in accordance with IFRS.  These policies that differ from the previous application of GAAP and the related impact on the Company's financial statements are as follows:A.  Employee benefitsActuarial gains and losses At the Transition Date, the Company applied the exemption in IFRS 1 and recognized all cumulative actuarial gains and losses and transitional assets and obligations on pension and other non-pension future employee benefits in opening retained earnings.  Under IFRS, the Company recognizes all actuarial gains and losses arising from changes in the present value of the defined benefit obligation and the fair value of plan assets immediately in other comprehensive income.  This is different than previous GAAP where the corridor approach was used, and the excess of the net actuarial gain or loss over 10% of the greater of the benefit obligation and the market-related value of plan assets was amortized over the expected average remaining service life of active employees.  The amount of this amortization comprised one of the components of pension expense under previous GAAP.  As a result, pension expense recognized in the consolidated statement of net income under IFRS excludes the amortization of actuarial gains and losses.  Under IFRS, these actuarial gains and losses are recognized immediately in other comprehensive income.Minimum funding requirementsAt the Transition Date, the Company determined that the minimum funding requirements of its defined benefit pension plans resulted in the recognition of a defined benefit obligation in its opening IFRS statement of financial position.  Under IFRS, any change in this defined benefit obligation is recognized in other comprehensive income.Measurement of plan assets Under IFRS, the expected return on plan assets is measured based on the fair value of pension fund assets.  Under previous GAAP, the Company measured the expected return on plan assets based on a market-related value of pension fund assets.  This difference in the measurement of plan assets results in a change in pension expense recognized in the consolidated statement of net income.B.  Property, plant and equipmentComponents and depreciation methodologyUnder IFRS, each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item must be depreciated separately.  This may result in differences in the individual components of property, plant and equipment between IFRS and previous GAAP.  Upon transition to IFRS, the Company reclassified certain items of property, plant and equipment into IFRS-compliant components.  The Company also changed its depreciation methodology from a straight-line basis where depreciation expense was calculated based on the pooling of assets, to a separate unit straight-line methodology.  As a result of the retrospective application of these changes, the Company adjusted accumulated depreciation in its opening IFRS statement of financial position, resulting in an increase in the net book value of its property, plant and equipment.  This adjustment in depreciation methodologies also results in a change in depreciation expense recognized in the consolidated statement of net income.CapitalizationCertain expenditures that are appropriate to capitalize as property, plant and equipment under previous GAAP do not qualify for capitalization under IFRS.  As a result of retrospectively implementing this change in accounting policy, the Company adjusted the cost and accumulated depreciation of its property, plant and equipment in its opening IFRS statement of financial position, resulting in a decrease in the net book value of its property, plant and equipment.  This adjustment also results in a change in operations expense and depreciation expense recognized in the consolidated statement of net income.Contributions from customersUnder IFRS, contributions from customers related to the construction of assets should be recognized initially as a liability and recognized as revenue in the period the related service is provided.  Under previous GAAP, the Company credited amounts received from customers against the cost of construction of property, plant and equipment.  This change in accounting policy results in a change in property, plant and equipmentand liabilities on the consolidated statement of financial position and a change in revenues and depreciation expense recognized in the statement of net income.C.  ImpairmentUnder IFRS, a one-step approach is used to test for, and to measure impairment of long-lived assets, with the carrying value of assets compared to its recoverable amount, which is defined as the higher of value in use and fair value less costs to sell.  Value in use is measured using discounted cash flows.  This is different from the two-step approach followed under previous GAAP, where an entity is required to compare carrying values to undiscounted cash flows to assess whether any impairment exists, and then to measure the impairment using discounted cash flows.Under IFRS, a first-time adopter is required to test goodwill for impairment at the Transition Date.  The Company's impairment testing as at the Transition Date under IFRS resulted in the recognition of an impairment loss in Allstream which was reflected as decreases in goodwill ($14.1 million), other intangible assets ($18.4 million) and property, plant and equipment ($101.2 million).  This adjustment also results in a decrease in depreciation and amortization expense recognized in the consolidated statement of net income.In performing the impairment testing of the Allstream cash-generating unit at the Transition Date, the Company measured the recoverable amount of the cash-generating unit based on a value in use calculation using certain key management assumptions.  Cash flow projections, which were made over a five-year period based on financial budgets approved by the Board, include key assumptions about revenues, expenses and other cash flows.  Revenue forecasts were based on management's estimate of growth in the markets served and are not considered to exceed the long-term average growth rates for those markets.  Operating expenses were estimated based upon past experience, adjusted for the increase in activity levels supporting the cash flow projections.  Discount rates applied to the cash flow forecasts are derived from the group's pre-tax weighted average cost of capital, adjusted to reflect management's estimate of the specific risk profiles of the individual cash-generating units.  The cash flows related to Allstream were discounted using pre-tax rates of 15.0% to 16.2%.D.  LeasesSale-leaseback transactionsUnder IFRS, in a sale-leaseback transaction where the leaseback is classified as an operating lease, any gain on sale is recognized immediately in income.  This accounting treatment differs from previous GAAP, where any gain on sale is deferred and recognized in income over the term of the operating lease.  The Company had one such sale-leaseback transaction, and upon transition to IFRS this deferred gain has been derecognized.  This adjustment results in an increase in operations expense as recognized in the consolidated statement of net income.E.  RevenuesRevenue recognitionUnder IFRS, the Company has recorded an adjustment to recognize a liability for customer prepayments related to wireless activation fees.  These fees are deferred and recognized as revenue over the period of the customer contract.F.  Decommissioning provisionsMeasurementUnder IFRS, the discount rate to be used for measuring decommissioning provisions should be based on current market rates at time of initial recognition and updated each reporting period.  This measurement basis is slightly different than that required under previous GAAP, so a minor adjustment to the decommissioning provision and corresponding item of property, plant and equipment is recognized at the Transition Date.G.  Share-based compensationForfeituresIn determining share-based compensation expense related to stock options, IFRS requires that the number of awards expected to vest be estimated at the time the award is granted.  This estimate may be revised based on subsequent information regarding the number of awards expected to vest.  Under previous GAAP, the Company recognizes forfeitures of awards as they occur.  As a result of retrospectively applying this change in accounting, a minor adjustment to retained earnings at the Transition Date has been recognized.H.  Income taxesIncome tax effect of other adjustments at the Transition DateAs a result of the differences between previous GAAP and IFRS for each of the financial statement items identified above, deferred taxes under IFRS have been adjusted, where applicable.(c) Reconciliations of GAAP to IFRSAs a first-time adopter of IFRS, the Company is required to reconcile previously reported GAAP to IFRS for equity and comprehensive income.A reconciliation of shareholders' equity from previous GAAP to IFRS is as follows:        Reference     December 31,2010June 30,2010Shareholders' equity under previous GAAP 1,286.51,282.3Adjustments to shareholders' equity to conform with IFRS:    Employee future benefitsA(645.9)(624.9) Property, plant and equipmentB146.5126.2 ImpairmentC(119.6)(133.7) LeasesD21.922.8 RevenuesE(4.9)(4.3) Decommissioning provisionsF0.91.1 Income taxesH162.6161.7Total reduction in shareholders' equity (438.5)(451.1)Shareholders' equity under IFRS 848.0831.2A reconciliation of earnings and comprehensive income from previous GAAP to IFRS is as follows: ReferenceThree months endedJune 30, 2010Six months endedJune 30, 2010Net income and comprehensive income under previous GAAP 28.2            48.6Adjustments to net income to conform with IFRS:    Employee future benefitsA(0.3)            (0.9) Property, plant and equipmentB10.3            20.6 ImpairmentC-            - LeasesD(0.4)            (0.8) RevenuesE(0.2)            (0.2) Decommissioning provisionsF-            - Share-based compensationG-            0.1 Income taxesH(2.4)            (4.8)Total increase in net income 7.0            14.0Net income under IFRS 35.2            62.6Adjustments to other comprehensive income to conformwith IFRS:    Employee future benefits A(88.0)(129.6) TaxesH22.933.8Total comprehensive loss under IFRS (29.9)(33.2)   For further information: Investors:   Paul Peters   Investor Relations   (204) 941-6178   investor.relations@mtsallstream.com     Media:   Selena Hinds      Corporate Communications   (416) 345-3576 or   (204) 941-8576   media.relations@mtsallstream.com